Management’s Discussion and Analysis of Results of Operations and Financial Condition
CDARS
Certificate of Deposit Account Registry Service
NASDAQ
National Association of Securities Dealers Automated Quotations Stock Market’s Global System
CECL
Current expected credit loss model
NIM
Net interest margin
CEO
Chief Executive Officer
Non-PCD
Not Purchased Financial Assets with Credit Deterioration
CET1
Common equity tier 1
NPA(s)
Nonperforming asset(s)
CFPB
Consumer Financial Protection Bureau
NSF
Nonsufficient funds
Commissioner
North Carolina Commissioner of Banks
OFAC
Treasury's Office of Foreign Asset Control
Company
First Bancorp and its consolidated subsidiaries
Patriot Act
Uniting and Strengthening American by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
CRA
Community Reinvestment Act of 1977
PCD
Purchased Financial Assets with Credit Deterioration
CRE
Commercial real estate
PPP
Paycheck Protection Program
DCF
Discounted Cash Flow
SBA
United States Small Business Administration
DIF
Deposit Insurance Fund of the FDIC
SBA Complete
SBA Complete, Inc.
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
SEC
Securities and Exchange Commission
EPS
Earnings per share
Select
Select Bancorp, Inc. and its subsidiary Select Bank & Trust Company
Exchange Act
Securities Exchange Act of 1934, as amended
TCE
Tangible common equity
FASB
Financial Accounting Standards Board
TDR
Troubled debt restructuring
FCA
Financial Conduct Authority
Treasury
United States Department of the Treasury
FDIC
Federal Deposit Insurance Corporation
We/us/our
First Bancorp and its consolidated subsidiaries
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FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, which statements are inherently subject to risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact and, further, are intended to speak only as of the date made. Such statements are often characterized by the use of qualifying words (and their derivatives) such as “expect,” “believe,” "anticipate," "intend,“ "estimate,” “plan,” “project,” or other qualifications concerning our opinions or judgments about future events. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of our customers, our level of success in integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic conditions. For additional information about factors that could affect our actual results, see the “Risk Factors” section in Item 1A of this Report.
PART I
Item 1. Business
General Description
The Company is the fourth largest commercial bank holding company headquartered in North Carolina. At December 31, 2025, the Company had total consolidated assets of $12.7 billion, total loans of $8.7 billion, total deposits of $10.7 billion, and shareholders’ equity of $1.7 billion. Our principal activity is the ownership and operation of the Bank, a state-chartered bank with its headquarters in Southern Pines, North Carolina, through which we engage in a full range of banking activities. Our principal executive offices are located at 205 SE Broad St., Southern Pines, North Carolina 28387, and our telephone number is (910) 246-2500.
The Company was incorporated in North Carolina on December 8, 1983 for the purpose of acquiring 100% of the outstanding common stock of the Bank through a stock-for-stock exchange. The Bank began banking operations in 1935 as the Bank of Montgomery, named for the county in which it originally operated. In 1985, its name was changed to First Bank and in September 2013, the Company and the Bank moved their headquarters and main offices to Southern Pines, North Carolina.
As of December 31, 2025, the Bank had two wholly-owned subsidiaries, Magnolia Financial and First Troy SPE, LLC. Magnolia Financial is a business financing company that offers accounts receivable financing and factoring, inventory financing, and purchase order financing throughout the southeastern United States. First Troy SPE, LLC is a holding entity for certain foreclosed real estate. SBA Complete, which was in the process of dissolution as of December 31, 2024, was formerly a subsidiary of the Bank and specialized in providing consulting services for financial institutions across the country related to SBA loan origination and servicing.
The Company is the parent of a series of statutory business trusts organized for the purpose of issuing trust preferred debt securities that qualify as regulatory capital. For purposes of the discussion below, these statutory business trusts are not included in our consolidated financial statements as they are variable interest entities and the Company is not the primary beneficiary. See additional discussion below in Item 7 under the section entitled “Borrowings” and Note 1 to the consolidated financial statements.
Acquisitions
In January, 2023, we acquired GrandSouth, a community bank headquartered in Greenville, South Carolina with $1.2 billion in total assets, $1.0 billion in loans, and $1.1 billion in deposits. GrandSouth operated from eight branches located throughout South Carolina, all of which we have continued to operate. The acquisition accomplished the Company's strategic initiative to expand its presence in South Carolina, specifically in the high-growth markets of the state including Greenville, Charleston and Columbia.
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Recent acquisitions include the following:
Name of Entity
Date of Acquisition
Assets Acquired
GrandSouth Bancorp
January, 2023
$1.2 billion
Select Bancorp, Inc.
October, 2021
$1.8 billion
Magnolia Financial, Inc.
September, 2020
$15.1 million
ASB Bancorp, Inc.
October, 2017
$0.8 billion
Carolina Bank Holdings, Inc.
March, 2017
$0.7 billion
Principal Business and Services We Provide
Lending Activities
We maintain a diversified loan portfolio by providing a broad range of commercial and retail lending services to business entities and individuals. We provide commercial business loans, commercial and residential real estate construction and mortgage loans, revolving lines of credit, letters of credit, and loans for personal uses, such as home improvement, and automobiles. Commercial real estate loans include loans secured by owner-occupied and non-owner occupied commercial buildings for improved commercial, office, retail, and warehouse and shopping center space. Through Magnolia Financial we provide accounts receivable financing and factoring, inventory financing, and purchase order financing. We also provide used car floor-plan financing through our CarBucks division. These lines of credit are typically offered to small used car dealers and are subject to traditional floor-plan administration procedures.
In 2025, we established a loan participation initiative to engage with regional and national commercial borrowers within the Bank’s footprint and nearby jurisdictions. The total of loan participations as of December 31, 2025 was nominal.
Because the majority of our customers are individuals and small- to medium-sized businesses, we do not believe that the loss of a single customer or group of customers would have a material adverse impact on the Bank. There are no seasonal factors that tend to have any material effect on the Bank’s business. Because we operate primarily within North Carolina and South Carolina, the economic conditions of these areas could have a material impact on the Company. See additional discussion below in the section entitled “Market Area and Competition.”
Credit Administration and Lending Policies
Conservative lending policies and procedures and appropriate underwriting standards are high priorities of the Bank. We seek to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by the Bank, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach. All loans are subject to our loan policy and financing guide, which are reviewed annually and updated as needed. Our lending policy requires, among other things, an analysis of the borrower's projected cash flow and ability to service the debt.
Individual lending authority is assigned by the Bank’s Chief Credit Officer. Loans are approved under our loan policy, which provides that lending officers have sole authority to approve loans of various amounts commensurate with their seniority, experience and needs within the market. All requests for extensions of credit in excess of any individual lending officer's authority are reviewed by one of our regional credit officers, who can approve loans up to their respective lending authority of $10 million to $15 million. When the request for approval exceeds the authority level of the regional credit officer, the request is then reviewed for approval by the Bank’s Chief Credit Officer who has $25 million in lending authority. For loans in excess of this amount, the Bank's Chief Executive Officer, the Company's President and the Bank's Chief Credit Officer have joint authority to approve loans up to $125 million. The Board, generally through its Executive Loan Committee, approves loans in excess of $125 million. In addition, the Executive Loan Committee reviews and approves loans to executive officers, directors, and their affiliates and recommends those loans to the Board for its approval.
Our legal lending limit to any one borrower is approximately $223.5 million. All lending authorities are based on the borrower’s total credit exposure, which is an aggregate of the Bank’s lending relationship with the borrower either directly or indirectly through loan guarantees or other borrowing entities related to the borrower through ownership or other control relationship(s).
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We continually monitor our loan portfolio to identify areas of concern and to enable us to take corrective action. Lending and credit administration officers and the Board meet periodically to review past due loans and portfolio quality, the status of large loans and certain other credit or economic related matters which may impact the risk in the portfolio. Individual lending officers are responsible for monitoring any changes in the financial status of borrowers and pursuing collection of early-stage past due amounts. For certain types of loans that exceed our established parameters of past due status, the Bank’s Asset Resolution Group assumes the management of the loans, and in some cases, we engage a third-party firm to assist in collection efforts. Loans that are serviced by others, such as certain residential mortgage loans, are monitored by the Bank’s credit officers, although ultimate collection of past due amounts is the responsibility of the servicing agents.
The Bank has an internal loan review department that conducts on-going and targeted reviews of the Bank’s loan portfolio and assesses the Bank’s adherence to loan policies, risk grading, and accrual policies. Reports are generated for management based on these activities and findings are used to adjust risk grades as deemed appropriate. In addition, these reports are shared with the Board. The loan review department also provides training assistance to the Bank’s training and credit administration departments.
To further assess the Bank’s loan portfolio, in addition to the Bank’s internal loan review department, we also contract with an independent consulting firm to perform independent assessments, including reviewing new loan originations meeting certain criteria and reviewing risk grades of existing credits meeting certain thresholds. The consulting firm’s observations, comments, and risk grade recommendations, including variances with the Bank’s risk grades, are shared with the Audit Committee of the Board and are considered by management in setting Bank policy, and in evaluating the adequacy of our ACL.
Loan Concentrations
Our commercial loan portfolio consists predominately of owner-occupied real estate and non-owner occupied income-producing real estate and land development loans, which are primarily secured by real estate located in North Carolina and South Carolina. In order to monitor the portfolio for possible concentrations, we categorize our CRE loans by regulatory categories, including multi-family, retail, warehouse, office, healthcare, hotel/motel, and other commercial real estate. As of December 31, 2025, the largest categories of CRE loans as a percentage of total loans were retail at approximately 13%, followed by office, of which non owner-occupied was approximately 6% and owner-occupied was approximately 3%, commercial at approximately 6% and warehouse at approximately 6%. These CRE categories are within management's guidelines as a percent of total capital. The loans within these categories are generally secured by real estate and are therefore susceptible to changes in real estate valuations and other market disruptions. The loans were originated using underwriting standards as set forth by management. Our loan policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the ACL.
Most of our business activity is with customers located within the markets where we have banking operations. The following table presents our total lending exposure in the counties with the largest percentage of our loan portfolio as of December 31, 2025 and 2024. These percentages represent the geographic location of the customer, which may or may not also be the location of the loan collateral.
Wake County, North Carolina
New Hanover County, North Carolina
Mecklenburg County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
No other county had total loans outstanding in excess of 5% of the total portfolio at either period presented. We have no significant concentrations in a few borrowers or in individual Metropolitan Statistical Areas. Therefore, while our exposure to credit risk is affected by changes in the economy within our markets, the risk is not significantly concentrated.
Investment Activities
Our investment policy is designed to maximize our income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Pursuant to this policy, we may invest in U.S. government
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bonds, GSEs, mortgage-backed securities, collateralized mortgage obligations, commercial mortgage-backed securities, state and municipal obligations, public housing authority bonds, and, to a limited extent, corporate bonds. Investments are subject to concentration and maturity limits to avoid unnecessary risks. We may also invest in time deposits with other financial institutions up to a defined limit.
Investments in our portfolio must satisfy certain quality criteria. In making investment decisions, we do not solely rely on credit ratings to determine the creditworthiness of an issuer of securities, but we use credit ratings in conjunction with other information when performing due diligence prior to the purchase of a security. Investments must be “investment-grade” as determined by a nationally recognized investment rating service. Securities rated below Moody’s BAA or Standard and Poor’s BBB generally will not be purchased. We may purchase non-rated municipal bonds only if the issues of bonds are located in our general market area and we determine these bonds have a credit risk no greater than the minimum ratings referred to above. We also are authorized to invest a portion of our securities portfolio in high quality corporate bonds, with the amount of such bonds not to exceed 15% of the entire securities portfolio. Prior to purchasing a corporate bond, the Bank’s management performs due diligence on the issuer of the bond, and the purchase is not made unless we believe that the purchase of the bond bears no more risk to the Bank than would an unsecured loan to the same company. On a periodic basis, as determined based on materiality and other relevant factors, we review the financial statements of the issuers of the corporate bonds that we own for any signs of deterioration so that we can take timely action if deemed necessary.
Our Chief Investment Officer implements the investment policy, monitors the investment portfolio, recommends portfolio strategies, and reports to the Bank’s Investment Committee. The Investment Committee generally meets at least quarterly and reviews investment activity, portfolio composition, portfolio tenure, and other elements as necessary to assess the overall position of the securities portfolio and risk of the portfolio relative to the overall balance sheet. In addition, reports of all purchases, sales, issuer calls, net profits or losses and market appreciation or depreciation of the securities portfolio are reviewed by the Board. Once a quarter, our interest rate risk exposure is evaluated by the Bank’s Asset Liability Committee ("ALCO") and a summary report is presented to the Board. A subset of the Bank's ALCO meets more regularly to evaluate a number of possible interest rate related activities. Each year, our written investment policy is reviewed by the Board and appropriate changes are made.
Deposits
We offer a full range of deposit accounts and services to both retail and commercial customers. These deposit accounts have a variety of interest rates and terms and consist of interest-bearing and noninterest-bearing accounts, including commercial and retail checking accounts, savings accounts, money market accounts, and time deposits, including various types of certificates of deposits and individual retirement accounts. The Bank is a member of the CDARS and ICS programs, which gives our customers the ability to obtain FDIC insurance on deposits of up to $50 million, while continuing to work directly with their local First Bank deposit team.
Brokered deposits are deposits obtained by utilizing an outside broker that is paid a fee. The Bank utilizes brokered deposits to accomplish several purposes, such as acquiring a certain maturity and dollar amounts without repricing the deposits of the Bank’s current customers (which could increase or decrease the overall cost of deposit), and to help manage interest rate risk.
Other Funding Sources
The FHLB of Atlanta allows us to obtain advances through its credit program. These advances are secured by qualifying loans secured by real estate, including residential mortgage loans, home equity lines of credit and commercial real estate loans.
If appropriate, subordinated debentures or senior debt may be used to augment our funding sources. The availability of these funding sources is subject to broad economic conditions, regulation and investor assessment of our financial strength and, as such, the cost of funds may fluctuate significantly and/or the availability of such funds may be restricted, thus impacting our net interest income, our immediate liquidity and/or our access to additional liquidity. The proceeds of these issuances could be downstreamed to the Bank as common equity at the Bank level.
As additional sources of funding, we maintain credit arrangements with various other financial institutions to purchase federal funds and participate in the Federal Reserve's discount window borrowings program.
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Other Services
We also offer credit cards, debit cards, letters of credit, safe deposit box rentals, and electronic funds transfer services, including wire transfers. In addition, to enhance the convenience of our customers, we provide internet banking, mobile banking and mobile check deposit, cash management, remote deposit capture, bank-by-phone capabilities, and ATMs across our branch network.
We offer various ancillary services as part of our commitment to customer service. Through a contractual relationship, we offer the placement of property and casualty insurance. We also provide non-FDIC insured investment and insurance products, including mutual funds, annuities, long-term care insurance, life insurance, and company retirement plans, as well as financial planning services through FB Wealth Management Services, our Investments Division.
Market Area and Competition
We are a community-oriented commercial bank offering a wide variety of financial services to meet the needs of our customers and communities. As of December 31, 2025, we conducted business from 113 branches, with 100 branch offices located across North Carolina and 13 branches in South Carolina.
Our branches and facilities are located in small- to medium-sized communities and in larger metropolitan areas with economies based primarily on a variety of industries, including services and manufacturing. Our branch footprint includes larger North Carolina cities, including Charlotte, Raleigh (Triangle region), Greensboro/Winston-Salem/High Point (Triad region), Asheville and Wilmington, and larger South Carolina cities including Greenville, Columbia and Charleston.
Our primary loan markets were previously presented in the Loan Concentrations section above. The following table presents the counties with the largest share of our deposit base as of December 31, 2025 and 2024. No other market area (as defined by county) comprises more than 5% of our deposit base at either period presented.
Moore County, North Carolina
Buncombe County, North Carolina
Guilford County, North Carolina
We experience strong competition in all aspects of the businesses in which we engage, including both making loans and attracting deposits, from both bank and non-bank competitors. Broadly speaking, we compete with national banks, super-regional banks, smaller community banks, non-traditional internet-based banks, insurance companies and agencies, and other financial intermediaries and investment alternatives, including mortgage companies, credit card issuers, leasing companies, finance companies, credit unions, money market mutual funds, brokerage firms, governmental and corporate bond issuers, and other securities firms. In many cases, our competitors have substantially greater resources, including broader geographic markets, higher lending limits, and the ability to make greater use of large-scale advertising and promotions, and offer certain services that we are unable to provide to our customers. We attempt to compete successfully with our competitors, regardless of their size, by emphasizing customer service, responsiveness, local decision making, and establishing relationships with our customers, while continuing to provide a wide variety of services. Additionally, many non-bank competitors are not subject to the same regulatory oversight or capital requirements, which can provide them a competitive advantage in some instances, such as operational flexibility and lower cost structures.
We encounter strong pricing competition in providing our services, particularly in making loans and attracting deposits. Competition for deposits in our markets and for national brokered deposits is primarily based on the types of deposits offered and rate paid on the deposits. Given the current rate environment, we are continuing to experience pressure to increase deposit rates in order to retain existing deposits and attract new deposits. Continued strong competition also exists in all of the lending activities we emphasize. With banks of all sizes attempting to maximize yields on earning assets and growth of their balance sheets, the competition for high-quality loans remains strong. Accordingly, loan rates in our markets continue to be under competitive pressure.
We expect competition in the industry to remain high. Competition may further intensify as additional companies (both banks and non-banks) enter the markets where we conduct business, competitors combine to present more formidable challengers, and we enter mature markets consistent with our expansion strategy.
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Human Capital Resources
At First Bank, we consider our associates to be our primary competitive advantage, and continued investment in human capital is a top priority for us. We have historically focused on building a rewarding work environment as we believe that valued and engaged associates lead to satisfied and active customers, which contributes to enriched shareholder value. We emphasize open and honest communication, collaboration, goal attainment, and personal and professional growth as the foundation to delivering high-quality service to one another and our customers. As of December 31, 2025, we had 1,332 full-time and 42 part-time associates, all of whom are employed by the Bank and the majority of whom are located in North Carolina and South Carolina.
Our human capital management strategy focuses on attracting, developing and retaining top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion, or physical ability. We strive to identify and select the best candidates for all open positions based on the qualifying factors for each job. We are dedicated to providing a workplace for our associates that is inclusive, supportive, and free of any form of discrimination or harassment; rewarding and recognizing our team members based on their individual results and team performance; and recognizing and respecting all of the characteristics and differences that make each of our associates unique. Our workforce consists of approximately 72% females and 19% minorities. Of our officer population, 73% are female or minorities, while our senior management team consists of 29% female or minority executives.
In 2020, we formed a Diversity Council, which is chaired by our CEO and meets regularly. The Diversity Council is focused on providing feedback and recommending actions for improvement, as well as removing barriers that impede progress related to the following areas:
• Creating a work environment that demonstrates all views are respected and provides equal access to opportunities for growth and advancement;
• Ensuring all open positions have a diverse pool of candidates, and our job requirements align with our principles and the markets we serve; and
• Creating internal organizational learning opportunities in which associates may voluntarily participate to deepen and develop personal understanding of diversity and inclusion.
Our Board and its Compensation Committee provide oversight on human capital matters, including overall compensation philosophy, equity award programs, and succession planning. Our human resources and legal departments develop policies to support and manage our human capital management strategy, identify risks, and implement practices to mitigate those risks, under the oversight of the Board and its committees.
Maintaining and further enhancing our corporate culture is an important element of our Board’s oversight of risk because our people are critical to the implementation of our corporate strategy. Our Board sets the “tone at the top” and holds senior management accountable for embodying, maintaining, and communicating our culture to associates. Our culture is guided by a philosophy we call "Our Promise to Service Excellence" ("Our Promise"). The principles of Our Promise are: Safety and Soundness, Knowledge and Accuracy, Courteous Service, and Convenience and Ease. All associates joining the Company, including those joining as a result of an acquisition, start their employment by participating in an orientation that focuses on learning about and embracing our culture.
We also seek to design careers with our Company that are fulfilling while fostering professional and personal growth with continuing education, on-the-job training, and development programs. In 2020, we launched our Leadership Development Program, which consists of three development tracks designed to instruct and enhance leadership skills at various levels of an associate's management experience. We believe that effective and meaningful leadership development will further elevate the Company and support us in continuing to attract and retain top talent as well as create a succession plan for future growth.
Providing associates with meaningful, competitive and supportive benefits to care for their lives and families is a top priority for the Company. We are proud to offer a comprehensive benefits package that includes medical, dental, vision and life insurance, paid time-off, 401(k) profit-sharing plan participation and an employee stock purchase plan. In 2025, the Company’s 401(k) plan matched 100% of each employee’s elective deferral amount, up to 6% of their compensation.
The Company’s benefits programs also include an Employee Assistance Program which provides all associates a comprehensive and personalized process to meet their individual needs and support them through issues they may be facing. The program provides unlimited phone access for information, resources, and referrals and provides sessions with a counselor for the associate and their family members.
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Supervision and Regulation
As a bank holding company, we are subject to supervision, examination, and regulation by the Federal Reserve and the Commissioner. The Bank is also subject to supervision and examination by the Federal Reserve and the Commissioner.
The Company and the Bank are subject to extensive regulation under federal and state laws. The regulatory framework is designed to protect the banking system as a whole and not for the protection of our shareholders and creditors.
The applicable statutes and regulations, as well as related policies, continue to be subject to changes by Congress, state legislatures, and federal and state regulators. Changes in statutes, regulations, and polices applicable to Company and the Bank (including their interpretations or implementation) cannot be predicted and could have a material adverse impact on the business and operations of the Company and the Bank.
Since our total assets exceed $10.0 billion, under current banking regulations and as discussed further below, we are subject to heightened supervision and regulation.
The following is a general summary of the material aspects of certain statutes, regulations and policies applicable to us. This summary does not purport to be complete and is qualified by reference to the applicable statutes, regulations, and policies.
Supervision and Regulation of the Company
General . The BHC Act limits the business of a bank holding company to owning or controlling banks and engaging in other activities closely related to the business of banking. In addition, the Company also must file reports with, and provide additional information, to the Federal Reserve.
Holding Company Bank Ownership. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging with another bank holding company.
Holding Company Control of Non-Banks. With some exceptions, the BHC Act prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that are deemed activities closely related to the business of banking or of managing or controlling banks under applicable law.
Transactions with Affiliates. Bank subsidiaries of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in securities, and on the use of securities as collateral for loans to any borrower. The Dodd-Frank Act further extends the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending and borrowing transactions involving an affiliate as covered transactions under applicable regulations. It also expands the scope of covered transactions required to be collateralized, requires collateral to be maintained at all times for covered transactions required to be collateralized, and places limits on acceptable collateral. These restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for payments of dividends, interest, and operational expenses.
Tying Arrangements. The Company is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit to a customer on either a requirement that the customer obtain additional services provided by the Company or the Bank, or an agreement by the customer to refrain from obtaining other services from a competitor.
Support of Bank Subsidiaries . Under Federal Reserve policy and the Dodd-Frank Act, the Company is required to act as a source of financial and managerial strength to the Bank. This means that the Company is required to
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commit, as necessary, capital and resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources or when it may not be in the Company’s or its shareholders’ best interests to do so. Any capital loans a bank holding company makes to a bank subsidiary are subordinate to deposits and to certain other indebtedness of that subsidiary.
State Law Restrictions. As a North Carolina corporation, the Company is subject to certain limitations and restrictions under applicable North Carolina corporate laws. For example, those laws include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers, or interested shareholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.
North Carolina Holding Company Laws. The Commissioner is empowered to regulate certain acquisitions of North Carolina banks and bank holding companies, issue cease and desist orders for violations of North Carolina banking laws, and promulgate rules necessary to effectuate the purposes of those laws.
Supervision and Regulation of the Bank
General . The Bank is a North Carolina state-chartered bank and is a member of the Federal Reserve. Federal banking regulations applicable to all depository financial institutions provide federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices, restrict preferential loans by banks to their “insiders," require banks to keep information on loans to major shareholders and executive officers, and bar certain director and officer interlocks between financial institutions.
As a state-chartered bank, the Bank is subject to regulation by the Commissioner. The Commissioner has a wide range of regulatory authority over the activities and operations of the Bank, and the Commissioner’s staff conducts periodic examinations of the Bank and its affiliates to ensure compliance with state banking laws and regulations and to assess the safety and soundness of the Bank. Among other things, the Commissioner regulates the merger of state-chartered banks, the payment of dividends, recordkeeping, types and amounts of loans and investments, the total of loans to one borrower and the establishment of branches. The Commissioner also has cease and desist powers over state-chartered banks for violations of state banking laws or regulations and for unsafe or unsound conduct that is likely to jeopardize the interest of depositors.
The Federal Reserve is authorized to approve mergers and assumptions of deposit liability transactions by member banks, and to prevent capital or surplus diminution in such transactions if the resulting, continuing, or assumed bank is an insured member bank. The Bank is a member of the Federal Reserve, and accordingly the Federal Reserve also conducts periodic examinations of the Bank to assess its safety and soundness and its compliance with banking laws and regulations, and it has the power to implement changes to, or restrictions on, the Bank’s operations if it finds that a violation is occurring or is threatened.
Consumer Protection. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers, including those that impose certain disclosure requirements and that govern the manner in which the Bank takes deposits, makes and collect loans, and provides other services. Failure to comply with these laws and regulations may subject the Bank to various penalties. Failure to comply with consumer protection requirements may also result in failure to obtain any required regulatory approval for merger or acquisition transactions we may wish to pursue.
Community Reinvestment. The CRA requires that, in connection with examinations of an applicable financial institution, federal bank regulators evaluate the record of those institutions in meeting the credit needs of local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of the institution. A bank's community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions, and applications to open a branch or facility. In some cases, a bank's failure to comply with the CRA or the filing of CRA protests by interested parties during applicable comment periods can result in the denial of approval or delay of such transactions.
Insider Credit Transactions. Banks are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. Extensions of credit (1) must be made on substantially the same terms (including interest rates and collateral) and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank; and (2) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may
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result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders and generally prohibit loans to executive officers other than for certain specified purposes.
Regulation of Management. Federal law sets forth circumstances under which officers or directors of a bank may be removed by the bank's federal supervisory agency, and generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.
Safety and Soundness Standards . Certain non-capital safety and soundness standards also are imposed upon banks. These standards cover, among other things, internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the applicable regulator determines to be appropriate, and standards for asset quality, earnings, regulatory capital and liquidity. In addition, each bank must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information, and ensure the proper disposal of customer and consumer information. A bank that fails to meet these standards may be required to submit a compliance plan or be subject to regulatory sanctions, including restrictions on growth.
Inspections. The Federal Reserve conducts periodic inspections of bank holding companies, such as the Company. In general, the objectives of this inspection program are to ascertain whether the financial strength of a bank holding company is maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its bank subsidiaries. The inspection type and frequency typically varies depending on asset size, complexity of the organization, and the bank holding company's rating at its last inspection.
Examinations . Banks are subject to periodic examinations by their primary regulators. In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing to a risk-focused approach. These examinations are extensive and cover the entire breadth of the operations of a bank. Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings of its most recent examinations. However, the examination authority of the Federal Reserve and the Commissioner allow examinations of supervised institutions as frequently as deemed necessary based on the condition of the institution or as a result of certain triggering events.
Dividends
A principal source of the Company's cash is from dividends received from the Bank, which are subject to regulation and limitation. As a general rule, regulatory authorities may prohibit banks from paying dividends in a manner that would constitute an unsafe or unsound banking practice. For example, paying dividends that deplete a bank's capital base to an inadequate level is typically deemed an unsafe and unsound banking practice. In addition, a bank may not pay cash dividends that would reduce the amount of its capital to less than minimum applicable regulatory capital requirements. North Carolina banking law also places limitations upon the payment of dividends by North Carolina banks.
Rules adopted in accordance with Basel III also impose limitations on the Bank's ability to pay dividends. In general, these rules limit the Bank's ability to pay dividends unless the Bank's common equity conservation buffer exceeds the minimum required capital ratio by at least 2.5% of risk-weighted assets.
The Federal Reserve has also issued a policy statement expressing the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless its earnings for the past year are sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company's capital needs, asset quality, and overall financial condition. A bank holding company's ability to pay dividends may also be restricted if a subsidiary bank becomes under-capitalized. These various regulatory policies may affect the Company's and the Bank's ability to pay dividends or otherwise engage in capital distributions.
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Dodd-Frank Act
General. The Dodd-Frank Act and its related regulations significantly changed the bank regulatory structure and affect the lending, deposit, investment, trading, and operating activities of banks and bank holding companies, including the Bank and the Company. Some of the provisions of the Dodd-Frank Act that impact the Company's and the Bank's business and operations are summarized below.
Corporate Governance. The Dodd-Frank Act requires publicly traded companies to provide their shareholders with a non-binding shareholder vote on executive compensation, a non-binding shareholder vote on the frequency of such vote, disclosure of "golden parachute" arrangements in connection with specified change in control transactions, and a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions. The SEC has adopted rules mandated by the Dodd-Frank Act that require a public company to disclose the ratio of the compensation of its CEO to the median compensation of its employees and a comparison of executive compensation to the market performance of the Company's stock. These rules are intended to provide shareholders with information that they can use to evaluate executive compensation.
Consumer Financial Protection Bureau. The Dodd-Frank Act established the CFPB and empowered it to exercise broad rule making, supervision, and enforcement authority for a wide range of consumer protection laws. The Bank is subject to the direct supervision of the CFPB. The CFPB focuses on risks to consumers and compliance with federal consumer financial laws, the markets in which firms operate and risks to consumers posed by activities in those markets, depository institutions that offer a wide variety of consumer financial products and services, and non-depository companies that offer one or more consumer financial products or services.
The consumer financial laws administered by the CFPB apply to all banks and include, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s lack of financial savvy, inability to protect himself in the selection or use of consumer financial products or services, or reasonable reliance on a covered entity to act in the consumer’s interests. The CFPB can issue cease and desist orders against banks and other entities that violate Federal consumer financial laws. The CFPB also may institute a civil action against an entity in of those consumer financial laws in order to impose a civil or .
Interchange Fees . The Bank is subject to limitations on interchange fees under the Durbin Amendment to the Dodd-Frank Act (the "Durbin Amendment"). The Durbin Amendment rules establish a maximum permissible interchange fee for an electronic debt transaction equal to the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction. The rules also allow for an upward adjustment of no more than $0.01 to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve certain fraud prevention standards.
FDIC Insurance
As an FDIC insured depository institution, the Bank's deposits are insured up to applicable limits by the DIF which is generally $250,000. For this protection, each insured bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.
The FDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital, and premiums are determined based on its capital, supervisory ratings, and other factors. Premium rates generally may increase if the DIF is strained due to the cost of bank failures and the number of troubled banks. In addition, if a bank experiences financial distress, operates in an unsafe or unsound manner, or is subject to a regulatory agreement or order, its deposit premiums may increase. The Dodd-Frank Act made banks with $10 billion or more in total assets responsible for increasing the DIF reserve ratio from 1.15% to 1.35% if necessary. Accordingly, the Bank's premiums may increase from time to time if the FDIC needs to increase assessments in order to replenish the fund and restore the DIF reserve ratio to 1.35%.
In December 2023, the FDIC approved a final rule implementing a special assessment to replenish the DIF reserve ratio. Based upon the terms of the special assessment, the Bank was not required to pay at the increased assessment rate.
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Legislative and Regulatory Guidance and Developments
Regulatory Capital Requirement under Basel III. The Company and the Bank are subject to the Basel III regulatory capital rules that became fully phased-in as of January 1, 2019.
Under Basel III, CET1 is comprised of common stock and related surplus, plus retained earnings, and is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities. Tier I capital is comprised of CET1 capital plus additional elements, such as trust preferred securities, which the Company includes in Tier 1 capital. Total capital is comprised of Tier I capital plus certain adjustments, the largest of which for the Company and the Bank is the ACL. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Company and the Bank, adjusted for their related risk levels using formulas set forth in Federal Reserve regulations.
The Basel III capital rules include a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The Company and the Bank are required to maintain the following minimum capital ratios:
• 4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%;
• 6.0% Tier I capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum Tier I capital ratio of at least 8.5%;
• 8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%; and
• 4.0%% Tier I leverage ratio.
In addition to the minimum capital requirements described above, the regulatory framework for prompt corrective action also contains specific capital guidelines for a bank’s classification as “well capitalized.” The current specific guidelines are as follows:
• CET1 Capital Ratio of at least 6.5%;
• Tier I Capital Ratio of at least 8.0%;
• Total Capital Ratio of at least 10.0%; and a
• Leverage Ratio of at least 5.0%.
If a bank falls below “well capitalized” status in any of these four ratios, it must ask for FDIC permission to originate or renew brokered deposits.
Financial Privacy and Cybersecurity. The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.
Under various policy statements, financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. Additionally, management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. The Company has multiple information security programs that reflect the requirements of this guidance. If, however, we fail to observe the regulatory guidance in the future, we could be subject to various regulatory sanctions, including financial penalties.
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A banking organization is required to notify its primary federal regulators as soon as possible and within 36 hours after identifying a “computer-security incident” that the banking organization believes in good faith is reasonably likely to materially disrupt or degrade its business or operations in a manner that would, among other things, jeopardize the viability of its operations, result in customers being unable to access their deposit and other accounts, result in a material loss of revenue, profit or stock price, or pose a threat to the financial stability of the U.S.
The SEC cybersecurity disclosure rules for public companies require disclosures regarding cybersecurity risk management (including the role of the Board in overseeing cybersecurity risks, management’s role and expertise in assessing and managing cybersecurity risks, and processes for assessing, identifying and managing cybersecurity risks) in annual reports. These cybersecurity disclosure rules also require the disclosure of material cybersecurity incidents in a Form 8-K, generally within four business days of determining an incident is material. Refer to Item 1A, “Risk Factors,” and Item 1C, "Cybersecurity," for additional disclosures related to cybersecurity.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a significant compromise, the risks of significant data loss or any material financial losses related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these . Additional discussion of our cybersecurity risk management process and strategy are contained in Item 1C. of this Report.
Anti-Money Laundering and the USA Patriot Act. The BSA requires all financial institutions to establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism; sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that might signal criminal activity); and mandates certain due diligence procedures and "know your customer" documentation. The Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions; creating new crimes and penalties; and expanding the extra-territorial jurisdiction of the United States. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money and report certain types of transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and of a financial institution to maintain and implement adequate programs to combat money and terrorist financing, or to comply with all of the relevant laws or regulations, could have financial, legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed and desist orders and civil money institutions found to be these obligations.
The AML, which amended the BSA, was intended to be a comprehensive reform and modernization of the United States bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others which are administered by OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Community Reinvestment Act. In October 2023, the Federal Reserve, FDIC, and OCC issued a final rule to amend their regulations implementing the CRA. The rule would have materially revised the current CRA framework, including the assessment areas in which a bank is evaluated to include activities associated with online and mobile
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banking, the tests used to evaluate the bank in its assessment areas, new methods of calculating credit for lending, investment and service activities, and additional data collection and reporting requirements. The rule would have resulted in a significant increase in the thresholds for large banks to receive “Outstanding” ratings in the future. Most of the provisions of the rule were scheduled to become applicable on January 1, 2026. Reporting of the collected data would be required in 2027.
The 2023 rule was preliminarily enjoined in March 2024, following legal challenge. In July 2025, the Federal Reserve, the OCC and the FDIC proposed to rescind the 2023 rule and replace it with the prior CRA regulations. The Federal Reserve continues to apply the 1995 CRA regulations.
Incentive Compensation. The federal bank regulatory agencies comprehensive guidance on incentive compensation policies are intended to ensure that the incentive compensation policies of financial institutions are not detrimental to the safety and soundness of such institutions by encouraging excessive risk-taking. This guidance covers all employees who have the ability to materially affect the risk profile of a financial institution, either individually or as part of a group, and is based upon the key principles that a financial institution’s incentive compensation arrangements should (1) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks; (2) be compatible with effective internal controls and risk management; and (3) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.
As required by the Dodd-Frank Act, U.S. banking agencies have jointly issued comprehensive regulations or guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging teammates to take imprudent risks. This guidance significantly affects the amount, form, and context of incentive compensation that may be provided to teammates and could negatively affect the Company’s ability to compete for talent relative to non-banking companies. The SEC finalized its incentive compensation clawback rule which may result in additional costs and restrictions on the form of the Company’s incentive compensation.
Federal Securities Laws. The common stock of the Company is registered with the SEC under the Exchange Act and the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act. This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and NASDAQ have adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act that apply to the Company as a NASDAQ-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.
Digital Asset Regulation
Although the federal banking and securities agencies are in the process of considering regulations governing the digital asset activities of banking organizations, it is not expected that such regulations will be issued until the third quarter of 2026. The existing supervisory framework dictates that, in order to effectively identify and manage digital asset-related risks and obtain supervisory non-objection to the proposed engagement in digital asset activities, banking organizations must implement appropriate risk management practices, including with respect to board and management oversight, policies and procedures, risk assessments, internal controls and monitoring.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies governing the Company and the Bank also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of future legislation or the issuance of new regulations could impact the regulatory structure under which we operate and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to business strategy, and limit the ability to pursue business opportunities in an efficient manner, or otherwise adversely affect our operations and financial condition.
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Available Information
We maintain a corporate internet site at www.LocalFirstBank.com, which contains a link within the “Investor Relations” section of the site to each of our filings with the SEC, including our annual reports on Form 10-K, as well as our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These filings are available, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These filings can also be accessed at the SEC’s website located at www.sec.gov. Information included on our internet site is not incorporated by reference into this Report.
Item 1A. Risk Factors
In addition to other information contained in this Report that may affect us, the risk factors summarized below, as well as any cautionary language in this Report, provide examples of the most significant risks, uncertainties, and events that could have a material adverse effect on our business, including our operating results and financial condition. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to us, or that we currently deem to be immaterial, also may materially or adversely affect our business, financial condition, and results of operations. The value or market price of our common stock could decline due to any of these identified or other unidentified risks.
Risks Related to Our Business
Changes and instability in economic conditions, geopolitical matters and financial markets, including a contraction of economic activity including a possible recession, could adversely impact our business, results of operations and financial condition.
Our success is impacted, to a certain extent by global, domestic and local economic and political conditions, as well as governmental monetary policies. More specifically, the local economic conditions of the Carolinas and the specific markets in which we operate have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans to us. Conditions such as changes in interest rates, money supply, levels of employment and other factors beyond our control may have a negative impact on economic activity. A deterioration in economic conditions, including an economic recession, may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. In particular, interest rates are highly sensitive to many factors that are beyond our control, including global, domestic and local economic conditions and the policies of various governmental and regulatory agencies and, specifically, the Federal Reserve. Throughout 2022 and 2023, the FOMC raised the target range for the federal funds rate. During 2024 and 2025, the FOMC lowered the target range for the federal funds rate. As of December 31, 2025, the target range was 3.50% to 3.75%. Although economic forecasts vary, the FOMC has indicated an expectation of one 25 basis point rate cut during 2026. Economic forecasts include a mix of and factors concerning , inflation, real estate values and other components. Economic , increased , or inflation could lead to decreased business and consumer confidence and -than-anticipated spending, thereby to possible impacts to our business including asset quality, deposit levels, loan demand and results of operations.
We also face credit risk arising from economic and geopolitical conditions, among other forms of risk, that our customers will not repay their loans. As we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral, which, in turn, can adversely affect the value of our loan and investment portfolios. CRE values continue to fluctuate and the outlook for CRE remains dependent on the broader economic environment and, specifically, how major subsectors respond to ongoing economic and behavioral developments. Some economic indicators suggest that CRE prices remain high relative to fundamentals and US market delinquency rates are elevated. Credit performance is susceptible to economic and market forces. Instability and uncertainty in the commercial and residential real estate markets, as well as in the broader commercial and retail credit markets, could have a material adverse effect on our financial condition and results of operations. Additionally, inflation risk can have an adverse impact on our customers ability to repay their loans. Our customers may be affected by inflation pressures and the rising costs of goods and services used in their households and businesses, which could have a impact on their cash flows and their ability to repay their loans to us.
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Lending activities involve substantial credit risk.
We offer a variety of loan products, including residential mortgage, consumer, construction, and commercial loans, with a majority of our portfolio consisting of commercial and industrial loans and commercial loans secured by commercial real estate. Most of our commercial business and CRE loans are made to small business or middle-market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. Additionally, these loans may increase concentration risk as to industry or collateral securing our loans. Future growth or acquisitions of banks with a portfolio composition different from ours could cause our portfolio mix to change.
Lending generally involves various degrees of risk depending on the facts and circumstances of the loan and borrower. If general economic conditions in the market areas in which we operate negatively impact our customers, our results of operations and financial condition may be adversely affected. Further, the deterioration of borrowers' businesses (from a variety of factors including, but not limited to: tariff impact, government policy change, change in end customer behavior, etc.) may hinder their ability to repay their loans with the Company, which could have a material adverse effect on our financial condition and results of operations. Risk of loan defaults is unavoidable in the banking industry. We attempt to limit exposure to this risk by monitoring carefully the amount of loans in specific industries and by exercising prudent lending practices. However, the risk that substantial credit losses could result in reduced earnings or losses cannot be eliminated.
Our ACL may not be adequate to cover actual losses.
CECL requires that estimated credit losses are reflected in the income statement in the period of origination or acquisition of a loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes. CECL also requires significant management judgment that is supported by models, assumptions, and data elements which may be subjective in nature or, as in the case of macroeconomic forecasts, be volatile from period to period. These factors involve model risk and are complex and could impact the Company's results of operations and capital levels, particularly in times of economic uncertainty or other unforeseen circumstances.
CECL requires a high degree of judgment related to risk characteristics, asset classification, loss drivers, impact of historical loss data and other factors to develop an estimate of expected lifetime losses. The CECL methodology also may result in perceived small changes to future forecasts having a disproportionate impact on the ACL and resulting provision for loan losses from period to period.
Because of the extensive use of estimates and assumptions, our actual loan losses could differ, possibly significantly, from our estimate and it is possible that the ACL will need to be increased for changes in economic forecasts, credit deterioration, or regulatory feedback. An increase in the ACL could materially and adversely affect our earnings, profitability and capital levels.
We are subject to interest rate risk, which could negatively impact earnings.
Net interest income is the most significant component of our earnings. Our net interest income results from the difference between the yields we earn on our interest-earning assets, primarily loans and investments, and the rates that we pay on our interest-bearing liabilities, primarily deposits and borrowings. When interest rates change, the yields we earn on our interest-earning assets and the rates we pay on our interest-bearing liabilities do not necessarily move in tandem with each other because of the difference between their maturities and repricing characteristics and which can negatively impact net interest income.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, influence not only the interest we receive on loans and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities; and (iii) the average duration of our mortgage portfolio and other interest-earning assets. Throughout 2022 and 2023, the FOMC raised the target range for the federal funds rate. During 2024 and 2025, the FOMC lowered the target range for the federal funds rate. As of December 31, 2025, the target range was 3.50% to 3.75%. It remains uncertain whether then FOMC will further decrease the federal funds rate to attain a monetary policy appropriate to keep inflation at normalized levels, leave the rate at its current level for a lengthy period of time or if it will instead increase the target range. Additionally, other interest rates may not move in a consistent manner with the federal
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funds rate.
Although not necessarily expected in 2026, if the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, would generally be adversely affected. Earnings could also be adversely affected if the interest rates received on our loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations, and any related economic downturn, especially domestically and in the markets in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet.
Our financial instruments expose us to certain market risks, including changing interest rates, and may increase the volatility of AOCI and total equity.
We hold certain financial instruments measured at fair value, primarily our AFS investments securities. For those financial instruments measured at fair value, we are required to recognize the changes in the fair value of such instruments in AOCI each quarter which impacts our total equity. Fair value can be affected by a variety of factors, many of which are beyond our control, including our credit position, interest rate volatility, capital markets volatility, and other economic factors. Accordingly, the application of fair value accounting for our AFS securities may cause AOCI and total equity to be more volatile than would be suggested by our underlying performance.
Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments, and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through from these or other sources could have a substantial negative effect on our liquidity.
Our access to funding sources in amounts adequate to finance our activities, or on terms which are acceptable to us, could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or deterioration in credit markets.
The proportion of our deposit account balances that exceed FDIC insurance limits may expose the Bank to enhanced liquidity risk in times of financial distress.
In its assessment of the larger bank failures that occurred in the first and second quarters of 2023, the FDIC concluded that a significant contributing factor to the failures of the institutions was the proportion of the deposits held by each institution that exceeded FDIC insurance limits. Uninsured deposits historically have been viewed by the FDIC as less stable than insured deposits. In July 2023, the federal banking agencies issued an interagency policy statement to underscore the importance of robust liquidity risk management and contingency funding planning. In the policy statement, the regulators noted that banks should maintain actionable contingency funding plans that take into account a range of possible stress scenarios, assess the stability of their funding and maintain a broad range of funding sources, ensure that collateral is available for borrowing, and review and revise contingency funding plans periodically and more frequently as market conditions and strategic initiatives change.
If a significant portion of our deposits were to be withdrawn within a short period of time such that additional sources of funding would be required to meet withdrawal demands, the Bank may be unable to obtain funding at favorable terms, which may have an adverse effect on our net interest margin. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated prevailing interest rates, such as the present period. Our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Further, interest rates paid for borrowings generally exceed the interest rates paid on deposits. This spread may be exacerbated by higher prevailing interest rates. In addition, because our AFS investment securities lose value when interest rates rise, after-tax proceeds resulting from the sale of such assets
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may be diminished during periods when interest rates are elevated. For additional information regarding uninsured deposits and liquidity, see Deposits and Liquidity sections of 2025 MD&A Item 7 following.
A failure in or breach of our operational or security systems, or those of our vendors, could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures, known as advanced persistent threats, directed at us and/or our third party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Although we employ comprehensive measures to prevent, detect, address, and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, or of data and confidential or proprietary information (our own or that of third parties) and the of our business operations. Any may subject us to regulatory , (including class action ) or enforcement, or require the payment of regulatory or or undertaking remediation efforts with respect to third parties affected by a cybersecurity , all or any of which could affect our business, financial condition or results of operations and our reputation. In addition, we cannot guarantee that any costs and liabilities incurred in relation to an attack or will be covered by our existing insurance policies or that applicable insurance will be available to us in the future on economically reasonable terms or at all.
As a financial institution, our operations rely heavily on the secure data processing, storage and transmission of confidential and other information to conduct our business. Our daily operations depend on the operational effectiveness of our technology. Any failure, interruption, or breach in security of our computer systems or outside vendor technology could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to inaccurate financial records. While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of any failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be addressed. The occurrence of any , , or security of our information systems could our reputation, result in a of customer business, subject us to additional regulatory , or us to civil and possible financial liability, any of which could have a material effect on our results of operations.
In addition, the Bank provides its customers the ability to bank online and through mobile banking. The secure transmission of confidential information over the internet is a critical element of online and mobile banking. While we use qualified third party vendors to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses, phishing schemes, and other security issues. The Bank may be required to spend significant capital and other resources to alleviate problems caused by security breaches or computer viruses. To the extent that the Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation, and other potential liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank’s systems and could affect its reputation and its ability to generate deposits.
We rely on certain external vendors.
We are reliant upon certain external vendors to provide products and services necessary to facilitate our day-to-day operations, including core data processing and other systems such as online banking. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with applicable contractual arrangements or service level agreements. Our vendors could also be the source of an attack on, or breach of, our operational systems. Any failures, interruptions, or security breaches, or any perception that our security measures are deficient, could negatively impact our operations. We maintain a system of policies and procedures designed to monitor vendor risks including, among other things, changes in the vendor’s organizational structure, financial condition, and support for existing products and services. While we believe these policies and procedures help to mitigate risk, and our vendors are not the sole source of service, the failure of an external vendor to perform in accordance with applicable contractual arrangements or the service level agreements could be disruptive to our operations, which could have a material impact on our business and its financial condition and results of
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operations. Additionally, if our third party vendors encounter difficulties or if we have difficulty in communicating with such third parties, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations, damage our reputation, result in a loss of customer business, result in a violation of privacy or other laws, and expose us to civil litigation, enforcement actions by governmental agencies, regulatory fine or other damages or losses, including those not covered by insurance.
In the normal course of business, we process large volumes of transactions involving millions of dollars. If our internal controls fail to work as expected, we could experience significant losses.
We process large volumes of transactions on a daily basis involving millions of dollars and are exposed to numerous types of operational risk, including the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk also includes potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards.
As part of these transactions, we settle funds on behalf of financial institutions, other businesses and consumers and receive funds from clients, card issuers, payment networks and consumers on a daily basis for a variety of transaction types. Transactions we facilitate include wire transfers, debit card, credit card and electronic bill payment transactions, supporting consumers, financial institutions and other businesses. These payment activities rely upon the technology infrastructure that facilitates the verification of activity with counterparties and the facilitation of the payment. If the continuity of our operations or integrity of our processing were compromised, this could result in a financial loss to us due to a failure in payment facilitation. In addition, we may issue credit to consumers, financial institutions or other businesses as part of the funds settlement. A default on this credit by a counterparty could result in a financial loss to us.
We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk. These systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. We continually monitor and improve our internal controls, data processing systems, and corporate-wide processes and procedures, but there can be no assurance that future losses will not occur.
We are subject to extensive regulation, which could have an adverse effect on our operations.
The Bank is subject to extensive regulation, examination, and supervision by various federal and state regulatory agencies, including the Commissioner and the Federal Reserve. This regulation, examination, and supervision is intended primarily to enhance the safe and sound operation of the Bank and for the protection of the DIF and our depositors and borrowers, rather than for holders of our equity securities and creditors. In the past, our business has been materially affected by these regulations and our compliance with these regulations is costly. Should we fail to comply with our regulatory requirements, federal and state regulators could impose restrictions on our activities, which could materially and adversely affect our operations and financial condition. This trend is likely to continue in the future.
Laws and regulations applicable to the banking industry change frequently and may continue to change, and we cannot predict the effects of any such changes. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets, and the determination of the level of ACL. Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material impact on our operations.
We are subject to complex and ever-changing laws and regulations governing the privacy and security of personal information concerning our customers, prospective, current, and former customers, and employees. These federal and state laws and regulations govern our obligations in the event of a security breach, breach of personal information, computer-security incident, and similar events. States have been actively passing new privacy laws, and this trend is likely to continue such that the privacy and security laws and regulations that may apply to us will continue to grow and change.
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We might be required to raise additional capital in the future, but that capital may not be available or may not be available on terms acceptable to us when it is needed.
We are required to maintain adequate capital levels to support our operations. In the future, we might need to raise additional capital to support growth, absorb loan losses, or meet more stringent capital requirements. Our ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot be certain of our ability to raise additional capital in the future if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability to conduct our business could be materially impaired.
Consumers may decide not to use banks or specifically our Company to complete their financial transactions.
The banking industry is highly competitive. Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds, or general-purpose reloadable prepaid cards, or digital assets such as stablecoins, rather than in bank deposit accounts.
Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. To the extent that other banks offer products or services that facilitate the minting or issuance of stablecoins backed by customer deposits, customers may convert bank deposits into stablecoins, which could accelerate deposit outflows, increase deposit volatility and heighten liquidity risk, particularly during periods of market stress. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
Additionally, we face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional, and online banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, thrifts, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries, such as online lenders and banks.
As customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Our ability to compete successfully depends on a number of factors, including, among other things:
• our ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;
• our ability to expand our market position;
• the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
• the rate at which we introduce new products and services relative to our competitors;
• customer satisfaction with our level of service;
• industry and general economic trends; and
• the ability to keep pace with technological change and to invest in technological improvements to meet customer demand and create operational efficiencies.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
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Negative public opinion regarding our Company and the financial services industry in general, could damage our reputation and adversely impact our earnings.
Reputation risk, or the risk to our business, earnings, and capital from negative public opinion regarding our Company and the financial services industry in general, is inherent in our business. Negative public opinion can result from actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action. Although we have taken steps to minimize reputation risk in dealing with our clients and communities, this risk always will be present given the nature of our business. In addition, the financial stability of other financial institutions could adversely impact our ability to engage in routine funding transactions. Defaults by, or even rumors or questions about one or more financials institutions can lead to market-wide liquidity and could lead to or by us or by other institutions.
New lines of business or new products and services may subject us to additional risk.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. We may invest significant time and resources in these efforts. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and/or new products or services could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Our reported financial results are impacted by management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and methods are fundamental to the way we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results. They require management to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting estimates include: the allowance for credit losses; business combinations, and goodwill and other intangible assets.
Our internal controls may be ineffective.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.
We may not be able to attract and retain skilled employees, adversely affecting our business.
The success of our business is highly dependent on the talents and efforts of our employees. Additionally, relationships between our key employees and the customers with whom they maintain relationships contribute to our success. Therefore, our success depends on our ability to attract and retain skilled people. Competition for the best people can be intense, and we may not be able to hire or retain sufficiently qualified people. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and/or the difficulty of promptly finding
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qualified replacement personnel. The loss of business if the customers were to follow that employee to a competitor or otherwise choose to transition to another financial services provider could adversely impact our business. While we believe we have strong relationships with our key personnel, there is no guarantee that all of our key personnel will remain with our organization.
We may be adversely affected by risks associated with potential or completed acquisitions.
As part of our growth strategy, we regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We seek merger and acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services.
Acquiring other financial institutions, financial services companies, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things:
• Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, and with integrating acquired businesses, resulting in the diversion of resources from the operation of our existing businesses;
• Acquisitions typically are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate acquisitions that we believe are in our best interests;
• Difficulty in estimating the value of target companies or assets and in evaluating credit, operations, management, and market risks associated with those companies or assets;
• Payment of a premium over tangible book and market values that may dilute our tangible book value and earnings per share in the short and long term;
• Potential exposure to unknown or contingent liabilities of the target company, including, without limitation, liabilities for regulatory and compliance issues and from potential litigation;
• Exposure to potential asset quality issues of the target company;
• Difficulties, inefficiencies or cost overruns associated with the integration of the operations, personnel, technologies, services, and products of acquired companies with ours. Further, expected revenue and/or operational synergies and cost savings associated with pending or recently completed acquisitions may not be fully realized or realized within the expected time frame;
• Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits;
• Potential disruption to our business; and
• The possible loss of key employees and customers of the target company.
Failure to successfully integrate the entities we acquire into our existing operations could increase our operating costs significantly and have a material adverse effect on our business, financial condition, and results of operations.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could have a significant negative impact on our profitability.
Goodwill represents the amount of consideration exchanged over the fair value of net assets we acquired in the purchase of another business. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate the carrying value of the asset might be impaired. At December 31, 2025, our goodwill totaled $478.8 million. While we have recorded no impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
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We are subject to losses due to errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.
We are exposed to many types of operational risk, including the risk of fraud by employees and third parties, clerical recordkeeping errors, and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially and adversely affected if employees, clients, counterparties, or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation, or purposeful damage to any of our operations or systems.
In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Our financial condition and results of operations could be negatively affected to the extent we rely on financial statements that do not comply with GAAP or are materially misleading, any of which could be caused by errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.
Risks Related to Our Common Stock
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described in this "Risk Factors" section and elsewhere in this Report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you may lose some or all of your investment.
Common stock is equity and is subordinate to our existing and future indebtedness and effectively subordinated to all the indebtedness and other non-common equity claims against our subsidiaries.
Shares of our common stock are equity interests in the Company and do not constitute indebtedness. As such, shares of the common stock rank junior to all of our indebtedness and to other non-equity claims against us and our assets available to satisfy claims against us, including our liquidation. Upon liquidation, lenders and holders of our debt securities, would receive distributions of our available assets prior to holders of our common stock.
There can be no assurance that we will continue to pay cash dividends .
Although we have historically paid cash dividends on our common stock, there is no assurance that we will continue to pay cash dividends. Future payment of cash dividends, if any, will be at the discretion of our Board and will be dependent upon our financial condition, results of operations, capital requirements, economic conditions, and such other factors as the Board may deem relevant.
Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.
Although our common stock is listed for trading on the NASDAQ Global Select Market under the symbol “FBNC,” the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity, and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the comparatively lower trading volume of our common stock relative to larger institutions, significant sales of our common stock or other volatility in our shares in the public market could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.
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We may issue additional shares of stock or equity derivative securities that will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of our common stock and adversely affect the terms on which we may obtain additional capital.
Subject to applicable NASDAQ rules, our Board generally has the authority, without action by or vote of the shareholders, to issue all or part of any authorized but unissued shares of stock for any corporate purpose, including issuances of equity-based incentives under or outside of our Capital compensation plans, issuances of equity in business combination transactions, and issuances of equity to raise additional capital to support growth or to otherwise strengthen our balance sheet. Any issuance of additional shares of stock or equity derivative securities will dilute the percentage ownership interest of our shareholders and may dilute the tangible book value per share of our common stock.
We may make future acquisitions, which could dilute current shareholders’ stock ownership and expose us to additional risks.
In accordance with our strategic plan, we evaluate opportunities to acquire other financial institutions, financial services companies and branch locations. Such transactions could have a material effect on our operating results and financial condition, including short- and long-term liquidity, and could require us to issue a significant number of shares of common stock or other securities and/or to use a substantial amount of cash, other liquid assets, and/or incur debt.
Our acquisition activities could involve a number of additional risks, some of which are described in more detail elsewhere in this Report and include: the possibility that expected benefits may not materialize in the timeframe expected or at all, or may be more costly to achieve; using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target company or assets; incurring the time and expense required to integrate the operations and personnel of the combined businesses; the possibility that we will be unable to successfully implement integration strategies due to challenges associated with integrating complex systems, technology, banking offices, and other assets of the acquired company in a manner that minimizes any adverse effect on customers, suppliers, employees, and other constituencies; the possibility of regulatory approval for the acquisition being delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues surrounding the Company, the target company, the assets acquired or the proposed combined entity; and key employees and customers as a result of an acquisition that is received.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
The Company recognizes the security of our banking operations is critical to protecting our customers, maintaining our reputation and preserving the value of the Company. The Board, primarily through its Risk Committee, provides direction and oversight of the enterprise-wide risk management framework of the Company, and cybersecurity represents a component of the Company’s overall approach to enterprise-wide risk management. The Company's Information Security Program establishes policies and procedures for the measurement of the effectiveness and efficiency of information security controls related to both design and operations. The Company leverages the following guidelines and frameworks to develop and maintain its Information Security Program: FFIEC Information Security IT Examination Handbook, FFIEC Business Continuity Management IT Examination Handbook, FFIEC Cybersecurity Assessment Tool, and GLBA 501(b). In general, the Company addresses cybersecurity risks through a comprehensive, cross-functional approach that is focused on confidentiality, security and availability of the information that the Company collects and stores by identifying, preventing, and mitigating cybersecurity threats and effectively responding to cyber threats when they occur.
As one of the elements of the Company’s overall enterprise-wide risk management approach, our Information Security Program is focused on the following key areas:
• Security Operation and Governance: The Board has delegated to senior management responsibility for the Information Security Program which is managed through the IT Steering Committee, which maintains alignment and appropriate insight regarding information security activities.
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• Collaborative Approach: The Company has implemented a cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
• Security Competencies: The Information Security department oversees a program of security competencies and tools designed to protect the confidentiality, integrity, and availability of our data . These assets represent a blend of various management (e.g., policies), operational (e.g., standards and processes), and technical controls (e.g., tools and configurations).
• Incident Response Plan: The Company has a contracted with a third-party to provides continual security monitoring 24 hours per day, seven days per week, where resources actively deliver threat analysis, vulnerability management, intrusion detection, and intrusion hunting. The Company’s Incident Response Plan helps reduce the risks related to security incidents by providing guidelines on responding to incidents.
• Third-Party Risk Management: Management of the Company’s third parties, including vendors and service providers, is conducted through a risk-based approach and the level of due diligence is driven from risk factors established by our Risk Management program. The process provides awareness and collaboration across internal teams including, but not limited to, Information Technology, Information Security and Business Continuity. In addition to ongoing monitoring of select vendors, a review is conducted on new or significantly changed third parties, applications, and technology to ensure that systems and third parties meet certain baseline requirements. This process is used to identify and monitor risks in vendor arrangements and assists management in establishing appropriate risk responses.
• Security Awareness and Education: The Company provides annual, mandatory training for personnel regarding security awareness as a means to equip the Company’s personnel with the understanding of how to properly use and protect the computing resources entrusted to them, and to communicate the Company’s information security policies, standards, processes and practices.
The Company leverages regular assessments to identify current and potential threats and vulnerabilities within the Company’s environment. Technical vulnerabilities are identified using automated vulnerability scanning tools, penetration testing, and system management tools, whereas non-technical vulnerabilities are identified via process or procedural reviews. The Company conducts a variety of assessments throughout the year, both internally and through third parties. Vulnerability assessment and penetration tests are performed on a regular basis to provide the Company with an unbiased view of its environment and controls. Vulnerabilities identified during these assessments are inventoried in a centralized tracking system and reported to management on a regular basis. A multi-step approach is applied to identify, report and remediate these vulnerabilities, and the Company adjusts its information security policies, standards, processes and practices as necessary based on the information provided by these assessments. The results of key assessments are reported in summary to the Board on an ongoing basis.
Governance
The Risk Committee of the Board provides direction and oversight of the enterprise-wide risk management framework of the Company, including the management of risks arising from cybersecurity threats. The Risk Committee receives periodic presentations which include updates on cybersecurity risks, including the threat environment, evolving standards, projects and initiatives, vulnerability assessments, third-party and independent reviews, technological trends and information security considerations arising with respect to the Company’s peers and third parties. The Risk Committee also receives information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding any such incident until it has been addressed. The full Board receives reports from the Risk Committee related to information cybersecurity.
Our Chief Operating Officer ("COO") , works collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s Incident Response Plans, including an assessment of the potential materiality of any cybersecurity incident. To facilitate the success of the Company’s cybersecurity risk management program, multidisciplinary teams throughout the Company are deployed to address cybersecurity threats and to respond to cybersecurity incidents. Through ongoing communications with these teams, the COO, Information Security, and Risk Management teams monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents in real time, and report such threats and incidents to the Corporate Crisis
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Management Team and ultimately the Board when appropriate. We believe our Board and management, including the COO, have the appropriate expertise, background, and depth of experience to manage risks arising from cybersecurity threats, including applicable knowledge gained through industry experience, internal and external training, and periodic discussions with consultants and peers with applicable knowledge and expertise. In addition, members of our management hold varying levels of relevant cybersecurity certifications.
To our knowledge, neither cybersecurity threats, nor the results including as a result of any previous cybersecurity incidents have materially affected the Company, including its business strategy, results of operations or financial condition. With regard to the possible impact of future cybersecurity threats or incidents, see Item 1A, Risk Factors - Risks Related to Our Business .
Item 2. Properties
The main office of the Company and Bank is located in Southern Pines, North Carolina and is owned by the Bank. The Bank’s operational departments, including accounting functions, information technology operations, loan operations, and deposit operations, are primarily housed in buildings in Greensboro, North Carolina; Dunn, North Carolina; Fletcher, North Carolina; and Troy, North Carolina, which are owned by the Bank. At December 31, 2025, the Company operated 113 bank branches. The Company owned all of its bank branch premises except 13 branch offices for which the land and buildings are leased and ten branch offices for which the land is leased but the building is owned. The Bank also leases several other office locations for administrative functions. There are no options to purchase or lease additional properties. The Company considers its facilities adequate to meet current needs and believes that lease renewals or replacement properties can be acquired as necessary to meet future needs.
Item 3. Legal Proceedings
Various legal proceedings may arise in the ordinary course of business and may be pending or threatened against the Company and its subsidiaries. Neither the Company nor any of its subsidiaries is involved in any pending legal proceedings that management believes are material to the Company or its consolidated financial position. If an exposure were to be identified, it is the Company’s policy to establish and accrue appropriate reserves during the accounting period in which a loss is deemed to be probable and the amount is determinable.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Stock, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Our common stock trades on NASDAQ under the trading symbol “FBNC.” Tables have been included in Item 7 under the heading, "Selected Financial Information," which provide historic information on the market price for the Company’s common stock. As of February 19, 2026, there were approximately 3,381 shareholders of record and another approximately 24,403 shareholders whose stock is held in “street name.”
The tables in Item 7 under "Selected Financial Information" section also include information regarding cash dividends declared per share of common stock for the periods presented. For the first quarter in 2025, we declared a cash dividend of $0.22 . For each quarter thereafter in 2025, we declared a cash dividend of $0.23 per common share. For the foreseeable future, it is our current intention to continue to pay regular cash dividends on a quarterly basis. However, our ability to pay future cash dividends can be restricted or eliminated by regulatory authorities.
Securities authorized for issuance under equity compensation plans
Refer to “Additional Information Regarding the Registrant’s Equity Compensation Plans” in Item 12.
Issuer Purchases of Equity Securities
Beginning in January 2024, the Board of the Company has authorized the repurchase of up to $40 million in shares of the Company’s common stock in private transactions and open market purchases. Any such repurchases would be made pursuant to a plan approved by and containing provisions about the timing, purchase prices and quantities
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purchased determined by management in its discretion. During the year ended December 31, 2025, 24,849 shares were repurchased. During the year ended December 31, 2024, the Company did not make any such purchases. As of December 31, 2025, The Company had remaining authorization to purchase up to $39.0 million of outstanding stock under the program. On January 27, 2026, the Board reauthorized the repurchase of up to $40 million in shares of the Company's common stock through January 27, 2027. No repurchases of any shares of the Company's common stock were made in 2026 through the date of this Annual Report in Form 10-K.
Performance Graph
The performance graph shown below compares the Company’s cumulative total return to shareholders for the five-year period commencing December 31, 2020 and ending December 31, 2025, with the cumulative total return of the Russell 2000 Index (reflecting overall stock market performance of small-capitalization companies), and the S&P U.S. BMI Banks Industry Group Index, as constructed by S & P Global (reflecting performance in broad market banking industry stocks). The graph and table assume that $100 was invested on December 31, 2020 in each of the Company’s common stock, the Russell 2000 Index, and the S&P U.S. BMI Banks Industry Group Index, and that all dividends were reinvested.
First Bancorp Comparison of Five-Year Total Return Performances (1)
Five Years Ended December 31, 2025
Total Return Index Values (1)
December 31,
First Bancorp
Russell 2000 Index
S&P US BMI Banks Industry Group Index
(1) Total return indices were provided from an independent source, S&P Global Market Intelligence, New York, New York, and assume initial investment of $100 on December 31, 2020, reinvestment of dividends, and changes in market values. Total return index numerical values used in this example are for illustrative purposes only.
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Item 6. Reserved.
Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This MD&A is intended to assist readers in understanding our results of operations and changes in financial position for the past three years. It should be read in conjunction with the consolidated financial statements and accompanying notes included in Item 8 of this Report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors.
Overview and 2025 Highlights
The Company is a bank holding company headquartered in Southern Pines, North Carolina. We provide diversified financial services primarily though the Bank, our principal subsidiary, including commercial and consumer banking services, mortgage lending, SBA lending, accounts receivable financing, and investment advisory services. As of December 31, 2025, the Bank had 113 branches in North Carolina and South Carolina and 1,353 full-time equivalent employees. We have grown organically as well as through strategic acquisitions as discussed previously in "Recent Developments and Acquisitions".
2025 Financial Highlights:
• Return on average assets was 0.89% for the year ended December 31, 2025, as compared to 0.63% for the prior year. Return on average common equity was 7.16% for the year ended December 31, 2025, as compared to 5.38% for the prior year. As discussed below, the returns for 2025 and 2024 were impacted by securities loss transactions as well as Hurricane Helene provisions.
• Total assets at December 31, 2025 were $12.7 billion, a 4.3% increase from a year earlier.
• Total loans outstanding expanded by $0.6 billion, or 7.8%, during the year. Loans totaled $8.7 billion at December 31, 2025.
• Credit quality continued to be strong with the NPA to total assets ratio at 0.30% as of December 31, 2025, consistent with December 31, 2024. Net charge offs as a percentage of average loans were 0.10% for 2025, as compared to 0.07% for the prior year.
• Capital remained strong with a total CET1 ratio of 14.10%, down from 14.35% for the prior year, and total risk-based capital ratio of 16.12% as of December 31, 2025, a decrease from 16.63% for the prior year. The decrease during 2025 in risk-based capital ratios was driven by loan growth, which carries a higher risk weight than short term investments, along with the repayment of $18.0 million of subordinated debt.
• Net income was $111.0 million, or $2.68 diluted EPS, for 2025 compared to net income of $76.2 million, or $1.84 diluted EPS, for 2024. As noted below, 2025 results were impacted by $71.6 million of securities loss from transactions that took place during the third and fourth quarter of 2025 and the $11.1 million reversal of provision related to Hurricane Helene throughout the year. See the following for discussion of changes to net income:
• Net interest income for 2025 increased $66.0 million, or 19.9%, driven by increased interest income and lower interest expense. The NIM was 3.40% for 2025, an increase of 51 basis points from the prior year.
• Total interest income increased $38.0 million in 2025 as compared to 2024, driven by higher interest income on loans of $21.1 million related to a combination of higher volumes of average balances and increased yields. Interest income on securities increased $20.5 million, primarily the result of increased yields driven by the securities loss-earnback transactions in late 2024 and the second half of 2025.
• Interest income on other interest-earning assets, primarily overnight funds, decreased $3.7 million, primarily the result of lower volumes along with the decrease in the federal funds rate.
• The 2025 decrease in interest expense of $28.0 million was driven by lower money market rates in late 2025, which resulted in repricing of our deposits and a corresponding $19.6 million decrease in
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deposit interest expense, especially in money market accounts which accounted for $7.4 million of the decrease. Additionally, interest expense on borrowings fell $8.4 million, primarily the result of average balances on outstanding borrowings.
• Provision for credit losses for 2025 of $11.5 million was down from $16.4 million in 2024 due primarily to the $13.0 million provision related to potential exposure from Hurricane Helene in 2024. Offsetting this was higher net charge offs in 2025, provisions for higher loan growth in 2025 and an increase in the level of unfunded commitments. See the "Provision for Loan Losses" section below.
• Noninterest income declined $25.8 million in 2025, which resulted primarily from the $71.6 million securities loss related to securities loss-earnback transactions that took place in the third and fourth quarter of 2025. Noninterest income in 2024 included a securities loss of $38.0 million related to a securities loss-earnback transactions that took place in the fourth quarter of 2024. Refer to "Noninterest Income" section below for further discussion.
• Noninterest expense increased $3.7 million in 2025, primarily related to the $4.2 million increase in Total personnel expense driven by increased incentives expense arising from the Company's performance. In 2024 and 2025, the Company actively managed headcount and continued to apply additional expense controls. Refer to "Noninterest Expense" section below for further discussion.
• Income tax expense increased $6.6 million from the prior year primarily resulting from higher pre-tax income. The 2025 effective tax rate of 20.4% was lower than the prior year as the result of net discrete tax benefits, primarily arising from state taxes, including the continued North Carolina graduated tax rate reductions.
Current Economic Conditions
Economic conditions during 2025 continued to show resilience, supported by generally positive domestic results, relatively low unemployment and sustained demand for goods and services. Inflationary pressures moderated further compared to prior periods, reflecting the impact of monetary policy actions taken by the Federal Reserve in recent years. However, a combination of positive and negative economic indicators persisted throughout 2025 and there continues to be some uncertainty in economic conditions and outlook. As such, we could be exposed to ongoing risks, which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations.
Our financial position and results of operations are susceptible, among other factors, to the ability of our loan customers to meet their loan obligations to us, the availability of our workforce, the availability of our vendors, and the volatility in the value of assets held by us or securing our loans. We have not realized significant negative impact on our loan portfolio or asset quality to date as a result of the current economic conditions. However, the economic pressures and uncertainties, increased consumer demand and recent volatility in both short-term and long-term interest rates have resulted in, and may continue to result in, specific changes in consumer and business spending and borrowing habits, given the current and expected interest rate environment, which could make it difficult to grow assets and income.
The extent to which the current economic conditions have a further impact on our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including actions taken by governmental authorities in response to inflationary trends and recessionary risks.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with GAAP and with general practices followed by the banking industry. Certain policies inherently have a greater reliance on the use of estimates, assumptions, or judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We have identified the determination of our ACL and related Allowance for Unfunded Commitments, as well as business combinations, related fair value measurements and goodwill determination to be the accounting areas that require the most subjective or complex judgments, estimates, and assumptions, and where changes in those judgments, estimates, and assumptions (based on new or additional information, changes in the economic climate and/or market interest rates, etc.) could have a significant effect on
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our financial statements. See the "Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience" discussion in the Financial Condition section of Management's Discussion and Analysis.
Our most significant accounting policies are presented in Note 1 to the accompanying consolidated financial statements. These policies, along with the disclosures presented in the other notes to the consolidated financial statements and in this MD&A, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.
Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments
While management uses the best information available to establish the ACL, future adjustments to the ACL and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. We perform periodic and systematic detailed reviews of the loan portfolio to identify trends and to assess the overall collectability of the portfolio. We believe the accounting estimate related to the ACL is a “critical accounting estimate” as: (1) changes in it can materially affect the provision for loan losses and net income; (2) it requires management to predict borrowers’ likelihood or capacity to repay, including evaluation of inherently uncertain future economic conditions; (3) the value of underlying collateral must be estimated on collateral-dependent loans; (4) prepayment activity must be projected to estimate the life of loans that often are shorter than contractual terms; and (5) it requires estimation of a reasonable and supportable forecast period for credit losses. Accordingly, this is a highly subjective process and requires significant judgment since it is difficult to evaluate current and future economic conditions in relation to an overall credit cycle and estimate the timing and extent of loss events that are expected to occur prior to end of a loan’s estimated life.
Our ACL is assessed at each quarterly balance sheet date and adjustments are recorded in the provision for loan losses on the consolidated statements of income. There are many factors affecting the ACL, some of which are quantitative, while others require qualitative judgment. There are both internal factors (i.e., loan balances, historical loss rates, credit quality, the contractual lives of loans), external factors (i.e., economic conditions such as trends in housing prices, interest rates, GDP, inflation, and unemployment), and assumptions of probability of default and loss given default by loan category, that can impact the ACL estimate. One of the most significant assumptions is the macroeconomic scenario forecasts that determine the economic variables utilized in the ACL model. Due to the inherent uncertainty in the macroeconomic forecasts, we evaluate a baseline scenario quarterly, as well as upside or downside macroeconomic scenarios to assess the most reasonable scenario based on review of the variable forecasts for each scenario, comparison to expectations, and sensitivity of variations in each scenario.
The most significant variable in the economic forecasts is the national unemployment rate (which has remained relatively stable), and changes in unemployment forecasts can have significant impact to the estimated ACL. Other economic variables include national GDP, the national commercial real estate pricing index and the national home price index. We use the national unemployment rate in all of our models regardless of the loan portfolio type, and we use a second economic variable in each cohort model depending on the loan portfolio type. The ACL quantitative estimate is sensitive to changes in the economic variable forecasts during the twelve-month reasonable and supportable forecast period with a straight-line reversion over the next three years to long-term average loss factors. There have been no changes to the reasonable and supportable period or reversion period in any year presented.
Although management believes its process for determining the ACL adequately considers all the factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect our earnings or financial position in future periods.
Under the range of macroeconomic forecast scenarios considered as of December 31, 2025, use of a "downside"/ more pessimistic scenario would have resulted in an increase to the modeled allowance results of approximately $32 million. This estimate reflects the sensitivity of the modeled allowance estimate to macroeconomic forecast data but does not consider other qualitative adjustments that could increase or decrease modeled loss estimates calculated using this alternative economic scenario.
PCD loans represent assets that are acquired with evidence of more than insignificant credit quality deterioration since origination at the acquisition date. At acquisition, the allowance on PCD assets is booked directly to the ACL. Any subsequent changes in the ACL on PCD assets is recorded through the provision for loan losses on the consolidated statements of income.
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We believe that the ACL is adequate to absorb the expected life of loan credit losses on the portfolio of loans as of the balance sheet date. Actual losses incurred may differ materially from our estimates. For example, inflationary pressures and recessionary concerns leading to macroeconomic economic deterioration, higher unemployment and declines in real estate and other asset valuations could affect our loss experience and assumptions utilized in our model.
We estimate expected credit losses on unfunded commitments to extend credit over the contractual period in which we are exposed to credit risk on the underlying commitments, unless the obligation is unconditionally cancellable. The allowance for off-balance sheet credit exposures, which is included in "Other liabilities" on the consolidated balance sheets, is adjusted for as an increase or decrease to the provision for unfunded commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The methodology is based on a loss rate approach that starts with the probability of funding based on historical experience. Similar to the methodology discussed above related to the loans receivable portfolio, adjustments are made to the historical losses for current conditions and reasonable and supportable forecasts.
Additional information on the loan portfolio and ACL can be found in the sections of this Item 7 titled “Nonperforming Assets” and “Allowance for Credit Losses and Loan Loss Experience” below.
Business Combinations and Goodwill
We believe that the accounting for business combinations, goodwill, and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. Pursuant to applicable accounting guidance, we recognize assets acquired, including identified intangible assets, and the liabilities assumed in acquisitions at their fair values as of the acquisition date, with the related transaction costs expensed in the period incurred. Specified items such as acquired operating lease assets and liabilities as lessee, employee benefit plans, and income-tax related balances are recognized in accordance with accounting guidance that results in measurements that may differ from fair value. Determining the fair value of assets acquired and liabilities assumed often involves estimates based on internal or third-party valuations which include appraisals, discounted cash flow analysis, or other valuation techniques that may include estimates of attrition, inflation, asset growth rates, discount rates, credit risk, multiples of earnings, or other relevant factors. The determination of fair value may require us to make point-in-time estimates about discount rates, future expected cash flows, market conditions, and other future events that can be volatile in nature and challenging to assess. While we use the best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
The primary identifiable intangible asset we typically record in connection with a whole bank or bank branch acquisition is the value of the core deposit intangibles which represents the estimated value of the long-term deposit relationships acquired in the transaction. Determining the amount of identifiable intangible assets and their average lives involves multiple assumptions and estimates and is typically determined by performing a discounted cash flow analysis, which involves a combination of any or all of the following assumptions: customer attrition/runoff, alternative funding costs, deposit servicing costs, and discount rates. The core deposit intangibles are amortized over the estimated useful lives of the deposit accounts based on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. The estimated useful lives are periodically reviewed for reasonableness and have generally been estimated to have a life ranging from seven to ten years, with an accelerated rate of amortization. We review identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Our policy is that an impairment loss is recognized, equal to the difference between the asset’s carrying amount and its fair value, if the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Estimating future cash flows involves the use of multiple estimates and assumptions, such as those listed above.
The ACL for PCD assets is recognized within business combination accounting with no initial impact to net income. Changes in estimates of expected credit losses on PCD loans after acquisition are recognized as provision expense (or reversal of provision expense) in subsequent periods as they arise. The ACL for non-PCD assets is recognized as provision expense in the same reporting period as the business combination. Estimated loan losses for acquired loans are determined using methodologies and applying estimates and assumptions that were described previously in the Allowance for Credit Losses on Loans and Allowance for Unfunded Commitments section above.
Non-PCD loans acquired are generally estimated at fair value using a discounted cash flow approach with assumptions of discount rate, remaining life, prepayments, probability of default, and loss given default. The actual
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cash flows on these loans could differ materially from the fair value estimates. The amount we record as the fair values for the loans is generally less than the contractual unpaid principal balance due from the borrowers, with the difference being referred to as the “discount” on the acquired loans. Discounts on acquired non-PCD loans are accreted to interest income over their estimated remaining lives, which may include prepayment estimates in certain circumstances.
Similarly, premiums or discounts on acquired debt are accreted or amortized to interest expense over their remaining lives. Actual accretion or amortization of premiums and discounts from a business acquisition may differ materially from our estimates impacting our operating results.
We believe that the accounting for goodwill also involves a higher degree of judgment than most other significant accounting policies. Goodwill arising from business combinations represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.
ASC 350-10 establishes standards for an impairment assessment of goodwill. At each reporting date between annual goodwill impairment tests, we consider potential indicators of impairment. Generally, absent potential impairment indicators, we perform an annual assessment of whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit was less than its carrying value. Impairment indicators considered include the condition of the economy and banking industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company's stock, and other relevant events. During 2025 there were no triggers warranting interim impairment assessments and for the 2025 annual assessment, we concluded that it was more likely than not that the fair value exceeded its carrying value. At December 31, 2025, we had $478.8 million of goodwill.
Recent Accounting Standards and Pronouncements
For information relating to recent accounting standards and pronouncements, see Note 1 to our consolidated financial statements entitled “Summary of Significant Accounting Policies.”
RESULTS OF OPERATIONS
The following discussion reviews the results of operations and key drivers to change in the results of 2025 as compared to 2024. For a description of our results of operations for 2024 as compared to 2023, refer to the "Overview and 2024 Highlights," Results of Operations," and "Analysis of Financial Condition and Changes in Financial Condition" sections of Item 7 in our 2024 Form 10-K.
Net Interest Income
Net interest income is our largest source of revenue and is the difference between the interest earned on interest-earning assets (generally loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (generally deposits and borrowed funds). Changes in the net interest income are the result of changes in volume and the net interest spread which affects NIM. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. NIM refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. Net interest income is also influenced by external factors such as local economic conditions, competition for loans and deposits, and market interest rates.
Net interest income amounted to $398.2 million in 2025, an increase of $66.0 million, or 19.9%, from $332.3 million in 2024. The increase was primarily due to the increase in yields on securities, partially a result of the securities loss-earnback transactions in 2025 and 2024, and the higher volume and yields of average loans outstanding. Additionally, interest expense decreased, primarily due the lower rates on interest-bearing deposits, specifically money market accounts, partially offset by the higher volume of average money market account balances. The average rate on borrowings decreased due to the payoff of borrowings with higher interest rates as well as borrowings with variable interest rates decreasing after the FOMC actions in 2024 and 2025.
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As a result of the higher net interest income related to the increase in the yield on interest-bearing assets and the decrease in the cost of interest-bearing liabilities, NIM expanded 51 basis points to 3.40% in 2025 from 2.89% in 2024. For internal purposes, we evaluate our NIM on a tax-equivalent basis, which is a non-GAAP financial measure, by adding the tax benefit realized from tax-exempt loans and securities to reported interest income, then dividing by total average earning assets. We believe that analysis of NIM on a tax-equivalent basis is useful and appropriate because it allows a comparison of net interest in different periods without taking into account the different mix of taxable versus non-taxable loans and investments that may have existed during those periods. The following is a reconciliation of reported net interest income to tax-equivalent net interest income and the resulting NIM as reported and on a tax-equivalent basis.
($ in thousands)
Year ended December 31,
Net interest income, as reported
Tax-equivalent adjustment
Net interest income, tax-equivalent
Net interest margin, as reported
Net interest margin, tax-equivalent
Our total cost of deposits has been more impacted by the FOMC's changes in short term rates than the yield on our interest-earning assets. The target federal funds rate began 2024 at 5.50% and remained there until September 2024, when it was reduced a total of 100 basis points by the end of 2024, helping to increase our NIM to 3.05% in the fourth quarter of 2024. In the second half of 2025, after a pause in rate changes, the FOMC made further rate changes, resulting in an additional 75 basis point decrease.
As shown in the chart below, our NIM has grown consistently since the first quarter of 2024. This NIM expansion is the result of our yield on interest-earning assets continuing to earn at higher rates, increasing 41 basis points during the same period, while our total cost of deposits peaked in the third quarter of 2024, then declined 44 basis points to 1.32% for the fourth quarter of 2025.
First Bancorp Comparison of Net Interest Margin,
Yield on Earning Assets and Total Cost of Deposits
Eight Quarters Ended December 31, 2025
Our NIM for all periods presented below benefited from the net accretion income arising from purchase accounting
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premiums/discounts associated with acquisitions. Presented in the table below is the amount of accretion which increased net interest income in each year presented.
Year ended December 31,
($ in thousands)
Interest income – increased by accretion of loan discount on acquired loans
Total interest income impact
Interest expense – (increased) reduced by (discount accretion) premium amortization of deposits
Interest expense – increased by discount accretion of borrowings
Total net interest expense impact
Impact on net interest income
The most significant component of the purchase accounting adjustments in each year was loan discount accretion on purchased loans. Generally, the level of loan discount accretion will decline each year after an acquisition due to the natural reduction in the outstanding balance of acquired loans. Alternately, levels of accretion will increase as a result of future acquisitions and related additions to loan discounts on acquired portfolios which are accreted to income as experienced since 2023 with the GrandSouth acquisition.
At December 31, 2025 and 2024, unaccreted loan discount on purchased loans amounted to $8.8 million and $15.1 million, respectively. The GrandSouth acquired portfolio comprised the majority of the remaining unaccreted loan discount at December 31, 2025.
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The following table presents the major components of net interest income and NIM.
Average Balances and Net Interest Income Analysis
Year Ended December 31,
($ in thousands)
Average
Volume
Interest
Earned
or Paid
Avg.
Rate
Average
Volume
Interest
Earned
or Paid
Avg.
Rate
Average
Volume
Interest
Earned
or Paid
Avg.
Rate
Assets
Loans (1) (2)
Taxable securities
Non-taxable securities
Short-term investments, primarily interest-bearing cash
Total interest-earning assets
Cash and due from banks
Premises and equipment
Other assets
Total assets
Liabilities and Equity
Interest-bearing checking
Money market deposits
Savings deposits
Other time deposits
Time deposits >$250,000
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total interest-bearing liabilities
Noninterest-bearing checking
Total sources of funds
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net yield on interest-earning assets and net interest income
Net yield on interest-earning assets and net interest income – tax-equivalent (3)
Interest rate spread
Average prime rate
(1) Average loans include nonaccruing loans, the effect of which is to lower the average rate shown. Interest earned includes recognized net loan fees, including late fees, prepayment fees, and deferred loan (cost)/fee amortization in the amounts of $(0.8) million , $(1.1) million, and $0.5 million for 2025, 2024, and 2023, respectively.
(2) Includes accretion of discount on acquired loans of $6.1 million, $8.9 million, and $11.5 million in 2025, 2024, and 2023, respectively.
(3) Includes tax-equivalent adjustments to reflect the tax benefit that we receive related to tax-exempt securities and loans as reduced by the related nondeductible portion of interest expense.
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The following table presents additional detail regarding the estimated impact that changes in interest-earning asset and interest-bearing liability volumes and changes in the interest rates we earned/paid had on our net interest income in 2025 and 2024.
Volume and Rate Variance Analysis
Year Ended December 31, 2025
Year Ended December 31, 2024
Change Attributable to
Change Attributable to
($ in thousands)
Changes
in Volume
Changes
in Rates
Total
Increase
(Decrease)
Changes
in Volume
Changes
in Rates
Total
Increase
(Decrease)
Interest income:
Loans
Taxable securities
Non-taxable securities
Other interest-earning assets, primarily overnight funds
Total interest income
Interest expense:
Interest bearing checking accounts
Money market accounts
Savings accounts
Other time
Time deposits >$250,000
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total interest expense
Net interest income
Note - Changes attributable to both volume and rate are allocated equally between rate and volume variances.
As demonstrated in the above table, net interest income expanded $66.0 million in 2025. Higher rates and volumes on interest-bearing assets and lower rates on interest-bearing liabilities were partially offset by higher money market volume.
• For 2025, higher loan volume resulted in a $13.2 million increase in interest income while increased market rates contributed to an additional $7.9 million of loan interest income. Variable rate loans comprised approximately 29% of the loan portfolio at December 31, 2025, and, accordingly, the magnitude of the immediate yield impact we experience from each federal funds rate change is limited.
• Increases in the overall yield on average investment securities, along with somewhat higher volumes, resulted in increased interest income of $20.5 million in 2025. During 2025, $585.1 million of AFS securities were purchased with a weighted average yield of 4.13%.
• Lower volumes of other interest-earning assets (primarily interest-bearing cash balances) along with lower yields resulted in a decrease in interest income of $3.7 million for the year.
• The decrease of $19.6 million in interest expense on deposits was driven by lower rates on accounts as we repriced deposits in response to the market decreases, partially offset with higher volumes, primarily in money market deposit accounts.
• Lower balances on short-term borrowings, historically comprised of short-term FHLB and Federal Reserve advances to fund loan demand in excess of deposit growth, contributed $7.1 million to the decrease in borrowings interest expense, which, in total, decreased $8.4 million in 2025.
Provision for Credit Losses and Provision for Unfunded Commitments
The provision for credit losses is comprised of the provision for loan losses and the provision for unfunded commitments. The provision recorded in each period represents the amount required such that the total ACL reflects
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the current estimate of life of loan credit losses in the loan portfolio and the allowance for unfunded commitments reflects the current expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. Our estimate of credit losses is determined using a complex model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and allowance for unfunded commitments. The allowance for unfunded commitments is included in "Other liabilities" in the consolidated balance sheets.
The provision for loan losses was $9.6 million in 2025 and $18.8 million in 2024. The amount of provision recorded in each period was the amount required such that the total ACL reflected the appropriate balance as determined under the CECL model. The primary contributor to the reduction in provision expense was the $13.0 million related to potential credit exposure from Hurricane Helene recognized in 2024.
We subscribe to a third-party service which provides quarterly macroeconomic scenarios for the United States economy. For 2025, we continue to utilize the baseline forecast, which incorporates an equal probability of the United States economy performing better or worse than the projection. The economic forecasts throughout the year have exhibited general stability of the economy demonstrated in relatively low unemployment rates, healthy GDP levels, and mixed results for real estate price indices for commercial and residential properties.
During 2025 we recorded a provision for unfunded commitments of $1.9 million compared to a reduction of $2.3 million for 2024. Changes in the level of provision each year are generally related to fluctuations in the level of available credit lines and updated loss drivers.
In the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene in third quarter of 2024, the Company identified borrowers who were potentially impacted. During 2025, the Company evaluated the commercial loan portfolio and adjusted risk ratings and nonaccrual status as applicable. Therefore, for those relationships, the normal reserving process was applied for December 31, 2025. For the potentially impacted consumer loans, the Company applied increased reserve rates based upon severe economic factors to the approximately $268 million of loans (primarily Residential 1-4 family real estate) in the most impacted path of Hurricane Helene. Due to the potential exposure from Hurricane Helene, the ACL on these impacted consumer loans was $1.9 million as of December 31, 2025, adding 2 basis points to the overall ACL as a percent of total loans, which was 1.42% as of December 31, 2025.
Additional discussion of the CECL method and our asset quality and credit metrics, which impact our provision for credit losses, is provided in the "Nonperforming Assets" and "Allowance for Credit Losses and Loan Loss Experience" sections following.
Noninterest Income
Our noninterest income amounted to $7.9 million in 2025, $17.9 million in 2024, and $57.3 million in 2023.
The decreased noninterest income for the year ended December 31, 2025 as compared to the same period in 2024 is a result of increased "Securities losses, net," partially offset by increased "Other gains, net." Details of the more significant components of noninterest income are presented in the table below.
Noninterest Income
Year Ended December 31,
($ in thousands)
Service charges on deposit accounts
Other service charges and fees - bankcard and interchange income, net
Other service charges - other
Presold mortgage loan fees and gains on sale
Commissions from sales of financial products
SBA loan sale gains
Bank-owned life insurance ("BOLI") income
Securities losses, net
Other gains, net
Total noninterest income
Service charges on deposit accounts decreased $0.4 million, or 2.3%, in 2025 as compared to 2024.
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Other service charges and fees - bankcard interchange income, net represents interchange income from debit and credit card transactions, net of associated interchange expense and amounted to $9.5 million in 2025, a 1.7% increase from the $9.3 million in 2024.
Other service charges - other includes items such as ATM charges, wire transfer fees, safety deposit box rentals, fees from sales of personalized checks, and check cashing fees. Also included in this category are SBA guarantee servicing fees and related servicing rights amortization which fluctuate based on the volume of and prepayment speeds on SBA loans serviced for others. The increase in this category in 2025 was $2.1 million, or 15.9%.
Securities losses, net was $71.6 million in 2025. $27.9 million of this loss relates to a securities loss-earnback transaction from the third quarter in which the Company sold $194.3 million of AFS securities bearing 1.63% at a loss. Additionally, $43.7 million of this loss relates to a securities loss-earnback transaction from the fourth quarter in which the Company sold $342.0 million of AFS securities bearing 1.67% at a loss.
Other gains, net amounted to a net gain of $8.7 million for 2025. The majority of the increase from the prior year related to a pretax gain of $4.6 million realized upon the sale of an office building during the fourth quarter.
Noninterest Expenses
Total noninterest expenses totaled $239.3 million, $235.6 million, and $254.4 million, for 2025, 2024, and 2023, respectively.
The primary contributors to the $3.7 million, or 1.6%, increase for the year ended December 31, 2025 as compared to 2024 was the $4.2 million increase in Total personnel expense arising from increased incentives due to the Company's financial performance, partially offset by the $0.9 million decrease in Amortization of intangible assets. For the year ended December 31, 2025, there was a continued overall effort by management to actively control headcount and expenses.
The following table presents the primary components of noninterest expense.
Noninterest Expenses
Year Ended December 31,
($ in thousands)
Salaries incentives and commissions expense
Employee benefit expense
Total personnel expense
Occupancy and equipment expense
Credit card rewards and other bankcard expenses
Telephone and data lines
Software licenses and other software costs
Data processing expense
Professional fees
Advertising and marketing
Non-credit losses
FDIC insurance costs
Corporate insurance costs
Merger and acquisition expenses
Intangibles amortization expense
Foreclosed real estate (gains) losses, net
Other operating expenses
Total noninterest expense
Income Taxes
We recorded income tax expense of $28.5 million in 2025, $21.9 million in 2024, and $27.8 million in 2023. Our effective tax rates were 20.4% for 2025, 22.3% for 2024, and 21.1% for 2023. The effective tax rate for 2025 included approximately $2.1 million of net discrete tax benefits, primarily arising from state taxes, including the continued North Carolina graduated tax rate reductions. The effective tax rate for 2024 included incremental state tax-related expense related to prior years, changes in state tax income apportionment, and the negative impact of
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decreasing deferred tax assets related to the North Carolina corporate income tax reduction effective January 1, 2025 and for future years.
ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
Loans
The loan portfolio is the largest category of our earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans, and consumer loans. The majority of our loan portfolio is within our North Carolina and South Carolina market areas. We also have a portfolio of SBA loans that have been made on a more dispersed geographic basis. The diversity of the economic bases of our market areas has historically provided a stable lending environment.
Total loans amounted to $8.7 billion at December 31, 2025, an increase of $627.7 million, or 7.8%, from December 31, 2024. The following table provides a summary of the loan portfolio composition at each of the past five year ends.
Loan Portfolio Composition
As of December 31,
($ in thousands)
Amount
Total
Loans
Amount
Total
Loans
Amount
Total
Loans
Amount
Total
Loans
Amount
Total
Loans
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Loans, gross
Unamortized net deferred loan (fees) costs
Total loans
The majority of our loan portfolio over the years has been real estate mortgage loans, including commercial and residential mortgages. Except for construction, land development, and other land loans, the majority of our real estate loans are primarily supported by cash flows from the borrower’s occupation or business, with the real estate pledged providing a secondary repayment source.
The largest component of our portfolio is non-owner occupied commercial real estate loans, followed by residential 1-4 family real estate and owner occupied commercial real estate loans. As demonstrated in the table above, while there have been some variations in the relative percentage of each loan category to the total portfolio over the years, the nature of our portfolio has not changed drastically from the prior year or the historical averages.
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A summary of scheduled loan maturities, based on contractual maturity dates, over certain time periods is presented below, with fixed rate loans and adjustable rate loans shown separately.
Loan Maturities
As of December 31, 2025
Due within
one year
Due after one year but
within five years
Due after five years but
within fifteen years
Due after fifteen
years
Total
($ in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Variable Rate Loans:
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total at variable rates
Fixed Rate Loans:
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total at fixed rates
Subtotal
Nonaccrual loans
Total loans
Note: The above table is based on contractual scheduled maturities. Early repayment of loans or renewals at maturity are not considered in this table.
Approximately 12% of our accruing loans outstanding at December 31, 2025 mature within one year and 61% of total loans mature within five years. During 2025, the Company continued to focus on shifting more loans to variable rates. As of December 31, 2025, the percentages of variable rate loans and fixed rate loans as compared to total performing loans were 29% and 71%, respectively, compared to 23% variable and 77% fixed at December 31, 2024. While fixed rate loans present market interest rate risk, we monitor our interest rate risk closely. Refer to additional discussion in the section “Interest Rate Risk” below.
The Company’s loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries, and geographic regions, the Company monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Bank makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. The Company has determined that there is no concentration of credit risk associated with its lending policies or practices.
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Most of our business activity is with customers located within the markets where we have banking operations. Therefore, our exposure to credit risk is significantly affected by changes in the economy within our markets. Approximately 87% of our loan portfolio is secured by real estate and is therefore susceptible to changes in real estate valuations.
The following tables provides a summary of the outstanding balances of the commercial real estate-owner occupied, commercial real estate-non owner occupied and multi-family real estate loan portfolio compositions at December 31, 2025 by geographic region.
Region
($ in thousands)
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Total
Charlotte, NC
Piedmont Triad, NC
Research Triangle, NC
Wilmington, NC
Asheville, NC
Other areas in NC
Greenville-Spartanburg, SC
Columbia, SC
Charleston, SC
Other areas in SC
Other states
Total
As noted above and described in the Item 1. Business section, we do not have concentrations geographically or by CRE category.
Nonperforming Assets
NPAs include nonaccrual loans, loans past due 90 days or more and still accruing interest, foreclosed real estate and, prior to the adoption of ASU 2022-02, accruing TDRs.
Nonaccrual loans are loans on which interest income is no longer being recognized or accrued because management has determined that the collection of interest is doubtful. Placing loans on nonaccrual status negatively impacts earnings because (1) interest accrued but unpaid as of the date a loan is placed on nonaccrual status is reversed and deducted from interest income; (2) future accruals of interest income are not recognized until it becomes probable that both principal and interest will be paid; and (3) principal charged-off, if appropriate, may necessitate additional provisions for loan losses that are charged against earnings. As a matter of policy, we generally place all loans that are past due 90 or more days on nonaccrual basis. There were no accruing loans that were past due 90 days or more at December 31, 2025 and December 31, 2024.
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The following table summarizes our NPAs at the dates indicated.
Nonperforming Assets
As of December 31,
($ in thousands)
Nonperforming assets
Nonaccrual loans
TDRs - accruing
Accruing loans >90 days past due
Total nonperforming loans
Foreclosed real estate
Total nonperforming assets
Allowance for credit losses
Total Loans
Asset Quality Ratios
Nonaccrual loans to total loans
Nonperforming loans to total loans
Nonperforming assets to total loans and foreclosed real estate
Nonperforming assets to total assets
Allowance for credit losses to total loans
Allowance for credit losses to nonaccrual loans
Allowance for credit losses to nonperforming loans
Our asset quality continues to be strong as demonstrated by stable or improving trends in all ratios as presented in the table above. Our total nonperforming loans to total loans was 0.42% at December 31, 2025, while our total NPA ratio was 0.30% at that date. Additional discussion of the credit quality classification status of our loans is contained in Note 4 to our consolidated financial statements.
"Commercial real estate - owner occupied" is the largest category of nonaccrual loans, at $13.5 million, or 37.1% of total nonaccrual loans, followed by "Commercial and industrial" at $9.1 million, or 25.1% of total nonaccrual loans, and "Residential 1-4 family real estate" at $5.9 million, or 16.3% of total nonaccrual loans.
As of December 31, 2025, SBA loans accounted for approximately $14.8 million of our nonaccrual loans, or 9.1%, of the total SBA portfolio, and carried guarantees from the SBA totaling $7.3 million. This is compared to $15.5 million, or 11.4%, of the SBA portfolio at December 31, 2024. We continue to closely monitor the SBA loan portfolio and give it appropriate consideration when evaluating the adequacy of the ACL as those loans are generally considered inherently more risky than other loans in our portfolio. Refer to additional discussion of the ACL below.
As shown in Note 4 to the consolidated financial statements, our accruing past due loans (30 or more days) totaled $18.5 million at December 31, 2025, with the majority (55.4%) being in the Residential 1-4 family real estate category.
We classify loans as “special mention” when there is a defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that we could sustain some loss if the deficiency is not corrected. Performing special mention loans, which are still accruing interest, totaled $29.3 million and $37.1 million as of December 31, 2025 and 2024, respectively. In addition, loans that are in the risk category of "classified" which are still accruing interest totaled $22.2 million at December 31, 2025 and $34.0 million at December 31, 2024. These loans have a risk of further deterioration and potential loss to the Bank.
Total foreclosed real estate amounted to $1.4 million at December 31, 2025, compared to $5.0 million in 2024. Six properties were added to foreclosed real estate during 2025 and we completed the sale of nine properties during the year.
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Allowance for Credit Losses, Allowance for Unfunded Commitments, and Loan Loss Experience
The total ACL amounted to $123.6 million at December 31, 2025 compared to $122.6 million at December 31, 2024. Fluctuations in the ACL are based on loan mix and growth, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, other assumptions and inputs to the CECL model, and as occurred in 2023, adjustments for acquired loan portfolios.
In the portions of Western North and South Carolina that were significantly impacted by Hurricane Helene in third quarter of 2024, the Company identified borrowers who were potentially impacted. During 2025, the Company evaluated the commercial loan portfolio and adjusted risk ratings and nonaccrual status as applicable. Therefore, for those relationships, for December 31, 2025, the normal reserving process was applied. For the potentially impacted consumer loans, the Company applied increased reserve rates based upon severe economic factors to the approximately $268 million of loans (primarily Residential 1-4 family real estate) in the most impacted path of Hurricane Helene. This compares to consumer and commercial loans totaling $744 million at December 31, 2024. Due to the potential exposure from Hurricane Helene, the ACL on these impacted consumer loans was $1.9 million as of December 31, 2025, adding 2 basis points to the overall ACL as a percent of total loans, which was 1.42% as of December 31, 2025. As of December 31, 2024, the ACL on these loans was $13.0 million, adding 16 basis points to the overall ACL as a percent of total loans, which was 1.51%.
The ACL reflects the best estimate of life of loan expected credit losses that will result from the inability of borrowers to make required loan payments. Systematic methodologies are used to determine the ACL for loans and the allowance for certain off-balance-sheet credit exposures. The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loan portfolio.
We consider the effects of past events, current conditions, and reasonable and supportable forecasts on the collectability of the loan portfolio. Our estimate of the ACL involves a high degree of judgment. Therefore, the process for determining expected credit losses may result in a range of expected credit losses. The ACL is calculated using collectively evaluated pools for loans with similar risk characteristics applying the DCF method. When a loan no longer shares similar risk characteristics with its segment, the loan is evaluated on an individual basis applying a DCF or asset approach for collateral-dependent loans. Refer also to the discussion of the critical estimates utilized in the ACL in the prior section, Critical Accounting Estimates, and refer to Note 1 of the consolidated financial statements for a discussion of our CECL methodology used to determine the ACL.
Our assessment of the ACL involves uncertainty and judgment and is subject to change in future periods. The amount of any changes could be significant if the assessment of loan quality or collateral values changes substantially with respect to one or more loan relationships or portfolios or if there is a significant change in the reasonable and supportable forecast used to model our expected credit losses. The allocation of the ACL as presented in the following table is based on reasonable and supportable forecasts, historical data, subjective judgment, and estimates and therefore, may not be predictive of the specific amounts or loan categories in which charge-offs may ultimately occur. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.
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The following table sets forth the allocation of the ACL by loan category at the dates indicated. However, the ACL is available to absorb losses in any and all categories.
Allocation of the Allowance for Credit Losses
As of December 31,
($ in thousands)
Loan Category
Loan Category
Loan Category
Loan Category
Loan Category
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total
Note: "% of Loan Category" represents the ACL as a percent of the respective total loan categories presented previously in the Loan Portfolio Composition table.
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For the years indicated, the following table summarized the net loss experience by loan category and key ratios demonstrating the asset quality trends over the most recent five years.
Loan Ratios, Loss and Recovery Experience
As of December 31,
($ in thousands)
Loans outstanding at end of year
Average amount of loans outstanding
Allowance for credit losses, at end of year
Net loan (charge-offs) recoveries
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total net charge-offs
Average loans
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
Total average loans
Ratios
Allowance for credit losses as a percent of loans at end of year
Allowance for credit losses as a multiple of net charge-offs
Provision for loan losses as a percent of net charge-offs
Recoveries of loans previously charged-off as a percent of loans charged-off
Total net charge-offs as a percent of average loans
Net (charge-offs) recoveries by loan category as a percent of average loans:
Commercial and industrial
Construction, development & other land loans
Commercial real estate - owner occupied
Commercial real estate - non owner occupied
Multi-family real estate
Residential 1-4 family real estate
Home equity loans/lines of credit
Consumer loans
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Securities
Our securities portfolio and the breakout of AFS and HTM securities is presented in the following table.
Securities Portfolio Composition
As of December 31,
($ in thousands)
Securities available for sale:
US Treasury securities
Government-sponsored enterprise securities
Mortgage-backed securities
Corporate bonds
Total securities available for sale
Securities held to maturity:
Mortgage-backed securities
State and local governments
Total securities held to maturity
Total securities
Average total securities during year, at amortized cost
During 2025, we sold $536.3 million of securities, with a weighted average yield of 1.66% , at a loss of $71.6 million and we purchased $585.1 million of securities, with a weighted average yield of 4.35%. Also impacting the change in balances of AFS securities was the improvement in unrealized loss on AFS securities which was $194.1 million at December 31, 2025 as compared to $368.1 million at December 31, 2024. Generally, we invested cash flows from amortizing investments in interest bearing cash deposits. As a result of the securities loss-earnback transactions during 2025, the composition of the securities portfolio has shifted to having a higher percentage of variable rate securities as of December 31, 2025 compared to the prior year.
The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Essentially all of our mortgage-backed securities, which include both AFS and HTM securities, are issued by GSEs or GNMA, and are traded in liquid secondary markets. These securities are recorded on the balance sheet at fair value for the AFS portfolio and at amortized cost for the HTM portfolio.
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The table below presents the composition, tax equivalent yields, and remaining maturities of our securities as of December 31, 2025. For more information about these securities, including gross unrealized gains and losses by type of security and securities pledged, see Note 3 to the consolidated financial statements.
Securities Portfolio Maturity Schedule
($ in thousands)
US Treasury securities
Government & govt.-sponsored enterprise securities
Mortgage-backed securities (1)
Corporate debt securities
Total
Weighted Average Yield (2)
Securities available for sale
Remaining maturity:
One year or less
After one through five years
After five through ten years
After ten years
Fair Value
Amortized cost
Weighted-average yield (2)
Weighted average maturity years
Mortgage-backed securities (1)
State and local governments
Total
Weighted Average Yield (2)
Securities held to maturity
Remaining maturity:
One year or less
After one through five years
After five through ten years
After ten years
Amortized cost
Fair value
Weighted-average yield (2)
Weighted average maturity years
(1) Mortgage-backed securities are shown maturing in the periods consistent with their estimated lives based on expected prepayment speeds.
(2) Yields have been computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. Weighted average yield for each maturity range has been computed on a fully taxable-equivalent basis using the amortized cost of each security in that range. Yields on tax-exempt investments have been adjusted to a taxable equivalent basis using a 23.05% tax rate.
Nearly all of our $1.9 billion in AFS mortgage-backed securities at December 31, 2025 were issued by the FHLMC, FNMA, GNMA, or the SBA, each of which is a GSE and guarantees the repayment of the securities. Included in this total are private-label commercial mortgage-backed securities of $0.7 million. Mortgage-backed securities vary in their repayment in correlation with the underlying pools of mortgage loans.
At December 31, 2025, we held $513.1 million in securities classified as HTM, which are carried at amortized cost. These securities had fair values that were lower than their carrying values by $64.6 million at December 31, 2025. Approximately $6.7 million of the HTM securities were mortgage-backed securities that have been issued by either the FHLMC or FNMA. The remaining $506.4 million in HTM securities were comprised almost entirely of highly-rated municipal bonds issued by state and local governments throughout the nation. We have no significant concentration of bond holdings from one state or local government entity, with the single largest exposure to any one entity being $9.3 million. We have evaluated any unrealized losses on individual securities at each year end and determined them to be of a temporary nature and caused by fluctuations in market interest rates, not by concerns about the ability of the issuers to meet their obligations.
Deposits
Deposits represent the primary funding source for our loans and investments. Total deposits amounted to $10.7 billion at December 31, 2025, an increase of $217.9 million, or 2.1%, from December 31, 2024. Deposit growth for the year was entirely organic as there were no acquisitions during 2025. During 2025, retail deposits grew $222.6 million, or 2.1%, from the prior year end. Brokered deposits ended 2025 at $4.9 million. We continue
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to have a diversified and granular deposit base which has remained a stable source of funding. At December 31, 2025, noninterest-bearing deposits accounted for 32% of total deposits. This contributes to our low cost of funds.
The table below presents our historical deposit mix which continues to be predominately transaction and non-time deposit accounts. As demonstrated in the below table, total time deposits have declined to 8% of total deposits at December 31, 2025 from 10% at December 31, 2021. Such a shift in mix is beneficial for us, as non-time deposit accounts generally carry lower interest rates compared to time deposits and we are able to reprice these deposit categories as market rates move over time. Approximately 98% of our time deposits mature within one year.
Deposit Composition
As of December 31,
($ in thousands)
Amount
Total
Amount
Total
Amount
Total
Amount
Total
Amount
Total
Noninterest-bearing checking accounts
Interest-bearing checking accounts
Money market accounts
Savings accounts
Other time deposits
Time deposits >$250,000
Total customer deposits
Brokered Deposits
Total deposits
While our customer deposits have remained fairly stable, there continues to be competition for deposits by both in-market and out-of-market competitors. We routinely engage in activities designed to grow and retain deposits, including emphasizing relationship banking to new and existing customers where borrowers are encouraged to maintain deposit accounts with us; pricing deposits at rate levels that will attract and/or retain deposits; and continually working to identify and introduce new products that will attract customers or enhance our appeal as a primary provider of financial services.
The table below presents maturities of time deposits which are individually greater than the FDIC insurance limit of $250,000 as of December 31, 2025.
As of December 31, 2025
($ in thousands)
3 Months
or Less
Over 3 to 6
Months
Over 6 to 12
Months
Over 12
Months
Total
Time deposits greater than the FDIC insurance limit of $250,000
As shown above, time deposits in excess of $250,000 totaled $305.5 million at December 31, 2025. On an individual account basis, there was a total of $159.9 million which was in excess of $250,000. This presentation of time deposit accounts does not evaluate total deposit relationships, account ownership types or other factors for determining the actual uninsured balances by customer.
As of December 31, 2025 and December 31, 2024, the estimated uninsured deposits we held totaled approximately $4.3 billion and $4.1 billion, respectively. As of December 31, 2025 and December 31, 2024, respectively, our insured deposits were estimated to be $6.5 billion, or 60.2% of total deposits, and $6.4 billion or 61.0% of total deposits. When coupled with deposits collateralized by investment securities with balances totaling $730.4 million and $690.5 million as of December 31, 2025 and December 31, 2024, respectively, approximately 67.0% and 67.6% of our total deposits were insured or collateralized at December 31, 2025 and December 31, 2024, respectively.
We do not take deposits through foreign offices. Deposits at December 31, 2025 from foreign depositors were nominal.
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Borrowings
Although none were outstanding as of December 31, 2025, short-term borrowings can be utilized to provide balance sheet liquidity and to fund imbalances in our loan growth compared to our deposit growth. In addition, we have long-term debt in the form of trust preferred securities and have the availability to borrow from the FHLB or FRB.
Total borrowings at December 31, 2025 decreased $17.3 million from the prior year end. During the year, the Company redeemed $18.0 million of subordinated debentures.
Our borrowings outstanding as of the dates presented were as follows:
($ in thousands)
December 31, 2025
December 31, 2024
FHLB advances
Trust preferred capital issuances
Subordinated debentures
Unamortized discounts on acquired borrowings
As noted in the table above, at December 31, 2025, we had $77.3 million of borrowings structured as trust preferred capital securities which qualify as Tier I capital for regulatory capital adequacy requirements. The Company issued $46.4 million of these securities with the balance assumed from acquisitions.
At December 31, 2025, the Company had several sources of readily available borrowing capacity:
• Borrowing capacity with the FHLB of approximately $1.4 billion which can be structured as either short-term or long-term borrowings, depending on the particular funding or liquidity need, and is secured by a blanket lien on most of our real estate loan portfolio, select investment securities, and our FHLB stock (of which $0.8 million were outstanding at December 31, 2025 and December 31, 2024).
• Federal funds lines with several correspondent banks totaling $265.0 million which provide for overnight unsecured federal funds purchased (of which none were outstanding at December 31, 2025 and December 31, 2024); and,
• A line of credit with the Federal Reserve through its discount window borrowing program of approximately $763.8 million which is secured by a blanket lien on a portion of our commercial and consumer loan portfolio (excluding real estate loans) and specific investment securities. All of this line was available at both December 31, 2025 and December 31, 2024.
Refer to Note 9 to the consolidated financial statements for additional discussion of our borrowings.
Liquidity, Commitments, and Contingencies
Our liquidity is determined by our ability to convert assets to cash or to acquire alternative sources of funds to meet the needs of our customers who are withdrawing or borrowing funds, and our ability to maintain required reserve levels, pay expenses, and operate the Company on an ongoing basis. Our primary liquidity sources are net income from operations, cash and due from banks, federal funds sold, and other short-term investments. Our securities portfolio has a high percentage of amortizing mortgage-backed securities generating monthly cash flows. In addition, the portfolio is comprised almost entirely of readily marketable securities, which could also be sold to provide cash. We also maintain available lines of credit from the FHLB and the Federal Reserve, as well as federal funds lines from several correspondent banks which are summarized below.
At December 31, 2025, the Company had several sources of readily available borrowing capacity as described above in the Borrowings section.
Liquidity is evaluated as both on-balance sheet (primarily cash and cash-equivalents, unpledged securities, and other marketable assets) and off-balance sheet (readily available lines of credit or other funding sources). Our overall on-balance sheet liquidity ratio was 14.9% at December 31, 2025. Our total liquidity ratio, including the $2.5 billion in available lines of credit, was 32.8% as of that date. The increase in available lines of credit during 2025
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was a result of additional loan and security collateral being transferred to the FHLB to enhance the levels of off-balance sheet liquidity.
We continue to manage liquidity sources and believe our liquidity sources, including unused lines of credit, are at an acceptable level and remain adequate to meet our operating needs in the foreseeable future. We will continue to monitor our liquidity position carefully and will explore and implement strategies to increase liquidity if deemed appropriate.
In the normal course of business we have various outstanding contractual obligations that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit, that may or may not require future cash outflows. Certain of the outstanding commitments and contingent liabilities, such as commitments to extend credit, are not reflected in the financial statements.
Presented below is a summary of our contractual obligations and other commercial commitments outstanding as of December 31, 2025.
Contractual Obligations and Other Commercial Commitments
Payments Due Per Period ($ in thousands)
Contractual Obligation as of December 31, 2025
Less
than 1 Year
1-3 Years
4-5 Years
After 5 Years
Total
Borrowings
Operating leases
Time deposits, including brokered deposits
Non-qualified postretirement plan liabilities
Committed LIHTC investment obligations
Estimated interest expense on borrowings and time deposits (1)
Total contractual cash obligations
(1) Represents forecasted interest expense on borrowings and time deposits based on interest rates and balances at December 31, 2025. Forecasts are based on the contractual maturity of each liability.
Amount of Commitment Expiration Per Period ($ in thousands)
Other Commercial Commitments as of December 31, 2025
Less
than 1 Year
1-3 Years
4-5 Years
After 5 Years
Total
Amounts
Committed
Lines of credit and loan commitments
Standby letters of credit
Total commercial commitments
As presented in the table above, at December 31, 2025, we had $30.8 million in standby letters of credit outstanding. We had no carrying amount for these standby letters of credit. The nature of standby letters of credit is that of a stand-alone obligation made on behalf of our customers to suppliers of the customers to guarantee payments owed to the suppliers by the customers. The standby letters of credit are generally for terms of one year, at which time they may be renewed for another year if both parties agree. The payment of the guarantees would generally be triggered by a continued nonpayment of an obligation owed by the customer to the supplier. In the event that we are required to honor a standby letter of credit, a note, already executed by the customer, becomes effective providing repayment terms and any collateral.
It has been our experience that deposit withdrawals are generally able to be replaced with new deposits when needed or through short-term advances from the FHLB. We believe that the Bank can meet its contractual cash obligations and existing commitments from normal operations.
Capital Resources and Shareholders’ Equity
Shareholders’ equity at December 31, 2025 amounted to $1.7 billion, a $208.6 million, or 14.4%, increase from December 31, 2024. The two basic components that typically have the largest impact on our shareholders’ equity are net income, which increases shareholders’ equity, and dividends declared, which decreases shareholders’ equity. Additionally, any stock issuances can significantly increase shareholders’ equity, including those associated with acquisitions such as in 2023, and any stock repurchases reduce shareholders’ equity. Finally, fluctuations in the
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amount of AOCI, generally driven by market interest rate changes resulting in increases or decreases in unrealized gains/losses on AFS securities, can have a significant impact on total equity. In 2025, the most significant factors that impacted our shareholders' equity were (1) $111.0 million net income reported for 2025, which increased equity, (2) common stock dividends declared of $37.7 million, which reduced equity; and (3) $132.7 million increase in equity related to changes in AOCI driven by lower unrealized losses on AFS securities.
As discussed in “Borrowings” above, we also currently have $77.3 million in trust preferred securities outstanding, all of which qualify as Tier I capital under regulatory standards. We are not aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on our liquidity, capital resources, or operations.
The Company and the Bank must comply with regulatory capital requirements established by the Federal Reserve and the Commissioner. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on our financial statements. The primary source of funds for the payment of dividends by the Company is dividends received from its subsidiary, the Bank. The Bank, as a North Carolina banking corporation, may declare dividends so long as such dividends do not reduce its capital below its applicable required capital (typically, the level of capital required to be deemed “adequately capitalized”). As of December 31, 2025, approximately $1.1 billion of the Company’s investment in the Bank is restricted as to transfer to the Company without obtaining prior regulatory approval.
Our regulatory capital ratios as of December 31, 2025, 2024 and 2023 are presented in the table below. All of our capital ratios significantly exceeded the minimum regulatory thresholds for all periods presented.
Risk-Based and Leverage Capital Ratios
As of December 31,
($ in thousands)
Risk-Based and Leverage Capital
Common Equity Tier I capital:
Shareholders’ equity
Intangible assets, net of deferred tax liability
Accumulated other comprehensive income adjustments
Total Common Equity Tier I capital
Add: Trust preferred securities eligible for Tier I capital treatment
Total Tier I leverage capital
Tier II capital:
Add: Allowable allowance for credit losses and unfunded commitments
Add: Subordinated debentures eligible for Tier II capital treatment
Tier II capital additions
Total capital
Total risk weighted assets
Adjusted fourth quarter average tangible assets
Risk-based and Leverage capital ratios:
Common equity Tier I capital to Tier I risk adjusted assets
Tier I capital to Tier I risk adjusted assets
Total risk-based capital to Tier II risk-adjusted assets
Tier I leverage capital to adjusted fourth quarter average assets
Our goal is to maintain our capital ratios at levels at least 200 basis points higher than the regulatory “well capitalized” thresholds set for banks. At December 31, 2025, our leverage ratio was 11.21% compared to the regulatory well capitalized bank-level threshold of 4.00% and our total risk-based capital ratio was 16.12% compared to the 10.50% regulatory well capitalized threshold.
The decrease in regulatory capital ratios in 2025 was related to the increase in risk weighted assets and the redemption of $18 million of subordinated debentures, partially offset by retained net income.
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In addition to regulatory capital ratios, we also closely monitor our ratio of TCE to tangible assets, which is a non-GAAP financial measure. The TCE ratio was 9.61% at December 31, 2025 compared to 8.22% at December 31, 2024, with the increase of 139 basis points related primarily to the improvement in our AOCI unrealized loss on AFS securities included in equity, partially a result of the securities loss-earnback transaction along with market improvements.
The following table reconciles common equity to tangible common equity and provides the calculation of the TCE ratio:
($ in thousands)
December 31, 2025
December 31, 2024
Reconciliation of Common Equity to TCE
Total shareholders' common equity
Less: Goodwill and other intangibles
Tangible common equity
Reconciliation of Total Assets to Tangible Assets
Total assets
Less: Goodwill and other intangibles
Tangible assets
TCE divided by Tangible Assets
See “Supervision and Regulation” under “Business” in Item 1. and Note 19 to the consolidated financial statements for discussion of other matters that may affect our capital resources.
Off-Balance Sheet Arrangements and Derivative Financial Instruments
Off-balance sheet arrangements include transactions, agreements, or other contractual arrangements pursuant to which we have obligations or provide guarantees on behalf of an unconsolidated entity. We have no off-balance sheet arrangements of this kind other than letters of credit and repayment guarantees associated with our trust preferred securities and subordinated debentures.
In the normal course of business, we are exposed to certain risks arising from both our business operations and economic conditions. As an element of our risk management strategies, we may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments include futures, forwards, interest rate swaps, options contracts, and other financial instruments with similar characteristics.
We do not engage in significant derivatives activities, however, in 2023 to accommodate customers, we implemented a program whereby we enter into interest rate swaps with certain commercial loan customers, with offsetting positions to dealers under a back-to-back swap program. At December 31, 2025, the Company's derivative financial instruments consist entirely of customer back-to-back interest rate swaps which are not designated as hedges. Under this program, the Company executes interest rate swaps with commercial banking customers to facilitate their risk management strategies. Those interest rate swaps are simultaneously economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program are not designated as hedging instruments, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Refer to Note 13 of the consolidated financial statements for additional discussion of our derivative positions.
Current Accounting Matters
We prepare our consolidated financial statements and related disclosures in conformity with standards established by, among others, the FASB. Because the information needed by users of financial reports is dynamic, the FASB frequently issues new rules and proposes new rules for companies to apply in reporting their activities. See Note 1 to our consolidated financial statements for a discussion of recent rule proposals and changes.
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Selected Financial Information
Year Ended December 31,
($ in thousands, except per share data)
Income Statement Data
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per Common Share Data
Earnings per common share – basic
Earnings per common share – diluted
Cash dividends declared
Market Price
High
Low
Close
Stated book value – common
Common shares outstanding at year end
Selected Balance Sheet Data (at year end)
Total assets
Loans
Allowance for credit losses
Intangible assets
Deposits
Borrowings
Total shareholders’ equity
Selected Average Balances
Total assets
Loans
Earning assets
Deposits
Interest-bearing liabilities
Total shareholders’ equity
Ratios
Return on average assets
Return on average common equity
Total risk-based capital ratio
Net interest margin
Net interest margin (taxable-equivalent basis)
Loans to deposits at year end
Allowance for loan losses to total loans
Nonperforming assets to total assets at year end
Net (charge-offs) recoveries to average total loans
Note - During both 2023 and 2021, the Company completed significant acquisitions impacting the comparisons for each of those years. See additional discussion under "Recent Developments and Acquisitions" in Item 1.
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