Carter Bankshares Inc

Previous wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2024 and June 30, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:

Current wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help readers understand Carter Bankshares, Inc., our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2024 and September 30, 2023. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. The results of operations reported in the accompanying Consolidated Financial Statements are not necessarily indicative of results to be expected in future periods. The MD&A includes the following sections:

Previous wording

These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumption that are difficult to predict and often are beyond the Company’s control. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of:

Current wording

These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and often are beyond the Company’s control. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of:

Previous wording

•changes in trade, monetary and fiscal policies and laws of the U.S. government, including policies of the Federal Reserve, FDIC and Treasury Department;

Current wording

•changes in trade, monetary and fiscal policies and laws of the U.S. government, including policies of the Federal Reserve, Federal Deposit Insurance Corporation, (“FDIC”) and Treasury Department;

Previous wording

•the outcome of pending and future litigation and/or governmental proceedings, including the outcome of lawsuits related to the largest nonperforming loan (“NPL”) relationship;

Current wording

•the outcome of pending and future litigation and/or governmental proceedings;

Previous wording

•the soundness of other financial institutions and any indirect exposure related to recent large bank failures and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with those failed banks may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;

Current wording

•the soundness of other financial institutions and any indirect exposure related to large bank failures and their impact on the broader market through other customers, suppliers and partners or that the conditions which resulted in the liquidity concerns with those failed banks may also adversely impact, directly or indirectly, other financial institutions and market participants with which the Company has commercial or deposit relationships with;

Previous wording

•our failure to attract or retain key employees;

Current wording

•our failure to attract or retain key associates;

Previous wording

•re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Current wording

•turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Previous wording

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.5 billion at June 30, 2024. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a Federal Deposit Insurance Corporation, (“FDIC”) insured, Virginia state-chartered bank, which operates 65 branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.

Current wording

Carter Bankshares, Inc. (the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.6 billion at September 30, 2024. The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”). The Bank is a FDIC insured, Virginia state-chartered bank, which operates 65 branches in Virginia and North Carolina. The Company provides a full range of financial services with retail, and commercial banking products and insurance. Our common stock trades on the Nasdaq Global Select Market under the ticker symbol “CARE”.

Previous wording

Beginning in 2023, and continuing into 2024 and 2025, the Company is focusing on refining and enhancing its brand image and position in the markets it serves. To strengthen and further shape the culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take

Current wording

Part of the Company’s current three-year strategic plan is to focus on refining and enhancing its brand image and position in the markets it serves. With this new brand strategy, the Company has embarked on a multi-year implementation plan to create a brand tailored to the needs of our critical growth audiences, with a focus on innovating brand experiences to exceed expectations and to build a brand that stands apart. This means a commitment to aligning processes, operations and systems around the Company’s brand while introducing new products and services, so that in time the Company can increase its brand awareness in the communities it serves. To strengthen and further shape the brand and culture of the Company, a new set of guiding principles were introduced to associates in June 2023. The guiding principles include a new purpose statement: To create opportunities for more people and businesses to prosper; supported by our new set of core values: Build Relationships, Earn Trust and Take Ownership. We believe these new guiding principles will help create alignment to support future growth by empowering our associates and igniting a passion for the Company.

Previous wording

The Company is focused on executing this strategy to successfully build our new brand and grow our business in our current markets as well as any new markets we may enter. As part of executing this strategy, the Company continues to dedicate significant resources to the ultimate resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank and shareholders. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors.

Current wording

The Company is focused on executing this strategy to successfully support the new brand and grow our business in our current markets as well as any new markets we may enter. As part of executing this strategy, the Company continues to dedicate significant resources to the ultimate resolution of the Company’s nonaccrual loans, the significant majority of which are related to a single large lending relationship that the Company placed on nonaccrual status in the second quarter of 2023, in a manner that best protects the Company, the Bank and shareholders. The Company is closely monitoring all developments that may impact collateral values or potential recoveries on its nonperforming loans, including claims that may be asserted by other purported creditors.

Previous wording

During the second quarter of 2024 the federal court lawsuit filed against the Company and the Bank by West Virginia Governor James C. Justice II, his wife Cathy L. Justice, his son James C. Justice, III, and related entities that he and/or they own (collectively, the “Justice Entities”) was dismissed with prejudice. In connection with the dismissal of this litigation, the Justice Entities have agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank. The Justice Entities have already started that process of curtailment, and the aggregate nonperforming loan balance associated with the Justice Entities has been reduced from $301.9 million as of March 31, 2024 to $294.1 million as of June 30, 2024.

Current wording

During the second quarter of 2024 the federal court lawsuit filed against the Company and the Bank by West Virginia Governor James C. Justice II, his wife Cathy L. Justice, his son James C. Justice, III, and related entities that he and/or they own was dismissed with prejudice. In connection with the dismissal of this litigation, the Justice Entities agreed upon a pathway of curtailment and payoff of the outstanding loans with the Bank. The Justice Entities have reduced the aggregate nonperforming loan balance associated with the Justice Entities has been reduced from $301.9 million as of March 31, 2024 to $280.9 million as of September 30, 2024.

Previous wording

The Company’s financial results continue to be significantly impacted by the Bank’s largest NPL relationship that was placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $294.1 million as of June 30, 2024. As a result, interest income was negatively impacted by $9.1 million and $11.3 million during the second quarter of 2024 and 2023, respectively. Interest income has been negatively impacted by $48.4 million in the aggregate since placement of these loans on nonaccrual status during the second quarter of 2023.

Current wording

The Company’s financial results continue to be significantly impacted by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023, which has an aggregate principal balance of $280.9 million as of September 30, 2024. As a result, interest income was negatively impacted by $8.8 million and $9.3 million during the third quarter of 2024 and 2023, respectively, and $27.2 million and $20.7 million during the nine months ended September 30, 2024 and the same period in 2023, respectively. Interest income has been negatively impacted by $57.2 million in the aggregate since placement of these loans on nonaccrual status during the second quarter of 2023.

Previous wording

•Net interest income increased $1.4 million, or 5.2% compared to the three months ended June 30, 2023, primarily due to an 84 basis point increase in the yield on earning assets offset by a 98 basis point increase in funding costs;

Current wording

•Net interest income increased $1.4 million, or 5.1% compared to the three months ended September 30, 2023, primarily due to a 57 basis point increase in the yield on earning assets, offset by a 61 basis point increase in funding costs;

Previous wording

•Total noninterest expense increased $1.9 million to $27.4 million for the three months ended June 30, 2024 compared to the same period in 2023; and

Current wording

•Total noninterest expense increased $0.2 million to $27.4 million for the three months ended September 30, 2024 compared to the same period in 2023; and

Previous wording

•The securities portfolio decreased $32.7 million and is currently 16.5% of total assets compared to 17.3% of total assets;

Current wording

•The securities portfolio decreased $36.4 million and is currently 16.1% of total assets compared to 17.3% of total assets;

Previous wording

•Total portfolio loans increased $43.6 million, or 2.5%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”) segment during the six months ended June 30, 2024 and was muted by $80.0 million in loan payoffs of two large commercial real estate loans;

Current wording

•Total portfolio loans increased $90.0 million, or 3.4%, on an annualized basis, primarily due to loan growth in the commercial real estate (“CRE”) segment during the nine months ended September 30, 2024 and was muted by $80.0 million in loan payoffs of two large commercial real estate loans;

Previous wording

•The portfolio loans to deposit ratio was 91.5%, compared to 94.2%;

Current wording

•The portfolio loans to deposit ratio was 88.0%, compared to 94.2%;

Previous wording

•At June 30, 2024, nonperforming loans declined by $9.3 million to $300.2 million since December 31, 2023. Nonperforming loans as a percentage of total portfolio loans were 8.46% compared to 8.83%. The decline is due to $7.8 million of curtailment payments made by the Banks’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023. These loans are contained in the Other segment with an aggregate principal balance of $294.1 million as of June 30, 2024 and comprise 98.0% of nonperforming loans at June 30, 2024;

Current wording

•At September 30, 2024, nonperforming loans declined by $21.8 million to $287.7 million since December 31, 2023. Nonperforming loans as a percentage of total portfolio loans were 8.00% compared to 8.83%. The decline is due to $21.0 million of curtailment payments made by the Banks’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023. These loans are contained in the Other segment with an aggregate principal balance of $280.9 million as of September 30, 2024 and comprise 97.6% of nonperforming loans at September 30, 2024;

Previous wording

•The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.72% compared to 2.77%. The ACL on portfolio loans totaled $96.7 million at June 30, 2024, compared to $97.1 million at December 31, 2023.

Current wording

•The Allowance for Credit Losses, (“ACL”) to total portfolio loans ratio was 2.25% compared to 2.77%. The ACL on portfolio loans totaled $80.9 million at September 30, 2024, compared to $97.1 million at December 31, 2023.

Previous wording

•Total deposits increased $159.4 million, or 8.61% on an annualized basis, compared to December 31, 2023; and

Current wording

•Total deposits increased $363.2 million, or 13.0% on an annualized basis, compared to December 31, 2023; and

Previous wording

•Federal Home Loan Bank (“FHLB”) borrowings decreased $155.4 million to $238.0 million at June 30, 2024 compared to $393.4 million at December 31, 2023 primarily due to liquidity provided by deposit growth.

Current wording

•Federal Home Loan Bank (“FHLB”) borrowings decreased $303.4 million to $90.0 million at September 30, 2024 compared to $393.4 million at December 31, 2023 primarily due to scheduled maturities, repayment of overnight funds and liquidity provided by deposit growth.

Previous wording

The Company reported net income of $4.8 million or $0.21 diluted earnings per common share (“EPS”) for the three months ended June 30, 2024 compared to net income of $5.7 million, or $0.24 diluted EPS for the same period in 2023.

Current wording

The Company reported net income of $5.6 million or $0.24 diluted earnings per common share (“EPS”) for the three months ended September 30, 2024 compared to net income of $3.6 million, or $0.16 diluted EPS for the same period in 2023.

Previous wording

Net interest income increased to $28.1 million for the three months ended June 30, 2024 from $26.7 million for the same period in 2023. Net interest income, on an FTE basis (non-GAAP), increased $1.3 million, or 4.9%, to $28.3 million for the three months ended June 30, 2024 compared to $27.0 million for the same period in 2023. The increase is primarily a result of an increase in average interest-earning assets of $175.4 million with the yield on average interest-earning assets increasing 83 basis points as well as a decline in the negative impact of the Bank’s largest NPL of $2.2 million in the second quarter of 2024, offset by an increase of 98 basis points in funding costs. Net interest income decreased to $56.5 million for the six months ended June 30, 2024 from $67.5 million for the same period in 2023. Net interest income, on an FTE basis (non-GAAP), decreased $11.1 million, or 16.3%, to $56.9 million for the six months ended June 30, 2024 compared to $68.0 million for the same period in 2023. The decline in net interest income and net interest margin were significantly driven by the aforementioned large NPL relationship, which negatively impacted interest income by $18.4 million for the six months ended June 30, 2024 as compared to $11.3 million for the same period in 2023. Funding costs increased 127 basis points, partially offset by an increase of 36 basis points on the yield on earning assets for the six months ended June 30, 2024 compared to the same period in 2023. During the six months ended June 30, 2024, $760.6 million of CDs matured and repriced from an average rate of 4.30% to an average rate of 4.41%.

Current wording

Net interest income increased to $28.8 million for the three months ended September 30, 2024 from $27.4 million for the same period in 2023. Net interest income, on an FTE basis (non-GAAP), increased $1.3 million, or 4.9%, to $29.0 million for the three months ended September 30, 2024 compared to the same period in 2023. The net interest margin increased 6 basis points to 2.58% for the three months ended September 30, 2024 compared to 2.52% for the same period in 2023. Net interest margin, on an FTE basis, increased 5 basis points to 2.59% for the three months ended September 30, 2024 compared to 2.54% for the same period in 2023. The increase was primarily a result of higher average interest-earning assets of $127.1 million with the yield on average interest-earning assets increasing 57 basis points. The most significant increase in interest-earning assets was a 65 basis point increase in the yield on average loans from 4.78% in the third quarter of 2023 to 5.43% in the third quarter of 2024, as well as a higher average loan balance.

Previous wording

Interest income increased to $54.6 million for the three months ended June 30, 2024 from $43.7 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $10.8 million, or 24.6%, to $54.8 million for the three months ended June 30, 2024 compared to $44.0 million for the same period in 2023, resulting from an increase in average interest-earning assets of $175.4 million, while the yield on average interest-earning assets increased 83 basis points. Average interest-earning assets increased primarily due to average loan growth of $272.6 million in taxable loans and an increase of $13.2 million in interest-bearing deposits with banks during the second quarter of 2024, and was partially offset by a decrease of $86.6 million in average investment securities and a decrease of $2.7 million in FHLB stock. The Bank’s largest NPL relationship negatively impacted interest income by $9.1 million in the second quarter of 2024 and was negatively impacted by $11.3 million in the second quarter of 2023. Interest income increased to $108.6 million for the six months ended June 30, 2024 from $95.7 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $12.8 million, or 13.4%, to $109.0 million for the six months ended June 30, 2024 compared to $96.2 million for the same period in 2023, resulting from average loan growth of $303.2 million in taxable loans.

Current wording

Interest income increased to $56.6 million for the three months ended September 30, 2024 from $48.9 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $7.7 million, or 15.6%, to $56.8 million for the three months ended September 30, 2024 compared to $49.1 million for the same period in 2023, primarily from growth in earning assets and higher earning asset yields. Average interest-earning assets increased primarily due to average loan growth of $200.4 million in loans and an increase of $31.2 million in interest-bearing deposits with banks during the third quarter of 2024, and was partially offset by a decrease of $93.4 million in average investment securities and a decrease of $11.1 million in FHLB stock. The Bank’s largest nonperforming lending relationship negatively impacted interest income by $8.8 million in the third quarter of 2024 and was negatively impacted by $9.3 million in the third quarter of 2023. Interest income increased to $165.2 million for the nine months ended September 30, 2024 from $144.6 million compared to the same period in 2023. Interest income, on an FTE basis (non-GAAP), increased $20.5 million, or 14.1%, to $165.8 million for the nine months ended September 30, 2024 compared to $145.3 million for the same period in 2023, resulting from average loan growth of $275.5 million in taxable loans.

Previous wording

The change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of June 30, 2024, the securities portfolio was comprised of 46.1% variable rate securities with approximately 99.3% that will reprice at least once over the next 12 months. We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate strategy has limited the impact of rising rates on the Company’s unrealized losses on debt securities. With interest rates likely peaking, the Bank may alter this interest rate mix strategy going forward.

Current wording

The change in average investment securities is the result of active balance sheet management to deploy the proceeds from securities maturities and principal curtailments into higher yielding loans, rather than reinvesting those proceeds back into the securities portfolio. The portfolio has been diversified as to bond types, maturities, and interest rate structures. As of September 30, 2024, the securities portfolio was comprised of 43.7% variable rate securities with approximately 96.9% that will reprice at least once over the next 12 months. We believe having a significant percentage of variable rate securities is an important strategy during times of rising interest rates because fixed-rate bond prices generally fall when interest rates increase, which can result in unrealized losses. However, variable rate securities do not carry as much interest rate risk so there is much less price volatility. This variable rate strategy has limited the impact of rising rates on the Company’s unrealized losses on debt securities. With the Federal Reserve on a likely path of reducing short-term interest rates, the Bank may alter this interest rate mix strategy going forward.

Previous wording

Interest expense of $26.5 million for the three months ended June 30, 2024 increased $9.5 million, or 55.8% compared to the same period in 2023, primarily due to an increase in average interest-bearing deposits of $318.4 million. The increase in average-bearing deposits reflected solid growth in average CDs of $335.0 million, an increase of $96.0 million in average money market accounts and an increase of $42.3 million in interest-bearing demand accounts, offset by a decrease of $154.9 million in savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding money market and CD products. Interest expense of $52.1 million for the six months ended June 30, 2024 increased $23.9 million, or 85.0% compared to the same period in 2023, primarily due to an average increase in CDs of $344.3 million. During the second quarter of 2024, $286.8 million of CDs matured and repriced from an average rate of 4.32% to an average rate of 4.39%. Additionally, FHLB borrowings decreased $122.3 million and the cost of these borrowings increased 19 basis points for the three months ended June 30, 2024 compared to the same period in 2023.

Current wording

Interest expense of $27.8 million for the three months ended September 30, 2024 increased $6.3 million, or 29.3% compared to the same period in 2023, primarily due to an increase in average interest-bearing deposits of $430.9 million. The increase in average-bearing deposits reflected solid growth in average CDs of $349.2 million, an increase of $128.7 million in interest-bearing demand accounts and an increase of $71.0 million in average money market accounts, offset by a decrease of $118.0 million in savings accounts as customer preferences shifted from lower cost non-maturing deposits to higher-yielding interest-bearing demand, money market and CD products. Interest expense of $79.9 million for the nine months ended September 30, 2024 increased $30.3 million, or 60.9% compared to the same period in 2023, primarily due to an average increase in CDs of $345.8 million.

Previous wording

Since the beginning of 2023, there has been continued pressure on our cost of funds due to the shift from non-maturing deposits to higher yielding CDs, money markets and higher-cost borrowings driven by the ongoing inversion of the yield curve, which has negatively impacted our net interest margin. During the three months ended June 30, 2024, this trend began to stabilize and we believe it will continue to stabilize in the coming quarters. Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 91.70% of our CD portfolio and 81.1% of our outstanding FHLB borrowings will mature and reprice over the next twelve months. This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) begin cutting short-term rates later this year and during the remainder of 2024.

Current wording

Our balance sheet is currently exhibiting characteristics of a slightly liability sensitive position due to the short-term nature of our deposit portfolio and FHLB borrowings. Specifically, 93.0% of our CD portfolio and 50.0% of our outstanding FHLB borrowings will mature and reprice over the next twelve months. This strategy gives us flexibility to manage the structure and pricing of our deposit and borrowing portfolios to reduce future funding costs should the Federal Open Market Committee (“FOMC”) continue cutting short-term rates in the future.

Previous wording

Provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb expected life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the provision for credit losses and net charge-offs:

Current wording

(Recovery) provision for credit losses is determined based on management’s estimates of the appropriate level of ACL needed to absorb expected life-of-loan losses in the loan and lease portfolio, after giving consideration to charge-offs and recoveries for the period. The following table presents information regarding the (recovery) provision for credit losses and net charge-offs:

Previous wording

The provision for credit losses increased $0.4 million and decreased $1.0 million for the three and six months ended June 30, 2024, respectively compared to the same periods in 2023. The increase in the provision for credit losses compared to the three months ended 2023 was primarily driven by loan growth, net charge-offs and a $0.5 million reserve on a new individually evaluated loan in the second quarter of 2024, offset by $1.4 million of other segment reserves released related to the $7.8 million of curtailment payments made by the Bank’s largest nonperforming lending relationship that was placed on nonaccrual status during the second quarter of 2023. The decrease for the six months ended June 30, 2024 in the provision for credit losses was primarily driven by the aforementioned $1.4 million of other segment reserves released related to the aforementioned $7.8 million of curtailment payments made by the Bank’s largest NPL relationship during the second quarter of 2024 and lower loan growth in 2024, offset by the $0.5 million reserve on the new individually evaluated loan.

Current wording

The (recovery) provision for credit losses decreased $1.5 million and $2.5 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023. The decrease for the three and nine months ended September 30, 2024 in the (recovery) provision for credit losses as compared to the same periods in 2023 was primarily driven by updated analysis of the individually evaluated loans within the Other loan segment and $1.7 million of other segment reserves released during the third quarter of 2024 related to $13.2 million of curtailment payments made during the third quarter by the Bank’s largest nonperforming lending relationship, offset by loan growth in the third quarter of 2024.

Previous wording

The (recovery) provision for unfunded commitments for the three and six months ended June 30, 2024 were recoveries of $0.2 million and $0.3 million, respectively compared to provisions of $0.4 million in both the three and six months ended June 30, 2023. The declines in both the three and six months ended June 30, 2024 were due to decreased commitments in construction loans during the periods.

Current wording

The provision (recovery) for unfunded commitments for the three and nine months ended September 30, 2024 was a provision of $0.2 million and a recovery $(0.1) million, respectively, compared to a recovery of $(0.1) million and a provision of $0.3 million in the same periods in 2023, respectively. The decrease and the increase in the three and nine months ended September 30, 2024, respectively were due to changes in commitments in construction loans during the periods.

Previous wording

Net charge-offs were $0.3 million and $0.9 million for the three and six months ended June 30, 2024 compared to $0.6 million and $1.2 million for the same periods in 2023. During the three and six months ended June 30, 2024, net charge-offs were primarily recognized in the other consumer segment. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 0.04% and 0.05% for the three and six months ended 2024 and 0.08% for both the three and six months ended June 30, 2023.

Current wording

Net charge-offs were $15.3 million and $16.2 million for the three and nine months ended September 30, 2024 compared to $0.8 million and $2.0 million for the same periods in 2023. During the three and nine months ended September 30, 2024 and September 30, 2023, net charge-offs were significantly impacted by a $15.0 million principal charge-off related to the Other segment of the loan portfolio. As a percentage of average portfolio loans, on an annualized basis, net charge-offs were 1.71% and 0.61% for the three and nine months ended 2024 and 0.09% and 0.08% for the three and nine months ended September 30, 2023, respectively.

Previous wording

Total noninterest income increased $0.5 million, or 10.0%, to $5.5 million for the three months ended June 30, 2024 and increased $0.8 million, or 8.3%, to $10.6 million for the six months ended June 30, 2024 when compared to the same periods in 2023. The increase for the three months ended June 30, 2024 was primarily due to an increase of $0.4 million in insurance commissions and $0.1 million increase on service charges, commissions and fees, offset by a decrease of $0.1 million in other noninterest income. During the three months ended June 30, 2024, we recognized an unrealized fair value gain of $63.3 thousand on equity securities. This unrealized fair value gain is recorded in other noninterest income.

Current wording

Total noninterest income increased $0.2 million, or 2.9%, to $5.4 million for the three months ended September 30, 2024 and increased $1.0 million, or 6.4%, to $16.0 million for the nine months ended September 30, 2024 when compared to the same periods in 2023. The increase for the three months ended September 30, 2024 was primarily due to higher insurance commissions of $0.2 million, offset by a decrease of $0.1 million in other noninterest income related to lower fair value adjustment of our interest rate swap contracts with commercial customers.

Previous wording

The most significant increase during the six months ended June 30, 2024 was $0.9 million higher insurance commissions. Also impacting the year-to-date increase was $0.1 million higher service charges, commissions and fees, offset by a decrease of $0.1 million in other noninterest income, as well as a decline of $0.1 million in commercial loan swap fee income as activity has declined due to the interest rate environment.

Current wording

The most significant increase during the nine months ended September 30, 2024 was higher insurance commissions of $1.1 million. Also impacting the increase for the nine months ended September 30, 2024 was a $0.2 million increase in service charges, commissions and fees, offset by a decrease of $0.2 million in other noninterest income similar to the decrease mentioned above and a decline of $0.1 million in commercial loan swap fee income as activity has declined due to the interest rate environment.

Previous wording

As compared to the six months ended June 30, 2024, the most significant increases in total noninterest expense, and similar variances to the same period in 2023, was an increase of $1.9 million in FDIC insurance expense, which was a direct result of the aforementioned large NPL relationship, an increase of $1.1 million in salaries and employee benefits, and an increase of $0.5 million in occupancy expenses. However, the year-to-date variance was also impacted by a $0.6 million increase in professional and legal fees as a result of the large NPL relationship and an increase of $0.3 million in debit card expense. The variance in debit card expenses was primarily related to discounts received in March of 2023.

Current wording

Total noninterest expense increased $0.2 million to $27.4 million for the three months ended September 30, 2024 compared to the same period in 2023. The most significant variance for the comparable period related to a $0.6 million increase in salaries and employee benefits, an increase of $0.4 million in occupancy expenses, an increase of $0.3 million in data processing expenses and a $0.2 million increase in FDIC insurance expense, offset by a decrease of $1.1 million in other noninterest expense and a decrease of $0.3 million in professional and legal fees.

Previous wording

Total noninterest expense increased $1.9 million to $27.4 million for the three months ended June 30, 2024 compared to the same period in 2023. The most significant variance for the comparable period related to higher FDIC insurance expenses of $0.9 million due to the deterioration in asset quality as a direct result of the large NPL relationship, which is a component used to determine the assessment. Other increases included, a $0.6 million increase in salaries and employee benefits, an increase of $0.2 million in occupancy expenses, $0.2 million in data processing expenses and a $0.1 million increase in other taxes. Salaries and employee benefits increased related to higher salary expense due to fewer open positions in retail, job grade assessment increases and normal merit increases. The variance in occupancy relates primarily to general inflationary cost increases for existing and new service agreements, as well as lease expense on a newly opened office in the second quarter of 2024. The increase in data processing related to higher third party costs.

Current wording

The increases in salaries and employee benefits resulted from higher salary expenses due to fewer open positions in retail, job grade assessment increases and normal merit increases. The increase in occupancy expenses, net of $0.4 million was due to new software license and depreciation expense in the third quarter of 2024 and the increase in data processing expenses of $0.3 million relates primarily to general inflationary cost increases for existing and new service agreements. The increase in advertising expenses relates to costs incurred for the Company’s new brand roll-out. The higher FDIC insurance expense was due to the deterioration in asset quality as a direct result of the large nonperforming lending relationship that was placed into nonaccrual status in the second quarter of 2023, which is a component used to determine the assessment. The decrease in other noninterest expense related to a gain of $0.5 million on a closed office that was sold in the third quarter of 2024, write-downs of $0.6 million on three legacy other real estate owned (“OREO”) properties and write-downs of $0.3 million on two additional closed offices in the third quarter of 2023.

Previous wording

The provision for income taxes increased $1.1 million and decreased $2.0 million to $1.1 million and $2.5 million for the three and six months ended June 30, 2024, respectively when compared to the same periods in 2023. Pre-tax income increased $0.2 million and decreased $13.0 million for the three and six months ended June 30, 2024, respectively when compared to the same periods in 2023. The effective tax rate was 18.9% and 19.3% for the three and six months ended June 30, 2024, respectively compared to 0.9% and 17.4% for the same periods in 2023. The increase in the effective tax rate for the three and six months ended June 30, 2024 compared to the same periods in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).

Current wording

The provision for income taxes increased $0.6 million and decreased $1.4 million to $1.4 million and $3.9 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. Pre-tax income increased $2.6 million and decreased $10.4 million for the three and nine months ended September 30, 2024, respectively when compared to the same periods in 2023. The effective tax rate was 19.9% and 19.5% for the three and nine months ended September 30, 2024, respectively, compared to 17.7% and 17.4% for the same periods in 2023. The increase in the effective tax rate for the three and nine months ended September 30, 2024 compared to the same periods in 2023 was primarily related to changes in pre-tax income, partially offset by higher levels of tax credits in 2023. The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”).

Previous wording

Total assets increased $20.0 million, to $4.5 billion at June 30, 2024 compared to December 31, 2023. Cash and due from banks increased $7.2 million to $61.7 million at June 30, 2024 compared to $54.5 million at December 31, 2023. Total portfolio loans increased $43.6 million, or 2.5% on an annualized basis, to $3.5 billion at June 30, 2024 compared to December 31, 2023 primarily due to loan growth in the CRE loan segment during the six months ended June 30, 2024. Loan growth was muted by $80.0 million in loan payoffs of two large commercial real estate loans in the first quarter of 2024. The variances in loan segments for portfolio loans related to increases of $130.7 million in CRE loans, offset by decreases in all the other loan segments, such as a $41.4 million decrease in construction loans, a $30.9 million decrease in C&I loans, a $7.8 million decrease in the other loan segment due to curtailment payments made by the Bank’s largest NPL relationship, a $4.0 million decrease in residential mortgages and a $3.0 million decrease in other consumer loans.

Current wording

Total assets increased $100.9 million, to $4.6 billion at September 30, 2024 compared to December 31, 2023. Cash and due from banks increased $50.5 million to $105.0 million at September 30, 2024 compared to $54.5 million at December 31, 2023 primarily due to higher excess cash on hand in the third quarter of 2024. Total portfolio loans increased $90.0 million, or 3.4% on an annualized basis, to $3.6 billion at September 30, 2024 compared to December 31, 2023 primarily due to loan growth in the CRE loan segment during the nine months ended September 30, 2024. Loan growth was muted by $80.0 million in loan payoffs of two large commercial real estate loans in the first quarter of 2024. The variances in loan segments for portfolio loans related to increases of $187.4 million in CRE loans, offset by decreases in all the other loan segments, such as a $36.8 million decrease in construction loans, a $30.0 million decrease in C&I loans, a $21.1 million decrease in the other loan segment due to curtailment payments made by the Bank’s largest nonperforming lending relationship, a $5.0 million decrease in residential mortgages and a $4.5 million decrease in other consumer loans.

Previous wording

The securities portfolio decreased $32.7 million and is currently 16.5% of total assets at June 30, 2024 compared to 17.3% of total assets at December 31, 2023. The decrease is due to ongoing maturities, principal curtailments, sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields. During the six months ended June 30, 2024 there was one new security purchase of $8.6 million and one sale of two bonds with a book value of 10.6 million. As of June 30, 2024, the securities portfolio was comprised of 46.1% variable rate securities with approximately 99.3% that will reprice at least once over the next 12 months. At June 30, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $89.3 million of gross unrealized losses. Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

Current wording

The securities portfolio decreased $36.4 million and is currently 16.1% of total assets at September 30, 2024 compared to 17.3% of total assets at December 31, 2023. The decrease is due to ongoing maturities, principal curtailments, purchases and sales of available for sale securities and changes in market values driven by fluctuations in intermediate treasury yields. During the nine months ended September 30, 2024 there was one new security purchase of $8.6 million and one sale of two bonds with a book value of $10.6 million. As of September 30, 2024, the securities portfolio was comprised of 43.7% variable rate securities with approximately 96.9% that will reprice at least once over the next 12 months. At September 30, 2024, total gross unrealized gains in the available-for-sale portfolio were $0.1 million, offset by $68.4 million of gross unrealized losses. Refer to the “Securities” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

Previous wording

During the second quarter of 2024, the Company purchased $5.0 million of equity securities with carrying value totaling $5.1 million at June 30, 2024. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. The Company’s investment in the mutual fund is eligible for investment credit under the Community Reinvestment Act.

Current wording

During the second quarter of 2024, the Company purchased $5.0 million of equity securities with carrying value totaling $5.2 million at September 30, 2024. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts. The Company’s investment in the mutual fund is eligible for investment credit under the Community Reinvestment Act.

Previous wording

FHLB stock, at cost decreased $7.2 million to $14.5 million at June 30, 2024 compared to December 31, 2023. The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings. Closed retail bank offices had a book value of $1.3 million at June 30, 2024 and $2.3 million at December 31, 2023 included in OREO on the Consolidated Balance Sheets.

Current wording

FHLB stock, at cost decreased $14.2 million to $7.4 million at September 30, 2024 compared to December 31, 2023. The decrease is due to a lower level of FHLB borrowings due to deposit growth that funded paydowns of FHLB borrowings. Closed retail bank offices had a book value of $0.5 million at September 30, 2024 and $2.3 million at December 31, 2023 included in OREO on the Consolidated Balance Sheets.