UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2025
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-42730
COASTALSOUTH BANCSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Georgia
57-1184730
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
400 Galleria Parkway, Suite 1900
Atlanta, GA
30339
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (678) 396-4605
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
COSO
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 7, 2025, the registrant had 11,978,921 shares of common stock, $1.00 par value per share, outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
1
Consolidated Balance Sheets as of June 30, 2025 (unaudited) and December 31, 2024
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2025 and 2024
2
Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2025 and 2024
3
Consolidated Statements of Shareholders' Equity (unaudited) for the Three and Six Months Ended June 30, 2025 and 2024
4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2025 and 2024
5
Notes to Consolidated Financial Statements (unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
61
Item 4.
Controls and Procedures
62
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
63
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
64
Signatures
65
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
COASTALSOUTH BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
June 30,
December 31,
2025
2024
(Unaudited)
Assets
Cash and cash equivalents
Cash and due from banks
$
12,674
8,391
Interest-bearing accounts with other banks
10,571
28,929
Federal funds sold
20,045
30,641
Total cash and cash equivalents
43,290
67,961
Investments
Securities available-for-sale, at fair value
331,760
335,267
Non-marketable equity securities
6,841
7,483
Total investments
338,601
342,750
Loans held for sale
209,101
174,033
Loans held for investment
1,527,199
1,409,443
Allowance for credit losses on loans
(17,497
)
(17,118
Loans held for investment, net
1,509,702
1,392,325
Bank-owned life insurance
47,373
46,484
Premises, furniture and equipment, net
18,166
17,796
Deferred tax asset
17,211
18,148
Goodwill
4,708
Intangible assets
1,482
1,678
Other assets
31,611
32,829
Total assets
2,221,245
2,098,712
Liabilities
Deposits
Non-interest bearing transaction accounts
313,386
302,907
Interest-bearing transaction accounts
209,816
181,068
Savings and money market
628,729
591,626
Time deposits
816,370
759,201
Total deposits
1,968,301
1,834,802
Other borrowings
14,753
41,725
Other liabilities
28,826
26,953
Total liabilities
2,011,880
1,903,480
Commitments and Contingencies (Note 4)
Shareholders' Equity
Preferred stock, $1.00 par value, 10,000,000 shares authorized, no shares issued or outstanding
—
Voting common stock, $1.00 par value, 50,000,000 shares authorized, 8,106,892 and 8,098,117 shares issued and outstanding at June 30, 2025 and December 31, 2024, respectively.
8,107
8,098
Non-voting common stock, $1.00 par value, 10,000,000 shares authorized, 2,172,029 shares issued and outstanding at June 30, 2025 and December 31, 2024
2,172
Capital surplus
159,267
158,755
Retained earnings
53,009
41,994
Accumulated other comprehensive loss
(13,190
(15,787
Total shareholders' equity
209,365
195,232
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
Six Months Ended
Interest income
Loans, including fees
23,813
23,633
46,120
46,685
3,296
2,335
6,115
3,875
Taxable
3,666
4,022
7,269
7,465
Non-taxable
94
188
206
114
104
218
210
699
842
1,661
1,836
Other earning assets from banks
111
140
246
281
Total interest income
31,793
31,170
61,817
60,558
Interest expense
Interest-bearing deposits
13,251
13,122
26,081
25,715
464
1,348
899
2,758
Total interest expense
13,715
14,470
26,980
28,473
Net interest income
18,078
16,700
34,837
32,085
Provision for credit losses
752
173
1,381
336
Net interest income after provision for credit losses
17,326
16,527
33,456
31,749
Noninterest income
449
491
889
787
Income from mortgage originations
326
299
547
537
Gain on sale of government guaranteed loans
265
35
355
Interchange income and card fees
257
226
523
442
Service charges on deposit accounts
215
198
426
409
Losses on sale of available-for-sale securities
-
(3,465
Other noninterest income
283
340
1,026
530
Total noninterest income (loss)
1,795
1,589
3,676
(405
Noninterest expense
Salaries and employee benefits
6,997
6,654
13,691
12,701
Occupancy and equipment
814
736
1,602
1,479
Software and other technology expense
719
631
1,422
1,297
Other professional fees
973
501
1,666
1,192
Data processing
652
534
1,277
1,060
Regulatory assessment
344
318
705
611
Other noninterest expense
1,593
1,278
3,148
2,563
Total noninterest expense
12,092
10,652
23,511
20,903
Income before taxes
7,029
7,464
13,621
10,441
Income tax provision
1,064
1,577
2,606
2,125
Net income
5,965
5,887
11,015
8,316
Net income per common share:
Basic
0.58
1.07
0.82
Diluted
0.57
0.56
1.04
0.80
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Other comprehensive income
Change in unrealized gain on available-for-sale securities
1,215
982
3,815
255
Reclassification adjustment for net loss on sale of securities included in net income
3,465
Income tax effect
(282
(229
(888
(872
Unrealized gain on available-for-sale securities, net of tax
933
753
2,927
2,848
Unrealized (loss) gains on derivatives
Change in unrealized gain (loss) on cash flow hedges
120
332
(293
Reclassification adjustment for net loss included in net income
(4
(399
(141
(644
(28
16
(22
Unrealized gain (loss) on derivative instruments, net of tax
88
(51
(330
70
Other comprehensive income, net of tax
1,021
702
2,597
2,918
Comprehensive income
6,986
6,589
13,612
11,234
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Accumulated
Common Stock
Other
Voting
Non-voting
Capital
Retained
Comprehensive
Three Months Ended:
Shares
Amount
Surplus
Earnings
Loss
Total
Balance, April 1, 2024
8,073,467
8,073
2,172,029
157,779
22,519
(17,315
173,228
Issuance of common stock under incentive plan
4,950
(5
Stock-based compensation expense
351
Balance as of June 30, 2024
8,078,417
8,078
158,125
28,406
(16,613
180,168
Balance, April 1, 2025
8,102,242
8,102
158,997
47,044
(14,211
202,104
4,650
37
42
233
Balance as of June 30, 2025
8,106,892
Six Months Ended:
Balance, January 1, 2024
7,367,900
7,368
145,944
20,090
(19,531
156,043
9,075
9
(9
Issuance of common stock upon private placement
701,442
701
11,543
12,244
647
Balance, January 1, 2025
8,098,117
8,775
33
479
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Operating activities
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation expense and software amortization
722
651
Increase in cash value of bank-owned life insurance
(889
(720
Net loss on sale of available-for-sale securities
Amortization of operating lease right-of-use assets
416
381
Amortization of debt issuance costs
28
27
Writedown on other real estate owned
99
Write down on repossessed assets
Net gain on sale of other real estate owned
(64
Gain on sale of government guaranteed loans, including originations of servicing rights
(265
(355
Loss on sale of other loans
71
Income from mortgage operations
(547
(537
Discount accretion and premium amortization on securities available-for-sale
(369
(215
Amortization of intangible assets
291
266
Deferred income tax expense
153
1,705
Originations of loans held for sale
(3,010,117
(1,939,698
Proceeds from loans held for sale
2,980,351
1,872,857
(Increase) decrease in other assets
(1,507
4,783
Increase (decrease) in other liabilities
1,873
Net cash used by operating activities
(16,846
(48,015
Investing activities
Purchase of securities available-for-sale
(20,925
(61,162
Proceeds from sales of securities available-for-sale
39,100
Proceeds from paydowns, calls, and maturities on securities available-for-sale
29,523
37,032
Net sale of non-marketable equity securities
642
1,858
Loan originations and principal collections, net
(123,343
(28,628
Net purchase of premises, furniture and equipment
(1,092
(473
Proceeds from sales of other real estate owned
829
Net cash used by investing activities
(114,366
(12,273
Financing activities
Net increase in deposits
133,499
54,933
Net repayment of Federal Home Loan Bank of Atlanta advances
(15,000
(50,000
Proceeds from Federal Reserve Bank advances
70,000
Proceeds from issuance of common stock under incentive plan
Proceeds from private placement capital raise
Net repayment of commercial line of credit
(12,000
Net cash provided by financing activities
106,541
75,177
Net increase in cash and cash equivalents
(24,671
14,889
Cash and cash equivalents, beginning of year
48,553
Cash and cash equivalents, end of period
63,442
Cash (received) paid during the period for:
Interest
25,022
25,922
Income taxes
1,368
460
Noncash investing and financing activities:
Unrealized gain on securities available-for-sale, net
Unrealized (loss) gain on derivatives, net
Transfers from loans held for investment to loans held for sale
4,496
5,082
Right-of-use assets obtained in exchange for new operating lease liabilities
535
323
Lease liabilities arising from obtaining right-of-use assets
CoastalSouth Bancshares, Inc. and Subsidiary
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements include the accounts of CoastalSouth Bancshares, Inc. (the “Company”) and its wholly-owned subsidiary. The Company owns 100% of Coastal States Bank (the “Bank”). The Bank has one wholly owned subsidiary, Coastal States Mortgage, Inc., a mortgage company focused on originating and selling residential mortgages to investors and to retain in the portfolio. The "Company” or “our,” as used herein, includes Coastal States Bank and Coastal States Mortgage, Inc.
These unaudited Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) followed within the financial services industry for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or notes required for complete financial statements.
In the opinion of management, all adjustments, consisting of normal and recurring items, considered necessary for a fair presentation of the Consolidated Financial Statements for the interim periods have been included. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts reported in prior periods have been reclassified to conform to the current year's presentation. These reclassifications did not have a material effect on previously reported net income, shareholders’ equity or cash flows.
Operating results for the three and six months ended June 30, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025. These statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2024 as filed with the Securities and Exchange Commission ("SEC") on Form S-1.
The Company’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2024 as filed with the SEC on Form S-1. There were no new accounting policies or changes to existing policies adopted during the six months ended June 30, 2025 which had a significant effect on the Company’s results of operations or statement of financial condition. For interim reporting purposes, the Company follows the same basic accounting policies and considers each interim period as an integral part of an annual period.
Operating Segments
The Company principally operates in one business segment, which is community banking.
Accounting standards require that information be reported about a company’s operating segments using a “management approach.” Reportable segments are identified in these standards as those revenue producing components for which separate financial information is produced internally and which are subject to evaluation by the Chief Operating Decision Maker ("CODM"). While the CODM monitors the revenue streams of the various products and services, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.
The Company's CODM is the chief executive officer. The segment measure of profit or loss is consolidated net income according to the Consolidated Statements of Operations, the measure of segment assets is total assets of the consolidated company according to the Consolidated Balance Sheets, and the accounting policies of the segment are the same as those described in the Consolidated Financial Statements within Note 1 for the year ended December 31, 2024 as filed with the SEC on Form S-1. The CODM monitors budgeted to actual results of net income to assess the company's performance, to make decisions on strategic initiatives, and to establish management's compensation. The segment's revenues are primarily derived from retail and commercial banking products, and investment income.
Contingencies
Due to the nature of their activities, the Company and its subsidiary are at times engaged in various legal proceedings that arise in the course of normal business, some of which were outstanding as of June 30, 2025. Although the ultimate outcome of all claims and lawsuits outstanding as of June 30, 2025 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on the Company’s results of operations or financial condition.
Accounting Pronouncements Not Yet Adopted
In December 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU enhances the transparency and decision usefulness of income tax disclosures for investors, lenders, creditors, and other allocators of capital (collectively, “investors”). These new enhancements are meant to better (1) understand an entity’s exposure to potential changes in jurisdictional tax legislation and the ensuing risks and opportunities, (2) assess income tax information that affects cash flow forecasts and capital allocation decisions, and (3) identify potential opportunities to
CoastalSouth Bancshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) - Continued
increase future cash flows. For public business entities, these amendments are effective for annual periods beginning after December 15, 2024, with early adoption permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis and retrospective application is permitted. The adoption of this standard is not expected to have a material effect on the Company’s Consolidated Financial Statements.
The Company has further evaluated other Accounting Standards Updates issued during 2025 but does not expect Updates other than those summarized above to have a material impact on the Consolidated Financial Statements.
NOTE 2 — INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available-for-sale along with allowance for credit losses, gross unrealized gains and losses at June 30, 2025 and December 31, 2024 are summarized in the tables below:
June 30, 2025
(In thousands of dollars)
AmortizedCost
Allowance for Credit Losses
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
U.S. Treasuries
5,993
249
5,744
Municipal obligations
62,163
18
8,293
53,888
Mortgage-backed securities
191,256
568
11,880
179,944
Asset-backed securities
33,608
222
186
33,644
Corporate debt securities
59,330
906
1,696
58,540
Total securities available-for-sale
352,350
1,714
22,304
December 31, 2024
5,990
378
5,612
61,401
8,367
53,071
181,242
211
15,361
166,092
46,775
384
219
46,940
64,264
963
1,675
63,552
359,672
1,595
26,000
The following is a summary of maturities of available-for-sale ("AFS") securities as of June 30, 2025. The amortized cost and estimated fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without penalty. Mortgaged-backed securities are not presented by maturity date because pay-downs are expected before contractual maturity dates.
Amortized
Estimated
Cost
Fair Value
Due in one year or less
2,500
Due after one year but within five years
31,324
31,089
Due after five years but within ten years
78,097
73,867
Due after ten years
49,173
44,360
The following table shows securities in unrealized loss position for which an allowance for credit losses ("ACL") has not been recorded and the length of time they were in continuous loss positions as of June 30, 2025:
Less than
Twelve months
or more
Unrealized
losses
53,118
36,563
205
104,233
11,675
140,796
1,532
10
7,395
176
8,927
3,355
20,810
1,663
24,165
Total AFS securities
41,450
248
191,300
22,056
232,750
7
The following table shows securities in unrealized loss position for which an ACL has not been recorded and the length of time they were in continuous loss positions as of December 31, 2024:
52,299
36,742
610
108,435
14,751
145,177
11,141
1,245
20,801
1,670
22,046
37,987
615
198,288
25,385
236,275
AFS securities are recorded at fair market value. Of the 144 securities in an unrealized loss position at June 30, 2025, 18 securities were in a continuous loss position for less than twelve months, and 126 securities were in a continuous loss position for twelve months or more. The Company believes, based on industry analyst reports, credit ratings and/or government guarantees, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered credit related required to be charged to the allowance.
Based on the results of management's review at June 30, 2025, none of the unrealized loss was attributable to credit impairment and all $22.3 million in unrealized loss was determined to be from factors other than credit. There can be no assurance that the Company will not conclude in future periods that conditions existing at that time indicate some or all of these securities may be sold or are credit related impaired, which would require a charge to earnings in such periods.
The table below presents a summary of sales activities in the Company's investment securities available-for-sale portfolio the periods presented:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
Gross gains on sales of securities
47
Gross losses on sales of securities
(3,512
Net realized losses on sales of securities available-for-sale
Sales proceeds
At June 30, 2025, investment securities with a book value of $57.6 million and a market value of $50.7 million were pledged to secure federal funds lines of credit, Federal Reserve Bank Discount Window credit availability, and municipal deposits. At December 31, 2024, investment securities with a book value of $59.2 million and a market value of $51.8 million were pledged to secure federal funds lines of credit, Federal Reserve Bank Discount Window credit availability, and municipal deposits.
NOTE 3 — LOANS AND ALLOWANCE FOR CREDIT LOSSES
Composition of Loan Portfolio
The Company engages in a full complement of lending activities, including commercial real estate loans ("CRE"), construction loans, commercial and industrial loans ("C&I"), and consumer purpose loans. While risk of loss in the Company’s portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may increase due to factors beyond the Company’s control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the real estate portfolio. The following is a brief description of the major loans receivable categories:
Commercial Loans
Acquisition, Development, and Construction ("ADC") – ADC loans include both loans and credit lines for the purpose of purchasing, carrying, and developing land into residential subdivisions or various types of commercial developments, such as industrial, hospitality, warehouse, retail, office, and multi-family. This category also includes loans and credit lines for construction of residential developments, multi-family buildings, and commercial buildings. The Company generally engages in ADC lending primarily in local markets served by its branches, and through our homebuilder finance and government guaranteed lending lines of business. The Company recognizes that risks are inherent in the financing of commercial real estate development and construction. These risks include location, market conditions and price volatility, change in interest rates, demand for developed land, lots and buildings, desirability of features and styling of completed developments and buildings, competition from other developments and builders, traffic patterns, remote work patterns, governmental jurisdiction, tax structure, availability of utilities, roads, public transportation and schools,
8
availability of permanent financing for homebuyers, zoning, environmental restrictions, lawsuits, economic and business cycle, labor, and reputation of the builder or developer.
Each ADC loan is underwritten to address: (i) the desirability of the project, its market viability and projected absorption period; (ii) the creditworthiness of the borrower and the guarantor as to liquidity, cash flow and assets available to ensure performance of the loan; (iii) equity contribution to the project; (iv) the developer’s experience and success with similar projects; and (v) the value of the collateral. ADC loans are inspected periodically to ensure that the project is on schedule and eligible for requested draws. Inspections may be performed by construction inspectors hired by the Company or by appropriate loan officers and are conducted periodically to monitor the progress of a particular project. These inspections may also include discussions with project managers and engineers. Rising interest rates and the potential for slowing economic conditions could negatively impact borrowers’ and guarantors’ ability to repay their debt which could make more of the Company’s loans collateral-dependent.
Income Producing CRE – Income Producing CRE loans include loans to finance income-producing commercial and multi-family properties. Lending in this category is generally limited to properties located in the Company’s market area with only limited exposure to properties located elsewhere but owned by in-market borrowers. Loans in this category include loans for neighborhood retail centers, medical and professional offices, single retail stores, warehouses and apartments leased generally to local businesses and residents. The underwriting of these loans takes into consideration the occupancy, rental rates, and local market demand as well as the financial health of the borrower. The primary risk associated with loans secured with income-producing property is the inability of that property to produce adequate cash flow to service the debt. High unemployment, significant increases to interest rates, generally weak economic conditions and/or an oversupply in the market may result in our customers having difficulty achieving adequate occupancy and/or rental rates. Payments on such loans are often dependent on successful operation or management of the properties.
Owner-Occupied CRE – Owner-occupied loans include loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized enterprises. These include both lines of credit and term loans which are amortized over the useful life of the assets financed. Personal guarantees, if applicable, are generally required for these loans. The Company recognizes that risk from economic cycles, pandemics, government regulation, supply-chain disruptions, product innovations or obsolescence, operational errors, lawsuits, natural disasters, losses due to theft or embezzlement, health or loss of key personnel, or competitive situations may adversely affect the scheduled repayment of business loans.
Senior Housing – Senior housing loans support senior adults facilities, generally restricted for adults over the age of 55 years old. These types of loans include senior apartments, independent living communities, assisted living and memory care communities, nursing homes or skilled nursing facilities, and continuing care retirement communities. The Company recognizes that risk from high resident turnover, pandemics, government regulation, operator risk, increases in acuity, availability and cost of qualified staffing resources, technology risk, and other risks such as liability, insurance, reimbursement and regulatory changes may impact repayment of these loans. Underwriting focuses primarily on operator quality and business operations rather than income producing CRE property quality metrics.
Commercial and Industrial – C&I loans are loans and lines of credit to finance business operations, equipment and other non-real estate collateral primarily for small and medium-sized enterprises. These include both lines of credit and term loans which are amortized over the useful life of the assets financed. Personal and/or corporate guarantees are generally obtained where available and prudent. The Company recognizes that risk from economic cycles, commodity prices, pandemics, government regulation, supply-chain disruptions, product innovations or obsolescence, operational errors, lawsuits, natural disasters, losses due to theft or embezzlement, health or loss of key personnel or competitive situations may adversely affect the scheduled repayment of business loans.
Retail loans
Marine Vessels – Marine vessel loans are a type of consumer loan used to finance the purchase of a boat or another marine craft. Functioning similarly to auto loans and personal loans, these installment loans come with a repayment term, fixed monthly payments and variable-or-fixed interest rates. These loans are underwritten in accordance with the Company’s general loan policies and procedures and are generally secured with title or preferred ships' mortgage on the marine vessel. The Company recognizes that risk from economic cycles, pandemics, government regulation, natural disasters, losses due to theft, or changes to customer's ability to meet the scheduled repayment of marine vessel. At June 30, 2025 and December 31, 2024, there were $302 thousand and $405 thousand of repossessed marine assets, respectively. There were $104 thousand and $67 thousand of repossessed assets write-downs during the six months ended June 30, 2025 and 2024, respectively.
Residential Mortgages – Residential mortgages are first or second-lien loans secured by a primary residence or second home. This category includes permanent mortgage financing, construction loans to individual consumers, and home equity lines of credit. The loans are generally secured by properties located within the local market area of the Bank's retail footprint which originates and services the loan. These loans are underwritten in accordance with the Company’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value. In addition to loans originated through the Company’s branches, the Company originates and services residential mortgages sold in the secondary market which are underwritten and closed pursuant to investor and agency guidelines. At June 30, 2025, there were no residential mortgage loans in process of foreclosure, and at December 31, 2024, there were $164 thousand of residential mortgage loans in process of
foreclosure. Additionally, the Company held no foreclosed residential properties at June 30, 2025 and had $864 thousand foreclosed residential properties at December 31, 2024.
Cash Value Life Insurance Line of Credit ("CVLI") – Cash value life insurance encompasses multiple types of life insurance that contain a cash value account. This cash value component typically earns interest or other investment gains and grows tax-deferred. CVLI loans are generally lines of credit ("LOC") secured by cash value life insurance of the debtor and can be originated for personal or business purposes. Upon the delinquency of the loan or lapse of an insurance policy premium payment, the Company pursues liquidation of the policy cash value in order to satisfy the loan.
Other Consumer – Other consumer loans primarily includes unsecured student loans and other secured and unsecured consumer purpose loans. Certain loans are secured by recreational vehicles and other such tangible property. These types of loans may be impacted by negative macroeconomic conditions impacting individual consumers, such as increased unemployment, which can reduce a borrower’s ability to repay the loan.
Loans held for sale ("LHFS") are comprised of loans acquired through mortgage warehouse lending activities and origination of mortgage loans. The Company serves as a warehouse lender by purchasing loans originated by third-party mortgage originators and selling these loans to other third-party investors. The Company also originates mortgage loans with customers through Coastal States Mortgage, Inc. ("CSM") and sells the majority of these loans to third-party investors.
Following is a summary of the composition of the loan portfolio at June 30, 2025 and December 31, 2024:
%
Commercial loans
Acquisition, development and construction
100,528
6.6
72,520
5.2
Income producing CRE
372,142
24.4
321,558
22.8
Owner-occupied CRE
91,147
6.0
94,573
6.7
Senior housing
236,474
15.5
234,081
16.6
Commercial and industrial
131,716
8.6
141,626
10.0
Total commercial loans
932,007
61.1
864,358
61.3
Marine vessels
301,327
19.7
263,657
18.6
Residential mortgages
185,527
12.1
174,099
12.4
Cash value life insurance LOC
87,135
5.7
86,844
6.2
Other consumer
21,203
1.4
20,485
1.5
Total retail loans
595,192
38.9
545,085
38.7
Total gross loans held for investment ("LHFI"), net of unearned income
100.0
Less allowance for credit losses
LHFI, net
LHFS
Credit Quality Indicators
The Company monitors the credit quality of its commercial loan portfolio using internal credit risk ratings. These credit risk ratings are based upon established regulatory guidance and are assigned upon initial approval of credit to borrowers. Credit risk ratings are updated periodically after the initial assignment or whenever management becomes aware of information affecting the borrowers’ ability to fulfill their obligations. The Company utilizes the following categories of credit grades to evaluate its commercial loan portfolio:
Pass — Loans classified as pass are higher quality loans that do not fit any of the other categories below.
Special Mention — Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.
Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The Company had no loans rated
Doubtful at June 30, 2025 or December 31, 2024.
The Company monitors the credit quality of its retail portfolio based primarily on payment activity and credit scores. Payment activity is the primary factor considered in determining whether a retail loan should be classified as nonperforming. Retail loans are considered to be nonperforming if they are on nonaccrual status or if they are 90 days past due or greater.
The following tables present the risk category of commercial loans on amortized cost basis and, for 2025, gross charge-offs by vintage year as of June 30, 2025:
Amortized Cost Basis by Origination Year
2023
2022
2021
Prior
Revolvers
Revolvers Converted to Term
Pass
49,412
41,088
8,371
1,365
292
Special mention
Substandard
Total acquisition, development and construction
Current period gross charge-offs
54,288
40,215
48,654
133,105
54,767
38,302
1,924
371,255
887
Total income producing
39,189
5,332
3,381
9,686
17,038
24,103
21,196
508
81,244
3,612
1,800
3,861
630
6,291
Total owner occupied
5,181
20,899
25,438
42,398
48,501
24,184
67,618
25,159
10,111
217,971
4,031
8,047
12,078
6,425
Total senior housing
28,215
39,631
16,930
25,233
26,103
10,773
16,313
4,125
22,872
2,630
124,979
2,199
51
260
2,477
1,685
4,538
Total non-real estate
16,981
16,573
6,602
25,136
4,315
11
The following tables present the risk category of retail loans on amortized cost basis and, for 2025, gross charge-offs by vintage year as of June 30, 2025:
Performing
56,713
45,904
68,103
87,296
21,115
22,196
Nonperforming
Total marine vessels
20,307
24,104
23,943
43,957
24,951
26,919
20,567
414
185,162
365
Total residential mortgages
27,284
87,133
Total cash value life insurance LOC
3,229
1,744
1,950
1,626
12,124
459
Total other consumer
239
The following tables present the risk category of commercial loans on amortized cost basis and, for 2024, gross charge-offs by vintage year as of December 31, 2024:
2020
56,157
12,929
2,923
503
41,441
54,468
123,767
57,156
28,306
16,006
321,146
412
16,418
4,400
9,803
19,153
26,183
15,831
12,520
87,906
1,825
3,996
846
6,667
6,225
23,149
13,366
43,372
24,428
80,881
31,613
9,789
190,083
17,532
7,494
25,026
13,903
5,069
18,972
63,048
12,563
41,292
34,052
12,364
19,206
1,472
6,400
18,811
3,281
136,878
36
2,626
69
1,734
4,712
19,525
9,026
18,880
5,015
87
149
12
The following tables present the risk category of retail loans on amortized cost basis and, for 2024, gross charge-offs by vintage year as of December 31, 2024:
48,640
74,645
95,768
21,729
5,690
17,185
19,067
29,485
49,850
27,362
12,472
17,104
18,292
202
173,834
164
101
17,268
303
83,751
3,093
1,921
1,995
83
2,898
11,414
465
20,442
43
11,457
53
Nonaccrual and Past Due Loans
A loan is placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued and is subsequently determined to have doubtful collectability is charged to interest income. Interest on loans that are classified as nonaccrual is subsequently applied to principal until the loans are returned to accrual status. The Company’s loan policy states that a nonaccrual loan may be returned to accrual status when (i) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (ii) it otherwise becomes well secured and in the process of collection. Restoration to accrual status on any given loan must be supported by a well-documented credit evaluation of the borrower’s financial condition and the prospects for full repayment, approved by the Company’s Chief Credit Officer. Past due loans are loans whose principal or interest is past due 30 days or more. During the six months ended June 30, 2025 and the six months ended June 30, 2024, there was $56 thousand and $5 thousand, respectively, of interest income reversed from income related to loans that were transferred to nonaccrual status.
The following table presents a summary of past due and nonaccrual loans as of June 30, 2025:
Loans Past Due
Current
30-59 DaysPast Due
60-89 DaysPast Due
90 Days or Moreand Accruing
Nonaccrual
TotalPast Due andNonaccrual
Total LoansReceivable
475
87,900
3,247
230,049
127,155
46
93
4,162
4,561
301,130
197
21,175
1,511,489
271
735
14,611
15,710
13
The following table presents a summary of past due and nonaccrual loans as of December 31, 2024:
91,148
3,425
227,511
6,570
137,330
4,285
4,296
172,525
1,309
1,574
19,996
325
121
489
1,392,677
1,639
49
14,957
16,766
Individually Analyzed Collateral-Dependent Loans
As of June 30, 2025, there were $14.6 million of individually analyzed collateral-dependent loans which are primarily secured by real estate, equipment and receivables. All of the Company's nonaccrual loans at June 30, 2025 are collateral-dependent. The following table presents an analysis of nonaccrual loans that are also collateral-dependent financial assets and related allowance for credit losses:
Nonaccrual Loans with No Allowance
Nonaccrual Loans with an Allowance
Total Nonaccrual Loans
Nonaccrual Interest Income Recognized
791
4,111
8,135
6,476
804
As of December 31, 2024, there were $15.0 million of individually analyzed collateral-dependent loans which are primarily secured by real estate, equipment and receivables. All of the Company's nonaccrual loans at December 31, 2024, are collateral-dependent. The following table presents an analysis of nonaccrual loans that are also collateral-dependent financial assets and related allowance for credit losses:
1,703
2,057
2,228
134
6,058
8,899
1,742
148
Modifications to Borrowers Experiencing Financial Difficulty
The Company periodically provides modifications to borrowers experiencing financial difficulty. These modifications include either payment deferrals, term extensions, interest rate reductions, principal forgiveness or combinations of modification types. The determination of whether the borrower is experiencing financial difficulty is made on the date of the modification. When principal forgiveness is provided, the amount of principal forgiveness is charged off against the allowance for credit losses with a corresponding reduction in the amortized cost basis of the loan.
14
The following table shows the amortized cost basis of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted as of June 30, 2025:
Principal forgiveness
Payment deferral
Term extension
Interest rate reduction
Combination of term extension and payment delay
Combination of term extension and interest rate reduction
Total modified loans
Percent of total loan class
2.7
2,160
3,845
2.9
10,270
0.7
The Company had no unfunded commitments to borrowers experiencing financial difficulty for which the Company has modified their loans as of June 30, 2025 or June 30, 2024.
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty during the last twelve months as of June 30, 2025:
Loan type
Financial effect
Provided one year of principal payment deferral (interest only).
Provided term extension of 14 months and deferral of full principal and interest payments.
Provided 36-month extension broken into three 12-month extension options, and reduced interest rate by 100 bps in the first 12 months and by 50 bps in the second 12 months.
The Company monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months as of June 30, 2025:
30-59DaysPast Due
60-89DaysPast Due
90 Days or MorePast Due
Commercial real estate
Total nonaccrual loans included above
The following table provides the amortized cost basis of financing receivables related to loans modified to borrowers experiencing financial difficulty at June 30, 2025 that had a subsequent payment default and were modified in the previous 12 months:
Payment Deferral
Combination Term Extension and Interest Rate Reduction
At June 30, 2024, there were no loans modified to borrowers experiencing financial difficulty.
Allowance for Credit Losses - Loans
The allowance for credit losses represents an allowance for expected losses over the remaining contractual life of the assets adjusted for prepayments. The contractual term does not consider extensions, renewals or modifications. The Company segregates the loan portfolio by type of loan and utilizes this segregation in evaluating exposure to risks within the portfolio.
15
The following table presents a summary of the Company's allowance, by loan category for credit losses for the three months ended June 30, 2025:
Beginning
Provision
Ending
Balance
Charge-offs
Recoveries
(Release)
Three Months Ended June 30, 2025
Acquisition, development, and construction
1,337
(94
1,243
6,619
463
7,082
595
167
762
4,149
(524
3,625
(26
831
13,542
20
13,543
67
1,376
1,801
337
2,141
79
82
373
(196
174
3,562
581
3,954
Total allowance for funded loans
(222
601
17,497
Reserve for losses on unfunded loan commitments
3,348
151
3,499
Total ACL
20,452
20,996
The following table presents a summary of the Company's allowance, by loan category for credit losses for the three months ended June 30, 2024:
Three Months Ended June 30, 2024
2,800
(276
2,524
5,230
92
5,322
(52
471
1,868
(187
1,681
922
(65
540
1,408
11,343
117
11,406
1,633
2,332
109
2,444
(47
97
357
30
389
4,431
207
4,596
15,774
(112
324
16,002
3,779
(151
3,628
19,553
19,630
The following table presents a summary of the Company's allowance, by loan category for credit losses for the six months ended June 30, 2025:
Six Months Ended June 30, 2025
1,188
55
5,867
543
4,576
(951
751
(32
100
12,925
638
1,688
(312
2,015
(6
402
(239
31
161
4,193
(36
17,118
(271
48
602
2,720
779
19,838
The following table presents a summary of the Company's allowance, by loan category for credit losses for the six months ended June 30, 2024:
Six Months Ended June 30, 2024
3,318
(794
5,067
628
(157
1,342
339
1,079
11,434
21
2,167
122
22
(79
603
15,465
25
624
3,916
(288
19,381
NOTE 4 — COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities that are not reflected in the Company’s financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. The Company does not anticipate any material losses as a result of these commitments and contingent liabilities.
Credit Related Commitments
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
17
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments where contract amounts represent credit risk as of June 30, 2025 and December 31, 2024:
Commitments to extend credit
480,944
460,840
Letters of credit
181
1,223
481,125
462,063
Commitments to extend credit, including unused lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
The Company maintains cash deposits with a financial institution that during the year are in excess of the insured limitation of the Federal Deposit Insurance Corporation. If the financial institution were not to honor its contractual liability, the Company could incur losses. Management is of the opinion that there is no material risk because of the financial strength of the institution.
Tax Credit Investments
The Company has invested capital in a limited partnership to obtain renewable energy tax credits generated by solar power projects. The following table summarizes the tax credit investment and equity investment as of June 30, 2025 and December 31, 2024:
Balance Sheet Location
Carrying amount
1,034
2,666
Amount of future funding commitments not included in carrying amount
N/A
4,685
2,721
The following table presents a summary of net provision (benefit) to income tax expense from tax credit investments recognized in the provision for income taxes related to the recognition of tax credits, adjustments to taxes payable from flow-through losses, and changes in deferred tax items for the three and six months ended June 30, 2025 and 2024:
Income Statement Location
June 30, 2024
Tax credits:
Investment in solar tax credits
Income tax benefit
(499
(189
(437
(257
The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which could have a material adverse effect on the financial position or operating results of the Company.
NOTE 5 — STOCK-BASED COMPENSATION
In 2017, the shareholders of the Company approved the CoastalSouth Bancshares, Inc. ("COSO") 2017 Incentive Plan (“2017 Plan”) to attract, incentivize and retain the services of senior officers, and directors of the Bank. As of June 30, 2025, there were 884,750 stock options and 372,500 unvested restricted stock units ("RSUs") outstanding under the 2017 Plan. In April 2025, the shareholders of the Company approved the COSO Omnibus Incentive Plan ("2025 Plan" and, together with the 2017 Plan, the "Plans") reserving 260,000 shares for future issuance, any or all of which may be granted as incentive stock options, nonqualified stock options, restricted stock, RSUs, deferred stock units, stock appreciation rights, performance awards, other stock-based awards, or any other right or interest relating to stock or cash. Following the adoption of the 2025 Plan, no new awards will be issued under the 2017 Plan.
In the event all or a portion of a stock award issued under the 2025 Plan is canceled, terminates, expires, is forfeited or lapses for any reason, any unissued or forfeited shares subject to such award shares become available for issuance pursuant to awards granted under the 2025 Plan thus increasing the number of shares available for future issuance. However, shares of common stock deducted or withheld upon the exercise or vesting of an award to satisfy tax withholding obligations count against the number of shares remaining available for issuance pursuant to awards granted under the Plan.
The Plans are administered by the Compensation Committee of our Board of Directors (the “Committee”). The determination of award recipients under the Plans, and the terms of those awards, are made by the Committee. The terms of each stock-based award are indicated in an award certificate. As of June 30, 2025, 260,000 shares authorized and available for issuance under the 2025 Plan.
Stock-based awards are recognized over the vesting period and reflected as salaries and employee benefits within the Consolidated Statements of Operations, which were $233 thousand and $351 thousand for the three months ended June 30, 2025 and 2024, respectively, and $479 thousand and $647 thousand for the six months ended June 30, 2025 and 2024, respectively.
Stock Options
The Company's stock options generally vest over four years of continuous service, with a majority vesting 25% on the anniversary of the grant date and a minority vesting 100% on the fourth anniversary of the grant date. The terms of all of the options are for ten years, expiring on the tenth anniversary of the grant date.
The grant date fair value of stock options is determined using the Black-Scholes model. Volatility is based on a peer group of similar community banks in the southeast United States. The risk-free rate is the treasury rate that most closely relates to the expected life on the grant date.
A summary of stock option activity for the six months ended June 30, 2025 and 2024 is presented below:
Weighted Average
Number of
Grant Date
Exercise Price
Outstanding at January 1, 2025
737,250
13.30
5.09
Exercised
(3,000
14.00
4.59
Forfeited or Expired
14.83
5.56
Outstanding at June 30, 2025
731,250
13.29
Outstanding at January 1, 2024
746,750
Granted
1,500
15.80
7.81
Outstanding at June 30, 2024
748,250
5.10
As of June 30, 2025 and 2024, there were $56 thousand and $241 thousand, respectively, of total unrecognized compensation cost related to stock options granted under the Plans. As of June 30, 2025, the cost is expected to be recognized over a weighted-average period of 0.78 years.
Restricted Stock Units
Periodically, the Company issues RSUs to its directors and senior officers. Compensation expense is recognized over the vesting period of the awards based upon the fair value of the stock at grant date. The Company did not grant any RSUs during the six months ended June 30, 2025 to the Board of Directors. During the six months ended June 30, 2024, the Company granted 19,700 of RSUs to the Board of Directors. In addition, the Company granted 40,500 and 80,500 of RSUs during the six months ended June 30, 2025 and 2024, respectively, to members of management which cliff vest 100% at the end of five years.
A summary of RSU activity for the six months ended June 30, 2025 and 2024 is below:
159,275
16.26
40,500
20.97
Delivered
(5,775
17.99
194,000
17.20
89,350
15.97
100,200
16.53
(9,075
17.67
180,475
16.19
As of June 30, 2025 and 2024, there was $2.1 million and $2.2 million, respectively, of total unrecognized compensation cost related to nonvested RSUs granted under the Plans. As of June 30, 2025, the cost is expected to be recognized over a weighted-average period
19
of 3.56 years.
NOTE 6 — NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding in-the-money stock warrants and options, as well as restricted stock units. Potential common shares are not included in the denominator of the diluted per share computation when inclusion would be anti-dilutive. As of June 30, 2025 and 2024, there were 1,500 and 83,000 common shares that were not included in the potentially dilutive stock options, respectively.
Net income per common share was calculated as follows for the three and six months ended June 30, 2025 and 2024:
(In thousands of dollars except share and per share amounts)
Net income per share - basic computation:
Net income available to common shareholders
Average common shares outstanding - basic
10,277,721
10,247,201
10,275,436
10,145,576
Basic net income per share
Diluted net income per share computation:
Incremental shares from assumed conversions
Stock options
247,388
152,865
257,590
144,265
Restricted stock units
87,146
45,078
103,971
54,974
Average common shares outstanding - diluted
10,612,255
10,445,144
10,636,997
10,344,815
Diluted net income per share
NOTE 7 — FAIR VALUE OF FINANCIAL INSTRUMENTS
US GAAP provides a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, collateral-dependent loans).
Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. US GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities AFS — Securities AFS are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Equity Securities — Equity securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. There were no equity securities held at June 30, 2025 and December 31, 2024.
Loans Held for Sale — Loans held for sale are comprised of loans originated for sale in the ordinary course of business and purchased with intent to sell through Mortgage Banker Finance ("MBF"). The fair value of loans originated for sale in the secondary market is based on purchase commitments or quoted prices for the same or similar loans and are classified as recurring Level 2. There were no loans held for sale requiring fair value adjustments at June 30, 2025 and December 31, 2024.
Collateral-Dependent Loans — The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered collateral-dependent, evaluated individually for impairment, and an allowance for credit loss is established. Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. If a loan is determined to be collateral-dependent, or if foreclosure is probable, the Company measures the net realizable value of the collateral (fair value less costs to sell) to determine the level of impairment for the loan. The valuation of collateral is supported by an appraisal, brokers price opinion, or other comparable market data. Otherwise, the Company performs a discounted cash flow analysis on the loan to determine the level of ACL needed. At June 30, 2025 and December 31, 2024, substantially all of the individually evaluated collateral-dependent loans were evaluated based upon the fair value of the collateral. Collateral-dependent loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.
Other Real Estate Owned ("OREO") — Foreclosed assets are adjusted to fair value upon transfer of the loans to OREO. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. OREO presented as measured on a non-recurring basis includes only those properties that had changes in valuation. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral.
Derivative Financial Instruments — The Company’s derivative financial instruments, which are interest rate contracts, are valued using a discounted cash flow method that incorporates current market interest rates.
The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy at June 30, 2025 and December 31, 2024:
Level 1
Level 2
Level 3
Assets:
Available-for-sale securities
58,040
500
331,260
Derivative assets
7,488
Liabilities:
Derivative liabilities
63,052
334,767
7,717
Level 3 assets measured at fair value on a recurring basis at June 30, 2025 and December 31, 2024 were $500 thousand. Level 3 liabilities measured at fair value on a recurring basis at June 30, 2025 and December 31, 2024 were $5 thousand and $6 thousand, respectively. There were no changes in the value in either of those periods.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities carried on the balance sheet by caption and by level within the valuation hierarchy (as described above) for which a nonrecurring change in fair value has been recorded during the six months ended June 30, 2025 and the year ended December 31, 2024.
Collateral-dependent loans, net
13,807
Other real estate owned
864
13,215
14,079
There were no liabilities measured at fair value on a nonrecurring basis at June 30, 2025 and December 31, 2024.
The following tables present quantitative information about the unobservable inputs used in Level 3 fair value measurements at June 30, 2025 and December 31, 2024:
Financial Instrument
Net CarryingValue
Valuation Technique
Unobservable Input
Input
Third party appraisal or broker's price opinion
Management discount for costs to sell
10%
Fair Value of Financial Instruments
The following tables include the estimated fair value of the Company’s financial assets and financial liabilities. The methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets and financial liabilities are discussed below. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value.
Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts at June 30, 2025.
CarryingAmount
Financial Assets:
1,471,083
Financial Liabilities:
1,866,741
15,076
1,347,071
1,723,134
41,531
Cash and cash equivalents — The carrying amounts of cash and due from banks and federal funds sold approximate their fair values.
Loans held for sale — Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. Fair value is based upon the contractual price to be received from these third parties, which may be different than cost.
Loans held for investment, net — Fair values are estimated for portfolios of loans with similar financial characteristics if collateral-dependent. Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect observable market information incorporating the credit, liquidity, yield and other risks inherent in the loan. The estimate of maturity is based upon the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of the current economic and lending conditions. Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discounted rates are judgmentally determined using available market information and specific borrower information.
Non-marketable equity securities — Non-marketable equity securities are carried at original cost basis, as cost approximates fair value and there is no ready market for such investments.
Deposits — The fair value of deposits with no stated maturity date, such as noninterest-bearing demand deposits, savings and money market and checking accounts, is based on the discounted value of estimated cash flows. The fair value of time deposits is based upon the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Other borrowings — The fair value of the Company’s Federal Home Bank of Atlanta ("FHLBA"), line of credit and subordinated debt advances are estimated based upon the discounted value of contractual cash flows. The fair value of investment securities sold under agreements to repurchase approximates the carrying amount because of the short maturity of these borrowings. The discount rate is estimated using rates quoted for the same or similar issues or the current rates offered to the Company for debt of the same remaining maturities.
NOTE 8 — REVENUE RECOGNITION
Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or
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services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The Company’s sources of revenue are generated from both interest and noninterest revenue streams. The majority of our revenue-generating transactions are not subject to ASC 606. Revenue streams generated by fees and interest from financial instruments, investments, and transfers and servicing of these assets are excluded from this disclosure.
The Company has certain revenue streams within the scope of ASC 606 contained within noninterest income. The Company’s contracts with customers generally do not contain terms that require significant judgment to determine the amount of revenue to recognize.
The tables below presents the revenue streams within the scope of the standard and is followed by a description of each noninterest income revenue stream for the periods presented:
Within Scope
Out of Scope
Noninterest income:
268
991
Total noninterest income
487
1,308
984
2,692
236
410
528
1,061
971
(1,376
Gain on sale of government guaranteed loans — The Company records a gain from the sale of government guaranteed loans to third parties at the time the transfer is complete. The gain on sale is recognized as a result of the recognition of mortgage servicing rights and premiums paid by the buyer for the purchase of the loan.
Bank-owned life insurance — The Company’s income from bank-owned life insurance primarily represents changes in the cash surrender value of such life insurance policies held on certain key employees, for which the Company is the owner and beneficiary. Revenue is recognized in each period based on the change in cash surrender value during the period.
Income from mortgage originations — The Company earns mortgage production income which is comprised primarily of activity related to the sale of consumer mortgage loans as well as loan origination fees such as closing charges, document review fees, application fees, other loan origination fees, and loan processing fees.
Interchange income and card fees — The Company earns interchange fees from debit cardholder transactions conducted through a payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are earned daily.
Service charges on deposit accounts — The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees and stop payment charges, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
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Losses on sale of available-for-sale securities — The Company recognizes realized gains or losses from the sale of its available-for-sale securities at the trade date and recognizes periodic mark-to-market adjustments on equity securities resulting from changes in fair value.
Other noninterest income — Other noninterest income consists primarily of loan fees, which are out of the scope of ASC Topic 606. The items within scope of the standard primarily relate to contracts with third parties for miscellaneous referral or broker income.
Contract assets and liabilities — A contract asset balance typically occurs when an entity performs a service for a customer before the customer payment of consideration, creating a contract receivable, or before payment is due, creating a contract asset. In contrast, a contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment of consideration from the customer. The Company’s noninterest revenue streams that are within the scope of ASC 606 are largely based on transactional activity which typically occurs at a point in time immediately after the performance obligations have been satisfied. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers. Therefore, the Company does not experience significant contract balances. As of June 30, 2025 and 2024, the Company did not have any significant contract balances.
NOTE 9 — LEASES
The Company has entered into several operating leases for properties for branch banking and other banking operations. The leases have various initial terms and expire on various dates. The lease agreements generally provide that the Company is responsible for ongoing repairs and maintenance, insurance, and real estate taxes. The leases also provide for renewal options and certain scheduled increases in monthly lease payments. The Company does not consider exercise of any of these lease renewal options to be reasonably certain.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. For these short-term leases, lease expense is recognized on a straight-line basis over the lease term. Rental expense recorded under short-term leases for the three and six months ended June 30, 2025 was $13 thousand. There were no rental expenses recorded under short-term leases for the three and six months ended June 30, 2024. At June 30, 2025 and December 31, 2024, the Company had no leases classified as finance leases.
At June 30, 2025 and December 31, 2024, the Company had an operating lease right-of-use ("ROU") asset of $4.2 million and $4.0 million, and an operating lease liability of $4.9 million and $4.8 million, respectively. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.
Rental expense recorded under long-term leases for the three months ended June 30, 2025 and 2024 was $263 thousand and $259 thousand, respectively. Rental expense recorded under long-term leases for the six months ended June 30, 2025 and 2024 was $553 thousand and $517 thousand, respectively.
The weighted-average remaining lease term and the weighted-average discount rate for operating leases were 6.53 years and 2.90%, respectively, at June 30, 2025.
A maturity analysis of the Company's operating lease liabilities and reconciliation of the undiscounted cash flows to the operating lease liability at June 30, 2025 is as follows (in thousands of dollars):
June 30, 2026
896
June 30, 2027
802
June 30, 2028
793
June 30, 2029
June 30, 2030
733
Thereafter
1,346
Total undiscounted cash flows
5,323
Discount on cash flows
(448
Total lease liability
4,875
NOTE 10 — DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes interest rate swaps agreements as part of its asset-liability management strategy to help mitigate its interest rate risk. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Derivative financial instruments are recorded in the Consolidated Balance Sheets as either an asset or a liability (in other assets or other liabilities, respectively) and measured at fair value.
The Company presents derivative position gross on the balance sheet. The following tables reflects the derivatives recorded on the balance sheet as of the dates indicated:
Included in Other Assets
Included in Other Liabilities
Notional
Fair
Value
Derivatives designated as hedges:
Interest rate swaps related to cash flow hedges
375,000
5,238
Interest rate swaps related to fair value hedges
25,535
2,250
Derivatives not designated as hedges:
Sold credit protection on risk participation agreements
15,000
225,000
3,141
Fair Value Hedges
Fair value hedge interest rate swaps mature on various dates with a combined notional amount of $25.5 million at June 30, 2025 and December 31, 2024. The risk management objective with respect to the fair value hedges is to hedge the risk of certain municipal securities. These fair value hedges convert the fixed rates of the bonds to a floating leg of the overnight Secured Overnight Financing Rate ("Overnight SOFR") + 26.161 basis points. The hedges were determined to be effective during the periods presented. The Company expects these hedges to remain effective during the remaining term of the swap.
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The following table presents the amounts recorded on the balance sheet related to cumulative basis adjustment for the fair value hedges as of June 30, 2025 and December 31, 2024:
Cumulative Amount of Fair
Line Item in the
Value Hedging Adjustment
Balance Sheet in
Included in the Carrying
Which the Hedged
Carrying Amount
Amount of the
Item is Included
of the Hedged Assets
Hedged Assets
Securities available-for-sale
23,505
22,632
(2,364
(3,271
As of June 30, 2025 and December 31, 2024, the total notional amount of the pay-fixed/receive variable interest rate swap portfolio was $25.5 million. There were no hedging adjustments on the balances above for discontinued relationships.
The following table summarizes information about the interest rate swaps designated as fair value hedges at June 30, 2025:
Notional amount of fair value hedges
Weighted average maturity in years
4.49
The following table presents the change in fair value for derivatives designated as fair value hedges as well as the offsetting change in fair value on the hedged item for the periods indicated:
Three Months Ended June 30,
Interest rate contracts: Gain or (Loss)
Change in fair value of interest rate swaps hedging available-for-sale securities
(380
(30
Change in fair value of hedged available-for-sale securities
388
Six Months Ended June 30,
(891
361
907
(361
The following table presents the effect of fair value hedge accounting on the Consolidated Statements of Operations and the location and amount of gain or (loss) recognized in income on fair value hedging relationships for the periods indicated:
Interest Income
(Offset to AOCI)
Gain or (loss) on fair value hedging relationships
Interest contracts:
Cash Flow Hedges
A cash flow hedge interest rate swap that matures on February 14, 2026 had a notional amount of $50.0 million as of June 30, 2025. The risk management objective with respect to hedge the risk of variability in its cash flows (i.e., future interest payments) attributable
to changes in the Secured Overnight Financing Rate ("SOFR") rate. The objective of the hedge is to offset the variability of cash flows due to the rollover of its fixed-rate advances from February 14, 2023 to February 14, 2026. The company designates the $50.0 million interest rate swap (the hedging instrument) as a cash flow hedge of the risk of changes in cash flows attributable to changes in the benchmark Federal Funds interest rate risk for the forecasted issuances of advances arising from a rollover strategy. The forecasted funding will be provided through FHLBA, brokered CD, or other fixed rate advances or a combination thereof. In addition, the funding can be wholly or partially from a term funding based on a contractually specified SOFR interest rate. The hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the swap.
A forward-starting cash flow hedge interest rate collar that matures on November 30, 2028 had a notional amount of $75.0 million as of June 30, 2025 with an effective date of November 30, 2025. The risk management objective with respect to this cash flow hedge is to hedge forecasted interest receipts indexed to the next $75.0 million of USD-SOFR CME variable rate loans from November 30, 2025 to November 30, 2028. The Company designates the $75.0 million interest rate collar (the hedging instrument) as a cashflow hedge, hedging the risk of changes in its cashflows when the contractually specified interest rate, currently USD-SOFR CME, settles between 3.25% to 1.00% and between 5.25% to 6.55%. The Company's interest receipts are being hedged for changes in the USD-SOFR CME rate. The hedging instrument includes a sold 1.00% floor to offset the asset’s embedded 1.00% floor. The offsetting higher 6.55% strike cap was included to ensure alignment with ASC 815-20-25-89(d) wherein the notional amount of the written option is not greater than the notional amount of the purchased component This hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the option.
A forward-starting cash flow hedge interest rate collar that matures on November 30, 2028 had a notional amount of $75.0 million as of June 30, 2025 with an effective date of November 30, 2025. The risk management objective with respect to this cash flow hedge is to hedge forecasted interest receipts indexed to the next $75.0 million of Prime rate assets from November 30, 2025 to November 30, 2028. The Company designates the $75.0 million interest rate collar (the hedging instrument) as a cash flow hedge, hedging the risk of changes in its cashflows if the contractually specified interest rate, currently Prime, settles between 6.50% to 4.25% and between 8.50% to 9.80%. The Company's interest receipts are being hedged for changes in the Prime rate. The SOFR hedging instrument includes a sold 1.00% SOFR floor to offset the Prime asset’s embedded 4.25% Prime floor. These strikes are arrived at by analysis showing a historically static spread of 325 basis points between SOFR and Prime indices and by which the interest rate derivatives market also uses in its construction of interest rate curves. The offsetting higher 6.55% SOFR strike cap (equivalent to a 9.80% Prime cap) was included to ensure alignment with 815-20-25-89(d) wherein the notional amount of the written option is not greater than the notional amount of the purchased component. This hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the option.
A cash flow hedge interest rate collar that matures on November 2, 2025 had a notional amount of $150.0 million as of June 30, 2025. The risk management objective with respect to this cash flow hedge is to hedge floating rate interest receipts based on the contractually specified SOFR rate. Initially, these receipts are made up of the interest payments received on the first of a previously unhedged $150.0 million pool of customer loans indexed to SOFR for interest payments received from November 2, 2022 through November 2, 2025. The company designates this interest rate collar (the hedging instrument) as a cash flow hedge, hedging the risk of changes in its cash flows between 4.00% and 1.00% attributable to changes in the contractually specified interest rate, currently the SOFR rate, on its customer floating rate loan pool. To reduce upfront premium expense, the company is capping any benefit on its customer floating rate loan pool by selling a 6.00% cap. The combination of the purchased option and the sold option created a collar costing $1.7 million. This hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the option.
A cash flow hedge interest rate swap that matures on October 21, 2030 had a notional amount of $25.0 million as of June 30, 2025. The risk management objective with respect to the cash flow hedge is to hedge the risk of variability in the Company’s cash flows (future interest payments) attributable to changes in the 3-month LIBOR rate pertaining to fluctuations in market interest rates on $25.0 million of FHLBA, brokered Certificate of Deposits or other fixed rate advances for that period. The objective of the hedge is to offset the variability of cash flows due to the rollover of its fixed-rate 3-month FHLBA or another fixed rate advance every quarter from October 31, 2022 to October 21, 2030. After June 30, 2023, both LIBOR hedge and hedged item converted to Overnight SOFR as hedged item utilizes a benchmark rate component. The hedge was determined to be effective during the periods presented. The Company expects the hedge to remain effective during the remaining term of the swap.
The tables below present the gains and (losses) recognized in AOCI and the location in the Consolidated Statements of Operations of the gains and (losses) reclassified from other comprehensive income ("OCI") into earnings for derivatives designated as cash flow hedges for the periods indicated:
Derivatives in Cash Flow Hedging Relationships
Amount of Gain (Loss) Recognized in OCI on Derivative
Location of Gain (Loss) Reclassified from OCI into Income
Amount of Gain (Loss) Reclassified from OCI into Income (pre-tax)
Interest rate swap contracts
Interest income (expense)
Effective portion
312
Deferred tax
Amount excluded from the assessment of effectiveness and amortized into earnings
(308
348
507
(16
(108
(190
622
(104
(482
714
857
(213
Gains and losses on interest rate swaps related to funding liabilities are recorded in interest income/expense. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value will not be included in current earnings but are reported as a component of OCI in the Consolidated Statements of Changes in Shareholders’ Equity. These changes in fair value will be included in earnings of future periods when earnings are also affected by the changes in the hedged cash flows. To the extent these derivatives are not effective, changes in their fair values are immediately included in other income or expense.
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The following tables summarizes information about the interest rate swaps and option collar designated as a cash flow hedge at June 30, 2025:
Notional Amount - Pay Fixed Swap
75,000
Weighted average fixed pay rate
2.78
Weighted average 3-month receive rate
4.43
2.19
During the next twelve months, the Company estimates that will be reclassified from OCI as a decrease to interest expense
664
During the next twelve months, the Company estimates that will be reclassified from Deferred Tax as a decrease to interest expense
Notional Amount Collar
300,000
Weighted average bought floor strike
3.63
Weighted average sold floor strike
1.00
Weighted average bought cap strike
6.55
Weighted average sold cap strike
5.63
1.88
During the next twelve months, the Company estimates that will be reclassified from OCI as a decrease to interest income
586
During the next twelve months, the Company estimates that will be reclassified from Deferred Tax as a decrease to interest income
185
Derivatives not Designated as Hedges
Risk Participation Agreements — The Company has one risk participation agreement with a financial institution counterparty for an interest rate swap related to a loan in which it is a participant. A risk participation agreement provides credit protection to the financial institution should the borrower fail to perform on their interest rate derivative contract with the financial institution. A risk participation agreement is a credit derivative not designated as a hedge. Credit derivatives are not speculative and are not used to manage interest rate risk in assets or liabilities. Changes in the fair value in credit derivatives are recognized directly in earnings. The fee received, less the estimate of the loss for the credit exposure, was recognized in earnings at the time of the transaction.
The net gain (loss) related to changes in fair value from derivative instruments not designated as hedging instruments during the periods indicated is summarized on the table below:
Location
Credit risk participation agreements
NOTE 11 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended June 30, 2025 and 2024:
Gains and Losses
on Securities
on
Available-for-Sale
Beginning Balance
(16,719
2,508
Other comprehensive income before reclassification, net of tax
91
1,024
Amounts reclassified from accumulated other comprehensive income, net of tax
(3
Net current period other comprehensive income (loss)
Ending Balance
(15,786
2,596
(20,768
3,453
1,008
(306
(20,015
3,402
The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2025 and 2024:
(18,713
2,926
Other comprehensive income (loss) before reclassification, net of tax
2,705
(22,863
3,332
194
563
757
2,654
(493
2,161
Net current period other comprehensive income
The following were significant amounts reclassified out of each component of other comprehensive income (loss) for the three months ended June 30, 2025 and 2024:
Details about Accumulative OtherComprehensive Income (Loss) Components
Affected Line ItemWhere Net Incomeis Presented
Realized (gains) losses on cash flow hedges
308
108
Interest income - Loans held-for-investment
(507
Interest expense - Interest-bearing deposits
Income tax provision (benefit)
The following were significant amounts reclassified out of each component of other comprehensive income (loss) for the six months ended June 30, 2025 and 2024:
Realized (gains) losses on available-for-sale securities
(811
482
213
145
Interest income - Investments, taxable
(623
(1,002
NOTE 12 — SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
On July 3, 2025, the Company completed its initial public offering ("IPO") of 2,035,000 shares of common stock at a public offering price of $21.50 per share, before underwriting discounts and commissions. The Company received proceeds, net of underwriting discounts and commissions, of approximately $34.0 million in the offering. The shares began trading on the New York Stock Exchange on July 2, 2025, under the ticker symbol “COSO”.
The Company evaluated subsequent events through the date its financial statements were issued, and there were no other subsequent events requiring accrual or disclosure through August 11, 2025.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion and analysis of financial condition and results of operations, also referred to hereafter as this MD&A, is to aid in understanding significant changes in the financial condition of CoastalSouth Bancshares, Inc. and our wholly owned subsidiary, Coastal States Bank, from December 31, 2024 through June 30, 2025 and on our results of operations for the three and six months ended June 30, 2025 and 2024. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2024 included in our Form S-1 that was declared effective by the Securities and Exchange Commission on July 1, 2025, relating to the IPO (the “Registration Statement”), and information presented elsewhere in this Quarterly Report on Form 10‑Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10‑Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following:
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Quarterly Report on Form 10-Q. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward-looking statements in this Quarterly Report on Form 10-Q. In addition, our past results of operations are not necessarily indicative of our future results. These forward-looking statements represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. However, the events and circumstances reflected in the forward-looking statements may not be achieved or occur. For example, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Any forward-looking statement speaks only as of the date on which it is made, and except as required by applicable law, we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
These statements are inherently uncertain, and we cannot guarantee future results, performance or achievements. For a discussion of these and other risks that may cause actual results to differ from expectations, refer to the section entitled “Risk Factors” and other
information contained in our Registration Statement and our other periodic filings, including quarterly reports on Form 10-Q and current reports on Form 8-K, that we file from time to time with the SEC.
Overview
CoastalSouth Bancshares, Inc. is a bank holding company headquartered in Atlanta, Georgia. We currently operate 11 retail banking branches in three primary markets, including the Lowcountry of South Carolina, Savannah, Georgia, and metro Atlanta, Georgia. CSB also operates four specialty lines of business each of which operates on a national platform, including Senior Housing, Marine Lending, Government Guaranteed Lending, and Mortgage Banker Finance. The deposits of CSB are insured by the FDIC. CSM, a wholly owned subsidiary of CSB, is a mortgage company focused on originating and selling residential mortgages to investors, some of which are retained in the portfolio.
The following discussion and analysis is intended to assist readers in their analysis and understanding of our consolidated financial statements and summary historical financial information appearing in this Quarterly Report on Form 10-Q and should be read in conjunction therewith. This discussion and analysis presents our financial condition and results of operations on a consolidated basis, unless otherwise specified.
Critical Accounting Policies and Estimates
Our accounting and reporting policies are in accordance with GAAP and conform to general practices within the banking industry. Application of these principles requires management to make estimates, assumptions or judgments that affect the amounts reported in the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Estimates, assumptions or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon future events. Carrying assets and liabilities at fair value results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources.
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, fair value measurements, stock-based compensation, and income taxes 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 environment and/or market interest rates, etc.) could have a significant effect on our financial statements. Therefore, we consider these policies, discussed below, to be critical accounting estimates and discuss them directly with the Audit Committee of our Board.
Our most significant accounting policies are presented in Note 1 of the consolidated financial statements as of December 31, 2024 included in our Registration Statement that was filed with the SEC. 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. There have been no significant changes to the accounting policies, estimates, and assumptions, or the judgments affecting the application of these estimates and assumptions from those disclosed in the Registration Statement.
The ACL represents management’s current estimate of credit losses for the remaining estimated life of financial instruments, with particular applicability on our balance sheet to loans held-for-investment and unfunded loan commitments. Estimating the amount of the ACL requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Credit losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
There are many factors affecting the ACL; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes are worse than management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.
Additional information on the loan portfolio and ACL can be found in the sections of this MD&A titled “Loans,” “Allowance for
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Credit Losses on Loans,” “Allowance for Credit Losses for Unfunded Commitments,” and “Nonperforming Loans.” Note 1 to the consolidated financial statements as of December 31, 2024 included our Registration Statement that was filed with the SEC includes additional information on accounting policies related to the ACL.
Emerging Growth Company
Pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected to take advantage of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the standard on the application date for private companies. We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company.
Selected Financial Data
The following table sets forth unaudited selected financial data for the most recent five quarters and the six months ended June 30, 2025 and 2024. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.
As of and for the Three Months Ended
As of and for the Six Months Ended
(dollars in thousands except
March 31,
September 30,
per share amounts)
Selected Operating Data:
30,024
30,537
32,554
13,265
14,266
15,588
16,759
16,271
16,966
Provision (recovery) for credit losses
629
1,240
(1,023
Noninterest income (loss)
1,881
1,958
2,961
11,419
10,335
10,830
Income tax expense
1,542
950
2,236
5,050
5,704
7,884
Adjusted net income (1)
10,970
Share and Per Share Data:
Basic earnings per share
0.49
0.77
Adjusted basic earnings per share (2)
1.08
Diluted earnings per share
0.47
0.54
0.75
Adjusted diluted earnings per share (2)
1.06
Book value per share
20.37
19.67
19.01
18.86
17.58
Tangible book value per share (3)
19.88
19.17
18.51
18.35
17.07
Shares of common stock outstanding
10,278,921
10,274,271
10,270,146
10,250,446
Weighted average diluted shares outstanding
10,642,078
10,596,364
10,544,087
Selected Balance Sheet Data:
2,190,391
2,129,346
2,115,547
Securities available-for-sale, at fair value (4)
325,478
355,174
339,937
Gross loans held for investment
1,472,232
1,409,913
1,442,077
187,481
193,938
154,885
Allowance for credit losses
15,615
Goodwill and other intangible assets
6,190
6,199
6,386
6,451
6,276
1,937,693
1,807,315
1,805,590
20,738
96,712
96,699
Total Shareholders' equity
193,303
(1) We calculate our adjusted net income as net income excluding items that are not part of core business operations, net of income taxes, which incorporate impacts to noninterest income and noninterest expense. This measure helps management and users of the financial statements to understand how core business operations are performing. This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(2) This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(3) We calculate tangible book value per common share as total shareholders' equity less goodwill and other intangibles, excluding mortgage servicing rights, divided by the outstanding number of our shares of common stock at the end of the relevant period. Tangible book value per common share is a non-GAAP financial measure, and, as we calculate tangible book value per common share, the most comparable GAAP measure is book value per common share. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(4) We did not have securities held to maturity in any of the periods presented.
(dollars in thousands)
Performance Ratios:
Pre-tax pre-provision net revenue (PPNR) (5)
7,781
7,221
7,894
9,097
7,637
15,002
10,777
Return on average assets (ROAA) (6)
1.09
0.97
1.47
1.15
1.03
Adjusted return on average assets (Adj. ROAA) (5)(6)
Return on average equity (6)
11.62
10.25
11.65
16.91
13.52
10.95
9.78
Adjusted return on average equity (5)(6)
12.90
Return on average tangible common equity (ROATCE) (5)(6)
11.92
10.52
11.97
17.40
13.94
11.23
10.09
Adjusted return on average tangible common equity (Adj. ROATCE) (5)(6)
13.31
Net interest rate spread (6)(7)
2.76
2.67
2.42
2.48
2.59
2.72
2.51
Net interest margin (6)(8)
3.46
3.38
3.21
3.32
3.43
3.42
Efficiency ratio (9)
60.85
61.26
56.70
54.35
58.24
61.05
65.98
Efficiency ratio, as adjusted (10)
59.48
Noninterest income to average total assets (6)
0.33
0.36
0.37
0.55
0.31
0.34
(0.04
Noninterest income to total revenue
9.03
10.74
14.86
8.69
9.54
(1.28
Adjusted noninterest income to total adjusted revenue (11)
8.71
Noninterest expense to average total assets (6)
2.21
1.94
2.02
2.07
2.20
2.05
Average interest-earning assets to average interest-bearing liabilities
126.50
126.31
127.90
127.59
128.29
126.41
127.65
Average equity to average total assets
9.37
9.46
9.20
8.70
8.48
9.41
8.34
Asset Quality Data:
Net charge-offs to average LHFI (6)
0.06
0.00
(0.02
0.02
0.03
0.01
Net charge-offs to total average loans (6)
0.05
Total allowance for credit losses to total LHFI
1.16
1.21
1.11
Total allowance for credit losses to total loans
1.01
Total allowance for credit losses to nonperforming loans
118.99
117.11
114.07
184.64
182.13
Nonperforming loans to gross LHFI
0.96
0.99
0.60
0.61
Nonperforming assets to total assets
0.66
0.70
0.76
0.44
0.42
Adjusted nonperforming assets to total assets (5)
0.46
0.53
0.21
0.18
Balance Sheet Ratios:
Loan-to-deposit ratio
88.21
85.65
86.30
88.74
88.45
Noninterest bearing deposits to total deposits
15.92
15.52
16.51
17.28
19.10
Capital Ratios:
Total shareholders' equity to total assets
9.43
9.23
9.30
9.08
8.52
Tangible common equity to tangible assets (12)
9.22
9.01
8.86
8.29
Tier 1 leverage ratio (13)
10.22
10.62
10.64
10.26
10.14
Common equity tier 1 ratio (13)
11.09
11.55
12.07
11.72
11.27
Tier 1 risk-based capital ratio (13)
Total risk-based capital ratio (13)
12.04
12.52
12.97
12.55
12.16
Other:
Number of branches
Number of full-time equivalent employees
180
178
183
177
(5) This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(6) Represent annualized data.
(7) Represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities for the periods.
(8) Net interest margin represents net interest income as a percent of average interest-earning assets for the periods.
(9) The efficiency ratio represents noninterest expense divided by sum of net interest income and noninterest income.
(10) The efficiency ratio, as adjusted, represents noninterest expense divided by the sum of net interest income and noninterest income, excluding net of tax, gains or losses on available-for-sale securities, gain on hedge termination, Merger expenses and bargain purchase gain. This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(11) We calculate revenue as net interest income plus noninterest income, excluding net of tax, gains or losses on available-for-sale securities, gain on hedge termination bargain purchase gain and Merger expenses. This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(12) We calculate tangible common equity as total shareholders' equity less goodwill and other intangibles, excluding mortgage servicing rights, we calculate tangible assets as total assets less goodwill and other intangibles, excluding mortgage servicing rights. This is a non-GAAP financial measure. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption "Non-GAAP Financial Measure Reconciliations."
(13) Ratios are for Coastal States Bank only.
Results of Operations — Comparison of Results of Operations for the Three Months Ended June 30, 2025 and 2024
The following discussion of our results of operations compares the three months ended June 30, 2025 and 2024. We reported net income for the three months ended June 30, 2025 of $6.0 million compared to net income of $5.9 million for the three months ended June 30, 2024. The increase of $78 thousand was primarily attributable to a lower effective tax rate albeit with a lower taxable income.
Net Interest Income
The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. The income and yield from non-taxable investment securities was not adjusted for tax equivalency.
Average
Interest and
Yield /
Fees
Rate
Earning Assets:
20,762
2.14
20,839
2.70
62,656
698
4.47
60,964
5.55
Investment securities
338,635
347,194
4,220
4.89
Loans:
167,617
7.89
107,604
8.73
1,506,211
6.34
1,424,411
6.67
Total earning assets
2,095,881
6.08
1,961,012
6.39
Noninterest-earning assets
100,835
104,490
2,196,716
2,065,502
Interest-bearing liabilities:
Demand deposits
198,932
360
0.73
178,991
0.48
Money market deposits
593,873
4,684
3.16
605,518
5,751
3.82
Savings deposits
35,266
44
0.50
38,561
798,344
8,163
4.10
608,783
7,109
4.70
Total interest-bearing deposits
1,626,415
3.27
1,431,853
3.69
Borrowings
30,452
6.11
96,692
5.61
Total interest-bearing liabilities
1,656,867
1,528,545
3.81
Noninterest-bearing liabilities:
Noninterest-bearing deposits
306,330
333,001
Other noninterest-bearing liabilities
27,682
28,825
Total noninterest-bearing liabilities
334,012
361,826
Shareholders' equity
205,837
175,131
Net interest spread
2.58
Net interest margin
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing interest rates and volumes on our net interest income during the periods indicated. The information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volumes and rate have been allocated to volume.
Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024
Increase (Decrease) Due to Change in:
Volume
Yield/Rate
Total Change
203
(232
(29
1,181
(1,325
(144
1,738
(2,083
(345
2,770
(1,809
961
9,630
(9,450
15,522
(14,899
623
(724
869
6,926
(7,993
(1,067
(11
8,304
(7,250
1,054
14,495
(14,366
129
(1,860
976
(884
12,635
(13,390
(755
2,887
(1,509
1,378
Net interest income for the three months ended June 30, 2025 was $18.1 million compared to $16.7 million for the three months ended June 30, 2024, an increase of $1.4 million, or 8.6%. This increase was primarily due to an increase in the average balance of our total interest-earning assets coupled with a decrease in the average rate paid on interest-bearing liabilities. The increase in the average balance for the interest-earning assets was primarily due to an increase in average loans outstanding. The yield on total earning assets and interest-bearing liabilities decreased by 31 and 49 basis points, respectively, during the same period.
Total interest income for the three months ended June 30, 2025 was $31.8 million compared to $31.2 million for the three months ended June 30, 2024, an increase of $623 thousand, or 2.0%. This increase was primarily due to growth in our loans portfolio albeit with lower yields.
Interest and fees on LHFI were $23.8 million for the three months ended June 30, 2025 compared to $23.6 million for the three months ended June 30, 2024, an increase of $180 thousand, or 0.8%. This increase was primarily attributable to an increase in average LHFI of $81.8 million, or 5.7%, albeit with a decrease in yield. The yield on gross LHFI decreased by 33 basis points compared to the same period in 2024. Interest and fees on LHFS were $3.3 million for the three months ended June 30, 2025 compared to $2.3 million for the three months ended June 30, 2024. This increase was primarily due to an increase in the average balance of LHFS outstanding although the yield decreased by 84 basis points compared to the same period in 2024.
Interest income on investment securities was $3.9 million for the three months ended June 30, 2025 compared to $4.2 million for the three months ended June 30, 2024. This decrease was primarily due to the fact that the yield on investment securities decreased by 30 basis points and the average balance decreased by $8.6 million during the period.
Interest expense for the three months ended June 30, 2025 was $13.7 million compared to $14.5 million for the three months ended June 30, 2024. This decrease was primarily attributable to lower average borrowings, specifically the payoff of a $70.0 million Bank Term Funding Program ("BTFP") that was outstanding during the second quarter of 2024, coupled with a 49 basis point decrease in the average cost of overall total interest-bearing liabilities, primarily in money market and time deposit accounts as the rates were adjusted to align with the market. Average borrowings outstanding decreased from June 30, 2024 to June 30, 2025 by $66.2 million, or 68.5%, primarily due to the aforementioned BTFP payoff, while the cost increased by 50 basis points during the same period.
Net interest margin for the three months ended June 30, 2025 and 2024 was 3.46% and 3.43%, respectively. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. This increase in our net interest margin is primarily due to a combination of average total earning assets growth and a decrease in average total interest-bearing liabilities. Average earning assets for the three months ended June 30, 2025 increased by $134.9 million compared to the three months ended June 30, 2024, principally due to growth of our loan portfolio. Average interest-bearing liabilities for the three months ended June 30, 2025 increased by $128.3 million compared to the three months ended June 30, 2024, driven by growth in average interest-bearing deposits.
Provision for Credit Losses
Provision for credit losses for the three months ended June 30, 2025 was $752 thousand compared to $173 thousand for the three months ended June 30, 2024, an increase of $579 thousand. This increase was primarily due to increased production of LHFI and unfunded commitments, changes in economic factors, and current period net charge-offs, offset by other changes in loss rates. Our allowance for credit losses as a percentage of gross LHFI at June 30, 2025 and 2024 was 1.15% and 1.11%, respectively.
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Noninterest Income
Noninterest income for the three months ended June 30, 2025 was $1.8 million, an increase of $206 thousand or 13.0%, compared to $1.6 million for the three months ended June 30, 2024. This increase was primarily due to gain on sale of government guaranteed loans ("GGL"), offset by a net decrease in other categories of noninterest income.
The following table sets forth the various components of our noninterest income for the periods indicated:
Increase (decrease)
(42
(8.6
230
657.1
Interchange and card fee income
13.7
9.0
(57
(16.8
13.0
Income from bank-owned life insurance policies ("BOLI") decreased by $42 thousand to $449 thousand for the three months ended June 30, 2025 compared to $491 thousand for the three months ended June 30, 2024. This decrease was primarily attributable to a lower yield on BOLI during the current period.
Gain on sale of GGL increased by $230 thousand to $265 thousand for the three months ended June 30, 2025 compared to $35 thousand for the three months ended June 30, 2024. The Company had more GGL that was able to be sold during the second quarter of 2025 than in the second quarter of 2024.
Interchange and card fee income increased by $31 thousand to $257 thousand for the three months ended June 30, 2025 compared to $226 thousand for the three months ended June 30, 2024. This increase was attributable to interchange fees from debit cardholder transactions conducted through a payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are earned on a daily basis.
Mortgage banking related income increased by $27 thousand to $326 thousand for the three months ended June 30, 2025 compared to $299 thousand for the three months ended June 30, 2024. This increase was primarily due to slightly higher secondary market mortgage production which is comprised primarily of activity related to the sale of consumer mortgage loans as well as loan origination fees such as closing charges, document review fees, application fees, other loan origination fees, and loan processing fees.
Service charges on deposit accounts were $215 thousand and $198 thousand for the three months ended June 30, 2025 and 2024, respectively. These service charges are mostly comprised of wire, NSF, and overdraft fees.
Other noninterest income decreased by $57 thousand to $283 thousand for the three months ended June 30, 2025 compared to $340 thousand for the three months ended June 30, 2024. This decrease was primarily due to lower miscellaneous income, offset by a net increase in other categories within other noninterest income.
Noninterest Expense
Noninterest expense for the three months ended June 30, 2025 was $12.1 million compared to $10.7 million for the three months ended June 30, 2024, an increase of 1.4 million, or 13.5%. This increase was across all noninterest expense categories primarily in other professional fees, salaries and employee benefits, and other noninterest expense.
The following table sets forth the major components of our noninterest expense for the three months ended June 30, 2025 and 2024:
Noninterest expense:
343
78
10.6
Other professional services
472
94.2
13.9
118
22.1
8.2
Marketing and advertising
269
72
36.5
1,324
1,081
243
22.5
1,440
13.5
Salaries and employee benefits expense for the three months ended June 30, 2025 was $7.0 million compared to $6.7 million for the three months ended June 30, 2024, an increase of $343 thousand, or 5.2%. This increase was attributable to hiring new employees with skills and experience necessary to support our strategic goals. The average number of full-time equivalent employees was 188 for the three months ended June 30, 2025 compared to 178 for three months ended June 30, 2024.
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Occupancy and equipment expense for the three months ended June 30, 2025 was $814 thousand compared to $736 thousand for the three months ended June 30, 2024, an increase of $78 thousand, or 10.6%. This increase was primarily due to new leases and rental increases, property taxes and depreciation, and upkeep related to the properties.
Other professional services expense for the three months ended June 30, 2025 was $973 thousand compared to $501 thousand for the three months ended June 30, 2024, an increase of $472 thousand, or 94.2%. This increase was primarily due to higher recruiting fees and loan collection related expense.
Software and technology expense for the three months ended June 30, 2025 was $719 thousand compared to $631 thousand for the three months ended June 30, 2024, an increase of $88 thousand, or 13.9%. This expense was primarily comprised of our information technology services, software licenses and maintenance and commensurate with the Company growth.
Data processing expense for the three months ended June 30, 2025 was $652 thousand compared to $534 thousand for the three months ended June 30, 2024, an increase of $118 thousand, or 22.1%. The data processing expense increase was due to increased wire and account processing volumes and other processing costs and is commensurate with growth, generally.
FDIC insurance and regulatory assessment expense for the three months ended June 30, 2025 was $344 thousand compared to $318 thousand for the three months ended June 30, 2024, an increase of $26 thousand, or 8.2%. This increase was primarily attributable to changes in the Bank's asset mix and growth rates.
Marketing and advertising expense for the three months ended June 30, 2025 was $269 thousand compared to $197 thousand for the three months ended June 30, 2024, an increase of $72 thousand, or 36.5%. This increase was primarily attributable to higher marketing and advertising costs associated with increased digital advertising, mailings, and sponsorships during the three months ended June 30, 2025 as compared to the same period last year. Marketing and advertising expense is included in Other noninterest expenses in our Company’s Consolidated Statements of Operations.
Other noninterest expenses, excluding marketing and advertising expense, for the three months ended June 30, 2025 were $1.3 million compared to $1.1 million for the three months ended June 30, 2024, an increase of $243 thousand, or 22.5%. This increase was primarily attributable to increases in board of directors fees paid in cash, as no equity awards were granted to the Board of Directors in 2025, general and administrative expense and other noninterest expense. Included in other noninterest expense for the three months ended June 30, 2025 and 2024 were directors’ fees paid in cash of $176 thousand and $79 thousand, respectively.
Income Tax Expense
Income tax expense for the three months ended June 30, 2025 and 2024 was $1.1 million and $1.6 million, respectively. Effective tax rates were 15.1% and 21.1% for the three months ended June 30, 2025 and 2024, respectively. The decrease in effective tax rate compared to the three months ended June 30, 2024 was due to higher recognition of solar tax credits during the three months ended June 30, 2025.
Results of Operations — Comparison of Results of Operations for the Six Months Ended June 30, 2025 and 2024
The following discussion of our results of operations compares the six months ended June 30, 2025 and 2024. We reported net income for the six months ended June 30, 2025 of $11.0 million compared to net income of $8.3 million for the six months ended June 30, 2024. The increase of $2.7 million was primarily due to a nonrecurring previously disclosed strategic repositioning of approximately $42.6 million of AFS securities that resulted in an approximately $2.7 million loss on sale, net of tax, during six months ended June 30, 2024.
40
21,738
2.28
20,987
2.69
75,496
4.44
65,259
5.66
336,954
7,675
350,865
7,881
4.52
152,318
8.10
89,422
1,467,523
1,416,431
6.63
2,054,029
6.07
1,942,964
6.27
101,048
107,219
2,155,077
2,050,183
197,485
693
0.71
176,634
577,557
9,022
3.15
588,837
10,917
3.73
35,203
39,106
96
786,554
16,279
4.17
619,928
14,318
4.64
1,596,799
3.29
1,424,505
28,121
6.45
97,554
5.69
1,624,920
3.35
1,522,059
3.76
299,895
327,210
27,445
29,841
327,340
357,051
202,817
171,073
Six Months Ended June 30, 2025 Compared to Six Months Ended June 30, 2024
137
(172
(35
1,419
(1,594
(175
(741
(206
3,346
(1,106
2,240
7,668
(8,233
(565
11,829
(10,570
1,259
(646
955
309
4,915
(6,810
(1,895
(13
7,801
(5,840
1,961
12,057
(11,691
366
(3,345
1,486
(1,859
8,712
(10,205
(1,493
3,117
(365
2,752
Net interest income for the six months ended June 30, 2025 was $34.8 million compared to $32.1 million for the six months ended June 30, 2024, an increase of $2.8 million, or 8.6%. This increase was primarily due to an increase in the average balance of our total interest-earning assets while the yield decreased at a lower rate compared the decrease in the average rate paid on interest-bearing liabilities despite a similar growth in average interest-bearing liabilities. The increase in the average balance for the total interest-earning assets was primarily due to an increase in average loans outstanding. The yield on total earning assets and interest-bearing liabilities decreased by 20 and 41 basis points, respectively, during the same period.
41
Total interest income for the six months ended June 30, 2025 was $61.8 million compared to $60.6 million for the six months ended June 30, 2024, an increase of $1.3 million, or 2.1%. This increase was primarily due to growth in our average total earning assets by $111.1 million principally in the average loans portfolio, notwithstanding a decrease in yields by 20 basis points from the comparable period.
Interest and fees on LHFI were $46.1 million for the six months ended June 30, 2025 compared to $46.7 million for the six months ended June 30, 2024, a decrease of $565 thousand, or 1.2%. This decrease was primarily attributable to the yield decrease on gross LHFI by 29 basis points compared to the same period last year. Interest and fees on LHFS were $6.1 million for the six months ended June 30, 2025 compared to $3.9 million for the six months ended June 30, 2024. This increase was primarily due to an increase in the average balance of LHFS outstanding, notwithstanding a decrease in yields by 62 basis points.
Interest income on investment securities was $7.7 million for the six months ended June 30, 2025 compared to $7.9 million for the six months ended June 30, 2024, a decrease of $206 thousand, or 2.6%. This decrease was primarily due to a decrease in the average balance by $13.9 million despite the yield on investment securities increasing by 8 basis points.
Interest expense for the six months ended June 30, 2025 was $27.0 million compared to $28.5 million for the six months ended June 30, 2024, a decrease of $1.5 million, or 5.2%. This decrease was primarily attributable to a 41 basis point decrease in the average yield on overall total interest-bearing liabilities, primarily in money markets and time deposits, due to rates adjustments. Average borrowings outstanding decreased from June 30, 2024 to June 30, 2025 by $69.4 million, or 71.2%, principally due to payoff of a $70.0 million Bank Term Funding Program ("BTFP") that was outstanding during the second half of 2024, while the yield increased by 76 basis points.
Net interest margin for the six months ended June 30, 2025 and 2024 was 3.42% and 3.32%, respectively. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. This increase in our net interest margin was primarily due to the increase in average interest-earning assets coupled with a decrease in yield on total earning assets at a lower pace as compared the decrease in yield for total interest-earning liabilities as discussed above.
Provision for credit losses for the six months ended June 30, 2025 was $1.4 million compared to $336 thousand for the six months ended June 30, 2024, an increase of $1.0 million. This increase was primarily attributable to increased production of LHFI and unfunded commitments, changes in economic factors, and current period net charge-offs, and an increase in reserves of individually analyzed collateral-dependent loans, offset by other changes in loss rates. Our allowance for credit losses as a percentage of gross LHFI at June 30, 2025 and 2024 was 1.15% and 1.11%, respectively.
Noninterest income for the six months ended June 30, 2025 was $3.7 million, an increase of $4.1 million or 1,007.7%, compared to a loss of $405 thousand for the six months ended June 30, 2024. This increase was primarily attributable to the previously disclosed loss on sale of AFS securities of $3.5 million, pre-tax, due AFS portfolio strategic repositioning during the six months ended June 30, 2024 coupled with a net increase in other noninterest income categories, principally $438 thousand of income recognized from a Small Business Investment Company ("SBIC") partnership investment related to the sale of one of the fund's underlying investments.
102
(90
(25.4
81
18.3
1.9
4.2
(100.0
496
93.6
4,081
1,007.7
BOLI income increased by $102 thousand to $889 thousand for the six months ended June 30, 2025 compared to $787 thousand for the six months ended June 30, 2024. This increase was primarily attributable to higher yield on BOLI during the current period.
Gain on sale of GGL decreased by $90 thousand to $265 thousand for the six months ended June 30, 2025 compared to $355 thousand for the same period during 2024. The Company's gain on the sale of GGL volume increases or decreases based on the attractiveness of market premiums and the amount of inventory of loans that are saleable.
Interchange and card fee income increased by $81 thousand to $523 thousand for the six months ended June 30, 2025 compared to $442 thousand for the six months ended June 30, 2024. This increase was attributable to an increase in interchange fees from debit cardholder transactions conducted through a payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are earned on a daily basis.
Mortgage banking related income increased by $10 thousand to $547 thousand for the six months ended June 30, 2025 compared to $537 thousand for the six months ended June 30, 2024. This increase was primarily due to higher revenue from mortgage production which is comprised primarily of activity related to the sale of consumer mortgage loans as well as loan origination fees such as closing charges, document review fees, application fees, other loan origination fees, and loan processing fees, albeit slightly lower secondary market volume.
Service charges on deposit accounts increased by $17 thousand to $426 thousand for the six months ended June 30, 2025 compared to $409 thousand for the six months ended June 30, 2024. This increase was attributable to higher number of NSF and overdraft fees charged during 2025.
There were no sales of AFS securities during the six months ended June 30, 2025. Losses on sale of AFS securities were $3.5 million for the six months ended June 30, 2024. The losses on sale of AFS securities during the six months ended June 30, 2024 were due to a previously disclosed nonrecurring AFS portfolio strategic repositioning in 2024.
Other noninterest income increased by $496 thousand to $1.0 million for the six months ended June 30, 2025 compared to $530 thousand for the six months ended June 30, 2024. This increase was primarily due to the aforementioned income recognized from a SBIC partnership investment related to the sale of one of the fund's underlying investments. Apart from this SBIC partnership related income, the largest component of other non-interest income generally consists of SBA loan servicing fees. SBA loan servicing fees increased by $26 thousand during the six months ended June 30, 2025 compared to the same period in 2024.
Noninterest expense for the six months ended June 30, 2025 was $23.5 million compared to $20.9 million for the six months ended June 30, 2024, an increase of $2.6 million, or 12.5%. This increase was across all noninterest expense categories but primarily in salaries and employee benefits, due to Company's growth and compensation adjustments, other professional fees and other noninterest expense.
The following table sets forth the major components of our noninterest expense for the six months ended June 30, 2025 and 2024:
990
7.8
123
8.3
474
39.8
125
9.6
217
20.5
15.4
502
376
126
33.5
2,646
2,187
21.0
2,608
12.5
Salaries and employee benefits expense for the six months ended June 30, 2025 was $13.7 million compared to $12.7 million for the six months ended June 30, 2024, an increase of $1.0 million, or 7.8%. This increase was attributable to hiring new employees with skills and experience necessary to support our strategic goals and annual salary adjustments. The average number of full-time equivalent employees was 183 for the six months ended June 30, 2025 compared to 177 for the six months ended June 30, 2024.
Occupancy and equipment expense for the six months ended June 30, 2025 was $1.6 million compared to $1.5 million for the six months ended June 30, 2024, an increase of $123 thousand, or 8.3%. This increase was primarily due to rental increments, property taxes and depreciation, and upkeep related to the properties.
Other professional services expense for the six months ended June 30, 2025 was $1.7 million compared to $1.2 million for the six months ended June 30, 2024, an increase of $474 thousand, or 39.8%. This increase was primarily in loan collection related expenses, employees recruiting fees, and consultant fees.
Software and technology expense for the six months ended June 30, 2025 was $1.4 million compared to $1.3 million for the six months ended June 30, 2024, an increase of $125 thousand, or 9.6%. This expense was primarily comprised of our information technology services, software licenses and maintenance and were commensurate with Company growth, generally.
Data processing expense for the six months ended June 30, 2025 was $1.3 million compared to $1.1 million for the six months ended June 30, 2024, an increase of $217 thousand, or 20.5%. Data processing expense increase was in line with the Company's increased wire and account processing volumes and other processing costs that were commensurate with growth, generally.
FDIC insurance and regulatory assessment expense for the six months ended June 30, 2025 was $705 thousand compared to $611 thousand for the six months ended June 30, 2024, an increase of $94 thousand, or 15.4%. This increase was primarily attributable to increases in capital and changes in asset mix and asset growth rates from 2024 to 2025.
Marketing and advertising expense for the six months ended June 30, 2025 was $502 thousand compared to $376 thousand for the six months ended June 30, 2024, an increase of $126 thousand, or 33.5%. This increase was primarily attributable to higher marketing and advertising costs associated with increased digital advertising, mailings, and sponsorships during 2025. Marketing and advertising expense is included in other noninterest expenses in our Company’s Consolidated Statements of Operations.
Other noninterest expenses, excluding marketing and advertising expense, for the six months ended June 30, 2025 were $2.6 million compared to $2.2 million for the six months ended June 30, 2024, an increase of $459 thousand, or 21.0%. This increase was across multiple categories but primarily was attributable to increases in board of directors fees paid in cash, as no equity award were granted to the Board of Directors in 2025, general and administrative, and OREO writedowns. Included in other noninterest expenses for the six months ended June 30, 2025 and 2024 were directors’ fees paid in cash of $351 thousand and $159 thousand, respectively.
Income tax expense for the six months ended June 30, 2025 and 2024 was $2.6 million and $2.1 million, respectively. Effective tax rates were 19.1% and 20.4% for the six months ended June 30, 2025 and 2024, respectively. The decrease in effective tax rate compared to the six months ended June 30, 2024 was due to a higher recognition of solar tax credits during the six months ended June 30, 2025. We had a net deferred tax asset of $17.2 million and $18.6 million at June 30, 2025 and 2024, respectively.
Financial Condition
Total Assets
Total assets increased $122.5 million, or 5.8%, to $2.22 billion at June 30, 2025 compared to $2.10 billion at December 31, 2024. The increasing trend in total assets was primarily attributable to growth of our loans held for investment portfolio.
Loans
Loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other of our asset category.
Average loans, including both LHFI and LHFS, were 78.9% and 77.7% of average earning assets as of June 30, 2025 and December 31, 2024, respectively. Therefore, the quality and diversification of our loan portfolio is an important consideration when reviewing our financial condition. The Company has established systematic procedures for approving and monitoring loans that vary depending on the size and nature of the loan and applies these procedures in a disciplined manner. Total gross loans of $1.74 billion at June 30, 2025 represent an increase of $152.8 million or 9.7% as compared to December 31, 2024.
LHFS are comprised of loans acquired through mortgage warehouse lending activities and origination of mortgage loans. We act as a warehouse lender by purchasing loans originated by third-party mortgage originators and selling these loans to other third-party investors. We also originate mortgage loans with customers through CSM and sell these loans to third-party investors. LHFS at June 30, 2025 were $209.1 million compared to $174.0 million at December 31, 2024.
Gross LHFI increased $117.8 million, or 8.4%, to $1.53 billion as of June 30, 2025 compared to $1.41 billion at December 31, 2024. There was a higher market demand for our commercial and retail loan products during the six months ended June 30, 2025 from December 31, 2024 as the Company experienced strong loan demand and has been able to close many deals in the pipeline.
The Company engages in a full complement of lending activities, including CRE loans, construction loans, C&I, and consumer purpose loans. Our loan portfolio has concentrations of over 10% of LHFI in income producing CRE, senior housing, marine vessels loans, and residential mortgages with the remaining balance in other categories within commercial and retail loans categories.
The following table presents the balance and associated percentage of each major category in our loan portfolio as of June 30, 2025 and December 31, 2024:
As of June 30, 2025
As of December 31, 2024
% of Total
Total loans held for investment, net
The Company has established a policy for managing concentration limits in the loan portfolio for commercial real estate, senior housing, and marine lending, among other loan types. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements, when appropriate, to allow us to react to a borrower’s deteriorating financial condition, should that occur.
The following tables presents the maturity distribution of our loans as of June 30, 2025 and December 31, 2024. The tables show the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates:
Due in One Year or Less
Due after One Year Through Five Years
Due after Five Years Through Fifteen Years
Due after Fifteen Years
FixedRate
AdjustableRate
484
57,985
36,037
2,246
3,266
36,681
4,381
148,604
123,500
9,130
30,574
1,140
18,132
5,937
35,929
3,673
9,579
11,416
1,244
22,869
95,284
970
140,220
6,753
13,475
38,972
27,209
21,521
22,895
872
49,855
171,625
224,536
330,639
40,679
67,131
2,403
45,139
3,680
28,528
590
239,317
29,212
7,847
1,586
2,669
763
10,489
13,269
14,252
134,652
20,992
66,143
1,047
380
10,274
133
12,574
22,958
4,034
66,912
49,291
13,992
261,244
164,187
62,429
194,583
228,570
397,551
89,970
81,123
263,647
209,326
45
564
45,304
58
22,037
504
4,045
17,239
2,296
164,845
77,491
9,926
29,328
1,151
19,282
3,320
1,997
38,783
3,597
9,767
9,039
1,254
26,816
84,577
981
148,523
24,302
38,945
27,426
28,920
17,856
877
24,404
158,476
243,612
279,074
48,621
56,727
2,424
51,020
3,292
25,295
737
204,177
30,156
2,398
368
4,084
2,114
8,194
15,042
6,902
134,997
15,850
70,994
1,028
363
1,584
11,648
5,397
6,718
16,581
5,668
73,115
45,137
15,900
216,476
165,490
31,122
175,057
249,280
352,189
93,758
72,627
218,900
216,510
The following is a discussion of the Company's segments and classes of LHFI:
As of June 30, 2025, our total commercial loans comprised of $932.0 million or 61.1%, of loans, compared to $864.4 million, or 61.3% of loans, as of December 31, 2024. Our total commercial loans balances increased by $67.6 million at June 30, 2025 compared to December 31, 2024.
Following below are our principal commercial loans portfolio categories:
Acquisition, Development, and Construction – ADC loans include both loans and credit lines for the purpose of purchasing, carrying, and developing land into residential subdivisions or various types of commercial developments, such as industrial, hospitality, warehouse, retail, office, and multi-family. This category also includes loans and credit lines for construction of residential developments, multi-family buildings, and commercial buildings. The Company generally engages in ADC lending primarily in local markets served by its branches, and through our homebuilder finance and government guaranteed lending lines of business. The Company recognizes that risks are inherent in the financing of commercial real estate development and construction. These risks include location, market conditions and price volatility, change in interest rates, demand for developed land, lots and buildings, desirability of features and styling of completed developments and buildings, competition from other developments and builders, traffic patterns, remote work patterns, governmental jurisdiction, tax structure, availability of utilities, roads, public transportation and schools, availability of permanent financing for homebuyers, zoning, environmental restrictions, lawsuits, economic and business cycle, labor, and reputation of the builder or developer.
The following table presents the balance and associated percentage of each category in our ADC loan portfolio as of June 30, 2025 and December 31, 2024:
ADC Loans by Type
Residential Builder
61,210
60.9
57,597
79.4
24,674
24.5
12,682
17.5
Restaurant
2,043
2.0
1,393
Office
9,165
9.1
848
1.2
Multifamily
3,436
3.5
0.0
Total ADC loans
As of June 30, 2025, our ADC loans comprised of $100.5 million, or 6.6%, of loans, compared to $72.5 million, or 5.2% of loans, as of December 31, 2024. Our ADC loans balances increased $28.0 million or 38.6% since December 31, 2024 due to continued demand of the ADC loans in our markets.
Income Producing CRE – Income producing CRE loans include loans to finance income-producing commercial and multifamily properties. Lending in this category is generally limited to properties located in the Company’s market area with only limited exposure to properties located elsewhere but owned by in-market borrowers. Loans in this category include loans for neighborhood retail centers, medical and professional offices, single retail stores, warehouses and apartments leased generally to local businesses and residents. The underwriting of these loans takes into consideration the occupancy, rental rates, and local market demand as well as the financial health of the borrower. The primary risk associated with loans secured with income producing property is the inability of that property to produce adequate cash flow to service the debt. High unemployment, significant increases to interest rates, generally weak economic conditions and/or an oversupply in the market may result in our customers having difficulty achieving adequate occupancy and/or rental rates. Payments on such loans are often dependent on successful operation or management of the properties. The Company's income producing CRE portfolio is diverse, with exposure spread across multiple real estate purposes.
The following table presents the balance and associated percentage of each category in our income producing CRE loan portfolio as of June 30, 2025 and December 31, 2024:
Income Producing CRE by Type
Hospitality
144,371
38.8
114,591
35.6
Retail
74,865
20.1
72,051
22.4
63,788
17.1
59,464
18.5
31,741
8.5
31,649
9.8
30,756
17,745
5.5
Industrial
16,858
4.5
14,652
4.6
8,093
2.2
3.6
Medical
0.5
Total income producing CRE loans
As of June 30, 2025, our income producing CRE loans comprised of $372.1 million, or 24.4%, of loans, compared to $321.6 million, or 22.8% of loans, as of December 31, 2024. The weighted average original or renewal loan-to-value ("LTV") of income producing CRE loans with an outstanding balance of greater than $500 thousand, which makes up 95.8% of the CRE balances June 30, 2025, was 61.7% and 63.0% as of June 30, 2025 and December 31, 2024, respectively. Our income producing CRE loans balances increased $50.6 million, or 15.7% since December 31, 2024 due to a steady demand in our markets coupled with fewer competitors actively pursuing income producing CRE loans and the reclassification of certain ADC loans to this category that completed construction during the period.
Owner-Occupied CRE – Owner-occupied CRE loans include loans secured by business facilities to finance business operations, equipment and owner-occupied facilities primarily for small and medium-sized enterprises. These include both lines of credit and term loans which are amortized over the useful life of the assets financed. Personal guarantees, if applicable, are generally required for these loans. The Company recognizes that risk from economic cycles, pandemics, government regulation, supply chain disruptions, product innovations or obsolescence, operational errors, lawsuits, natural disasters, losses due to theft or embezzlement, health or loss of key personnel, or competitive situations may adversely affect the scheduled repayment of business loans.
The following table presents the balance and associated percentage of each category in our owner-occupied CRE loan portfolio as of June 30, 2025 and December 31, 2024:
Owner-occupied CRE by Type
39,839
43.7
43,546
46.0
22,834
25.1
23,641
25.0
12,475
12,158
12.9
6,920
7.6
8,464
3,985
4.4
3,136
3.3
5,094
3.8
Total owner-occupied CRE loans
As of June 30, 2025, our owner-occupied CRE loans comprised of $91.1 million, or 6.0%, of loans, compared to $94.6 million, or 6.7% of loans, as of December 31, 2024. The weighted average original or renewal LTV of owner-occupied CRE loans with an outstanding balance of greater than $500 thousand, which makes up 72.7% of the balances at June 30, 2025, was 77.4% and 76.1% as of June 30, 2025 and December 31, 2024, respectively. Our owner-occupied CRE loans balances decreased $3.4 million or 3.6% since December 31, 2024 as competition remains fierce for this loan type.
As of June 30, 2025, our Senior housing loans comprised of $236.5 million or 15.5%, of loans, compared to $234.1 million, or 16.6% of loans as of December 31, 2024. The weighted average original or renewal LTV of Senior housing loans was 62.9% and 62.4% as of June 30, 2025 and December 31, 2024, respectively. Our Senior housing loans balances increased $2.4 million or 1.0% since December 31, 2024 as the Company continues monitoring its concentration of Senior housing loans.
As of June 30, 2025, our C&I loans comprised of $131.7 million, or 8.6% of loans, compared to $141.6 million, or 10.0% of loans, as of December 31, 2024. Our C&I loans balances have decreased by $9.9 million or 7.0% since December 31, 2024 due to lower production.
Retail Loans
As of June 30, 2025, our total retail loans comprised of $595.2 million, or 38.9% of loans, compared to $545.1 million, or 38.7% of loans, as of December 31, 2024. Our total retail loans balances increased $50.1 million or 9.2% since December 31, 2024 due to a higher production and demand for our retail products, primarily marine vessels and residential mortgages loans.
Following below are our principal retail loans portfolio categories:
Residential Mortgages – Residential mortgages are first or second-lien loans secured by a primary residence or second home. This category includes permanent mortgage financing, construction loans to individual consumers, and home equity lines of credit. The loans are generally secured by properties located within the local market area of the Bank's retail footprint which originates and services the loan. These loans are underwritten in accordance with the Company’s general loan policies and procedures which require, among other things, proper documentation of each borrower’s financial condition, satisfactory credit history, and property value. In addition to loans originated through the Company’s branches, the Company originates and services residential mortgages sold in the secondary market which are underwritten and closed pursuant to investor and agency guidelines. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral.
As of June 30, 2025, our residential mortgage loans comprised of $185.5 million, or 12.1% of loans, compared to $174.1 million, or 12.4% of loans, as of December 31, 2024. Our residential mortgage loans balances increased $11.4 million or 6.6% since December 31, 2024 due to continued demand for our residential mortgage products.
During the six months ended June 30, 2025, we originated $40.5 million and sold $21.0 million in home mortgage loans. During the year ended December 31, 2024, we originated $86.0 million and sold $49.5 million in home mortgage loans.
Marine Vessels – Marine vessel loans are a type of consumer loan used to finance the purchase of a boat or another marine craft. Functioning similarly to auto loans and personal loans, these installment loans come with a repayment term, fixed monthly payments and variable-or-fixed interest rates. These loans are underwritten in accordance with the Company’s general loan policies and procedures and are generally secured with title or preferred ships' mortgage on the marine vessel. The Company recognizes that risk from economic cycles, pandemics, government regulation, natural disasters, losses due to theft, or changes to customer's ability to meet the scheduled repayment of marine vessel.
As of June 30, 2025, our marine vessels loans comprised of $301.3 million or 19.7%, of loans, compared to $263.7 million, or 18.6% of loans, as of December 31, 2024. Our marine vessels loans balances increased $37.7 million or 14.3% since December 31, 2024 due to higher demand for our marine vessels loans product.
Cash Value Life Insurance Line of Credit – Cash value life insurance ("CVLI") encompasses multiple types of life insurance that contain a cash value account. This cash value component typically earns interest or other investment gains and grows tax deferred. CVLI loans are generally lines of credit secured by cash value life insurance of the debtor and can be originated for personal or business purposes. Upon the delinquency of the loan or lapse of an insurance policy premium payment, the Company pursues liquidation of the policy cash value in order to satisfy the loan.
As of June 30, 2025, our CVLI loans comprised of $87.1 million, or 5.7% of loans, compared to $86.8 million, or 6.2% of loans, as of December 31, 2024. Our CVLI loans balances increased modestly by $291 thousand or 0.3% since December 31, 2024 as higher interest rates have softened demand for the product.
As of June 30, 2025, our other consumer loans comprised of $21.2 million, or 1.4% of loans, compared to $20.5 million, or 1.5% of loans, as of December 31, 2024. Our other consumer loans balances increased $718 thousand or 3.5% since December 31, 2024 as higher interest rates have softened demand for the product.
Internally Assigned Grades on LHFI
The Company utilizes an internal loan classification system for the Commercial portfolio that is updated to perpetually grade loans according to certain credit quality indicators. These credit quality indicators include, but are not limited to, recent credit performance, delinquency, liquidity, cash flows, debt coverage ratios, collateral type and LTV ratio. The Company determines its risk rating classification of the Retail lending portfolio based on nonaccrual and delinquency status in accordance with the Uniform Retail Credit Classification guidance and industry norms. See Note 3 to the consolidated financial statements.
The following tables provides details of the Company’s loan and lease portfolio by segment, class, and internallyassigned grade at June 30, 2025 and December 31, 2024:
Retail loans (1)
1,490,804
17,889
18,506
(1) Retail loans are not risk rated but are classified as performing or nonperforming. Performing loans are presented in the Pass category and nonperforming loans are in the Substandard category.
190,084
25,025
1,353,311
25,061
31,071
Pass rated loans were 97.6% of total LHFI at June 30, 2025 as compared to 96.0% at December 31, 2024. Special mention rated loans were 1.2% of total LHFI at June 30, 2025 as compared to 1.8% at December 31, 2024. Substandard loans were 1.2% of total LHFI at June 30, 2025 as compared to 2.2% at December 31, 2024. The primary cause of the decrease in special mention and substandard loans during the comparative periods is a combination of payoffs, paydowns, and improved business performance within the Senior Housing loan portfolio.
Nonperforming Loans
Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Loans are placed on nonaccrual status when it becomes probable that interest is not fully collectable generally when the loan becomes 90 days past due. Once loans are placed on nonaccrual status, previously accrued but unpaid interest is reversed from interest income, and the accrual of interest income is suspended. Future payments received are applied to the principal balance of the loan. If and when borrowers demonstrate the sustained ability to repay such loans in accordance with the loan’s contractual terms, the loan may be returned to accrual status. Loans which
become 90 days past due are reviewed for collectability of principal. Principal amounts deemed uncollectible are charged off against the provision for credit losses on loans, unless such loans are in the process of modification, collection through repossession, or foreclosure. Certain consumer loans are not placed on nonaccrual but are monitored and charged-off at 120 days past due.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until sold and is recorded at the lower of cost or fair value, minus estimated costs to sell. Subsequent to foreclosure, losses resulting from the periodic revaluation of the property are charged to loss on OREO, net and a new carrying value is established. Any gains or losses realized at the time of disposal or subsequent write-downs are reflected in the Consolidated Statements of Operations. Expenses to maintain such assets are included in net cost of operation of OREO.
Nonperforming loans include loans 90 days or more past due and still accruing and loans accounted for on a nonaccrual basis. Nonperforming assets consist of nonperforming loans in addition to OREO.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of June 30, 2025 and December 31, 2024:
Nonaccrual loans (1)
Past due loans 90 days and still accruing
Total nonperforming loans
14,704
15,006
Total nonperforming assets
15,870
Allowance for credit losses to total LHFI
(1) Nonaccrual loans include balances of approximately $4.6 million and $4.8 million that are covered by government guarantees at June 30, 2025 and December 31, 2024, respectively.
Nonperforming loans were $14.7 million and $15.0 million at June 30, 2025 and December 31, 2024, respectively. The decrease in nonperforming loans from December 31, 2024 to June 30, 2025 was primarily due to the sale of other real estate owned and payments collected on nonaccrual loans during the period.
The following table sets forth the major classifications of nonaccrual loans as of June 30, 2025 and December 31, 2024:
Total nonaccrual loans
Allowance for Credit Losses on Loans
The ACL on loans is a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. The ACL represents management's best estimate of credit losses expected over the life of the loan, adjusted for expected contractual payments and the impact of prepayment expectations. ACL is not required for LHFS and is only recorded for LHFI.
The Company estimates the ACL on loans based on the underlying loans’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. It is the Company's policy to write off uncollectible interest receivable of LHFI when it is considered uncollectible, which is generally when an asset is placed on nonaccrual and exclude it from the ACL.
Expected credit losses are reflected in the ACL through a charge to Provision for credit losses. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off and the ACL is reduced by the same amount. Loans are charged off against the ACL when management believes the collection of the principal is unlikely. Subsequent recoveries of previously charged off amounts, if any, are credited to the ACL when received. See Note 1 of our consolidated financial statements as of December 31, 2024 for additional information regarding ACL policy.
It is management's policy to maintain the ACL at a level adequate for risks inherent in the loan portfolio. The Federal Reserve Bank and South Carolina Board of Financial Institutions also review the ACL as an integral part of their examination process. Based on the
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information currently available, management believes that our ACL is adequate. However, the loan portfolio can be adversely affected if economic conditions or the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
The allowance for credit losses on loans was $17.5 million at June 30, 2025 compared to $17.1 million at December 31, 2024, an increase of $379 thousand, or 2.2% primarily attributed to increased production of LHFI, changes in economic factors, and current period net charge-offs, offset by other changes in loss rates and a decrease in reserves on individually analyzed loans.
Analysis of the Allowance for Credit Losses on Loans. The following table provides an analysis of the ACL on loans and net charge-offs for the periods presented:
As of
Allowance for credit losses on loans at end of period (1)
Loans balances:
Total loans held for investment, end of period
Average loans held for investment
1,418,022
Net charge-offs to average LHFI
Allowance for credit losses on loans to total LHFI (1)
Nonaccrual loans as a percentage of end of period loans
Allowance for credit losses on loans to nonaccrual loans at end of period (1)
119.75
114.45
Allowance for credit losses on loans to total nonperforming loans at end of period (1)
(1) Excludes allowance for credit losses for unfunded loans commitments.
At June 30, 2025, the ACL on loans totaled $17.5 million, or 1.15% of loans, compared to $17.1 million, or 1.21% of loans, at December 31, 2024. The decrease in the ACL on loans as a percentage of loans compared to December 31, 2024 was primarily attributed to changes in loan volume and mix and changes in economic factors offset by other changes in loss rates and a decrease in reserves on individually analyzed loans.
For the six months ended June 30, 2025, our net charge-off ratio as a percentage of average loans, as annualized, was 0.03%, compared to 0.01% for the year ended December 31, 2024. Originating and maintaining high quality loans is a top priority for the management.
As of June 30, 2025, our ratio of nonperforming assets to total assets was 0.66%, compared to 0.76% as of December 31, 2024. The decrease was due to the sale of other real estate owned and payments collected on nonaccrual loans during the period.
The following table allocates the allowance for credit losses on loans by loan category for the periods presented:
% of Loans in each category to total loans
Total allowance for credit losses on loans
Allowance for Credit Losses for Unfunded Commitments
The Company records an ACL for unfunded loan commitments, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in the Company’s Consolidated Statements of Operations. The ACL for unfunded commitment exposures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur. The ACL for unfunded commitments is included in Other liabilities on the Company’s Consolidated Balance Sheets.
As of June 30, 2025, the ACL for unfunded commitments was $3.5 million compared to $2.7 million at December 31, 2024. The increase in the ACL for unfunded commitments was primarily due to production of new loan commitments.
Net Charge-offs
The following table summarizes net charge-offs to average loans for each of June 30, 2025 and December 31, 2024:
Average Loans
Net Charge-offs (Recoveries)
Net Charge-offs to Average Loans (1)
Net Charge-offs to Average Loans
81,017
0.00%
110,569
343,650
260,325
86,112
97,900
(53
(0.05%)
238,104
243,235
155,197
0.03%
144,395
0.06%
280,610
275,236
0.01%
176,797
(0.01%)
170,354
(15
85,320
94,428
0.05%
20,716
208
2.02%
21,580
(1
223
(1) Represents annualized June 30, 2025 data.
Net charge-offs were $223 thousand and $96 thousand as of June 30, 2025 and December 31, 2024, respectively.
Deposits represent our Bank’s primary source of funds. We gather deposits primarily through our branch locations and targeting new deposits relationships by our bankers. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts, and certificate of deposits. We put continued effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and expansion into new markets. As the Company wins new loan customers and targets new deposit relationships with competitive rates on interest bearing accounts, our bankers are focused on ensuring that we win the entire relationship, including operating accounts, so that we can preserve our attractive mix of deposits.
Total deposits increased $133.5 million, or 7.3%, to $1.97 billion at June 30, 2025 compared to $1.83 billion at December 31, 2024. As of June 30, 2025, 15.9% of total deposits were comprised of noninterest-bearing deposits accounts and 84.1% of interest-bearing deposit accounts compared to 16.5% and 83.5% as of December 31, 2024, respectively. These increases were due to a continued result of pursuing and winning new relationships as well as maintaining our existing relationships.
At June 30, 2025, we had total brokered deposits of $307.9 million, or 15.6% of total deposits, compared to $275.3 million, or 15.0% of total deposits, at December 31, 2024. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the Federal Home Loan Bank of Atlanta.
At June 30, 2025, our uninsured deposits were $713.7 million, or 36.3% of total deposits, compared to $667.4 million, or 36.4% of total deposits, at December 31, 2024.
The following table summarizes our average deposit balances and weighted average rates as of June 30, 2025 and December 31, 2024:
Average Balance
Weighted Average Rate(1)
Weighted Average Rate
Noninterest-bearing demand deposits
−
323,949
Interest-bearing demand deposits
179,495
0.45
598,621
38,074
Certificates of deposits
651,974
4.62
1,468,164
3.64
1,896,694
2.77
1,792,113
2.98
(1) Annualized weighted average rate for June 30, 2025.
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The following tables set forth the maturity of time deposits as of June 30, 2025:
Three Months
Three to Six Months
Six to Twelve Months
After Twelve Months
Time deposits ($250,000 or less)
262,053
214,400
98,784
69,733
644,970
Time deposits (more than $250,000)
60,457
82,936
27,047
960
171,400
Total time deposits
322,510
297,336
125,831
70,693
Commercial Mortgage Servicing Rights
As of June 30, 2025 and December 31, 2024, we serviced $114.6 million and $120.4 million, respectively, of SBA and United States Department of Agriculture loans for others. The size of this loan servicing portfolio has grown over the last few years as we consistently originated and sold portions of these loans that we originate while retaining loan servicing rights. Activity for commercial mortgage servicing rights was as follows:
As of June 30,
As of December 31,
Balance, beginning of period
1,237
1,125
Additions
95
Disposals
Other changes(1)
(210
(314
Balance, end of period
1,122
(1) Comprised of amortization.
Our commercial mortgage servicing rights are included in intangible assets on our consolidated balance sheets and are reported net of amortization and impairment, if any.
Other Borrowings
The Company utilizes FHLBA advances as a supplementary funding source to finance our operations. These FHLBA advances are collateralized by securities owned by the Company and held in safekeeping by the FHLBA, FHLBA stock owned by the Company, and certain qualifying loans secured by real estate, including residential mortgage loans, home equity lines of credit and commercial real estate loans.
At June 30, 2025 and December 31, 2024, we had a maximum borrowing capacity from the FHLBA of $177.0 million and $162.8 million, respectively. We had no FHLBA advances outstanding as of June 30, 2025, and $15.0 million of FHLBA advances outstanding as of December 31, 2024.
The Company had no line of credit outstanding as of June 30, 2025, and a $12.0 million line of credit outstanding, net of debt costs, as of December 31, 2024 with a maximum commitment availability of $24.0 million at June 30, 2025 and December 31, 2024.
As of June 30, 2025 and December 31, 2024, the Company had $14.8 million and $14.7 million, respectively, of subordinated debt, net of debt costs outstanding.
Investment Portfolio
The securities portfolio is the second largest component of our interest earning assets. The portfolio serves the following purposes: (i) to optimize the Bank’s income consistent with the investment portfolio’s liquidity and risk objectives; (ii) to balance market and credit risks of other assets and the Bank’s liability structure; (iii) to profitably deploy funds which are not needed to fulfill loan demand, deposit redemptions or other liquidity purposes; and (iv) provide collateral which the Bank is required to pledge against public funds.
We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Investment securities not classified as either held-to-maturity or trading are classified as available-for-sale. All of the securities in our investment portfolio were classified as available-for-sale as of June 30, 2025 and December 31, 2024. Investment securities available-for-sale are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of AOCI in the Consolidated Statements of Comprehensive Income. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.
Securities available-for-sale consist primarily of U.S. Treasuries, municipal obligations, mortgage-backed securities, asset-backed securities, and corporate debt securities. No issuer of the available-for-sale securities comprised more than ten percent of our shareholders’ equity as of June 30, 2025 and December 31, 2024, except Federal Home Loan Mortgage Corp ("FHLMC"), Federal National Mortgage Association ("FNMA') and Government National Mortgage Association ("Ginnie Mae") within those periods.
The following table summarizes the fair value of the available-for-sale securities portfolio as of June 30, 2025 and December 31, 2024:
Amortized Cost
Unrealized Gain (loss)
(249
(378
(8,275
(8,330
(11,312
(15,150
165
(790
(712
Total available for sale securities
(20,590
(24,405
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At June 30, 2025, we evaluated securities available-for-sale which had an unrealized loss to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value with a charge to earnings. We do not intend to sell these securities, and it is not more likely than not that we will be required to sell them before recovery of the amortized cost basis, which may be at maturity.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of June 30, 2025. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, considering the expected life of each security. The weighted average yield for each maturity range was computed using the amortized cost of each security within the applicable maturity range. The yield on non-taxable investments was not adjusted for tax equivalency.
Due in OneYear or Less
Due after One YearThrough Five Years
Due after Five YearsThrough Ten Years
Due afterTen Years
Weighted Average Yield
8,323
1.90
24,018
29,822
2.36
32,573
13,159
4.01
145,524
3.51
17,298
16,310
5.73
10.00
17,008
7.54
36,781
5.50
3,041
5.58
63,897
3.99
91,256
194,697
3.55
We utilize interest rate swaps agreements for some of our securities available-for-sale as part of our asset-liability management strategy to help mitigate its interest rate risk. As of June 30, 2025 and December 31, 2024, the carrying amount of our hedged securities available for sale related to cumulative basis adjustment for the fair value hedges was $23.5 million and $22.6 million, respectively.
Liquidity
The term liquidity refers to the measure of our ability to meet cash flow requirements of our depositors and borrowers, while at the same time meeting our operational, capital, and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities in order to meet the return on investment objectives of our shareholders.
The Bank’s Asset and Liability Committee, as well as the Credit and Risk Committee of the Board of Directors are the primary groups responsible for monitoring the Bank’s liquidity position. We have identified various liquidity metrics and ratios, including the volatile funds ratio, non-core funding dependency ratio and loan to deposit ratio that these committees use to monitor the Bank’s liquidity position. Further, these groups are also responsible for reviewing and monitoring the stress testing of the Bank's overall liquidity under multiple liquidity stress scenarios. As of June 30, 2025 the Bank was in compliance with all internal policies and guidelines.
Our liquidity position is supported by management of our liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities.
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Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLBA advances, and the Federal Reserve discount window.
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and new customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.
As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As of June 30, 2025 and December 31, 2024, we had $69.5 million of unsecured federal funds lines with no amounts advanced.
As of June 30, 2025 and December 31, 2024, we had access to the Federal Reserve’s discount window in the amount of $29.4 million and $30.4 million, respectively. There were no borrowings outstanding as of June 30, 2025 and December 31, 2024 for the Federal Reserve’s discount window. We had pledged investment securities at June 30, 2025 and December 31, 2024 totaling $8.8 million and $8.5 million, respectively, as collateral for federal funds purchased. In addition, we also had pledged investment securities at June 30, 2025 and December 31, 2024, totaling $31.0 million and $32.1 million, respectively, as collateral at the Federal Reserve Bank.
At June 30, 2025, we had no outstanding advances from the FHLBA. At December 31, 2024, we had $15.0 million of outstanding advances from the FHLBA. Based on the values of collateral pledged, we had $169.0 million and $141.8 million as of June 30, 2025 and December 31, 2024, respectively, of additional borrowing availability with the FHLBA. We had no pledged investment securities at June 30, 2025 or December 31, 2024 pledged as collateral for the FHLBA advances. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.
Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the Federal Banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios. These include a CET1 risk-based capital ratio, a Tier 1 risk-based capital ratio, which includes CET1 and additional Tier 1 capital, and a total risk-based capital ratio, which includes Tier 1 and Tier 2 capital. CET1 is primarily comprised of the sum of common stock instruments and related surplus net of treasury stock plus retained earnings less certain adjustments and deductions, including with respect to goodwill, intangible assets, mortgage servicing assets, and deferred tax assets subject to temporary timing differences. Additional Tier 1 capital is primarily comprised of noncumulative perpetual preferred stock. Tier 2 capital consists of instruments disqualified from Tier 1 capital, including qualifying subordinated debt and a limited amount of loan loss reserves up to a maximum of 1.25% of risk-weighted assets, subject to certain eligibility criteria. The capital rules also define the risk-weights assigned to assets and off-balance sheet items to determine the risk-weighted asset components of the risk-based capital rules, including, for example, certain “high volatility” commercial real estate, past due assets, structured securities, and equity holdings.
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the Tier 1 leverage ratio. The leverage capital ratio is the ratio of Tier 1 capital to quarterly average assets net of goodwill, certain other intangible assets, and certain required deduction items require the Bank to maintain:
(i) a minimum leverage ratio of Tier 1 capital to average total assets, after certain adjustments, of 4.0%,
(ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%,
(iii) a minimum ratio of total-capital to risk-weighted assets of 8.0% and,
(iv) a minimum ratio of CET1 to risk-weighted assets of 4.5%.
In addition, the capital rules require a capital conservation buffer of 2.5% above each of the minimum risk-based capital ratio requirements (CET1, Tier 1, and total capital), comprised of CET1, which is designed to absorb losses during periods of economic stress. These buffer requirements must be met for a bank or bank holding company to be able to pay dividends, engage in share buybacks, or make discretionary bonus payments to executive management without restriction. The capital conservation buffer in effect as of June 30, 2025 and December 31, 2024 was 4.04% and 4.97%, respectively.
Prompt Corrective Action — The Federal Banking agencies have broad powers with which to require companies to take prompt corrective action to resolve problems of insured depository institutions that do not meet minimum capital requirements. The law establishes five capital categories for this purpose:
(i) well-capitalized;
(ii) adequately capitalized;
(iii) undercapitalized;
(iv) significantly undercapitalized; and
(v) critically undercapitalized.
To be well-capitalized, the Bank must maintain at least the following capital ratios:
The table below summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of June 30, 2025 and December 31, 2024. Because the Company is a small bank holding company under the guidelines of the Federal Reserve and is not required to report consolidated capital ratios for regulatory purposes, capital ratios are presented for the Bank only.
The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of the dates reflected per the table below.
There have been no conditions or events since June 30, 2025 that management believes would change this classification.
The following table summarizes the capital amounts and ratios of CSB and the regulatory minimum requirements at June 30, 2025 and December 31, 2024:
Ratio at June 30,
Ratio at December 31,
Regulatory Capital Ratio
Regulatory Capital Ratio Requirements including Capital Conservation
Minimum Requirements for "Well Capitalized" Depository
Requirements
Buffer
Institution
Coastal States Bank
Total capital (to risk-weighted assets)
8.00
10.50
Tier 1 capital (to risk-weighted assets)
6.00
8.50
CETI capital (to risk-weighted assets)
4.50
7.00
6.50
Tier 1 leverage
4.00
5.00
Contractual Obligations
The following tables contain supplemental information regarding our total contractual obligations at June 30, 2025 and December 31, 2024:
Payments Due at June 30, 2025
Within One Year
One to Three Years
Three to Five Years
After Five Years
Deposits without a stated maturity
1,151,931
745,677
70,570
Other borrowings (1)
Operating lease liabilities
Total contractual obligations
1,898,504
72,165
1,609
16,346
1,988,624
(1) $15 million due after five years represents gross subordinated debt outstanding.
Payments Due at December 31, 2024
1,075,601
754,997
3,850
354
27,000
42,000
987
1,642
1,380
1,302
5,311
1,858,585
5,492
16,302
1,882,113
(1) $27 million due within one year includes a gross revolving commercial line of credit of $12 million and an FHLB of Atlanta advance of $15 million outstanding; $15 million due after five years represents gross subordinated debt outstanding.
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
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Off-Balance Sheet Arrangements
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.
Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities. Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.
See Note 4 of our consolidated financial statements as of June 30, 2025, included elsewhere in this Form 10-Q, for more information regarding our off-balance sheet arrangements as of June 30, 2025 and December 31, 2024.
Non-GAAP Financial Measure Reconciliations
The measures entitled return on average tangible book value per share, adjusted nonperforming assets to total assets, adjusted net income, adjusted basic earnings per share, adjusted diluted earnings per share, pre-tax, pre-provision net revenue, adjusted return on average assets, adjusted return on average equity, efficiency ratio, as adjusted, return on average tangible common equity, adjusted return on average tangible common equity, adjusted noninterest income to total revenue, and tangible common equity to tangible assets are not measures recognized under accounting principles generally accepted in the United States of America (“GAAP”) and therefore are considered non-GAAP financial measures. The most comparable GAAP measures to these measures are return on book value per share, total nonperforming assets to total assets, net income, basic earnings per share, diluted earnings per share, net income, return on average assets, return on average equity, the efficiency ratio, return on average equity, noninterest income to total revenue, total common equity to total assets, respectively.
Management believes that that these non-GAAP financial measures and the information they provide are useful to investors since these measures permit investors to view the Company’s performance using the same tools that management uses to evaluate the Company’s past performance and prospects for future performance. While management believes that these non-GAAP financial measures are useful in evaluating our performance, this information should be considered as supplemental and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Additionally, these non-GAAP financial measures should be considered as additional views of the way the Company’s financial measures are affected by significant items and other factors, and since they are not required to be uniformly applied, they may not be comparable to other similarly titled measures at other companies.
The following table reconciles, as of the dates set forth below, shareholders’ equity (on a GAAP basis) to tangible equity and total assets (on a GAAP basis) to tangible assets and calculates our tangible book value per share.
Tangible Common Equity:
Less: Goodwill and intangibles
(6,190
(6,199
(6,386
(6,451
(6,276
Adjusted for: Mortgage servicing rights
1,093
1,258
1,037
Tangible Common Equity
204,297
196,998
188,110
174,929
Common share outstanding
Book value per common share
Tangible book value per common share
Tangible assets:
Less: goodwill and intangibles
Tangible assets
2,216,177
2,185,285
2,093,563
2,124,153
2,110,308
Tangible common equity to tangible assets
The efficiency ratio, as adjusted, is a non-GAAP measure of expense control relative to adjusted revenue. We calculate the efficiency ratio, adjusted, by dividing total noninterest expenses, as determined under GAAP but excluding merger related expenses, by the sum
57
of total net interest income and total noninterest income, each as determined under GAAP, but excluding net gains or losses on the sale of securities and other nonrecurring income sources, if applicable, from this calculation, which we refer to below as adjusted revenue. We believe that this provides one reasonable measure of core expenses relative to core revenue.
For the noninterest income to total revenue ratio, we calculate revenue as net interest income plus noninterest income but excluding net gains or losses on the sale of securities and other nonrecurring income sources, if applicable, from this calculation, which we refer to below as adjusted revenue. We believe that this provides one reasonable measure of core noninterest income relative to core total revenue.
The following table reconciles our efficiency ratio, as adjusted, and noninterest income to total revenue ratio for the periods set forth below.
GAAP-based efficiency ratio
Adjusted for:
Loss on sale of AFS securities (1)
Adjusted revenue
19,873
18,640
18,229
19,927
18,289
38,513
35,145
Less: Merger expenses
Adjusted noninterest expense
Efficiency ratio, as adjusted
-1.28
Adjusted noninterest income to total adjusted revenue
(1) For the six months ended June 30, 2024 consists of loss on sale of available-for-sale securities due to non-routine strategic portfolio restructuring.
Management will often make adjustments to our results of operations when completing analysis of our operations in order to exclude certain items that we do not consider to be indicative of our core banking operations. For the tables below, net income is adjusted to remove merger related expenses as well as gains or losses on sales of securities and other nonrecurring income sources, if applicable. While we acknowledge that these items are likely to recur in future periods, they are not considered to be indicative of our core banking operations, and therefore, management often excludes them from our analysis of our return on average assets and our return on average equity to better understand our core operating performance.
The following table reconciles our adjusted net income, adjusted basic earnings per share, and adjusted diluted earnings per share, as adjusted, for the periods set forth below.
10,273,125
Loss on sale of AFS securities, net of tax (1)
Adjusted net income
Adjusted basic earnings per share
Adjusted diluted earnings per share
The following table reconciles our adjusted net income and return on average assets, as adjusted, for the periods set forth below.
Average assets
2,111,196
2,117,357
2,130,485
Return on average assets (1)
Loss on sale of AFS securities, net of tax (2)
Adjusted return on average assets (1)
(1) Represents annualized data.
(2) For the six months ended June 30, 2024 consists of loss on sale of available-for-sale securities due to non-routine strategic portfolio restructuring.
The following table reconciles our adjusted net income and return on average equity, as adjusted, for the periods set forth below.
Average shareholders' equity
199,763
194,724
185,434
Return on average shareholders' equity (1)
Adjusted return on average shareholders' equity (1)
59
The following table reconciles, as of the dates set forth below, the calculation of the return on average equity (on a GAAP basis) to the calculation of the return on average tangible equity and the calculation of the adjusted return on average tangible equity.
Return on average shareholders' equity
Average Tangible Common Equity:
Less: Average goodwill and intangibles
(6,168
(6,328
(6,432
(6,257
(6,355
(6,248
(6,400
Adjusted for: Average mortgage servicing rights
1,082
1,198
1,263
1,041
1,094
1,114
Average tangible common equity
200,751
194,633
189,555
180,218
169,870
197,709
165,787
Return on average tangible common (1) shareholders' equity
Adjusted return on average tangible common equity (1)
The following table reconciles, as of the dates set forth below, the calculation of the nonperforming assets to total assets ratio (on a GAAP basis) and the calculation of the adjusted nonperforming assets to total assets ratio. Adjusted nonperforming assets to total assets ratio is calculated by adjusting for the guaranteed portions of nonaccrual loans from the total nonperforming assets.
15,370
9,321
8,786
GAAP-based nonperforming assets to total assets
Guaranteed portions of nonaccrual loans
4,583
4,692
4,811
4,916
4,910
Adjusted total nonperforming assets
10,121
10,678
11,059
4,405
3,876
Adjusted nonperforming assets to total assets
The following table reconciles net income (on a GAAP basis), as of the dates set forth below, to the calculation of the pre-tax, pre-provision net revenue ("PPNR"). PPNR is calculated by adjusting for the income tax expense and the provision for credit losses to the net income.
Net income (GAAP-based)
Plus:
Pre-tax, pre-provision net revenue
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk inherent in the normal course of lending and deposit-taking activities. We are also exposed to market risk in our investing activities.
Interest Rate Risk Management
Net interest income is our most significant component of earnings and we consider interest rate risk to be our most significant market risk. 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 the average duration of our loan portfolio, investment securities and other interest-earning assets.
Our goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may impact our earnings adversely because the interest rates of the underlying assets and liabilities do not change at the same speed, to the same extent or on the same basis.
One of the tools management uses to estimate and manage the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon multiple assumptions for each scenario, including loan and deposit re-pricing characteristics and the rate of prepayments. The ALCO periodically reviews the assumptions for reasonableness based on historical data and future expectations; however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared, in order to measure the change in net interest revenue. Policy limits are based on immediate rate shock scenarios which are compared to the base scenario. Other scenarios analyzed may include ramped rate shocks, delayed rate shocks, yield curve steepening or flattening, or other variations in rate movements. While the primary policy scenarios focus on a 12-month time frame, longer time horizons are also modeled.
Our policy is based on the 12-month impact on net interest revenue of interest rate shocks. Our shock scenario assumes rates immediately change the full amount at the scenario onset. The following table presents our interest sensitivity position at June 30, 2025 and December 31, 2024:
Net Interest IncomeSensitivity
12 Month Projection
(Shock in basis points)
-200
-100
+100
+200
(6.79
(4.00
4.31
7.39
(5.32
(2.88
7.28
There has been no significant change in the Company's estimated net interest income sensitivity position from December 31, 2024. From a net interest income perspective, the Company generally has an asset sensitive rate position. With the current inverted interest rate yield curve, modeling of net interest income in changing rate environments presents particular challenges. A flat or inverted interest rate yield curve is an unfavorable interest rate environment for many financial institutions, including the Bank, as short-term interest rates generally drive our deposit pricing and longer-term interest rates generally drive loan pricing. When these rates converge or invert, the profit spread we realize between loan yields and deposit rates narrows, which pressures our NIM.
Economic Value of Equity
We also compute amounts by which the net present value of our assets and liabilities (economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. This model uses a discounted cash flow analysis to measure the interest rate sensitivity of net portfolio value. The model estimates the economic value of each type of asset, liability and off-balance
sheet contract under the assumptions that the yield curve increases or decreases instantaneously, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve.
The following table sets forth the calculation of the estimated changes in our EVE that would result from the designated immediate changes in the yield curve at June 30, 2025 and December 31, 2024:
Economic Value of Equity Sensitivity
(3.78
(1.26
1.23
(0.14
(3.51
(1.13
(0.19
(2.22
As previously noted, these assumptions are inherently uncertain, and actual results may differ from simulated results. The current interest rate path is less certain for 2025, and further rate decreases are contingent upon improving inflationary conditions. Further changes to interest rates and monetary policy are dependent upon the Federal Reserve's assessment of economic data as it becomes available. We would expect net interest income to decline somewhat in a decreasing interest rate environment and to increase in an increasing interest rate environment, as our model reflects that interest-earning assets reprice faster than interest-bearing deposits which is attributable to assumed deposit betas and repricing lags as there is continued strong market competition for core deposits.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2025. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2025.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2025, there was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a‑15 or 15d‑15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are a party to various legal proceedings such as claims and lawsuits arising in the course of our normal business activities. Although the ultimate outcome of all claims and lawsuits outstanding as of June 30, 2025 cannot be ascertained at this time, it is the opinion of management that these matters, when resolved, will not have a material adverse effect on our business, results of operations or financial condition.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed under the section entitled “Risk Factors” in the Registration Statement. These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Please be aware that these risks may change over time and other risks may prove to be important in the future.
There are no material changes during the period covered by this report to the risk factors previously disclosed in the Registration Statement.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
Not applicable.
(b) Use of Proceeds
On July 3, 2025 we completed our IPO of 2,035,000 shares of our common stock at an IPO price of $21.50 per share, with 1,700,000 shares sold by us and 335,000 shares sold by selling shareholders. On July 30, 2025, the underwriters purchased an additional 300,000 shares from the selling shareholders, exercising their option to purchase up to 305,250 shares from the selling shareholders within 30 days following the offering. We received proceeds of $34.0 million, net of underwriting discounts and commissions of approximately $2.5 million. We expect the estimated offering expenses payable by us to be approximately $1.9 million. Piper Sandler & Co. acted as bookrunner for the IPO, and Stephens Inc. acted as lead manager for the offering. None of the expenses associated with the IPO were paid to directors, officers, affiliates, persons owning 10% or more of any class of equity securities, or to their associates, or to our affiliates.
All of the shares issued and sold in our IPO were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-287854), which was declared effective by the SEC on July 1, 2025. There has been no material change in the planned use of proceeds from our IPO from those disclosed in our final prospectus dated July 1, 2025 and filed with the SEC pursuant to Rule 424(b)(4) on July 2, 2025.
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit
Number
Description of Exhibit
3.1
Articles of Incorporation (incorporated by reference to Exhibit 3.1 to CoastalSouth Bancshares, Inc. on Form S-1 filed with the SEC on June 6, 2025)
3.2
Third Amended and Restated ByLaws (incorporated by reference to Exhibit 3.2 to CoastalSouth Bancshares, Inc. on Form S-1 filed with the SEC on June 6, 2025)
10.1
CoastalSouth Bancshares, Inc. Omnibus Incentive Plan (incorporated by reference to Exhibit 10.7 to CoastalSouth Bancshares, Inc. on Form S-1 filed with the SEC on June 6, 2025)
10.2
Form of Restricted Unit Grant under the CoastalSouth Bancshares, Inc. 2025 Incentive Plan (incorporated by reference to Exhibit 10.8 to CoastalSouth Bancshares, Inc. on Form S-1 filed with the SEC on June 6, 2025)
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CoastalSouth Bancshares, Inc.
Date: August 11, 2025
By:
/s/ Stephen R. Stone
Stephen R. Stone
President and Chief Executive Officer
/s/ Anthony P. Valduga
Anthony P. Valduga
Chief Financial Officer & Chief Operating Officer