PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets September 30, 2023 and December 31, 2022 (Dollars in thousands) September 30, December 31, Assets 2023 2022 (Unaudited) (Audited) Cash and due from banks, including reserve requirements of $ 0 at both 9/30/23 and 12/31/22 $ 35,762 50,061 Interest-bearing deposits 40,857 21,535 Cash and cash equivalents 76,619 71,596 Investment securities available for sale 378,794 445,394 Other investments 2,900 2,656 Total securities 381,694 448,050 Mortgage loans held for sale 1,848 211 Loans 1,078,173 1,032,608 Less allowance for credit losses ( 10,285 ) ( 10,494 ) Net loans 1,067,888 1,022,114 Premises and equipment, net 16,782 18,205 Cash surrender value of life insurance 18,021 17,703 Right of use lease asset 4,908 5,116 Accrued interest receivable and other assets 39,504 37,932 Total assets $ 1,607,264 1,620,927 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 444,627 523,088 Interest-bearing demand, MMDA & savings 633,003 814,128 Time, over $ 250,000 137,715 31,001 Other time 165,423 66,998 Total deposits 1,380,768 1,435,215 Securities sold under agreements to repurchase 83,024 47,688 Junior subordinated debentures 15,464 15,464 Lease liability 5,002 5,185 Accrued interest payable and other liabilities 15,654 12,180 Total liabilities 1,499,912 1,515,732 Commitments Shareholders' equity: Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding - - Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,549,799 shares at September 30, 2023 and 5,636,830 shares at December 31, 2022 50,969 52,636 Common stock held by deferred compensation trust, at cost; 167,193 shares at September 30, 2023 and 169,094 shares at December 31, 2022 ( 2,011 ) ( 2,181 ) Deferred compensation 2,011 2,181 Retained earnings 107,372 100,156 Accumulated other comprehensive loss ( 50,989 ) ( 47,597 ) Total shareholders' equity 107,352 105,195 Total liabilities and shareholders' equity $ 1,607,264 1,620,927 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings Three and Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands, except per share amounts) Three months ended Nine months ended September 30, September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 14,145 11,051 40,695 30,727 Interest on due from banks 606 900 1,506 1,453 Interest on investment securities: U.S. Government sponsored enterprises 2,358 1,288 6,868 2,280 State and political subdivisions 696 1,056 2,254 3,009 Other 501 316 1,383 463 Total interest income 18,306 14,611 52,706 37,932 Interest expense: NOW, MMDA & savings deposits 1,752 494 4,888 1,263 Time deposits 2,512 134 4,666 421 Junior subordinated debentures 284 146 791 324 Other 418 44 912 117 Total interest expense 4,966 818 11,257 2,125 Net interest income 13,340 13,793 41,449 35,807 Provision for credit losses 562 408 1,161 889 Net interest income after provision for loan losses 12,778 13,385 40,288 34,918 Non-interest income: Service charges 1,412 1,458 4,081 4,000 Other service charges and fees 165 169 510 540 Loss on sale of securities, net - - ( 2,488 ) - Mortgage banking income 72 59 204 358 Insurance and brokerage commissions 291 213 725 709 Appraisal management fee income 2,785 2,711 7,469 9,656 Miscellaneous 2,049 2,183 6,286 5,904 Total non-interest income 6,774 6,793 16,787 21,167 Non-interest expense: Salaries and employee benefits 6,722 6,177 19,508 18,469 Occupancy 1,988 2,038 5,983 5,886 Professional fees 406 413 1,255 1,241 Advertising 217 175 562 509 Debit card expense 392 228 947 826 FDIC Insurance 186 121 556 346 Appraisal management fee expense 2,182 2,151 5,881 7,680 Miscellaneous 2,162 2,152 6,884 6,082 Total non-interest expense 14,255 13,455 41,576 41,039 Earnings before income taxes 5,297 6,723 15,499 15,046 Income tax expense 1,170 1,416 3,393 3,070 Net earnings $ 4,127 5,307 12,106 11,976 Basic net earnings per share $ 0.76 0.96 2.22 2.18 Diluted net earnings per share $ 0.74 0.93 2.15 2.11 Cash dividends declared per share $ 0.19 0.18 0.72 0.69 See accompanying Notes to Consolidated Financial Statements. 5 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands) Three months ended Nine months ended September 30, September 30, 2023 2022 2023 2022 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net earnings $ 4,127 5,307 12,106 11,976 Other comprehensive loss: Unrealized holding losses on securities available for sale ( 9,408 ) ( 16,578 ) ( 6,892 ) ( 59,661 ) Reclassification adjustment for losses on securities available for sale included in net earnings - - 2,488 - Total other comprehensive loss, before income taxes ( 9,408 ) ( 16,578 ) ( 4,404 ) ( 59,661 ) Income tax benefit related to other comprehensive income: Unrealized holding losses on securities available for sale ( 2,162 ) ( 3,808 ) ( 1,584 ) ( 13,708 ) Reclassification adjustment for losses on securities available for sale included in net earnings - - 572 - Total income tax benefit related to other comprehensive income ( 2,162 ) ( 3,808 ) ( 1,012 ) ( 13,708 ) Total other comprehensive loss, net of tax ( 7,246 ) ( 12,770 ) ( 3,392 ) ( 45,953 ) Total comprehensive income (loss) $ ( 3,119 ) ( 7,463 ) 8,714 ( 33,977 ) See accompanying Notes to Consolidated Financial Statements. 6 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Changes in Shareholders' Equity Three and Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands) Common Stock Held By Accumulated Deferred Other Common Stock Retained Deferred Compensation Comprehensive Shares Amount Earnings Compensation Trust Loss Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Balance, December 31, 2022 5,636,830 $ 52,636 100,156 2,181 ( 2,181 ) ( 47,597 ) 105,195 Adoption of new accounting standard, net of tax - - ( 838 ) - - - ( 838 ) Cash dividends declared on common stock ($0.34 per share) - - ( 1,925 ) - - - ( 1,925 ) Restricted stock units exercised 191 6 - - - - 6 Equity incentive plan, net - - - ( 344 ) 344 - - Net earnings - - 3,171 - - - 3,171 Change in accumulated other comprehensive loss, net of tax - - - - - 9,173 9,173 Balance, March 31, 2023 5,637,021 $ 52,642 100,564 1,837 ( 1,837 ) ( 38,424 ) 114,782 Common stock repurchase ( 46,222 ) ( 833 ) - - - - ( 833 ) Cash dividends declared on common stock ($0.19 per share) - - ( 1,069 ) - - - ( 1,069 ) Equity incentive plan, net - - - 130 ( 130 ) - - Net earnings - - 4,808 - - - 4,808 Change in accumulated other comprehensive loss, net of tax - - - - - ( 5,319 ) ( 5,319 ) Balance, June 30, 2023 5,590,799 $ 51,809 104,303 1,967 ( 1,967 ) ( 43,743 ) 112,369 Common stock repurchase ( 41,000 ) ( 840 ) - - - - ( 840 ) Cash dividends declared on common stock ($0.19 per share) - - ( 1,058 ) - - - ( 1,058 ) Equity incentive plan, net - - - 44 ( 44 ) - - Net earnings - - 4,127 - - - 4,127 Change in accumulated other comprehensive loss, net of tax - - - - - ( 7,246 ) ( 7,246 ) Balance, September 30, 2023 5,549,799 $ 50,969 107,372 2,011 ( 2,011 ) ( 50,989 ) 107,352 Balance, December 31, 2021 5,661,569 $ 53,305 88,968 1,992 ( 1,992 ) 96 142,369 Common stock repurchase ( 7,000 ) ( 199 ) - - - - ( 199 ) Cash dividends declared on common stock ($0.33 per share) - - ( 1,877 ) - - - ( 1,877 ) Restricted stock units exercised 1,461 41 - - - - 41 Equity incentive plan, net - - - 50 ( 50 ) - - Net earnings - - 3,452 - - - 3,452 Change in accumulated other comprehensive loss, net of tax - - - - - ( 18,342 ) ( 18,342 ) Balance, March 31, 2022 5,656,030 $ 53,147 90,543 2,042 ( 2,042 ) ( 18,246 ) 125,444 Common stock repurchase ( 15,000 ) ( 395 ) - - - - ( 395 ) Cash dividends declared on common stock ($0.18 per share) - - ( 1,019 ) - - - ( 1,019 ) Equity incentive plan, net - - - 57 ( 57 ) - - Net earnings - - 3,217 - - - 3,217 Change in accumulated other comprehensive loss, net of tax - - - - - ( 14,841 ) ( 14,841 ) Balance, June 30, 2022 5,641,030 $ 52,752 92,741 2,099 ( 2,099 ) ( 33,087 ) 112,406 Cash dividends declared on common stock ($0.18 per share) - - ( 1,019 ) - - - ( 1,019 ) Equity incentive plan, net - - - 51 ( 51 ) - - Net earnings - - 5,307 - - - 5,307 Change in accumulated other comprehensive loss, net of tax - - - - - ( 12,770 ) ( 12,770 ) Balance, September 30, 2022 5,641,030 $ 52,752 97,029 2,150 ( 2,150 ) ( 45,857 ) 103,924 See accompanying Notes to Consolidated Financial Statements. 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands) 2023 2022 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 12,106 11,976 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 2,416 4,914 Provision for credit losses 1,161 889 Deferred income taxes ( 248 ) ( 31 ) Loss on sale of investment securities, net 2,488 - Gain on sale of premises and equipment ( 185 ) - Restricted stock expense ( 7 ) ( 95 ) Proceeds from sales of mortgage loans held for sale 11,031 20,475 Origination of mortgage loans held for sale ( 12,668 ) ( 17,813 ) Change in: Cash surrender value of life insurance ( 318 ) ( 301 ) Right of use lease asset 578 568 Other assets ( 93 ) ( 2,944 ) Lease liability ( 553 ) ( 556 ) Other liabilities 1,357 232 Net cash provided by operating activities 17,066 17,314 Cash flows from investing activities: Purchases of investment securities available for sale ( 6,992 ) ( 139,657 ) Proceeds from sales, calls and maturities of investment securities available for sale 52,023 7,870 Proceeds from paydowns of investment securities available for sale 13,898 31,186 Proceeds from paydowns on other investments 112 1,011 Purchases of FHLB stock ( 323 ) ( 105 ) Net change in loans ( 45,862 ) ( 120,252 ) Purchases of premises and equipment ( 1,522 ) ( 4,196 ) Proceeds from sale of premises and equipment 1,460 - Proceeds from bank owned life insurance - 65 Net cash provided (used) by investing activities 12,793 ( 224,078 ) Cash flows from financing activities: Net change in deposits ( 54,447 ) 88,343 Net change in securities sold under agreement to repurchase 35,336 892 Common stock repurchased ( 1,673 ) ( 594 ) Cash dividends paid on common stock ( 4,052 ) ( 3,915 ) Net cash provided (used) by financing activities ( 24,836 ) 84,726 Net change in cash and cash equivalents 5,023 ( 122,038 ) Cash and cash equivalents at beginning of period 71,596 277,499 Cash and cash equivalents at end of period $ 76,619 155,461 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Nine Months Ended September 30, 2023 and 2022 (Dollars in thousands) 2023 2022 (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 10,766 2,112 Income taxes $ 3,462 3,069 Noncash investing and financing activities: Change in unrealized loss on investment securities available for sale, net $ ( 3,392 ) ( 45,953 ) Issuance of accrued restricted stock units $ 6 41 Initial recognition of lease right-of-use asset and lease liability $ 370 1,726 Allowance for credit losses record upon adoption of ASU 326, net of tax $ ( 838 ) - See accompanying Notes to Consolidated Financial Statements. 9 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Notes to Consolidated Financial Statements ( Unaudited ) (1) Summary of Significant Accounting Policies The Consolidated Financial Statements include the financial statements of Peoples Bancorp of North Carolina, Inc. (the “Company”) and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. All significant intercompany balances and transactions have been eliminated in consolidation. In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), to facilitate the issuance of $ 20.6 million of trust preferred securities. PEBK Trust II is not included in the Consolidated Financial Statements. The Bank operates three banking offices focused on the Latino population that were formerly operated as a separate division of the Bank under the name Banco de la Gente (“Banco”). These offices, which offer the same banking services as our other branches offer, now operate under the same name as our other offices; however, we continue to separately categorize mortgage loans originated from these offices. The Consolidated Financial Statements in this report (other than the Consolidated Balance Sheet at December 31, 2022) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segment: Banking Operations and CBRES, as discussed more fully in Note 7. In determining the appropriateness of segment definition, the Company considers the criteria of Accounting Standards Codification (“ASC”) 280, Segment Reporting. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the adoption of ASC 326 noted below. 10 Table of Contents Recent Accounting Pronouncements The following table provides a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted. ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging. January 1, 2023 The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements. ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC. January 1, 2023 The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements. ASU 2020-03: Codification Improvements to Financial Instruments Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326. January 1, 2023 The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. January 1, 2023 The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements. Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of operations, financial position or disclosures. On January 1, 2023, the Company adopted ASC 326, which replaced the incurred loss impairment framework in prior GAAP with a current expected credit loss (“CECL”) framework, which requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses (“ACL”). In addition, the adoption of CECL resulted in changes to the Company’s accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Adoption of ASC 326 resulted in an initial reduction to retained earnings of $ 838,000 , net of tax, due to a $ 1.1 million increase in the allowance for credit losses, comprised of a $2.3 million increase in the allowance for credit losses on unfunded commitments and a $ 1.2 million decrease in the allowance for credit losses on loans. There was no impact to the available-for-sale securities portfolio or other financial instruments. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP (referred to as the “Incurred Loss” methodology). The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material. The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. 11 Table of Contents The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of September 30, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. No loans were individually evaluated as of September 30, 2023. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a Weighted Average Remaining Maturity (“WARM”) methodology: - 1-4 family residential construction loans - Other construction loans and all land development and other land loans - Secured by farmland (including farm residential and other improvements) - Home equity loans - 1-4 family residential loans secured by first liens - 1-4 family residential loans secured by junior liens - Secured by multifamily residential properties - Loans secured by owner-occupied, nonfarm nonresidential properties - Loans secured by other nonfarm nonresidential properties - Loans to finance agricultural production and other loans to farmers - Commercial and industrial loans - Other revolving credit plans - Other consumer loans - Obligations (other than securities and leases) of states and political subdivisions in the US - Other loans Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life of the loan pool. The methodology considers historical loss experience and a loss forecast expectation to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses. The Company’s forecast component projects the next four quarters to have similar loss rates to the period between November 1, 2015 and September 30, 2019, and then with a reversion back to the long-term average over four quarters. This period is intended to reflect the environment that began when the Federal Reserve started its last series of rate hikes beginning in November of 2015, and reflects the overall loan loss rates of the Company during this time of no higher than 0.4%. This period has been extended from the prior quarter by three months, and had minor impacts on the loss rates. The Company expects to adjust these time frames for affecting the forecast periods as the rate environment changes to reflect either increasing or decreasing loan loss rates that will adjust the historical loss rates. Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk. Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate. The Company did not have any loans evaluated on an individual basis at September 30, 2023. Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets. Reclassification Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the 2023 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings. 12 Table of Contents (2) Investment Securities Investment securities available for sale at September 30, 2023 and December 31, 2022 are as follows: (Dollars in thousands) September 30, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S Treasuries $ 10,968 - 1,130 9,838 U.S. Government sponsored enterprises 11,510 - 765 10,745 Mortgage-backed securities 292,512 70 32,715 259,867 State and political subdivisions 130,000 - 31,656 98,344 Total $ 444,990 70 66,266 378,794 (Dollars in thousands) December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S Treasuries $ 10,951 - 1,137 9,814 U.S. Government sponsored enterprises 12,245 - 706 11,539 Mortgage-backed securities 299,222 445 25,829 273,838 State and political subdivisions 184,768 91 34,656 150,203 Total $ 507,186 536 62,328 445,394 The current fair value and associated unrealized losses on investments in securities with unrealized losses at September 30, 2023 and December 31, 2022 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. (Dollars in thousands) September 30, 2023 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ - - 9,838 1,130 9,838 1,130 U.S. Government sponsored enterprises - - 10,745 765 10,745 765 Mortgage-backed securities 33,158 1,336 221,918 31,379 255,076 32,715 State and political subdivisions - - 98,344 31,656 98,344 31,656 Total $ 33,158 1,336 340,845 64,930 374,003 66,266 (Dollars in thousands) December 31, 2022 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ 2,878 104 6,936 1,033 9,814 1,137 U.S. Government sponsored enterprises 2,904 87 8,635 619 11,539 706 Mortgage-backed securities 128,241 8,740 120,464 17,089 248,705 25,829 State and political subdivisions 65,880 7,766 76,291 26,890 142,171 34,656 Total $ 199,903 16,697 212,326 45,631 412,229 62,328 13 Table of Contents At September 30, 2023, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 66.3 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2023 tables above, all three of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions, all seven of the securities issued by U.S. Government sponsored enterprises and 129 of the 134 mortgage-backed securities contained unrealized losses. These unrealized losses are not related to credit impairment because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities. The Company does not have an allowance for credit losses on available for sale securities at September 30, 2023. At December 31, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 62.3 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2022 tables above, all three of the U.S. Treasury securities, 149 of the 158 securities issued by state and political subdivisions, all seven of the securities issued by U.S. Government sponsored enterprises and 123 of the 133 mortgage-backed securities contained unrealized losses. These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities. The amortized cost and estimated fair value of investment securities available for sale at September 30, 2023, presented by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. September 30, 2023 (Dollars in thousands) Amortized Cost Fair Value Due within one year $ 2,994 2,956 Due from one to five years 16,454 14,707 Due from five to ten years 53,180 43,382 Due after ten years 79,850 57,882 Mortgage-backed securities 292,512 259,867 Total $ 444,990 378,794 No securities available for sale were sold during the three months ended September 30, 2023. During the nine months ended September 30, 2023, proceeds from sales of securities available for sale were $ 51.0 million and resulted in gross losses of $ 2.7 million and gross gains of $ 177,000 . No securities available for sale were sold during the nine months ended September 30, 2022. Securities with a fair value of approximately $ 129.8 million and $ 96.0 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes as required by law. 14 Table of Contents (3) Loans Major classifications of loans at September 30, 2023 and December 31, 2022 are summarized as follows: (Dollars in thousands) September 30, 2023 December 31, 2022 Real estate loans: Construction and land development $ 127,706 114,446 Single-family residential 344,415 322,262 Single-family residential - Banco de la Gente non-traditional 18,388 20,019 Commercial 430,270 406,750 Multifamily and farmland 64,313 65,562 Total real estate loans 985,092 929,039 Loans not secured by real estate: Commercial loans 68,738 81,307 Farm loans 574 938 Consumer loans 7,680 6,834 All other loans 16,089 14,490 Total loans 1,078,173 1,032,608 Less allowance for credit losses ( 10,285 ) ( 10,494 ) Total net loans $ 1,067,888 1,022,114 The Bank makes loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Wake, Rowan and Forsyth counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below: · Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. · Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. · Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over the loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. · Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. · Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. Loans are considered past due if the required principal and interest payments have not been received within 30 days of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 15 Table of Contents The following tables present an age analysis of past due loans, by loan type, as of September 30, 2023 and December 31, 2022: September 30, 2023 (Dollars in thousands) Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ 39 - 39 127,667 127,706 - Single-family residential 938 217 1,155 343,260 344,415 - Single-family residential - Banco de la Gente non-traditional 840 89 929 17,459 18,388 - Commercial 481 - 481 429,789 430,270 - Multifamily and farmland - - - 64,313 64,313 - Total real estate loans 2,298 306 2,604 982,488 985,092 - Loans not secured by real estate: Commercial loans 375 99 474 68,264 68,738 99 Farm loans - - - 574 574 - Consumer loans 37 - 37 7,643 7,680 - All other loans - - - 16,089 16,089 - Total loans $ 2,710 405 3,115 1,075,058 1,078,173 99 December 31, 2022 (Dollars in thousands) Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ 363 - 363 114,083 114,446 - Single-family residential 4,318 256 4,574 317,688 322,262 - Single-family residential - Banco de la Gente non-traditional 2,977 264 3,241 16,778 20,019 - Commercial 306 - 306 406,444 406,750 - Multifamily and farmland - - - 65,562 65,562 - Total real estate loans 7,964 520 8,484 920,555 929,039 - Loans not secured by real estate: Commercial loans 3 - 3 81,304 81,307 - Farm loans - - - 938 938 - Consumer loans 71 - 71 6,763 6,834 - All other loans - - - 14,490 14,490 - Total loans $ 8,038 520 8,558 1,024,050 1,032,608 - 16 Table of Contents The following table presents non-accrual loans as of September 30, 2023 and December 31, 2022: CECL Methodology Incurred Loss Methodology September 30, 2023 December 31, 2022 Nonaccrual Loans Nonaccrual Loans Total Total With No With Nonaccrual Nonaccrual (Dollars in thousands) Allowance Allowance Loans Loans Real estate loans: Construction and land development $ 46 - 46 53 Single-family residential 1,878 - 1,878 1,914 Single-family residential - Banco de la Gente non-traditional 1,575 - 1,575 1,532 Commercial - - - 129 Multifamily and farmland 80 - 80 91 Total real estate loans 3,579 - 3,579 3,719 Loans not secured by real estate: Commercial loans 33 - 33 - Consumer loans 2 - 2 9 Total $ 3,614 - 3,614 3,728 Interest income is not recognized on non-accrual loans. The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Bank modifies loans by providing principal forgiveness on certain loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Bank may modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. The following table shows the amortized cost basis at September 30, 2023 of the loans to borrowers experiencing financial difficulty that were modified during the nine months ended September 30, 2023, disaggregated by loan class and type of concession granted. There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended September 30, 2023. (Dollars in thousands) Term Extension Amortized Cost Basis at September 30, 2023 % of Loan Class Loan class: Single-family residential 154 0.04 % Commercial real estate 673 0.16 % Total $ 827 17 Table of Contents The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty. Term Extension Loan Class Financial Effect Single-family residential Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term. Commercial real estate Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate. Upon the Bank’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount. No loans modified in the nine months ended September 30, 2023 that were made to borrowers experiencing financial difficulty had been written off at September 30, 2023. The Bank closely monitors the performance of those loans that are modified because borrowers are experiencing financial difficulty so as to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the nine months ended September 30, 2023. (Dollars in thousands) Payment Status (Amortized Cost Basis) Current 30 - 89 Days Past Due 90 + Days Past Due Loan type: Single-family residential 154 - - Commercial real estate 673 - - Total $ 827 - - The following table presents impaired loans as of and for the year ended December 31, 2022: December 31, 2022 (Dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Recorded Investment in Impaired Loans Related Allowance Real estate loans: Construction and land development $ 110 - 110 110 2 Single-family residential 3,912 236 3,300 3,536 60 Single-family residential - Banco de la Gente non-traditional 10,441 - 9,748 9,748 611 Commercial 1,785 421 1,346 1,767 9 Multifamily and farmland 104 - 91 91 - Total impaired real estate loans 16,352 657 14,595 15,252 682 Loans not secured by real estate: Commercial loans 116 - 116 116 1 Consumer loans 11 - 9 9 - Total impaired loans $ 16,479 657 14,720 15,377 683 18 Table of Contents The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2022. (Dollars in thousands) Three months ended Nine months ended Twelve months ended September 30, 2022 September 30, 2022 December 31, 2022 Average Balance Interest Income Recognized Average Balance Interest Income Recognized Average Balance Interest Income Recognized Real estate loans: Construction and land development $ 60 1 65 4 75 8 Single-family residential 1,393 51 1,131 150 5,194 194 Single-family residential - Banco de la Gente stated income 12,487 134 13,454 407 8,757 552 Commercial 1,939 25 1,985 75 1,916 93 Multifamily and farmland 97 1 100 4 96 5 Total impaired real estate loans 15,976 212 16,735 640 16,038 852 Loans not secured by real estate: Commercial loans 138 3 163 7 137 8 Consumer loans 21 1 14 2 15 2 Total impaired loans $ 16,135 216 16,912 649 16,190 862 Impaired loans collectively evaluated for impairment totaled $ 5.1 million $ 4.9 million at September 30, 2022 and December 31, 2022, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $ 44,000 and $ 44,000 at September 30, 2022 and December 31, 2022, respectively. The following tables present changes in the allowance for credit losses for the three and nine months ended September 30, 2023 and 2022. The September 30, 2023 table reflects the CECL methodology and the September 30, 2022 table reflects the Incurred Loss methodology. Paycheck Protection Program (“PPP”) loans are excluded from the allowance for credit losses because PPP loans are guaranteed by the Small Business Administration (“SBA”). No loans were individually evaluated as of September 30, 2023. (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer and All Other Unallocated Total Three months ended September 30, 2023 Allowance for credit losses: Beginning balance $ 5,394 3,207 183 2,365 288 367 2 242 - 12,048 Charge-offs - - - - - ( 94 ) - ( 141 ) - ( 235 ) Recoveries - 8 - 1 - 8 - 24 - 41 Provision (recovery) for unfunded commitments ( 95 ) ( 31 ) - - - 3 - ( 4 ) - ( 127 ) Provision (recovery) for loan losses 390 111 ( 5 ) ( 12 ) ( 15 ) 87 - 133 - 689 Ending balance $ 5,689 3,295 178 2,354 273 371 2 254 - 12,416 Nine months ended September 30, 2023 Allowance for credit losses: Beginning balance $ 1,415 2,322 763 3,207 164 657 - 214 1,752 10,494 Adjustment for CECL implementation 3,781 715 ( 576 ) ( 986 ) 115 ( 295 ) 2 54 ( 1,752 ) 1,058 Charge-offs - - - - - ( 129 ) - ( 450 ) - ( 579 ) Recoveries - 131 - 5 - 40 - 106 - 282 Provision (recovery) for unfunded commitments ( 125 ) ( 18 ) - - - 3 - ( 6 ) - ( 146 ) Provision (recovery) for loan losses 618 145 ( 9 ) 128 ( 6 ) 95 - 336 - 1,307 Ending balance $ 5,689 3,295 178 2,354 273 371 2 254 - 12,416 Allowance for credit loss-loans $ 3,618 3,237 178 2,354 273 371 2 252 - 10,285 Allowance for credit losses unfunded loan commitments 2,071 58 - - - - - 2 - 2,131 Total allowance for credit losses $ 5,689 3,295 178 2,354 273 371 2 254 - 12,416 19 Table of Contents (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente Non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer and All Other Unallocated Total Nine months ended September 30, 2022: Allowance for loan losses: Beginning balance $ 1,193 2,013 864 2,234 150 711 - 110 2,080 9,355 Charge-offs - ( 120 ) - - - ( 20 ) - ( 450 ) - ( 590 ) Recoveries - 219 - 6 - 64 - 87 - 376 Provision 180 78 ( 101 ) 885 5 ( 14 ) - 467 ( 611 ) 889 Ending balance $ 1,373 2,190 763 3,125 155 741 - 214 1,469 10,030 Three months ended September 30, 2022: Allowance for loan losses: Beginning balance $ 1,272 2,171 813 3,156 157 633 - 216 1,371 9,789 Charge-offs - ( 89 ) - - - ( 13 ) - ( 204 ) - ( 306 ) Recoveries - 92 - 2 - 8 - 37 - 139 Provision 101 16 ( 50 ) ( 33 ) ( 2 ) 113 - 165 98 408 Ending balance $ 1,373 2,190 763 3,125 155 741 - 214 1,469 10,030 Allowance for loan losses at September 30, 2022: Ending balance: individually evaluated for impairment $ - 37 605 6 - - - - - 648 Ending balance: collectively evaluated for impairment 1,373 2,153 158 3,119 155 741 - 214 1,469 9,382 Ending balance $ 1,373 2,190 763 3,125 155 741 - 214 1,469 10,030 Loans at September 30, 2022: Ending balance $ 112,854 312,208 20,469 399,015 62,040 76,434 961 20,926 - 1,004,907 Ending balance: individually evaluated for impairment $ - 547 8,703 1,401 - - - - - 10,651 Ending balance: collectively evaluated for impairment $ 112,854 311,661 11,766 397,614 62,040 76,434 961 20,926 - 994,256 The Bank utilizes several credit quality indicators to manage credit risk in an ongoing manner. The Bank uses an internal risk grade system that categorizes loans into pass, watch or substandard categories. The Bank uses the following credit quality indicators: · Pass – Includes loans ranging from excellent quality with a minimal amount of credit risk to loans with higher risk and servicing needs but still are considered to be acceptable. The higher risk loans in this category are not problem credits presently, but may be in the future if the borrower is unable to change its present course. · Watch – These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. · Substandard – A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. 20 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of September 30, 2023. Term Loans by Origination Year Revolving Loans (dollars in thousands) Revolving Converted to Total 2023 2022 2021 2020 2019 Prior Loans Term Loans Loans September 30, 2023 Real Estate Loans Construction and land development Pass $ 28,242 72,097 12,409 6,798 2,019 4,409 1,638 - 127,612 Watch - - - - - - - - - Substandard - - - - - 94 - - 94 Total Construction and land development $ 28,242 72,097 12,409 6,798 2,019 4,503 1,638 - 127,706 Single family Pass $ 27,917 71,607 47,350 25,406 13,323 52,180 102,493 - 340,276 Watch - - - - 90 372 630 - 1,092 Substandard - - - - - 2,664 383 - 3,047 Total single family $ 27,917 71,607 47,350 25,406 13,413 55,216 103,506 - 344,415 Single family-Banco de la Gente non-traditional Pass $ - - - - - 15,894 - - 15,894 Watch - - - - - 381 - - 381 Substandard - - - - - 2,113 - - 2,113 Total Banco de la Gente non-traditional $ - - - - - 18,388 - - 18,388 Commercial Pass $ 34,136 110,380 81,144 69,611 30,713 96,897 1,610 - 424,491 Watch 235 - - 117 - 5,015 - - 5,367 Substandard - - - 412 - - - - 412 Total commercial $ 34,371 110,380 81,144 70,140 30,713 101,912 1,610 - 430,270 Multifamily and farmland Pass $ 7,921 13,464 22,026 6,789 3,245 10,056 620 - 64,121 Watch - - - - - 112 - - 112 Substandard - - - - - 80 - - 80 Total multifamily and farmland $ 7,921 13,464 22,026 6,789 3,245 10,248 620 - 64,313 Total real estate loans $ 98,451 267,548 162,929 109,133 49,390 190,267 107,374 - 985,092 Loans not secured by real estate Commercial Pass $ 7,370 15,184 4,335 3,193 2,630 12,973 21,663 - 67,348 Watch - 85 - - 81 110 1,081 - 1,357 Substandard 33 - - - - - - - 33 Total Commercial $ 7,403 15,269 4,335 3,193 2,711 13,083 22,744 - 68,738 Farm Pass $ 202 46 91 - 11 53 171 - 574 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 202 46 91 - 11 53 171 - 574 Consumer Pass $ 2,603 1,558 484 253 84 67 2,624 - 7,673 Watch - - - - - - - - - Substandard - - 3 - - - 4 - 7 Total consumer $ 2,603 1,558 487 253 84 67 2,628 - 7,680 All other Pass $ 1,074 6,455 498 433 648 4,030 2,812 - 15,950 Watch - - - - - 75 64 - 139 Substandard - - - - - - - - - Total all other $ 1,074 6,455 498 433 648 4,105 2,876 - 16,089 Total loans not secured by real estate $ 11,282 23,328 5,411 3,879 3,454 17,308 28,419 - 93,081 Total loans $ 109,733 290,876 168,340 113,012 52,844 207,575 135,793 - 1,078,173 Current period gross charge-offs $ - 87 104 21 1 366 - - 579 21 Table of Contents The following table presents the credit risk profile of each loan type based on credit quality indicators as of December 31, 2022: December 31, 2022 (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer All Other Total Pass $ 114,282 317,850 16,410 402,236 65,348 80,596 938 6,818 14,345 1,018,823 Watch 54 922 1,136 3,963 123 711 - 1 145 7,055 Substandard 110 3,490 2,473 551 91 - - 15 - 6,730 Total $ 114,446 322,262 20,019 406,750 65,562 81,307 938 6,834 14,490 1,032,608 (4) Net Earnings Per Share Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares. The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and nine months ended September 30, 2023 and 2022 is as follows: For the three months ended September 30, 2023 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,127 5,402,048 $ 0.76 Effect of dilutive securities: Restricted stock units - unvested 19,070 Shares held in deferred comp plan by deferred compensation trust 166,168 Diluted earnings per share $ 4,127 5,587,286 $ 0.74 For the nine months ended September 30, 2023 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 12,106 5,442,788 $ 2.22 Effect of dilutive securities: Restricted stock units - unvested 18,899 Shares held in deferred comp plan by deferred compensation trust 168,099 Diluted earnings per share $ 12,106 5,629,786 $ 2.15 For the three months ended September 30, 2022 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 5,307 5,473,443 $ 0.96 Effect of dilutive securities: Restricted stock units - unvested 17,188 Shares held in deferred comp plan by deferred compensation trust 166,937 Diluted earnings per share $ 5,307 5,657,568 $ 0.93 22 Table of Contents For the nine months ended September 30, 2022 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 11,976 5,484,063 $ 2.18 Effect of dilutive securities: Restricted stock units - unvested 15,090 Shares held in deferred comp plan by deferred compensation trust 165,041 Diluted earnings per share $ 11,976 5,664,194 $ 2.11 (5) Fair Value The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance. 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 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 use of option pricing models, discounted cash flow models and similar techniques. Cash and Cash Equivalents For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category. Investment Securities Available for Sale Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category. Other Investments For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category. 23 Table of Contents Loans The fair value of loans, excluding previously presented individually evaluated loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments. Mutual Funds For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on the balance sheet and reported in the Level 2 fair value category. Deposits The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category. Securities Sold Under Agreements to Repurchase For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category. FHLB Borrowings The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category. Junior Subordinated Debentures Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category. Commitments to Extend Credit and Standby Letters of Credit Commitments to extend credit and standby letters of credit are generally short-term in duration and made at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 24 Table of Contents The tables below present all financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2023 and December 31, 2022. (Dollars in thousands) September 30, 2023 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 9,838 - 9,838 - U.S. Government sponsored enterprises 10,745 - 10,745 - Mortgage-backed securities 259,867 - 259,867 - State and political subdivisions 98,344 - 98,344 - Mutual funds held in deferred compensation trust 1,850 - 1,850 (Dollars in thousands) December 31, 2022 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 9,814 - 9,814 - U.S. Government sponsored enterprises 11,539 - 11,539 - Mortgage-backed securities 273,838 - 273,838 - State and political subdivisions 150,203 - 150,203 - Mutual funds held in deferred compensation trust 1,327 - 1,327 The fair value measurements for mortgage loans held for sale and individually evaluated loans on a non-recurring basis at September 30, 2023 and December 31, 2022 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3. (Dollars in thousands) Fair Value Measurements September 30, 2023 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 1,848 - - 1,848 Individually evaluated loans - - - - (Dollars in thousands) Fair Value Measurements December 31, 2022 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 211 - - 211 Impaired loans 14,694 - - 14,694 (Dollars in thousands) Fair Value September 30, 2023 Fair Value December 31, 2022 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Mortgage loans held for sale $ 1,848 211 Rate lock commitment N/A N/A Individually evaluated loans - 14,694 Appraised value and discounted cash flows Discounts to reflect current market conditions and ultimate collectability 0 - 25 % 25 Table of Contents The carrying amount and estimated fair value of financial instruments at September 30, 2023 and December 31, 2022 are as follows: (Dollars in thousands) Fair Value Measurements at September 30, 2023 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 76,619 76,619 - - 76,619 Investment securities available for sale 378,794 - 378,794 - 378,794 Other investments 2,900 - - 2,900 2,900 Mortgage loans held for sale 1,848 - - 1,848 1,848 Loans, net 1,067,888 - - 1,053,008 1,053,008 Mutual funds held in deferred compensation trust 1,850 - 1,850 - 1,850 Liabilities: Deposits $ 1,380,768 - - 1,384,977 1,384,977 Securities sold under agreements to repurchase 83,024 - 83,024 - 83,024 Junior subordinated debentures 15,464 - 15,464 - 15,464 (Dollars in thousands) Fair Value Measurements at December 31, 2022 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 71,596 71,596 - - 71,596 Investment securities available for sale 445,394 - 445,394 - 445,394 Other investments 2,656 - - 2,656 2,656 Mortgage loans held for sale 211 - - 211 211 Loans, net 1,022,114 - - 998,587 998,587 Mutual funds held in deferred compensation trust 1,327 - 1,327 - 1,327 Liabilities: Deposits $ 1,435,215 - - 1,434,871 1,434,871 Securities sold under agreements to repurchase 47,688 - 47,688 - 47,688 Junior subordinated debentures 15,464 - 15,464 - 15,464 (6) Leases As of September 30, 2023, the Bank had operating right of use assets of $ 4.9 million and operating lease liabilities of $ 5 .0 million. The Bank maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Bank if the option is not exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term. 26 Table of Contents The following table presents lease cost and other lease information as of September 30, 2023 and 2022. (Dollars in thousands) September 30, 2023 September 30, 2022 Operating lease cost $ 605 $ 617 Other information: Cash paid for amounts included in the measurement of lease liabilities 583 605 Operating cash flows from operating leases - - Right-of-use assets obtained in exchange for new lease liabilities - operating leases 370 1,726 Weighted-average remaining lease term - operating leases 8.61 9.01 Weighted-average discount rate - operating leases 2.71 % 2.30 % The following table presents lease maturities as of September 30, 2023. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: September 30, 2023 2023 $ 203 2024 819 2025 773 2026 650 2027 612 Thereafter 2,625 Total 5,682 Less: Imputed Interest ( 680 ) Operating Lease Liability $ 5,002 (7) Reportable Segments The Company has two reportable segments, as described below. Banking Operations – This segment reflects the consolidated Bank, excluding CBRES. The primary source of revenue for this segment is net interest income. CBRES – A Bank subsidiary that provides appraisal management services to community banks. The primary source of revenue for this segment is appraisal management fee income. 27 Table of Contents The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents financial information for the Company, which is not considered to be a reportable segment, and is included to reconcile the results of the reportable segments to the Consolidated Financial Statements prepared in conformity with GAAP. (Dollars in thousands) Banking Operations CBRES Other Consolidated As of and for the three months ended September 30, 2023 Interest income $ 18,297 $ - $ 9 $ 18,306 Interest expense 4,681 - 285 4,966 Net interest income 13,616 - ( 276 ) 13,340 Provision for credit losses 562 - - 562 Noninterest income 3,989 - - 3,989 Appraisal management fee income - 2,785 - 2,785 Noninterest expense 11,515 401 157 12,073 Appraisal management fee expense - 2,182 - 2,182 Income tax expense (benefit) 1,215 46 ( 91 ) 1,170 Net income (loss) $ 4,313 $ 156 $ ( 342 ) $ 4,127 Total assets $ 1,601,541 $ 3,713 $ 2,010 $ 1,607,264 As of and for the three months ended September 30, 2022 Interest income $ 14,606 $ - $ 5 $ 14,611 Interest expense 671 - 147 818 Net interest income 13,935 - ( 142 ) 13,793 Provision for loan losses 408 - - 408 Noninterest income 4,080 2 - 4,082 Appraisal management fee income - 2,711 - 2,711 Noninterest expense 10,607 538 159 11,304 Appraisal management fee expense - 2,151 - 2,151 Income tax expense (benefit) 1,473 6 ( 63 ) 1,416 Net income (loss) $ 5,527 $ 18 $ ( 238 ) $ 5,307 Total assets $ 1,670,896 $ 3,298 $ 2,096 $ 1,676,290 As of and for the nine months ended September 30, 2023 Interest income $ 52,680 $ - $ 26 $ 52,706 Interest expense 10,466 - 791 11,257 Net interest income 42,214 - ( 765 ) 41,449 Provision for credit losses 1,161 - - 1,161 Noninterest income 9,318 - - 9,318 Appraisal management fee income - 7,469 - 7,469 Noninterest expense 34,118 1,094 483 35,695 Appraisal management fee expense - 5,881 - 5,881 Income tax expense (benefit) 3,541 114 ( 262 ) 3,393 Net income (loss) $ 12,712 $ 380 $ ( 986 ) $ 12,106 Total assets $ 1,601,541 $ 3,713 $ 2,010 $ 1,607,264 As of and for the nine months ended September 30, 2022 Interest income $ 37,921 $ - $ 11 $ 37,932 Interest expense 1,801 - 324 2,125 Net interest income 36,120 - ( 313 ) 35,807 Provision for loan losses 889 - - 889 Noninterest income 11,497 14 - 11,511 Appraisal management fee income - 9,656 - 9,656 Noninterest expense 31,518 1,360 481 33,359 Appraisal management fee expense - 7,680 - 7,680 Income tax expense (benefit) 3,091 146 ( 167 ) 3,070 Net income (loss) $ 12,119 $ 484 $ ( 627 ) $ 11,976 Total assets $ 1,670,896 $ 3,298 $ 2,096 $ 1,676,290 (8) Subsequent Events The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. Management has concluded that there were no material subsequent events. 28 Table of Contents