PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

pebk_10q.htm UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2024 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ 000-27205 (Commission File No.) PEOPLES BANCORP OF NORTH CAROLINA, INC. (Exact name of registrant as specified in its charter) North Carolina 56-2132396 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 518 West C Street , Newton , North Carolina 28658 (Address of principal executive offices) (Zip Code) ( 828 ) 464-5620 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None 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) ☐ Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 5,457,646 shares of common stock, outstanding at July 31, 2024. INDEX PART I. FINANCIAL INFORMATION PAGE(S) Item 1. Financial Statements Consolidated Balance Sheets at June 30, 2024 (Unaudited) and December 31, 2023 (Audited) 4 Consolidated Statements of Earnings for the three and six months ended June 30, 2024 and 2023 (Unaudited) 5 Consolidated Statements of Comprehensive Income for the three and six and months ended June 30, 2024 and 2023 (Unaudited) 6 Consolidated Statements of Changes in Shareholders’ Equity for the three and six months ended June 30, 2024 and 2023 (Unaudited) 7 Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023 (Unaudited) 8-9 Notes to Consolidated Financial Statements (Unaudited) 10-29 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30-42 Item 3. Quantitative and Qualitative Disclosures About Market Risk 43 Item 4. Controls and Procedures 43 PART II. OTHER INFORMATION Item 1. Legal Proceedings 43 Item 1A. Risk Factors 43 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44 Item 3. Defaults upon Senior Securities 44 Item 5. Other Information 44 Item 6. Exhibits 45 Signatures 46 Certifications 2 Table of Contents FORWARD-LOOKING STATEMENTS Statements made in this Quarterly Report on Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Quarterly Report on Form 10-Q was prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by the registrant and its subsidiaries, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2023. 3 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets June 30, 2024 and December 31, 2023 (Dollars in thousands) June 30 December 31, Assets 2024 2023 (Unaudited) (Audited) Cash and due from banks $ 31,909 32,819 Interest-bearing deposits 50,926 49,556 Cash and cash equivalents 82,835 82,375 Investment securities available for sale 393,260 391,924 Other investments 2,779 2,874 Total securities 396,039 394,798 Mortgage loans held for sale 1,288 686 Loans 1,110,672 1,093,066 Less allowance for credit losses ( 10,016 ) ( 11,041 ) Net loans 1,100,656 1,082,025 Premises and equipment, net 15,888 16,702 Cash surrender value of life insurance 18,365 18,134 Right of use lease asset 4,374 4,731 Accrued interest receivable and other assets 35,953 36,459 Total assets $ 1,655,398 1,635,910 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 415,977 432,687 Interest-bearing demand, MMDA & savings 710,446 620,244 Time, over $250,000 147,333 148,904 Other time 202,200 190,210 Total deposits 1,475,956 1,392,045 Securities sold under agreements to repurchase 18,824 86,715 Junior subordinated debentures 15,464 15,464 Lease liability 4,487 4,832 Accrued interest payable and other liabilities 16,355 15,838 Total liabilities 1,531,086 1,514,894 Commitments and contingencies 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 5,457,646 shares at June 30, 2024 and 5,534,499 shares at December 31, 2023 48,678 50,625 Common stock held by deferred compensation trust, at cost: 166,247 shares at June 30, 2024 and 163,702 shares at December 31, 2023 ( 1,980 ) ( 1,910 ) Deferred compensation 1,980 1,910 Retained earnings 115,623 109,756 Accumulated other comprehensive loss ( 39,989 ) ( 39,365 ) Total shareholders' equity 124,312 121,016 Total liabilities and shareholders' equity $ 1,655,398 1,635,910 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings Three and Six Months Ended June 30, 2024 and 2023 (Dollars in thousands, except per share amounts) Three months ended Six months ended June 30, June 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 15,571 13,667 30,709 26,550 Interest on due from banks 725 517 1,632 900 Interest on investment securities: U.S. Government sponsored enterprises 2,551 2,280 5,142 4,510 State and political subdivisions 695 696 1,390 1,558 Other 528 439 1,007 882 Total interest income 20,070 17,599 39,880 34,400 Interest expense: NOW, MMDA & savings deposits 2,438 1,648 4,498 3,136 Time deposits 3,628 1,638 7,309 2,154 Junior subordinated debentures 283 259 567 507 Other 305 283 786 494 Total interest expense 6,654 3,828 13,160 6,291 Net interest income 13,416 13,771 26,720 28,109 Provision for (recovery of) credit losses ( 468 ) 375 ( 377 ) 599 Net interest income after provision for loan losses 13,884 13,396 27,097 27,510 Non-interest income: Service charges 1,346 1,328 2,686 2,669 Other service charges and fees 180 163 364 345 Loss on sale of securities, net - - - ( 2,488 ) Mortgage banking income 74 39 125 132 Insurance and brokerage commissions 219 206 465 434 Appraisal management fee income 3,181 2,590 5,595 4,684 Miscellaneous 2,521 2,077 4,324 4,238 Total non-interest income 7,521 6,403 13,559 10,014 Non-interest expense: Salaries and employee benefits 6,827 6,286 13,807 12,786 Occupancy 2,105 1,981 4,216 3,995 Professional fees 635 450 1,027 849 Advertising 95 156 377 345 Debit card expense 425 282 737 555 FDIC Insurance 192 260 383 370 Appraisal management fee expense 2,523 2,049 4,427 3,699 Miscellaneous 2,329 2,155 4,673 4,722 Total non-interest expense 15,131 13,619 29,647 27,321 Earnings before income taxes 6,274 6,180 11,009 10,203 Income tax expense 1,386 1,372 2,173 2,223 Net earnings $ 4,888 4,808 8,836 7,980 Basic net earnings per share $ 0.93 0.88 1.67 1.46 Diluted net earnings per share $ 0.89 0.85 1.61 1.41 Cash dividends declared per share $ 0.19 0.19 0.54 0.53 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 Six Months Ended June 30, 2024 and 2023 (Dollars in thousands) Three months ended Six months ended June 30, June 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net earnings $ 4,888 4,808 8,836 7,980 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale ( 882 ) ( 6,905 ) ( 811 ) 2,515 Reclassification adjustment for losses on securities available for sale included in net earnings - - - 2,488 Total other comprehensive income (loss), before income taxes ( 882 ) ( 6,905 ) ( 811 ) 5,003 Income tax expense (benefit) related to other comprehensive income: Unrealized holding gains (losses) on securities available for sale ( 203 ) ( 1,586 ) ( 187 ) 577 Reclassification adjustment for losses on on securities available for sale included in net earnings - - - 572 Total income tax expense (benefit) related to other comprehensive income ( 203 ) ( 1,586 ) ( 187 ) 1,149 Total other comprehensive income (loss), net of tax ( 679 ) ( 5,319 ) ( 624 ) 3,854 Total comprehensive income (loss) $ 4,209 ( 511 ) 8,212 11,834 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 Six Months Ended June 30, 2024 and 2023 (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, 2023 5,534,499 $ 50,625 109,756 1,910 ( 1,910 ) ( 39,365 ) 121,016 Common stock repurchase ( 78,500 ) ( 1,998 ) - - - - ( 1,998 ) Cash dividends declared on common stock - - ( 1,929 ) - - - ( 1,929 ) Equity incentive plan, net - - - 33 ( 33 ) - - Net earnings - - 3,948 - - - 3,948 Change in accumulated other comprehensive income, net of tax - - - - - 55 55 Balance, March 31, 2024 5,455,999 $ 48,627 111,775 1,943 ( 1,943 ) ( 39,310 ) 121,092 Cash dividends declared on common stock - - ( 1,040 ) - - - ( 1,040 ) Restricted stock units issued 1,647 51 - - - - 51 Equity incentive plan, net - - - 37 ( 37 ) - - Net earnings - - 4,888 - - - 4,888 Change in accumulated other comprehensive loss, net of tax - - - - - ( 679 ) ( 679 ) Balance, June 30, 2024 5,457,646 $ 48,678 115,623 1,980 ( 1,980 ) ( 39,989 ) 124,312 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 - - ( 1,925 ) - - - ( 1,925 ) Restricted stock units issued 191 6 - - - - 6 Equity incentive plan, net - - - ( 344 ) 344 - - Net earnings - - 3,172 - - - 3,172 Change in accumulated other comprehensive income, net of tax - - - - - 9,173 9,173 Balance, March 31, 2023 5,637,021 $ 52,642 100,565 1,837 ( 1,837 ) ( 38,424 ) 114,783 Common stock repurchase ( 46,222 ) ( 833 ) - - - - ( 833 ) Cash dividends declared on common stock - - ( 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 $ 51,809 104,304 1,967 ( 1,967 ) ( 43,743 ) 112,370 See accompanying Notes to Consolidated Financial Statements. 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Six Months Ended June 30, 2024 and 2023 (Dollars in thousands) 2024 2023 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 8,836 7,980 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 1,429 1,720 Provision for (recovery of) credit losses ( 377 ) 599 Deferred income taxes ( 218 ) ( 238 ) Loss on sale of investment securities net - 2,488 Gain on sale of premises and equipment - ( 191 ) Restricted stock expense 92 78 Proceeds from sales of mortgage loans held for sale 6,973 6,754 Origination of mortgage loans held for sale ( 7,575 ) ( 8,103 ) Cash surrender value of life insurance ( 231 ) ( 209 ) Change in: Right of use lease asset 357 403 Other assets 961 595 Lease liability ( 345 ) ( 385 ) Other liabilities 425 1,386 Net cash provided by operating activities 10,327 12,877 Cash flows from investing activities: Purchases of investment securities available for sale ( 13,729 ) ( 6,992 ) Proceeds from sales, calls and maturities of investment securities available for sale 3,000 52,023 Proceeds from paydowns of investment securities available for sale 8,160 8,206 Proceeds from paydowns of other investment securities 128 75 Redemption (purchase) of FHLB stock ( 10 ) 2 Net change in loans ( 18,254 ) ( 25,219 ) Purchases of premises and equipment ( 215 ) ( 953 ) Proceeds from sale of premises and equipment - 1,460 Net cash provided (used) by investing activities ( 20,920 ) 28,602 Cash flows from financing activities: Net change in deposits 83,911 ( 65,691 ) Net change in securities sold under agreement to repurchase ( 67,891 ) 45,484 Proceeds from Fed Funds purchased - 43,275 Repayments of Fed Funds purchased - ( 43,275 ) Common stock repurchased ( 1,998 ) ( 833 ) Cash dividends paid on common stock ( 2,969 ) ( 2,994 ) Net cash provided (used) by financing activities 11,053 ( 24,034 ) Net change in cash and cash equivalents 460 17,445 Cash and cash equivalents at beginning of period 82,375 71,596 Cash and cash equivalents at end of period $ 82,835 89,041 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Six Months Ended June 30, 2024 and 2023 (Dollars in thousands) 2024 2023 (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 14,607 5,948 Income taxes $ 1,837 1,498 Noncash investing and financing activities: Change in unrealized loss on investment securities available for sale, net $ ( 624 ) 3,854 Restricted stock units issued $ 51 6 Initial recognition of lease right-of-use asset and lease liability $ - 348 Allowance for credit losses recorded 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 Consolidated Financial Statements in this report (other than the Consolidated Balance Sheet at December 31, 2023) 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 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2024 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2023. Recent Accounting Pronouncements The following table provides a summary of Accounting Standards Updates (“ASU’s”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has not adopted as of June 30, 2024, which may impact the Company’s financial statements. ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2023-07 Segment Reporting (Topic 280) The ASU provides amendments to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses Annual periods after 12/15/23 and interim periods after 12/15/24 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2023-09 Income Taxes (Topic 740) The ASU provides amendments to improve the transparency of income tax disclosures. January 1, 2025 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2024-01 Compensation—Stock Compensation (Topic 718) The ASU adds an illustrative example (with four fact patterns) on how an entity would apply Accounting Standards Codification (ASC) 718 scope guidance. January 1, 2025 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2024-02 Codification Improvements Amendments to Remove References to Concepts Statements The ASU removes references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references are a substitute for actual wording from a Concepts Statement. In most cases, the ASU is not intended to result in significant accounting changes for most entities. January 1, 2025 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. 10 Table of Contents 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. Reclassification Certain amounts in the 2023 consolidated financial statements have been reclassified to conform to the 2024 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings. (2) Comprehensive Income The Company reports as comprehensive income all changes in shareholders’ equity during the year from sources other than shareholders. Other comprehensive income refers to all components (revenues, expenses, gains, and losses) of comprehensive income that are excluded from net income. The Company’s only component of other comprehensive income is unrealized gains and losses, net of income tax, on investment securities available for sale. The following table presents the changes in accumulated other comprehensive loss for the three and six months ended June 30, 2024 and 2023: For the three months ended For the six months ended (dollars in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Beginning balance $ ( 39,310 ) $ ( 38,424 ) $ ( 39,365 ) $ ( 47,597 ) Other comprehensive loss before reclassifications, net ( 679 ) ( 5,319 ) ( 624 ) 1,938 Amounts reclassified from accumulated other comprehensive loss, net - - - 1,916 Net current period other comprehensive loss ( 679 ) ( 5,319 ) ( 624 ) 3,854 Ending balance $ ( 39,989 ) $ ( 43,743 ) $ ( 39,989 ) $ ( 43,743 ) (3) 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 six months ended June 30, 2024 and 2023 is as follows: For the three months ended June 30, 2024 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,888 5,290,856 $ 0.93 Effect of dilutive securities: Restricted stock units - unvested 19,886 Shares held in deferred comp plan by deferred compensation trust 165,608 Diluted earnings per share $ 4,888 5,476,350 $ 0.89 For the six months ended June 30, 2024 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 8,836 5,304,763 $ 1.67 Effect of dilutive securities: Restricted stock units - unvested 19,015 Shares held in deferred comp plan by deferred compensation trust 164,975 Diluted earnings per share $ 8,836 5,488,753 $ 1.61 11 Table of Contents For the three months ended June 30, 2023 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,808 5,451,521 $ 0.88 Effect of dilutive securities: Restricted stock units - unvested 20,636 Shares held in deferred comp plan by deferred compensation trust 161,749 Diluted earnings per share $ 4,808 5,633,906 $ 0.85 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 7,980 5,463,495 $ 1.46 Effect of dilutive securities: Restricted stock units - unvested 18,812 Shares held in deferred comp plan by deferred compensation trust 167,073 Diluted earnings per share $ 7,980 5,649,380 $ 1.41 (4) Investment Securities Investment securities available for sale at June 30, 2024 and December 31, 2023 are as follows: (Dollars in thousands) June 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasuries $ 7,978 - 872 7,106 U.S. Government sponsored enterprises 10,163 - 590 9,573 GSE - Mortgage-backed securities 257,268 176 23,296 234,148 Private label mortgage-backed securities 39,971 11 1,854 38,128 State and political subdivisions 129,796 - 25,491 104,305 Total $ 445,176 187 52,103 393,260 (Dollars in thousands) December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasuries $ 10,974 - 830 10,144 U.S. Government sponsored enterprises 11,111 - 596 10,515 GSE - Mortgage-backed securities 257,705 185 22,988 234,902 Private label mortgage-backed securities 33,317 16 2,063 31,270 State and political subdivisions 129,922 - 24,829 105,093 Total $ 443,029 201 51,306 391,924 12 Table of Contents The current fair value and associated unrealized losses on investments in securities with unrealized losses at June 30, 2024 and December 31, 2023 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. (Dollars in thousands) June 30, 2024 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ - - 7,106 872 7,106 872 U.S. government sponsored enterprises - - 9,573 590 9,573 590 GSE -Mortgage-backed securities 10,239 144 210,829 23,152 221,068 23,296 Private label mortgage-backed securities 6,884 46 25,467 1,808 32,351 1,854 State and political subdivisions - - 104,305 25,491 104,305 25,491 Total $ 17,123 190 357,280 51,913 374,403 52,103 (Dollars in thousands) December 31, 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 $ - - 10,144 830 10,144 830 U.S. government sponsored enterprises - - 10,515 596 10,515 596 GSE -Mortgage-backed securities 24,167 546 203,234 22,442 227,401 22,988 Private label mortgage-backed securities 3,416 43 23,095 2,020 26,511 2,063 State and political subdivisions - - 105,093 24,829 105,093 24,829 Total $ 27,583 589 352,081 50,717 379,664 51,306 At June 30, 2024, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 52.1 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2024 tables above, both of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions contained unrealized losses, all seven of the securities issued by U.S. Government sponsored enterprises (“GSE”), 115 of the 124 GSE mortgage-backed securities, and 13 of the 16 private label mortgage backed securities contained unrealized losses. The Company did not have any reserves on available for sale securities at June 30, 2024, as no credit related losses were identified in the Company’s June 30, 2024 analysis. At December 31, 2023, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 51.3 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2023 tables above, all three of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions contained unrealized losses, all seven of the securities issued by GSE, 114 of the 121 GSE mortgage-backed securities, and 12 of the 14 private label mortgage backed securities contained unrealized losses. The Company did not have an allowance for credit losses on available for sale securities at December 31, 2023, as no credit related losses were identified in the Company’s December 31, 2023 CECL analysis. The amortized cost and estimated fair value of investment securities available for sale at June 30, 2024, 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. June 30, 2024 (Dollars in thousands) Amortized Cost Fair Value Due within one year $ 2,997 2,951 Due from one to five years 17,620 15,955 Due from five to ten years 59,340 49,675 Due after ten years 107,951 90,531 Mortgage-backed securities 257,268 234,148 Total $ 445,176 393,260 No securities available for sale were sold during the six months ended June 30, 2024. No securities available for sale were sold during the three months ended June 30, 2023. During the six months ended June 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 . 13 Table of Contents Securities with a fair value of approximately $ 61.3 million and $ 132.0 million at June 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits and for other purposes as required by law. (5) Loans Major classifications of loans at June 30, 2024 and December 31, 2023 are summarized as follows: (Dollars in thousands) June 30, 2024 December 31, 2023 Real estate loans: Construction and land development $ 119,606 136,401 Single-family residential 376,657 372,825 Commercial 456,088 425,820 Multifamily and farmland 70,701 63,042 Total real estate loans 1,023,052 998,088 Loans not secured by real estate: Commercial 64,464 70,544 Farm 523 550 Consumer 6,483 6,966 All other 16,150 16,918 Total loans 1,110,672 1,093,066 Less allowance for credit losses ( 10,016 ) ( 11,041 ) Total net loans $ 1,100,656 1,082,025 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. 14 Table of Contents 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. The following tables present an age analysis of past due loans, by loan type, as of June 30, 2024 and December 31, 2023: June 30, 2024 (Dollars in thousands) Loans 30-89 Days Past Due Nonaccrual Loans Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ - 41 41 119,565 119,606 - Single-family residential 1,965 3,779 5,744 370,913 376,657 - Commercial 1,025 - 1,025 455,063 456,088 - Multifamily and farmland - 69 69 70,632 70,701 - Total real estate loans 2,990 3,889 6,879 1,016,173 1,023,052 - Loans not secured by real estate: Commercial 83 252 335 64,129 64,464 - Farm - - - 523 523 - Consumer 19 15 34 6,449 6,483 - All other - - - 16,150 16,150 - Total loans $ 3,092 4,156 7,248 1,103,424 1,110,672 - December 31, 2023 (Dollars in thousands) Loans 30-89 Days Past Due Nonaccrual Loans Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ 5 45 50 136,351 136,401 - Single-family residential 3,761 3,302 7,063 365,762 372,825 - Commercial 13 - 13 425,807 425,820 - Multifamily and farmland - 76 76 62,966 63,042 - Total real estate loans 3,779 3,423 7,202 990,886 998,088 - Loans not secured by real estate: Commercial 125 463 588 69,956 70,544 - Farm - 1 1 549 550 - Consumer 63 - 63 6,903 6,966 - All other - - - 16,918 16,918 - Total loans $ 3,967 3,887 7,854 1,085,212 1,093,066 - 15 Table of Contents The following table presents non-accrual loans as of June 30, 2024 and December 31, 2023: June 30, 2024 Nonaccrual Loans Nonaccrual Loans Total With No With Nonaccrual (Dollars in thousands) Allowance Allowance Loans Real estate loans: Construction and land development $ 41 - 41 Single-family residential 3,779 - 3,779 Multifamily and farmland 69 - 69 Total real estate loans 3,889 - 3,889 Loans not secured by real estate: Commercial 252 - 252 Consumer 15 - 15 Total $ 4,156 - 4,156 December 31, 2023 Nonaccrual Loans Nonaccrual Loans Total With No With Nonaccrual (Dollars in thousands) Allowance Allowance Loans Real estate loans: Construction and land development $ 45 - 45 Single-family residential 3,302 - 3,302 Multifamily and farmland 76 - 76 Total real estate loans 3,423 - 3,423 Loans not secured by real estate: Commercial 31 432 463 Consumer 1 - 1 Total $ 3,455 432 3,887 No interest income was recognized on non-accrual loans for the six months ended June 30, 2024 and 2023. 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 tables show the amortized cost basis at June 30, 2024 and 2023 of the loans to borrowers experiencing financial difficulty that were modified during the six months ended June 30, 2024 and 2023, disaggregated by loan class and type of concession granted. (Dollars in thousands) Amortized Cost Basis at June 30, 2024 % of Loan Class Modification Type Financial Effect Loan class: Single-family residential 201 0.05 % Interest rate reduction Adjustable rate loan converted to fixed rate loan Commercial not secured by real estate 73 0.11 % Term extension Line of credit converted to amortizing term loan Total $ 274 16 Table of Contents (Dollars in thousands) Amortized Cost Basis at June 30, 2023 % of Loan Class Modification Type Financial Effect Loan class: Single-family residential 157 0.05 % Term extension Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term. Commercial real estate 680 0.16 % Term extension Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate. Total $ 837 No loans modified in the six months ended June 30, 2024 and 2023 that were made to borrowers experiencing financial difficulty had been written off at June 30, 2024 and 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 tables show the performance of loans that have been modified in the six months ended June 30, 2024 and 2023. June 30, 2024 (Dollars in thousands) Payment Status (Amortized Cost Basis) Current 30 - 89 Days Past Due 90 + Days Past Due Loan type: Single-family residential 201 Commercial not secured by real estate 73 - - Total $ 274 - - June 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 157 - - Commercial real estate 680 - - Total $ 837 - - 17 Table of Contents The following tables present changes in the allowance for credit losses for the three and six months ended June 30, 2024 and 2023. (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Commercial Multifamily and Farmland Commercial Farm Consumer and All Other Total Three months ended June 30, 2024 Allowance for credit losses: Beginning balance $ 3,680 3,597 2,345 313 672 2 238 10,847 Charge-offs - ( 126 ) - - ( 301 ) - ( 145 ) ( 572 ) Recoveries - 15 1 - 34 - 26 76 Provision (recovery) for loan losses (1) ( 362 ) ( 2 ) 28 ( 42 ) ( 37 ) ( 1 ) 81 ( 335 ) Ending balance $ 3,318 3,484 2,374 271 368 1 200 10,016 Allowance for credit loss-loans $ 3,318 3,484 2,374 271 368 1 200 10,016 Allowance for credit losses loan commitments 1,541 1 1 - 19 - 3 1,565 Total allowance for credit losses $ 4,859 3,485 2,375 271 387 1 203 11,581 Six months ended June 30, 2024 Allowance for credit losses: Beginning balance $ 3,913 3,484 2,317 268 812 2 245 11,041 Charge-offs - ( 126 ) - - ( 747 ) - ( 355 ) ( 1,228 ) Recoveries - 71 203 - 39 - 62 375 Provision (recovery) for loan losses (1) ( 595 ) 55 ( 146 ) 3 264 ( 1 ) 248 ( 172 ) Ending balance $ 3,318 3,484 2,374 271 368 1 200 10,016 Allowance for credit loss-loans $ 3,318 3,484 2,374 271 368 1 200 10,016 Allowance for credit losses loan commitments 1,541 1 1 - 19 - 3 1,565 Total allowance for credit losses $ 4,859 3,485 2,375 271 387 1 203 11,581 (1) Excludes provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments. 18 Table of Contents (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Commercial Multifamily and Farmland Commercial Farm Consumer and All Other Unallocated Total Three months ended June 30, 2023 Allowance for credit losses: Beginning balance $ 3,249 3,191 2,244 298 348 1 286 - 9,617 Charge-offs - - - - ( 35 ) - ( 142 ) - ( 177 ) Recoveries - 111 1 - 23 - 23 - 158 Provision (recovery) for loan losses (1) ( 22 ) - 120 ( 10 ) 31 1 71 - 191 Ending balance $ 3,227 3,302 2,365 288 367 2 238 - 9,789 Allowance for credit loss-loans $ 3,227 3,302 2,365 288 367 2 238 - 9,789 Allowance for credit losses loan commitments 2,166 88 - - - 1 4 - 2,259 Total allowance for credit losses $ 5,393 3,390 2,365 288 367 3 242 - 12,048 Six months ended June 30, 2023 Allowance for credit losses: Beginning balance $ 1,415 3,085 3,207 164 657 - 214 1,752 10,494 Adjustment for CECL implementation (1) 1,584 64 ( 986 ) 115 ( 295 ) 2 48 ( 1,752 ) ( 1,220 ) Charge-offs - - - - ( 35 ) - ( 308 ) - ( 343 ) Recoveries - 123 3 - 32 - 82 - 240 Provision (recovery) for loan losses (1) 228 30 141 9 8 - 202 - 618 Ending balance $ 3,227 3,302 2,365 288 367 2 238 - 9,789 Allowance for credit loss-loans $ 3,227 3,302 2,365 288 367 2 238 - 9,789 Allowance for credit losses loan commitments 2,166 88 - - - 1 4 - 2,259 Total allowance for credit losses $ 5,393 3,390 2,365 288 367 3 242 - 12,048 (1) Excludes adjustment for CECL implemenation and provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the condensed consolidated financial statements provides more detail concerning the implementation adjustment and provision for credit losses related to unfunded commitments. The were no collateral dependent loans individually evaluated at June 30, 2024 and December 31, 2023. 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. · Doubtful – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus 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. · Loss – Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. 19 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 June 30, 2024. Term Loans by Origination Year Revolving Loans (dollars in thousands) Revolving Converted to Total 2024 2023 2022 2021 2020 Prior Loans Term Loans Loans June 30, 2024 Real Estate Loans Construction and land development Pass $ 16,265 37,245 46,498 7,690 6,388 4,727 268 - 119,081 Watch - - - 446 - - - - 446 Substandard - - - - - 79 - - 79 Total Construction and land development $ 16,265 37,245 46,498 8,136 6,388 4,806 268 - 119,606 Single family Pass $ 10,133 33,974 76,532 46,097 22,691 71,769 107,734 - 368,930 Watch - - - - - 1,536 993 - 2,529 Substandard - - 661 - - 4,315 222 - 5,198 Total single family $ 10,133 33,974 77,193 46,097 22,691 77,620 108,949 - 376,657 Commercial Pass $ 36,985 45,955 119,567 78,229 60,282 109,391 2,212 - 452,621 Watch - - - - - 3,062 - - 3,062 Substandard - - - - - 405 - - 405 Total commercial $ 36,985 45,955 119,567 78,229 60,282 112,858 2,212 - 456,088 Multifamily and farmland Pass $ 214 8,702 21,287 21,141 6,336 12,473 434 - 70,587 Watch - - - - - 45 - - 45 Substandard - - - - - 69 - - 69 Total multifamily and farmland $ 214 8,702 21,287 21,141 6,336 12,587 434 - 70,701 Total real estate loans $ 63,597 125,876 264,545 153,603 95,697 207,871 111,863 - 1,023,052 Loans not secured by real estate Commercial Pass $ 5,922 10,305 12,915 3,994 2,063 13,848 14,125 - 63,172 Watch - 558 - 73 276 127 6 - 1,040 Substandard - 29 223 - - - - - 252 Total Commercial $ 5,922 10,892 13,138 4,067 2,339 13,975 14,131 - 64,464 Farm Pass $ 59 163 23 61 - 12 205 - 523 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 59 163 23 61 - 12 205 - 523 Consumer Pass $ 953 1,593 1,001 247 148 95 2,406 - 6,443 Watch - - 23 - - - - - 23 Substandard - - - - - 14 3 - 17 Total consumer $ 953 1,593 1,024 247 148 109 2,409 - 6,483 All other Pass $ 616 - 6,318 425 244 3,153 5,261 - 16,017 Watch - - - - - 133 - - 133 Substandard - - - - - - - - - Total all other $ 616 - 6,318 425 244 3,286 5,261 - 16,150 Total loans not secured by real estate $ 7,550 12,648 20,503 4,800 2,731 17,382 22,006 - 87,620 Total loans $ 71,147 138,524 285,048 158,403 98,428 225,253 133,869 - 1,110,672 20 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs as of June 30, 2024. Gross Loan Charge-offs by Origination Year Revolving Loans (dollars in thousands) Revolving Converted to Total 2024 2023 2022 2021 2020 Prior Loans Term Loans Loans Real estate loans: Construction and land development $ - 126 - - - - - - 126 Single-family residential - - - - - - - - - Commercial - - - - - - - - - Multifamily and farmland - - - - - - - - - Total real estate loans - 126 - - - - - - 126 Loans not secured by real estate: Commercial - 347 397 3 - - - - 747 Consumer - 10 4 - - 234 - - 248 All other - - - - - 107 - - 107 Total gross charge-offs $ - 483 401 3 - 341 - - 1,228 21 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 December 31, 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 December 31, 2023 Real Estate Loans Construction and land development Pass $ 40,034 71,429 10,736 6,692 1,721 3,914 1,337 - 135,863 Watch - - 448 - - - - - 448 Substandard - - - - - 90 - - 90 Total Construction and land development $ 40,034 71,429 11,184 6,692 1,721 4,004 1,337 - 136,401 Single family Pass $ 32,333 76,326 47,490 24,813 12,984 64,847 106,962 - 365,755 Watch - - - - 89 1,389 860 - 2,338 Substandard - - - - 11 4,342 379 - 4,732 Total single family $ 32,333 76,326 47,490 24,813 13,084 70,578 108,201 - 372,825 Commercial Pass $ 45,755 109,255 78,645 61,973 29,579 92,753 2,158 - 420,118 Watch 232 - - 116 - 4,943 - - 5,291 Substandard - - - 411 - - - - 411 Total commercial $ 45,987 109,255 78,645 62,500 29,579 97,696 2,158 - 425,820 Multifamily and farmland Pass $ 7,987 13,286 21,512 6,624 3,158 9,851 501 - 62,919 Watch - - - - - 47 - - 47 Substandard - - - - - 76 - - 76 Total multifamily and farmland $ 7,987 13,286 21,512 6,624 3,158 9,974 501 - 63,042 Total real estate loans $ 126,341 270,296 158,831 100,629 47,542 182,252 112,197 - 998,088 Loans not secured by real estate Commercial Pass $ 9,561 14,122 4,841 2,942 2,232 12,030 23,411 - 69,139 Watch - - - - 57 102 783 - 942 Substandard 31 - - - - - - - 31 Loss - 82 - - - - 350 432 Total Commercial $ 9,592 14,204 4,841 2,942 2,289 12,132 24,544 - 70,544 Farm Pass $ 198 42 83 - 1 27 199 - 550 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 198 42 83 - 1 27 199 - 550 Consumer Pass $ 2,262 1,352 404 222 72 58 2,591 - 6,961 Watch - - - - - - - - - Substandard - - 2 - - - 3 - 5 Total consumer $ 2,262 1,352 406 222 72 58 2,594 - 6,966 All other Pass $ 79 6,401 474 274 599 3,698 5,256 - 16,781 Watch - - - - - 74 63 - 137 Substandard - - - - - - - - - Total all other $ 79 6,401 474 274 599 3,772 5,319 - 16,918 Total loans not secured by real estate $ 12,131 21,999 5,804 3,438 2,961 15,989 32,656 - 94,978 Total loans $ 138,472 292,295 164,635 104,067 50,503 198,241 144,853 - 1,093,066 22 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs as of December 31, 2023. Gross Loan Charge-offs by Origination Year Revolving Loans (dollars in thousands) Revolving Converted to Total 2023 2022 2021 2020 2019 Prior Loans Term Loans Loans Real estate loans: Construction and land development $ - - - - - - - - - Single-family residential - - - - - - - - - Commercial - - - - - - - - - Multifamily and farmland - - - - - - - - - Total real estate loans - - - - - - - - - Loans not secured by real estate: Commercial - 49 51 16 - 13 - - 129 Farm - - - - - - - - - Consumer - 41 53 6 1 468 - - 569 All other - - - - - - - - - Total gross charge-offs $ - 90 104 22 1 481 - - 698 (6) Leases As of June 30, 2024, the Bank had operating right of use assets of $ 4.4 million and operating lease liabilities of $ 4.5 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. The following table presents lease cost and other lease information as of June 30, 2024 and 2023. (Dollars in thousands) June 30, 2024 June 30, 2023 Operating lease cost $ 420 $ 396 Other information: Cash paid for amounts included in the measurement of lease liabilities 408 382 Operating cash flows from operating leases - - Right-of-use assets obtained in exchange for new lease liabilities - operating leases - 348 Weighted-average remaining lease term - operating leases 8.16 8.81 Weighted-average discount rate - operating leases 2.76 % 2.69 % The following table presents lease maturities as of June 30, 2024. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: June 30, 2024 2024 $ 410 2025 773 2026 650 2027 612 2028 510 Thereafter 2,116 Total 5,071 Less: Imputed Interest ( 584 ) Operating Lease Liability $ 4,487 23 Table of Contents (7) Securities Sold Under Agreements to Repurchase (“repurchase agreements”) The Bank utilizes repurchase agreements to facilitate the needs of our customers and provide additional funding to our balance sheet. Repurchase agreements are transactions whereby we offer to sell to a counterparty an undivided interest in an eligible security at an agreed upon purchase price, and which obligates the Bank to repurchase the security on an agreed upon date at an agreed upon repurchase price plus interest at an agreed upon rate. Securities sold under repurchase agreements are recorded at the amount of cash received in connection with the transaction and are reflected in the accompanying consolidated balance sheet. Repurchase agreements are subject to terms and conditions of the master repurchase agreements between the Bank and the customer and are accounted for as secured borrowings. At June 30, 2024 and December 31, 2023, repurchase agreements totaled $ 18.8 million and $ 86.7 million, respectively. These borrowings were collateralized with government-sponsored enterprise securities with a market value of $ 28.4 million and $ 89.8 million at June 30, 2024 and December 31, 2023, respectively. We monitor collateral levels on a continuous basis and maintain records of each transaction specifically describing the applicable security and the counterparty’s fractional interest in that security, and we segregate the security from its general assets in accordance with regulations governing custodial holdings of securities. The primary risk with repurchase agreements is market risk associated with the securities securing the transactions, as we may be required to provide additional collateral based on fair value changes of the underlying securities. (8) Commitments and Contingencies The Bank is 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 include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The 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 is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments to extend credit and standby letters of credit as it does for on-balance-sheet instruments. In most cases, the Bank requires collateral or other security to support financial instruments with credit risk. (Dollars in thousands) Contractual Amount 06/30/24 12/31/23 Financial instruments whose contract amount represent credit risk: Commitments to extend credit $ 372,753 367,482 Standby letters of credit $ 3,810 3,721 Commitments to extend credit are conditional agreements to lend to a customer. Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $ 376.6 million does not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Bank to pay a third party on behalf of a customer. Those letters of credit are primarily issued to businesses in the Bank’s delineated market area. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds real estate, equipment, automobiles and customer deposits as collateral supporting those commitments for which collateral is deemed necessary. The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, when this extension of credit is not unconditionally cancelable. The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding activity and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The allowance for credit losses for unfunded loan commitments of $ 1.6 million and $ 2.1 million at June 30, 2024 and 2023, respectively, is separately classified on the balance sheet within Other Liabilities. 24 Table of Contents The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three and six months ended June 30, 2024 and 2023. (dollars in thousands) For three months ended For six months ended June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Beginning Balance $ 1,698 $ 2,075 $ 1,770 $ - Cummulative effect of change in accounting principle - - - 2,278 Provision for (recovery of) credit losses ( 133 ) 184 ( 205 ) ( 19 ) Ending balance $ 1,565 $ 2,259 $ 1,565 $ 2,259 (9) Fair Value The Company is required to disclose fair value information about financial instruments, whether or not recognized at fair value 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. 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. 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 2 fair value category. Management determined that the valuation technique used at current period end and prior period end are more appropriately classified as Level 2 and has updated in the current period and prior period year end classifications to Level 2. 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 1 fair value category. 25 Table of Contents 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 2 fair value category. Management determined that the valuation technique used at current period end and prior period end are more appropriately classified as Level 2 and has updated in the current period and prior period year end classifications to Level 2. 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. The tables below present all financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2024 and December 31, 2023. (Dollars in thousands) June 30, 2024 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 7,106 - 7,106 - U.S. Government sponsored enterprises 9,573 - 9,573 - GSE - Mortgage-backed securities 234,148 - 234,148 - Private label mortgage-backed securities 38,128 - 38,128 - State and political subdivisions 104,305 - 104,305 - (Dollars in thousands) December 31, 2023 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 10,144 - 10,144 - U.S. Government sponsored enterprises 10,515 10,515 GSE - Mortgage-backed securities 234,902 - 234,902 - Private label mortgage-backed securities 31,270 - 31,270 - State and political subdivisions 105,093 - 105,093 - The fair value measurements for individually evaluated loans on a non-recurring basis at June 30, 2024 and December 31, 2023 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 individually evaluated loans and other real estate are considered Level 3. 26 Table of Contents (Dollars in thousands) Fair Value Measurements June 30, 2024 Level 1 Valuation Level 2 Valuation Level 3 Valuation Individually evaluated loans $ - - - - (Dollars in thousands) Fair Value Measurements December 31, 2023 Level 1 Valuation Level 2 Valuation Level 3 Valuation Individually evaluated loans $ - - - - (Dollars in thousands) Fair Value June 30, 2024 Fair Value December 31, 2023 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Individually evaluated loans $ - $ - Appraised value Discounts to reflect current market conditions and ultimate collectability 0 - 25 % The carrying amount and estimated fair value of financial instruments at June 30, 2024 and December 31, 2023 are as follows: (Dollars in thousands) Fair Value Measurements at June 30, 2024 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 82,835 82,835 - - 82,835 Investment securities available for sale 393,260 - 393,260 - 393,260 Other investments 2,779 - - 2,779 2,779 Mortgage loans held for sale 1,288 - 1,288 - 1,288 Loans, net 1,100,656 - - 1,092,244 1,092,244 Mutual funds held in deferred compensation trust 2,387 2,387 - - 2,387 Liabilities: Deposits $ 1,475,956 - 1,479,261 - 1,479,261 Securities sold under agreements to repurchase 18,824 - 18,824 - 18,824 Junior subordinated debentures 15,464 - 15,464 - 15,464 27 Table of Contents Fair Value Measurements at December 31, 2023 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 82,375 82,375 - - 82,375 Investment securities available for sale 391,924 - 391,924 - 391,924 Other investments 2,874 - - 2,874 2,874 Mortgage loans held for sale 686 - 686 - 686 Loans, net 1,082,025 - - 1,071,178 1,071,178 Mutual funds held in deferred compensation trust 2,171 2,171 - - 2,171 Liabilities: Deposits $ 1,392,045 - 1,397,351 - 1,397,351 Securities sold under agreements to repurchase 86,715 - 86,715 - 86,715 Junior subordinated debentures 15,464 - 15,464 - 15,464 (10) 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. 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. 28 Table of Contents (Dollars in thousands) Banking Operations CBRES Other Consolidated As of and for the three months ended June 30, 2024 Interest income $ 20,060 $ - $ 10 $ 20,070 Interest expense 6,371 - 283 6,654 Net interest income 13,689 - ( 273 ) 13,416 Provision for (recovery of) credit losses ( 468 ) - - ( 468 ) Noninterest income 4,340 - - 4,340 Appraisal management fee income - 3,181 - 3,181 Noninterest expense 12,019 399 190 12,608 Appraisal management fee expense - 2,523 - 2,523 Income tax expense (benefit) 1,423 60 ( 97 ) 1,386 Net income (loss) $ 5,055 $ 199 $ ( 366 ) $ 4,888 Total assets $ 1,650,872 $ 4,035 $ 491 $ 1,655,398 As of and for the three months ended June 30, 2023 Interest income $ 17,591 $ - $ 8 $ 17,599 Interest expense 3,569 - 259 3,828 Net interest income 14,022 - ( 251 ) 13,771 Provision for (recovery of) credit losses 375 - - 375 Noninterest income 3,813 - - 3,813 Appraisal management fee income - 2,590 - 2,590 Noninterest expense 11,038 360 172 11,570 Appraisal management fee expense - 2,049 - 2,049 Income tax expense (benefit) 1,418 42 ( 88 ) 1,372 Net income (loss) $ 5,004 $ 139 $ ( 335 ) $ 4,808 Total assets $ 1,606,211 $ 3,511 $ 1,852 $ 1,611,574 As of and for the six months ended June 30, 2024 Interest income $ 39,861 $ - $ 19 $ 39,880 Interest expense 12,593 - 567 13,160 Net interest income 27,268 - ( 548 ) 26,720 Provision for (recovery of) credit losses ( 377 ) - - ( 377 ) Noninterest income 7,964 - - 7,964 Appraisal management fee income - 5,595 - 5,595 Noninterest expense 24,125 743 352 25,220 Appraisal management fee expense - 4,427 - 4,427 Income tax expense (benefit) 2,264 98 ( 189 ) 2,173 Net income (loss) $ 9,220 $ 327 $ ( 711 ) $ 8,836 Total assets $ 1,650,872 $ 4,035 $ 491 $ 1,655,398 As of and for the six months ended June 30, 2023 Interest income $ 34,384 $ - $ 16 $ 34,400 Interest expense 5,784 - 507 6,291 Net interest income 28,600 - ( 491 ) 28,109 Provision for (recovery of) credit losses 599 - - 599 Noninterest income 5,330 - - 5,330 Appraisal management fee income - 4,684 - 4,684 Noninterest expense 22,602 694 326 23,622 Appraisal management fee expense - 3,699 - 3,699 Income tax expense (benefit) 2,327 67 ( 171 ) 2,223 Net income (loss) $ 8,402 $ 224 $ ( 646 ) $ 7,980 Total assets $ 1,606,211 $ 3,511 $ 1,852 $ 1,611,574 29 Table of Contents Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report of Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-20 through A-62 of the Company’s 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2024 Annual Meeting of Shareholders. Introduction Management’s discussion and analysis of earnings and related data are presented to assist in understanding the consolidated financial condition and results of operations of the Company. The Company is the parent company of the Bank and a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell, Wake, Rowan and Forsyth counties, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”). Overview Our business consists principally of attracting deposits from the general public and investing these funds in commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. Our profitability depends primarily on our net interest income, which is the difference between the income we receive on our loan and investment securities portfolios and our cost of funds, which consists of interest paid on deposits and borrowed funds. Net interest income also is affected by the relative amounts of our interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, a positive interest rate spread will generate net interest income. Our profitability is also affected by the level of other income and operating expenses. Other income consists primarily of miscellaneous fees related to our loans and deposits, mortgage banking income and commissions from sales of annuities and mutual funds. Operating expenses consist of compensation and benefits, occupancy related expenses, federal deposit and other insurance premiums, data processing, advertising and other expenses. Our operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The earnings on our assets are influenced by the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rates, market and monetary fluctuations. Lending activities are affected by the demand for commercial and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Our cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. These factors can cause fluctuations in our net interest income and other income. In addition, local economic conditions can impact the credit risk of our loan portfolio, in that (1) local employers may be required to eliminate employment positions of individual borrowers, and (2) small businesses and commercial borrowers may experience a downturn in their operating performance and become unable to make timely payments on their loans. Management evaluates these factors in estimating the allowance for credit losses (“ACL”, “allowance for credit losses”, or “allowance”) and changes in these economic factors could result in increases or decreases to the provision for loan losses. Prior to the COVID-19 pandemic, economic conditions, while not as robust as the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 500 basis points since March 1, 2022 to a range of 5.25% to 5.50% at June 30, 2024. Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends. Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plants and inventories. During periods of high inflation there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans, and deposits. Also, general increases in the price of goods and services can be expected to result in increased operating expenses. 30 Table of Contents Our business emphasis has been and continues to be to operate as a well-capitalized, profitable and independent community-oriented financial institution dedicated to providing quality customer service. We are committed to meeting the financial needs of the communities in which we operate. We expect growth to be achieved in our local markets and through expansion opportunities in contiguous or nearby markets. While we would be willing to consider growth by acquisition in certain circumstances, we do not consider the acquisition of another company to be necessary for our continued ability to provide a reasonable return to our shareholders. We believe that we can be more effective in serving our customers than many of our non-local competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries. Our ability to provide these services is enhanced by the stability and experience of our Bank officers and managers. Summary of Critical Accounting Policies 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 specific accounting guidance. The following is a summary of some of the more subjective and complex accounting policies of the Company. A more complete 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 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2024 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2023. Results of Operations Summary. Net earnings were $4.9 million or $0.93 per share and $0.89 per diluted share for the three months ended June 30, 2024, compared to $4.8 million or $0.88 per share and $0.85 per diluted share for the prior year period. The increase in second quarter 2024 net earnings is primarily the result of an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below. Net earnings were $8.8 million or $1.67 per share and $1.61 per diluted share for the six months ended June 30, 2024, compared to $8.0 million or $1.46 per share and $1.41 per diluted share for the prior year period. The increase in second quarter net earnings is primarily attributable to an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below. The annualized return on average assets was 1.08% for the six months ended June 30, 2024, compared to 1.01% for the same period one year ago, and annualized return on average shareholders’ equity was 14.69% for the six months ended June 30, 2024, compared to 14.12% for the same period one year ago. Net Interest Income. Net interest income, the major component of the Company’s net income, is the amount by which interest and fees generated by interest-earning assets exceed the total cost of funds used to carry them. Net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned and rates paid. Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets. Net interest income was $13.4 million for the three months ended June 30, 2024, compared to $13.8 million for the three months ended June 30, 2023. The decrease in net interest income is due to a $2.8 million increase in interest expense, partially offset by a $2.5 million increase in interest income. The increase in interest income reflects a $1.9 million increase in interest income and fees on loans, a $208,000 increase in interest income on balances due from banks and a $359,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities and higher yields on securities purchased since June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Net interest income after the provision for credit losses was $13.9 million for the three months ended June 30, 2024, compared to $13.4 million for the three months ended June 30, 2023. The provision for credit losses for the three months ended June 30, 2024 was a recovery of $468,000, compared to an expense of $375,000 for the three months ended June 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $12.7 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the three months ended June 30, 2024. In addition, the high rate environment is slowing additional construction activity resulting in a decrease combined with a decrease in unfunded construction loan commitments with approximately $4.9 million in new commitments offset by the $9.9 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the three months ended June 30, 2024. Provision for credit loss recoveries noted above were partially offset by an increase in net charge-offs during the three months ended June 30, 2024, compared to the three months ended June 30, 2023, primarily due to commercial and industrial loan charge-offs during the three months ended June 30 2024, which were previously reflected in reserves on individually evaluated loans. 31 Table of Contents Interest income was $20.1 million for the three months ended June 30, 2024, compared to $17.6 million for the three months ended June 30, 2023. The increase in interest income is due to a $1.9 million increase in interest income and fees on loans, a $208,000 increase in interest income on balances due from banks and a $359,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities, and higher yields on securities purchased during the six months ended June 30, 2024. During the three months ended June 30, 2024, average loans were $1.11 billion, an increase of $52.6 million from average loans of $1.06 billion for the three months ended June 30, 2023. During the three months ended June 30, 2024, average investment securities available for sale were $445.1 million, a decrease of $5.6 million from average investment securities available for sale of $450.7 million for the three months ended June 30, 2023. The average yield on loans for the three months ended June 30, 2024 and 2023 was 5.65% and 5.19%, respectively. The average yield on investment securities available for sale was 3.36% and 3.01% for the three months ended June 30, 2024 and 2023, respectively. The average yield on earning assets was 5.01% and 4.55% for the three months ended June 30, 2024 and 2023, respectively. Interest expense was $6.7 million for the three months ended June 30, 2024, compared to $3.8 million for the three months ended June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the three months ended June 30, 2024, average interest-bearing non-maturity deposits were $684.8 million, a decrease of $18.7 million from average interest-bearing non-maturity deposits of $703.5 million for the three months ended June 30, 2023. During the three months ended June 30, 2024, average certificates of deposit were $349.5 million, an increase of $143.8 million from average certificates of deposit of $205.7 million for the three months ended June 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.43% and 0.94% for the three months ended June 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.17% for the three months ended June 30, 2024, compared to 3.19% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.46% for the three months ended June 30, 2024, compared to 1.56% for the same period one year ago. The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended June 30, 2024 and 2023. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the three months ended June 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below. 32 Table of Contents Three months ended Three months ended June 30, 2024 June 30, 2023 (Dollars in thousands) Average Balance Interest Yield / Rate Average Balance Interest Yield / Rate Interest-earning assets: Loans receivable $ 1,108,684 $ 15,571 5.65 % $ 1,056,062 $ 13,667 5.19 % Investments - taxable 308,105 3,031 3.96 % 299,400 2,630 3.52 % Investments - nontaxable* 140,252 749 2.15 % 154,342 793 2.06 % Due from banks 53,770 725 5.42 % 40,899 517 5.07 % Total interest-earning assets 1,610,811 20,076 5.01 % 1,550,703 17,607 4.55 % Non-interest earning assets: Cash and due from banks 29,695 39,625 Allowance for credit losses (10,795 ) (9,618 ) Other assets 20,297 23,206 Total assets $ 1,650,008 $ 1,603,916 Interest-bearing liabilities: Interest-bearing demand, MMDA & savings deposits $ 684,782 $ 2,438 1.43 % $ 703,495 $ 1,648 0.94 % Time deposits 349,514 3,628 4.17 % 205,687 1,638 3.19 % Junior subordinated debentures 15,464 283 7.36 % 15,464 259 6.72 % Other 39,431 305 3.11 % 56,673 283 2.00 % Total interest-bearing liabilities 1,089,191 6,654 2.46 % 981,319 3,828 1.56 % Non-interest bearing liabilities and shareholders' equity: Demand deposits 427,299 494,568 Other liabilities 14,075 13,939 Shareholders' equity 119,443 114,090 Total liabilities and shareholders' equity $ 1,650,008 $ 1,603,916 Net interest spread $ 13,422 2.55 % $ 13,779 2.99 % Net yield on interest-earning assets 3.35 % 3.56 % Taxable equivalent adjustment Investment securities $ 6 $ 8 Net interest income $ 13,416 $ 13,771 *Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $10.4 million in 2024 and $11.8 million in 2023. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities. 33 Table of Contents Year to date net interest income was $26.7 million for the six months ended June 30, 2024, compared to $28.1 million for the six months ended June 30, 2023. The decrease in net interest income is due to a $6.9 million increase in interest expense, partially offset by a $5.5 million increase in interest income. The increase in interest income reflects a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities and higher yields on securities purchased since June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Net interest income after the provision for credit losses was $27.1 million for the six months ended June 30, 2024, compared to $27.5 million for the six months ended June 30, 2023. The provision for credit losses for the six months ended June 30, 2024 was a recovery of $377,000, compared to an expense of $599,000 for the six months ended June 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $29.1 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the first six months ending June 30, 2024. In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $12.4 million in new commitments offset by the $19.5 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the six months ended June 30, 2024. Provision for credit loss recoveries noted above were partially offset by an increase in net charge-offs during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to commercial and industrial loan charge-offs during the six months ended June 30 2024, which were previously reflected in reserves on individually evaluated loans. Interest income was $39.9 million for the six months ended June 30, 2024, compared to $34.4 million for the six months ended June 30, 2023. The increase in interest income is due to a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities, and higher yields on securities purchased during the six months ended June 30, 2024. During the six months ended June 30, 2024, average loans were $1.10 billion, an increase of $54.0 million from average loans of $1.05 billion for the six months ended June 30, 2023. During the six months ended June 30, 2024, average investment securities available for sale were $444.3 million, a decrease of $19.1 million from average investment securities available for sale of $463.4 million for the six months ended June 30, 2023. The average yield on loans for the six months ended June 30, 2024 and 2023 was 5.61% and 5.12%, respectively. The average yield on investment securities available for sale was 3.36% and 3.00% for the six months ended June 30, 2024 and 2023, respectively. The average yield on earning assets was 4.99% and 4.48% for the six months ended June 30, 2024 and 2023, respectively. Interest expense was $13.2 million for the six months ended June 30, 2024, compared to $6.3 million for the six months ended June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the six months ended June 30, 2024, average interest-bearing non-maturity deposits were $666.5 million, a decrease of $72.6 million from average interest-bearing non-maturity deposits of $739.1 million for the six months ended June 30, 2023. During the six months ended June 30, 2024, average certificates of deposit were $350.9 million, an increase of $188.4 million from average certificates of deposit of $162.5 million for the six months ended June 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.36% and 0.86% for the six months ended June 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.19% for the six months ended June 30, 2024, compared to 2.67% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.43% for the six months ended June 30, 2024, compared to 1.31% for the same period one year ago. The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the six months ended June 30, 2024 and 2023. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the six months ended June 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below. 34 Table of Contents Six months ended Six months ended June 30, 2024 June 30, 2023 (Dollars in thousands) Average Balance Interest Yield / Rate Average Balance Interest Yield / Rate Interest-earning assets: Loans receivable $ 1,100,671 30,709 5.61 % $ 1,046,646 26,550 5.12 % Investments - taxable 311,064 6,040 3.90 % 328,148 5,460 3.36 % Investments - nontaxable* 136,517 1,512 2.23 % 138,330 1,548 2.26 % Due from banks 60,144 1,632 5.46 % 36,698 900 4.95 % Total interest-earning assets 1,608,396 39,893 4.99 % 1,549,822 34,458 4.48 % Non-interest earning assets: Cash and due from banks 30,870 38,576 Allowance for credit losses (10,929 ) (10,028 ) Other assets 20,568 21,892 Total assets $ 1,648,905 $ 1,600,262 Interest-bearing liabilities: Interest-bearing demand, MMDA & savings deposits $ 666,544 4,498 1.36 % $ 739,100 3,136 0.86 % Time deposits 350,881 7,309 4.19 % 162,465 2,154 2.67 % Junior subordinated debentures 15,464 567 7.37 % 15,464 507 6.61 % Other 56,063 786 2.82 % 49,494 494 2.01 % Total interest-bearing liabilities 1,088,952 13,160 2.43 % 966,523 6,291 1.31 % Non-interest bearing liabilities and shareholders' equity: Demand deposits 427,524 508,975 Other liabilities 11,502 10,799 Shareholders' equity 120,927 113,965 Total liabilities and shareholders' equity $ 1,648,905 $ 1,600,262 Net interest spread $ 26,733 2.56 % $ 28,167 3.17 % Net yield on interest-earning assets 3.34 % 3.67 % Taxable equivalent adjustment Investment securities $ 13 $ 58 Net interest income $ 26,720 $ 28,109 *Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $10.6 million in 2024 and $11.8 million in 2023. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities. Changes in interest income and interest expense can result from variances in both volume and rates. The following table describes the impact on the Company’s tax equivalent net interest income resulting from changes in average balances and average rates for the periods indicated. The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each. 35 Table of Contents Three months ended June 30, 2024 compared to three months ended June 30, 2023 Six months ended June 30, 2024 compared to six months ended June 30, 2023 (Dollars in thousands) Changes in average volume Changes in average rates Total Increase (Decrease) Changes in average volume Changes in average rates Total Increase (Decrease) Interest income: Loans: Net of unearned income $ 710 1,194 1,904 1,439 2,720 4,159 Investments - taxable 81 320 401 (308 ) 888 580 Investments - nontaxable (74 ) 30 (44 ) (20 ) (16 ) (36 ) Due from banks 168 40 208 606 126 732 Total interest income 885 1,584 2,469 1,717 3,718 5,435 Interest expense: Interest-bearing demand, MMDA & savings deposits (55 ) 845 790 (399 ) 1,761 1,362 Time deposits 1,319 671 1,990 3,211 1,944 5,155 Junior subordinated debentures - 24 24 - 60 60 Other (110 ) 132 22 79 213 292 Total interest expense 1,154 1,672 2,826 2,891 3,978 6,869 Net interest income $ (269 ) (88 ) (357 ) (1,174 ) (260 ) (1,434 ) Provision for Credit Losses . The provision for credit losses for the three months ended June 30, 2024 was a recovery of $468,000, compared to an expense of $375,000 for the three months ended June 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $12.7 million in loans being paid off or transitioning to permanent financing in other loan categories within the portfolio with lower loss rates than the construction pool during the three months ended June 30, 2024. In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $4.9 million in new commitments offset by the $9.9 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the three months ended June 30, 2024. The provision for credit losses for the six months ended June 30, 2024 was a recovery of $377,000, compared to an expense of $599,000 for the six months ended June 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $29.1 million in loans being paid off or transitioning to permanent financing in other loan categories within the portfolio with lower loss rates than the construction pool during the first six months ending June 30, 2024. In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $12.4 million in new commitments offset by $19.5 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the six months ended June 30, 2024. Non-Interest Income. Non-interest income was $7.5 million for the three months ended June 30, 2024, compared to $6.4 million for the three months ended June 30, 2023. The increase in non-interest income is primarily attributable to a $591,000 increase in appraisal management fee income due to an increase in appraisal volume and a $444,000 increase in miscellaneous non-interest income primarily due to an increase in income on Small Business Investment Company (SBIC) investments. Non-interest income was $13.6 million for the six months ended June 30, 2024, compared to $10.0 million for the six months ended June 30, 2023. The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the six months ended June 30, 2023 compared to no losses in the six months ended June 30, 2024, and a $911,000 increase in appraisal management fee income due to an increase in appraisal volume. Non-Interest Expense. Non-interest expense was $15.1 million for the three months ended June 30, 2024, compared to $13.6 million for the three months ended June 30, 2023. The increase in non-interest expense is primarily attributable to a $541,000 increase in salaries and employee benefits expense primarily due to increases in salary and restricted stock expenses, a $474,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $185,000 increase in professional fees, a $143,000 increase in debit card expense and a $174,000 increase in miscellaneous non-interest expense. 36 Table of Contents Non-interest expense was $29.6 million for the six months ended June 30, 2024, compared to $27.3 million for the six months ended June 30, 2023. The increase in non-interest expense is primarily attributable to a $1.0 million increase in salaries and employee benefits expense primarily due to increases in salary, medical insurance and restricted stock expenses, a $728,000 increase in appraisal management fee expense due to an increase in appraisal volume, A $221,000 increase in occupancy expense, a $178,000 increase in professional fees and a $182,000 increase in debit card expense. Income Taxes. Income tax expense was $1.4 million for the three months ended June 30, 2024 and 2023. The effective tax rate was 22.09% for the three months ended June 30, 2024, compared to 22.20% for the three months ended June 30, 2023. Income tax expense was $2.2 million for the six months ended June 30, 2024 and 2023. The effective tax rate was 19.74% for the six months ended June 30, 2024, compared to 21.79% for the six months ended June 30, 2023. Analysis of Financial Condition Investment Securities. Available for sale securities were $393.3 million as of June 30, 2024, compared to $391.9 million as of December 31, 2023. Average investment securities available for sale for the six months ended June 30, 2024 were $444.3 million, compared to $454.8 million for the year ended December 31, 2023. Loans. Total loans were $1.11 billion as of June 30, 2024, compared to $1.09 billion at December 31, 2023. Average loans represented 68% of average earning assets for the three months ended June 30, 2024 and the year ended December 31, 2023. The Bank had $1.3 million and $686,000 in mortgage loans held for sale as of June 30, 2024 and December 31, 2023, respectively. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At June 30, 2024, the Bank had $117.9 million in residential mortgage loans, $108.6 million in home equity loans and $675.8 million in commercial mortgage loans, which include $256.8 million secured by commercial property and $149.0 million secured by residential property. At December 31, 2023, the Bank had $112.8 million in residential mortgage loans, $107.7 million in home equity loans and $639.9 million in commercial mortgage loans, which include $488.9 million secured by commercial property and $151.0 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization Allowance for Credit Losses (ACL). The allowance for credit losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance that management believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. 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 June 30, 2024. 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. The Company calculates the allowance for credit losses using a Weighted Average Remaining Maturity (“WARM”) methodology. The ACL balance was $10.0 million at June 30, 2024 as compared to $11.0 million at December 31, 2023. The decrease is primarily composed of a $541,000 decrease in allowance for other construction loans, all land development, and other land loans as a result of loan balance decreases in this category during the six months ended June 30, 2024 and a $442,000 decrease in allowance for commercial and industrial loans primarily due to a $432,000 decrease in reserves on individually evaluated loans in this category at June 30, 2024 as compared to December 31, 2023. 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. 37 Table of Contents The portion of the ACL balance attributable to qualitative factors was $4.9 million at June 30, 2024, compared to $5.2 million at December 31, 2023. The decrease of $284,000 between these periods is mainly attributable to the decrease in reserves of $299,000 for other construction loans and all land development and other land loans as a result of decreases in loan balances for this category. No changes to the risk status of any of the risk factors was made during the second quarter of 2024. 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 adjusted for selling costs as appropriate. There were no loans individually evaluated as of June 30, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023. Reserves on individually evaluated loans were $432,000 at December 31, 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. The allowance for credit losses on off-balance sheet credit exposures was $1.6 million and $1.8 million at June 30, 2024 and December 31, 2023, respectively. The decrease of $205,000 during the six months ended June 30, 2024 was primarily due to a $239,000 decrease in the allowance balance for other construction loans and all land development and other land loans. The overall balances in this category decreased $22.4 million during the six months ended June 30, 2024. While off balance sheet credit exposures increased in total from December 31, 2023 to June 30, 2024, the majority of the increase was in unfunded commitments on commercial real estate loans and commercial loans not secured by real estate that have lower reserve rates than other construction loans and all land development and other land loans, which resulted in the overall decrease in the allowance for credit losses on off-balance sheet credit exposures. Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by the third-party credit review firm (as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The board of directors of the Bank (“the Bank Board”) reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration. As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below $1.5 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank Board. Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk. Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance. The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance. 38 Table of Contents Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures. Estimating the amount of the allowance for credit losses 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 allowance for credit losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all 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 differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods. Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations. Management believes it has established the allowance for credit losses pursuant to CECL, and has taken into account the views of its regulators and the current economic environment. Management considers the allowance adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements. Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company. Non-performing Assets. Non-performing assets were $4.2 million or 0.25% of total assets at June 30, 2024, compared to $3.9 million or 0.24% of total assets at December 31, 2023. Non-accrual loans were $4.2 million at June 30, 2024, compared to $3.9 million at December 31, 2023. As a percentage of total loans outstanding, non-accrual loans were 0.37% at June 30, 2024, compared to 0.36% at December 31, 2023. Non-accrual loans over $250,000 are individually evaluated for specific reserves. Non-performing assets include $3.9 million in commercial and residential mortgage loans and $267,000 in other loans at June 30, 2024, compared to $3.4 million in commercial and residential mortgage loans and $464,000 in other loans at December 31, 2023. The Bank had no loans 90 days past due and still accruing at June 30, 2024 and December 31, 2023. The Bank had no other real estate owned at June 30, 2024 and December 31, 2023. Deposits. Deposits were $1.48 billion as of June 30, 2024, compared to $1.39 billion as of December 31, 2023. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.33 billion at June 30, 2024, compared to $1.24 billion at December 31, 2023. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability. Certificates of deposit in amounts of more than $250,000 totaled $147.3 million at June 30, 2024, compared to $148.9 million December 31, 2023. Estimated uninsured deposits totaled $378.6 million, or 25.65% of total deposits, at June 30, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at June 30, 2024. Borrowed Funds. There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023. Securities sold under agreements to repurchase were $18.8 million at June 30, 2023, compared to $86.7 million at December 31, 2023. The decrease in securities sold under agreements to repurchase is primarily due to customers transferring funds from securities sold under agreements to repurchase to deposits via the IntraFi network’s Insured Cash Sweep (“ICS”) during the six months ended June 30, 2024 Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million at June 30, 2024 and December 31, 2023. Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. 39 Table of Contents The Company manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Committee (“ALCO”) of the Bank. The ALCO meets quarterly and has the responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company. ALCO seeks to minimize interest rate risk between interest-earning assets and interest-bearing liabilities by attempting to minimize wide fluctuations in net interest income due to interest rate movements. The ability to control these fluctuations has a direct impact on the profitability of the Company. Management monitors this activity on a regular basis through analysis of its portfolios to determine the difference between rate sensitive assets and rate sensitive liabilities. The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the six months ended June 30, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $519.4 million. The Company has an overall interest rate risk management strategy that may incorporate the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of June 30, 2024. Included in the rate sensitive assets are $181.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate. At June 30, 2024, the Company had $124.1 million in loans with interest rate floors. No floors were in effect on loans with floors on interest rates charged at June 30, 2024. Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of June 30, 2024, such unfunded commitments to extend credit were $372.8 million, while commitments in the form of standby letters of credit totaled $3.8 million. As of December 31, 2023, such unfunded commitments to extend credit were $367.5 million, while commitments in the form of standby letters of credit totaled $3.7 million. The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of June 30, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.33 billion, or 90% of total deposits. As of December 31, 2023, the Bank’s core deposits totaled $1.24 billion, or 89% of total deposits. The other sources of funding for the Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Bank’s policies include the ability to access wholesale funding of up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Bank’s ratio of wholesale funding to total assets was 0.49% and 0.50% as of June 30, 2024 and December 31, 2023, respectively. The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023. At June 30, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $215.9 million compared to $214.1 million at December 31, 2023. The remaining availability under the line of credit with the FHLB was $125.0 million at June 30, 2024 compared to $122.2 million at December 31, 2023. The Bank had no borrowings from the FRB at June 30, 2024 or December 31, 2023. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At June 30, 2024, the carrying value of loans pledged as collateral to the FRB totaled $619.3 million compared to $611.2 million at December 31, 2023. Availability under the line of credit with the FRB was $483.9 million at June 30, 2024 compared to $445.1 million at December 31, 2023. 40 Table of Contents The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of June 30, 2024. The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.91% at June 30, 2024 and 25.39% at December 31, 2023. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2024 and December 31, 2023. Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit. Capital Resources. Shareholders’ equity was $124.3 million, or 7.51% of total assets, at June 30, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023. Annualized return on average equity for the six months ended June 30, 2024 was 14.69%, compared to 14.12% for the six months ended June 30, 2023. Total cash dividends paid on common stock were $3.0 million for the six months ended June 30, 2024 and 2023. In the first quarter of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was allocated to repurchase the Company’s common stock. In the fourth quarter of 2023, the Board of Directors authorized an additional $2.0 million to be allocated to repurchase the Company’s common stock, which increased the total amount authorized in 2023 to $4.0 million. The Company repurchased approximately $4.0 million, or 181,022 shares of its common stock, under this stock repurchase program through March 31, 2024, when the program expired. In June of 2024, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company had not repurchased any shares of its common stock under this stock repurchase program as of June 30, 2024. In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019). This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions. Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at June 30, 2024 and December 31, 2023. The Company’s Tier 1 capital ratio was 14.15% and 13.94% at June 30, 2024 and December 31, 2023, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.07% and 14.96% at June 30, 2024 and December 31, 2023, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 12.97% and 12.75% at June 30, 2024 and December 31, 2023, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.60% and 10.51% at June 30, 2024 and December 31, 2023, respectively. 41 Table of Contents The Bank’s Tier 1 risk-based capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively. The total risk-based capital ratio for the Bank was 14.95% and 14.85% at June 30, 2024 and December 31, 2023, respectively. The Bank’s common equity Tier 1 capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively. The Bank’s Tier 1 leverage capital ratio was 10.43% and 10.35% at June 30, 2024 and December 31, 2023, respectively. A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at June 30, 2024. 42 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable Item 4. Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with the SEC. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings In the opinion of management, the Company is not involved in any material pending legal proceedings other than routine proceedings occurring in the ordinary course of business. Item 1A. Risk Factors For information regarding the risk factors that could affect the Company’s business, results of operations, financial condition and liquidity, see the information under Part I, Item 1A. “Risk Factors” in the Form 10-K filed with the SEC on March 7, 2024, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Form 10-K. 43 Table of Contents Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Period Total Number of Shares Purchased (1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3) April 1 - 30, 2024 1,277 $ 28.76 - $ - May 1 - 31, 2024 - $ - - $ - June 1 - 30, 2024 - $ - - $ 2,000,000 Total 1,277 $ 28.76 - (1) The Company purchased 1,277 shares on the open market in the three months ended June, 2024 for its deferred compensation plan. All purchases were funded by participant contributions to the plan. (2) Reflects shares purchased under the Company's publicly announced stock repurchase program. (3) Reflects dollar value of balance available for repurchase at end of period under the Company's stock repurchase program, which was authorized in June 2024. Item 3. Defaults Upon Senior Securities Not applicable Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information Trading Arrangements of Section 16 Reporting Persons. During the quarter ended June 30, 2024, no person who is required to file reports pursuant to Section 16(a) of the Securities and Exchange Act of 1934, as amended, with respect to holdings of, and transactions in, the Company’s common shares (i.e. directors and certain officers of the Company) maintained, adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1(c) arrangement”, as those terms are defined in Section 229.408 of the regulations of the SEC. 44 Table of Contents Item 6. Exhibits Exhibit (3)(i)(a) Articles of Incorporation of the Registrant, incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999 Exhibit (3)(i)(b) Articles of Amendment dated December 19, 2008, regarding the Series A Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008 Exhibit (3)(i)(c) Articles of Amendment dated February 26, 2010, incorporated by reference to Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010 Exhibit (3)(i)(d) Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form 10-K filed with the Securities and Exchange Commission on March 18, 2022 Exhibit (3)(ii) Second Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and Exchange Commission on June 24, 2015 Exhibit (4)(I Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999 Exhibit (31)(a) Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit (31)(b) Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002 Exhibit (32) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit (101) The following materials from the Company’s 10-Q Report for the quarterly period ended June 30, 2024, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements. 45 Table of Contents 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. Peoples Bancorp of North Carolina, Inc. August 6, 2024 /s/ Lance A. Sellers Date Lance A. Sellers President and Chief Executive Officer (Principal Executive Officer) August 6, 2024 /s/ Jeffrey N. Hooper Date Jeffrey N. Hooper Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) 46