PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets September 30, 2024 and December 31, 2023 (Dollars in thousands) September 30 December 31, Assets 2024 2023 (Unaudited) (Audited) Cash and due from banks $ 36,061 32,819 Interest-bearing deposits 37,101 49,556 Cash and cash equivalents 73,162 82,375 Investment securities available for sale 398,573 391,924 Other investments 2,753 2,874 Total securities 401,326 394,798 Mortgage loans held for sale 1,218 686 Loans 1,124,177 1,093,066 Less allowance for credit losses ( 10,616 ) ( 11,041 ) Net loans 1,113,561 1,082,025 Premises and equipment, net 15,206 16,702 Cash surrender value of life insurance 18,482 18,134 Right of use lease asset 4,194 4,731 Accrued interest receivable and other assets 34,501 36,459 Total assets $ 1,661,650 1,635,910 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 408,766 432,687 Interest-bearing demand, MMDA & savings 728,142 620,244 Time, over $250,000 143,573 148,904 Other time 199,496 190,210 Total deposits 1,479,977 1,392,045 Securities sold under agreements to repurchase 8,429 86,715 Junior subordinated debentures 15,464 15,464 Lease liability 4,312 4,832 Accrued interest payable and other liabilities 17,186 15,838 Total liabilities 1,525,368 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 September 30, 2024 and 5,534,499 shares at December 31, 2023 48,678 50,625 Common stock held by deferred compensation trust, at cost; 158,905 shares at September 30, 2024 and 163,702 shares at December 31, 2023 ( 1,772 ) ( 1,910 ) Deferred compensation 1,772 1,910 Retained earnings 118,542 109,756 Accumulated other comprehensive loss ( 30,938 ) ( 39,365 ) Total shareholders' equity 136,282 121,016 Total liabilities and shareholders' equity $ 1,661,650 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 Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands, except per share amounts) Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 16,098 14,145 46,807 40,695 Interest on due from banks 608 606 2,240 1,506 Interest on investment securities: U.S. Government sponsored enterprises 2,503 2,358 7,645 6,868 State and political subdivisions 695 696 2,085 2,254 Other 563 501 1,570 1,383 Total interest income 20,467 18,306 60,347 52,706 Interest expense: NOW, MMDA & savings deposits 2,892 1,752 7,390 4,888 Time deposits 3,611 2,512 10,920 4,666 Junior subordinated debentures 283 284 850 791 Other 132 418 918 912 Total interest expense 6,918 4,966 20,078 11,257 Net interest income 13,549 13,340 40,269 41,449 Provision for (recovery of) credit losses 297 562 ( 80 ) 1,161 Net interest income after provision for loan losses 13,252 12,778 40,349 40,288 Non-interest income: Service charges 1,515 1,412 4,201 4,081 Other service charges and fees 163 165 527 510 Gain (loss) on sale of securities, net 5 - 5 ( 2,488 ) Mortgage banking income 138 72 263 204 Insurance and brokerage commissions 252 291 717 725 Appraisal management fee income 3,073 2,785 8,668 7,469 Miscellaneous 1,949 2,049 6,273 6,286 Total non-interest income 7,095 6,774 20,654 16,787 Non-interest expense: Salaries and employee benefits 6,602 6,722 20,409 19,508 Occupancy 2,446 1,988 6,662 5,983 Professional fees 590 406 1,617 1,255 Advertising 188 217 565 562 Debit card expense 333 392 1,070 947 FDIC Insurance 189 186 572 556 Appraisal management fee expense 2,436 2,182 6,863 5,881 Miscellaneous 2,232 2,162 6,905 6,884 Total non-interest expense 15,016 14,255 44,663 41,576 Earnings before income taxes 5,331 5,297 16,340 15,499 Income tax expense 1,373 1,170 3,546 3,393 Net earnings $ 3,958 4,127 12,794 12,106 Basic net earnings per share $ 0.74 0.76 2.41 2.22 Diluted net earnings per share $ 0.72 0.74 2.33 2.15 Cash dividends declared per share $ 0.19 0.19 0.73 0.72 See accompanying Notes to Consolidated Financial Statements. 5 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands) Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net earnings $ 3,958 4,127 12,794 12,106 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale 11,756 ( 9,408 ) 10,945 ( 6,892 ) Reclassification adjustment for (gains) losses on securities available for sale included in net earnings ( 5 ) - ( 5 ) 2,488 Total other comprehensive income (loss), before income taxes 11,751 ( 9,408 ) 10,940 ( 4,404 ) Income tax expense (benefit) related to other comprehensive income: Unrealized holding gains (losses) on securities available for sale 2,701 ( 2,162 ) 2,514 ( 1,584 ) Reclassification adjustment for (gains) losses on securities available for sale included in net earnings ( 1 ) - ( 1 ) 572 Total income tax expense (benefit) related to other comprehensive income 2,700 ( 2,162 ) 2,513 ( 1,012 ) Total other comprehensive income (loss), net of tax 9,051 ( 7,246 ) 8,427 ( 3,392 ) Total comprehensive income (loss) $ 13,009 ( 3,119 ) 21,221 8,714 See accompanying Notes to Consolidated Financial Statements. 6 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Changes in Shareholders' Equity Three and Nine Months Ended September 30, 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 Cash dividends declared on common stock - - ( 1,039 ) - - - ( 1,039 ) Equity incentive plan, net - - - ( 208 ) 208 - - Net earnings - - 3,958 - - - 3,958 Change in accumulated other comprehensive income, net of tax - - - - - 9,051 9,051 Balance, September 30, 2024 5,457,646 $ 48,678 118,542 1,772 ( 1,772 ) ( 30,938 ) 136,282 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 - - 3,171 - - - 3,171 Change in accumulated other comprehensive income, net of tax - - - - - 9,173 9,173 Balance, March 31, 2023 5,637,021 $ 52,642 100,564 1,837 ( 1,837 ) ( 38,424 ) 114,782 Common stock repurchase ( 46,222 ) ( 833 ) - - - - ( 833 ) Cash dividends declared on common stock - - ( 1,069 ) - - - ( 1,069 ) Equity incentive plan, net - - - 130 ( 130 ) - - Net earnings - - 4,808 - - - 4,808 Change in accumulated other comprehensive loss, net of tax - - - - - ( 5,319 ) ( 5,319 ) Balance, June 30, 2023 5,590,799 $ 51,809 104,303 1,967 ( 1,967 ) ( 43,743 ) 112,369 Common stock repurchase ( 41,000 ) ( 840 ) - - - - ( 840 ) Cash dividends declared on common stock - - ( 1,058 ) - - - ( 1,058 ) Equity incentive plan, net - - - 44 ( 44 ) - - Net earnings - - 4,127 - - - 4,127 Change in accumulated other comprehensive loss, net of tax - - - - - ( 7,246 ) ( 7,246 ) Balance, September 30, 2023 5,549,799 $ 50,969 107,372 2,011 ( 2,011 ) ( 50,989 ) 107,352 See accompanying Notes to Consolidated Financial Statements. 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands) 2024 2023 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 12,794 12,106 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 2,184 2,416 Provision for (recovery of) credit losses ( 80 ) 1,161 Deferred income taxes ( 63 ) ( 248 ) Gain on sale of held for sale mortgage loans ( 211 ) ( 155 ) (Gain) loss on sale of investment securities net ( 5 ) 2,488 Write-down of premises and equipment 362 - Gain on sale of premises and equipment - ( 185 ) Restricted stock expense 84 ( 7 ) Proceeds from sales of mortgage loans held for sale 14,677 11,186 Origination of mortgage loans held for sale ( 14,998 ) ( 12,668 ) Cash surrender value of life insurance ( 348 ) ( 318 ) Change in: Right of use lease asset 537 578 Other assets ( 401 ) ( 93 ) Lease liability ( 520 ) ( 553 ) Other liabilities 1,264 1,357 Net cash provided by operating activities 15,276 17,065 Cash flows from investing activities: Purchases of investment securities available for sale ( 23,521 ) ( 6,992 ) Proceeds from sales, calls and maturities of investment securities available for sale 14,708 52,023 Proceeds from paydowns of investment securities available for sale 12,449 13,898 Proceeds from paydowns of other investment securities 128 112 Purchase of FHLB stock ( 10 ) ( 323 ) Net change in loans ( 31,456 ) ( 45,862 ) Purchases of premises and equipment ( 427 ) ( 1,522 ) Proceeds from sale of premises and equipment - 1,460 Net cash provided (used) by investing activities ( 28,129 ) 12,794 Cash flows from financing activities: Net change in deposits 87,932 ( 54,447 ) Net change in securities sold under agreement to repurchase ( 78,286 ) 35,336 Proceeds from Fed Funds purchased - 43,275 Repayments of Fed Funds purchased - ( 43,275 ) Common stock repurchased ( 1,998 ) ( 1,673 ) Cash dividends paid on common stock ( 4,008 ) ( 4,052 ) Net cash provided (used) by financing activities 3,640 ( 24,836 ) Net change in cash and cash equivalents ( 9,213 ) 5,023 Cash and cash equivalents at beginning of period 82,375 71,596 Cash and cash equivalents at end of period $ 73,162 76,619 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Nine Months Ended September 30, 2024 and 2023 (Dollars in thousands) 2024 2023 (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 21,501 10,766 Income taxes $ 3,149 3,462 Noncash investing and financing activities: Change in unrealized loss on investment securities available for sale, net $ 8,427 ( 3,392 ) Restricted stock units issued $ 51 6 Initial recognition of lease right-of-use asset and lease liability $ - 370 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 September 30, 2024, which may impact the Company’s financial statements. 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. The adoption of this guidance is expected to have an immaterial impact on 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. The adoption of this guidance is expected to have an immaterial impact on 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 nine months ended September 30, 2024 and 2023: For the three months ended For the nine months ended (dollars in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2024 Beginning balance $ ( 39,310 ) $ ( 38,424 ) $ ( 39,365 ) $ ( 47,597 ) Other comprehensive loss before reclassifications, net 8,376 ( 12,565 ) 8,431 ( 5,308 ) Amounts reclassified from accumulated other comprehensive (gain) loss, net ( 4 ) - ( 4 ) 1,916 Net current period other comprehensive gain (loss) 8,372 ( 12,565 ) 8,427 ( 3,392 ) Ending balance $ ( 30,938 ) $ ( 50,989 ) $ ( 30,938 ) $ ( 50,989 ) (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. Shares held in the deferred compensation plan by the deferred compensation trust are excluded for purposes of calculating the weighted average number of shares outstanding and basic earnings per share in accordance with ASC 260-10-45-40 and ASC 260-10-45-45 through ASC 260-26010-45-46. The reconciliation of the amounts used in the computation of both basic earnings per share and diluted earnings per share for the three and nine months ended September 30, 2024 and 2023 is as follows: For the three months ended September 30, 2024 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 3,958 5,295,765 $ 0.74 Effect of dilutive securities: Restricted stock units - unvested 22,616 Shares held in deferred comp plan by deferred compensation trust 162,576 Diluted earnings per share $ 3,958 5,480,957 $ 0.72 For the nine months ended September 30, 2024 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 12,794 5,301,742 $ 2.41 Effect of dilutive securities: Restricted stock units - unvested 20,224 Shares held in deferred comp plan by deferred compensation trust 161,304 Diluted earnings per share $ 12,794 5,483,270 $ 2.33 11 Table of Contents For the three months ended September 30, 2023 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,127 5,402,048 $ 0.76 Effect of dilutive securities: Restricted stock units - unvested 19,070 Shares held in deferred comp plan by deferred compensation trust 166,168 Diluted earnings per share $ 4,127 5,587,286 $ 0.74 For the nine months ended September 30, 2023 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 12,106 5,442,788 $ 2.22 Effect of dilutive securities: Restricted stock units - unvested 18,899 Shares held in deferred comp plan by deferred compensation trust 168,099 Diluted earnings per share $ 12,106 5,629,786 $ 2.15 (4) Investment Securities Investment securities available for sale at September 30, 2024 and December 31, 2023 are as follows: (Dollars in thousands) September 30, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasuries $ 7,980 - 606 7,374 U.S. Government sponsored enterprises 9,540 - 433 9,107 GSE - Mortgage-backed securities 247,554 263 17,900 229,917 Private label mortgage-backed securities 43,931 166 1,137 42,960 State and political subdivisions 129,733 - 20,518 109,215 Total $ 438,738 429 40,594 398,573 (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 The current fair value and associated unrealized losses on investments in securities with unrealized losses at September 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. 12 Table of Contents (Dollars in thousands) September 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 $ - - 7,374 606 7,374 606 U.S. government sponsored enterprises - - 9,107 433 9,107 433 GSE -Mortgage-backed securities 8,961 114 206,059 17,786 215,020 17,900 Private label mortgage-backed securities 4,001 19 22,438 1,118 26,439 1,137 State and political subdivisions - - 109,215 20,518 109,215 20,518 Total $ 12,962 133 354,193 40,461 367,155 40,594 (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 September 30, 2024, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 40.6 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 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”), 110 of the 118 GSE mortgage-backed securities, and 11 of the 16 private label mortgage backed securities contained unrealized losses. The Company did not have any reserves on available for sale securities at September 30, 2024, as no credit related losses were identified in the Company’s September 30, 2024 Current Expected Credit Loss (“CECL”) 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 September 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. September 30, 2024 (Dollars in thousands) Amortized Cost Fair Value Due within one year $ 7,929 7,910 Due from one to five years 18,615 17,437 Due from five to ten years 66,312 57,372 Due after ten years 98,328 85,937 Mortgage-backed securities 247,554 229,917 Total $ 438,738 398,573 During the three and nine months ended September 30, 2024, proceeds from sales of securities available for sale were $ 11.7 million and resulted in gross gains of $ 33,000 and gross losses of $ 28,000 . No securities available for sale were sold during the three months ended September 30, 2023. During the nine months ended September 30, 2023, proceeds from sales of securities available for sale were $ 51.0 million and resulted in gross losses of $ 2.7 million and gross gains of $ 177,000 . Securities with a fair value of approximately $ 50.6 million and $ 132.0 million at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits and for other purposes as required by law. 13 Table of Contents (5) Loans Major classifications of loans at September 30, 2024 and December 31, 2023 are summarized as follows: (Dollars in thousands) September 30, 2024 December 31, 2023 Real estate loans: Construction and land development $ 124,322 136,401 Single-family residential 378,697 372,825 Commercial 462,917 425,820 Multifamily and farmland 69,860 63,042 Total real estate loans 1,035,796 998,088 Loans not secured by real estate: Commercial 65,364 70,544 Farm 478 550 Consumer 6,717 6,966 All other 15,822 16,918 Total loans 1,124,177 1,093,066 Less allowance for credit losses ( 10,616 ) ( 11,041 ) Total net loans $ 1,113,561 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 September 30, 2024 and December 31, 2023: September 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 $ 131 38 169 124,153 124,322 - Single-family residential 1,159 3,612 4,771 373,926 378,697 - Commercial 427 6 433 462,484 462,917 - Multifamily and farmland - - - 69,860 69,860 - Total real estate loans 1,717 3,656 5,373 1,030,423 1,035,796 - Loans not secured by real estate: Commercial 175 250 425 64,939 65,364 - Farm - - - 478 478 - Consumer 27 16 43 6,674 6,717 - All other - - - 15,822 15,822 - Total loans $ 1,919 3,922 5,841 1,118,336 1,124,177 - 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 September 30, 2024 and December 31, 2023: September 30, 2024 Nonaccrual Loans Nonaccrual Loans Total With No With Nonaccrual (Dollars in thousands) Allowance Allowance Loans Real estate loans: Construction and land development $ 38 - 38 Single-family residential 3,612 - 3,612 Multifamily and farmland 6 - 6 Total real estate loans 3,656 - 3,656 Loans not secured by real estate: Commercial 250 - 250 Consumer 16 - 16 Total $ 3,922 - 3,922 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 nine months ended September 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. A change to the allowance for credit losses is evaluated based on the nature of the 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 September 30, 2024 and 2023 of the loans to borrowers experiencing financial difficulty that were modified during the nine months ended September 30, 2024 and 2023, disaggregated by loan class and type of concession granted. One $30,000 loan to a borrower experiencing financial difficulty was modified during the three months ended September 30, 2024. No loans to borrowers experiencing financial difficulty were modified during the three months ended September 30, 2023. Modifications during the three months ended September 30, 2024 and 2023 are not presented in tables due to immateriality. 16 Table of Contents (Dollars in thousands) Amortized Cost Basis at September 30, 2024 % of Loan Class Modification Type Financial Effect Loan class: Single-family residential $ 230 0.06 % Interest rate reduction and term extension Adjustable rate loan converted to fixed rate loan and HELOC converted to amortizing term loan Commercial not secured by real estate 71 0.11 % Term extension Line of credit converted to amortizing term loan Total $ 301 (Dollars in thousands) Amortized Cost Basis at September 30, 2023 % of Loan Class Modification Type Financial Effect Loan class: Single-family residential $ 154 0.04 % Term extension Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term. Commercial real estate 673 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 $ 827 No loans modified in the nine months ended September 30, 2024 and 2023 that were made to borrowers experiencing financial difficulty had been written off at September 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 nine months ended September 30, 2024 and 2023. September 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 $ 230 Commercial not secured by real estate 71 - - Total $ 301 - - September 30, 2023 (Dollars in thousands) Payment Status (Amortized Cost Basis) Current 30 - 89 Days Past Due 90 + Days Past Due Loan type: Single-family residential $ 154 - - Commercial real estate 673 - - Total $ 827 - - 17 Table of Contents The following tables present changes in the allowance for credit losses for the three and nine months ended September 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 September 30, 2024 Allowance for credit losses: Beginning balance $ 3,318 3,484 2,374 271 368 1 200 10,016 Charge-offs - - - - ( 50 ) - ( 157 ) ( 207 ) Recoveries - 29 - - 6 - 69 104 Provision (recovery) for loan losses (1) 245 ( 19 ) 179 63 130 - 105 703 Ending balance $ 3,563 3,494 2,553 334 454 1 217 10,616 Allowance for credit loss-loans $ 3,563 3,494 2,553 334 454 1 217 10,616 Allowance for credit losses - loan commitments 1,144 1 - - 11 - 3 1,159 Total allowance for credit losses $ 4,707 3,495 2,553 334 465 1 220 11,775 Nine months ended September 30, 2024 Allowance for credit losses: Beginning balance $ 3,913 3,484 2,317 268 812 2 245 11,041 Charge-offs - ( 126 ) - - ( 797 ) - ( 513 ) ( 1,436 ) Recoveries - 99 202 - 45 - 134 480 Provision (recovery) for loan losses (1) ( 350 ) 37 34 66 394 ( 1 ) 351 531 Ending balance $ 3,563 3,494 2,553 334 454 1 217 10,616 Allowance for credit loss-loans $ 3,563 3,494 2,553 334 454 1 217 10,616 Allowance for credit losses - loan commitments 1,144 1 - - 11 - 3 1,159 Total allowance for credit losses $ 4,707 3,495 2,553 334 465 1 220 11,775 (1) Excludes provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the 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 September 30, 2023 Allowance for credit losses: Beginning balance $ 3,227 3,302 2,365 288 367 2 238 - 9,789 Charge-offs - - - - ( 94 ) - ( 141 ) - ( 235 ) Recoveries - 8 1 - 8 - 24 - 41 Provision (recovery) for loan losses (1) 391 105 ( 12 ) ( 15 ) 90 - 131 - 690 Ending balance $ 3,618 3,415 2,354 273 371 2 252 - 10,285 Allowance for credit loss-loans $ 3,618 3,415 2,354 273 371 2 252 - 10,285 Allowance for credit losses - loan commitments 2,071 58 - - - - 2 - 2,131 Total allowance for credit losses $ 5,689 3,473 2,354 273 371 2 254 - 12,416 Nine months ended September 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 - - - - ( 129 ) - ( 450 ) - ( 579 ) Recoveries - 131 5 - 40 - 106 - 282 Provision (recovery) for loan losses (1) 619 135 128 ( 6 ) 98 - 334 - 1,308 Ending balance $ 3,618 3,415 2,354 273 371 2 252 - 10,285 Allowance for credit loss-loans $ 3,618 3,415 2,354 273 371 2 252 - 10,285 Allowance for credit losses - loan commitments 2,071 58 - - - - 2 - 2,131 Total allowance for credit losses $ 5,689 3,473 2,354 273 371 2 254 - 12,416 (1) Excludes adjustment for CECL implemenation and provision for credit losses related to unfunded commitments. Note 8,"Commitments and Contingencies" in the consolidated financial statements provides more detail concerning the implementation adjustment and provision for credit losses related to unfunded commitments. There were no collateral dependent loans individually evaluated at September 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 September 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 September 30, 2024 Real Estate Loans Construction and land development Pass $ 32,962 30,168 43,073 6,959 6,315 4,328 - - 123,805 Watch - - - 444 - - - - 444 Substandard - - - - - 73 - - 73 Total Construction and land development $ 32,962 30,168 43,073 7,403 6,315 4,401 - - 124,322 Single family Pass $ 16,100 34,921 76,307 44,736 22,387 68,475 108,479 - 371,405 Watch - - - - - 1,432 993 - 2,425 Substandard - 32 929 - 127 3,558 221 - 4,867 Total single family $ 16,100 34,953 77,236 44,736 22,514 73,465 109,693 - 378,697 Commercial Pass $ 50,958 46,966 125,291 73,004 59,129 101,599 2,118 - 459,065 Watch - - - - - 3,445 - - 3,445 Substandard - - - - 401 6 - - 407 Total commercial $ 50,958 46,966 125,291 73,004 59,530 105,050 2,118 - 462,917 Multifamily and farmland Pass $ 411 8,556 20,994 20,961 6,193 12,190 443 - 69,748 Watch - - - - - 44 - - 44 Substandard - - - - - 68 - - 68 Total multifamily and farmland $ 411 8,556 20,994 20,961 6,193 12,302 443 - 69,860 Total real estate loans $ 100,431 120,643 266,594 146,104 94,552 195,218 112,254 - 1,035,796 Loans not secured by real estate Commercial Pass $ 7,786 10,597 10,960 3,475 1,890 12,959 16,591 - 64,258 Watch - 307 - 71 267 210 1 - 856 Substandard - 27 223 - - - - - 250 Total Commercial $ 7,786 10,931 11,183 3,546 2,157 13,169 16,592 - 65,364 Farm Pass $ 56 199 20 55 - 5 143 - 478 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 56 199 20 55 - 5 143 - 478 Consumer Pass $ 1,580 1,423 876 212 118 74 2,395 - 6,678 Watch - - 22 - - - - - 22 Substandard - 5 - - - 9 3 - 17 Total consumer $ 1,580 1,428 898 212 118 83 2,398 - 6,717 All other Pass $ 611 - 6,276 401 230 3,011 5,162 - 15,691 Watch - - - - - 131 - - 131 Substandard - - - - - - - - - Total all other $ 611 - 6,276 401 230 3,142 5,162 - 15,822 Total loans not secured by real estate $ 10,033 12,558 18,377 4,214 2,505 16,399 24,295 - 88,381 Total loans $ 110,464 133,201 284,971 150,318 97,057 211,617 136,549 - 1,124,177 The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs during the nine months ended September 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 $ - - - - - - - - - Single-family residential - - 126 - - - - - 126 Commercial - - - - - - - - - Multifamily and farmland - - - - - - - - - Total real estate loans - - 126 - - - - - 126 Loans not secured by real estate: Commercial - 347 397 3 50 - - - 797 Consumer - 23 4 - - 379 - - 406 All other - - - - - 107 - - 107 Total gross charge-offs $ - 370 527 3 50 486 - - 1,436 20 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of 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 21 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs during the year ended 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 September 30, 2024, the Bank had operating right of use assets of $ 4.2 million and operating lease liabilities of $ 4.3 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 September 30, 2024 and 2023. (Dollars in thousands) September 30, 2024 September 30, 2023 Operating lease cost $ 630 $ 605 Other information: Cash paid for amounts included in the measurement of lease liabilities 613 583 Operating cash flows from operating leases - - Right-of-use assets obtained in exchange for new lease liabilities - operating leases - 370 Weighted-average remaining lease term - operating leases 8.03 8.61 Weighted-average discount rate - operating leases 2.78 % 2.71 % The following table presents lease maturities as of September 30, 2024. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: September 30, 2024 2024 $ 205 2025 773 2026 650 2027 612 2028 510 Thereafter 2,116 Total 4,866 Less: Imputed Interest ( 554 ) Operating Lease Liability $ 4,312 22 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 September 30, 2024 and December 31, 2023, repurchase agreements totaled $ 8.4 million and $ 86.7 million, respectively. These borrowings were collateralized with government-sponsored enterprise securities with a market value of $ 17.2 million and $ 89.8 million at September 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 09/30/24 12/31/23 Financial instruments with credit risk: Commitments to extend credit $ 355,369 367,482 Standby letters of credit 3,769 3,721 $ 359,138 371,203 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 $ 359.1 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 $ 1.2 million and $ 2.1 million at September 30, 2024 and 2023, respectively, is separately classified on the balance sheet within Other Liabilities. 23 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 nine months ended September 30, 2024 and 2023. (dollars in thousands) For three months ended For nine months ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Beginning Balance $ 1,565 $ 2,259 $ 1,770 $ - Cummulative effect of change in accounting principle - - - 2,278 Recovery of credit losses ( 406 ) ( 128 ) ( 611 ) ( 147 ) Ending balance $ 1,159 $ 2,131 $ 1,159 $ 2,131 (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. 24 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 September 30, 2024 and December 31, 2023. (Dollars in thousands) September 30, 2024 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 7,374 - 7,374 - U.S. Government sponsored enterprises 9,107 - 9,107 - GSE - Mortgage-backed securities 229,917 - 229,917 - Private label mortgage-backed securities 42,960 - 42,960 - State and political subdivisions 109,215 - 109,215 - (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 September 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. There were no individually evaluated loans at September 30, 2024 and December 31, 2023 25 Table of Contents The carrying amount and estimated fair value of financial instruments at September 30, 2024 and December 31, 2023 are as follows: (Dollars in thousands) Fair Value Measurements at September 30, 2024 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 73,162 73,162 - - 73,162 Investment securities available for sale 398,573 - 398,573 - 398,573 Other investments 2,753 - - 2,753 2,753 Mortgage loans held for sale 1,218 - 1,218 - 1,218 Loans, net 1,113,561 - - 1,107,886 1,107,886 Mutual funds held in deferred compensation trust 2,533 2,533 - - 2,533 Liabilities: Deposits $ 1,479,977 - 1,483,082 - 1,483,082 Securities sold under agreements to repurchase 8,429 - 8,429 - 8,429 Junior subordinated debentures 15,464 - 15,464 - 15,464 (Dollars in thousands) 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. 26 Table of Contents The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents financial information for the Company, which is not considered to be a reportable segment, and is included to reconcile the results of the reportable segments to the Consolidated Financial Statements prepared in conformity with GAAP. (Dollars in thousands) Banking Operations CBRES Other Consolidated As of and for the three months ended September 30, 2024 Interest income $ 20,458 $ - $ 9 $ 20,467 Interest expense 6,635 - 283 6,918 Net interest income 13,823 - ( 274 ) 13,549 Provision for (recovery of) credit losses 297 - - 297 Noninterest income 4,022 - - 4,022 Appraisal management fee income - 3,073 - 3,073 Noninterest expense 11,988 424 168 12,580 Appraisal management fee expense - 2,436 - 2,436 Income tax expense (benefit) 1,417 49 ( 93 ) 1,373 Net income (loss) $ 4,143 $ 164 $ ( 349 ) $ 3,958 Total assets $ 1,656,990 $ 4,183 $ 477 $ 1,661,650 As of and for the three months ended September 30, 2023 Interest income $ 18,297 $ - $ 9 $ 18,306 Interest expense 4,681 - 285 4,966 Net interest income 13,616 - ( 276 ) 13,340 Provision for (recovery of) credit losses 562 - - 562 Noninterest income 3,989 - - 3,989 Appraisal management fee income - 2,785 - 2,785 Noninterest expense 11,515 401 157 12,073 Appraisal management fee expense - 2,182 - 2,182 Income tax expense (benefit) 1,215 46 ( 91 ) 1,170 Net income (loss) $ 4,313 $ 156 $ ( 342 ) $ 4,127 Total assets $ 1,603,071 $ 3,713 $ 480 $ 1,607,264 As of and for the nine months ended September 30, 2024 Interest income $ 60,319 $ - $ 28 $ 60,347 Interest expense 19,228 - 850 20,078 Net interest income 41,091 - ( 822 ) 40,269 Provision for (recovery of) credit losses ( 80 ) - - ( 80 ) Noninterest income 11,986 - - 11,986 Appraisal management fee income - 8,668 - 8,668 Noninterest expense 36,113 1,167 520 37,800 Appraisal management fee expense - 6,863 - 6,863 Income tax expense (benefit) 3,681 147 ( 282 ) 3,546 Net income (loss) $ 13,363 $ 491 $ ( 1,060 ) $ 12,794 Total assets $ 1,656,990 $ 4,183 $ 477 $ 1,661,650 As of and for the nine months ended September 30, 2023 Interest income $ 52,680 $ - $ 26 $ 52,706 Interest expense 10,466 - 791 11,257 Net interest income 42,214 - ( 765 ) 41,449 Provision for (recovery of) credit losses 1,161 - - 1,161 Noninterest income 9,318 - - 9,318 Appraisal management fee income - 7,469 - 7,469 Noninterest expense 34,118 1,094 483 35,695 Appraisal management fee expense - 5,881 - 5,881 Income tax expense (benefit) 3,541 114 ( 262 ) 3,393 Net income (loss) $ 12,712 $ 380 $ ( 986 ) $ 12,106 Total assets $ 1,603,071 $ 3,713 $ 480 1,607,264 27 Table of Contents