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: March 31, 2025 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. 5,459,441 shares of common stock, outstanding at April 30, 2025. INDEX PART I. FINANCIAL INFORMATION PAGE(S) Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2025 (Unaudited) and December 31, 2024 (Audited) 4 Consolidated Statements of Earnings for the three months ended March 31, 2025 and 2024 (Unaudited) 5 Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2025 and 2024 (Unaudited) 6 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2025 and 2024 (Unaudited) 7 Consolidated Statements of Cash Flows for the three months ended March 31, 2025 and 2024 (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 30-39 Item 3. Quantitative and Qualitative Disclosures About Market Risk 39 Item 4. Controls and Procedures 39 PART II. OTHER INFORMATION Item 1. Legal Proceedings 40 Item 1A. Risk Factors 40 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40 Item 3. Defaults upon Senior Securities 40 Item 5. Other Information 40 Item 6. Exhibits 41 Signatures 42 Certifications 43-45 2 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, 2024. 3 Table of Contents PART I. FINANCIAL INFORMATION Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets March 31, 2025 and December 31, 2024 (Dollars in thousands) March 31, December 31, Assets 2025 2024 (Unaudited) (Audited) Cash and due from banks $ 32,372 30,919 Interest-bearing deposits 70,148 28,347 Cash and cash equivalents 102,520 59,266 Investment securities available for sale 374,350 388,003 Other investments 2,674 2,728 Total securities 377,024 390,731 Mortgage loans held for sale 544 1,367 Loans 1,152,080 1,138,404 Less allowance for credit losses ( 10,047 ) ( 9,995 ) Net loans 1,142,033 1,128,409 Premises and equipment, net 15,074 14,847 Cash surrender value of life insurance 17,796 17,675 Other real estate 125 369 Right of use lease asset 3,831 4,013 Accrued interest receivable and other assets 34,038 35,285 Total assets $ 1,692,985 1,651,962 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 412,761 402,254 Interest-bearing demand, MMDA & savings 756,241 741,363 Time, over $250,000 148,352 145,939 Other time 200,215 195,175 Total deposits 1,517,569 1,484,731 Junior subordinated debentures 15,464 15,464 Lease liability 3,958 4,136 Accrued interest payable and other liabilities 17,486 17,068 Total liabilities 1,554,477 1,521,399 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 5,459,441 shares at March 31, 2025 and 5,457,646 shares at December 31, 2024 48,708 48,658 Common stock held by deferred compensation trust, at cost; 161,680 shares at March 31, 2025 and 158,580 shares at December 31, 2024 ( 1,842 ) ( 1,757 ) Deferred compensation 1,842 1,757 Retained earnings 123,439 121,062 Accumulated other comprehensive loss ( 33,639 ) ( 39,157 ) Total shareholders' equity 138,508 130,563 Total liabilities and shareholders' equity $ 1,692,985 1,651,962 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings Three Months Ended March 31, 2025 and 2024 (Dollars in thousands, except per share amounts) 2025 2024 (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 16,016 15,138 Interest on due from banks 350 907 Interest on investment securities: U.S. Government sponsored enterprises 2,261 2,591 State and political subdivisions 694 695 Other 649 479 Total interest income 19,970 19,810 Interest expense: Interest-bearing demand, MMDA & savings deposits 2,652 2,060 Time deposits 3,133 3,681 Junior subordinated debentures 241 284 Other - 481 Total interest expense 6,026 6,506 Net interest income 13,944 13,304 Provision for credit losses 268 91 Net interest income after provision for credit losses 13,676 13,213 Non-interest income: Service charges 1,412 1,340 Other service charges and fees 186 184 Loss on sale of securities, net ( 4 ) - Mortgage banking income 27 51 Insurance and brokerage commissions 237 246 Appraisal management fee income 3,042 2,414 Miscellaneous 1,629 1,803 Total non-interest income 6,529 6,038 Non-interest expense: Salaries and employee benefits 6,788 6,980 Occupancy 2,028 2,111 Professional fees 507 392 Advertising 253 199 Debit card expense 236 312 FDIC insurance 189 191 Appraisal management fee expense 2,419 1,904 Other 2,153 2,427 Total non-interest expense 14,573 14,516 Earnings before income taxes 5,632 4,735 Income tax expense 1,287 787 Net earnings $ 4,345 3,948 Basic net earnings per share $ 0.82 0.74 Diluted net earnings per share $ 0.79 0.72 Cash dividends declared per share $ 0.36 0.35 See accompanying Notes to Consolidated Financial Statements. 5 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2025 and 2024 (Dollars in thousands) 2025 2024 (Unaudited) (Unaudited) Net earnings $ 4,345 3,948 Other comprehensive income : Unrealized holding gains on securities available for sale 7,171 71 Reclassification adjustment for losses on securities available for sale included in net earnings 4 - Total other comprehensive income , before income taxes 7,175 71 Income tax benefit related to other comprehensive income : Unrealized holding gains on securities available for sale ( 1,656 ) ( 16 ) Reclassification adjustment for losses on sales of securities available for sale included in net earnings ( 1 ) - Total income tax expense related to other comprehensive income ( 1,657 ) ( 16 ) Total other comprehensive income, net of tax 5,518 55 Total comprehensive income $ 9,863 4,003 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 Months Ended March 31, 2025 and 2024 (Dollars in thousands) 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, 2024 5,457,646 $ 48,658 121,062 1,757 ( 1,757 ) ( 39,157 ) 130,563 Restricted stock units vested 1,795 50 - - - - 50 Cash dividends declared on common stock - - ( 1,968 ) - - - ( 1,968 ) Equity incentive plan, net - - - 85 ( 85 ) - - Net earnings - - 4,345 - - - 4,345 State tax rate reduction ( 99 ) ( 99 ) Other comprehensive income - - - - - 5,617 5,617 Balance, March 31, 2025 5,459,441 $ 48,708 123,439 1,842 ( 1,842 ) ( 33,639 ) 138,508 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 Other comprehensive income - - - - - 55 55 Balance, March 31, 2024 5,455,999 $ 48,627 111,775 1,943 ( 1,943 ) ( 39,310 ) 121,092 See accompanying Notes to Consolidated Financial Statements. 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Three Months Ended March 31, 2025 and 2024 (Dollars in thousands) 2025 2024 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 4,345 3,948 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 678 671 Provision for credit losses 268 91 Deferred income taxes 786 ( 208 ) Gain on sale of held for mortgage loans ( 32 ) ( 40 ) Loss on sale of investment securities net 4 - Write-down of premises and equipment 31 - Gain on sale of other real estate ( 17 ) - Restricted stock expense ( 27 ) 6 Proceeds from sales of mortgage loans held for sale 1,564 3,137 Origination of mortgage loans held for sale ( 709 ) ( 3,703 ) Cash surrender value of life insurance ( 121 ) ( 116 ) Change in: Right of use lease asset 182 178 Other assets ( 1,295 ) ( 1,043 ) Lease liability ( 178 ) ( 172 ) Other liabilities 445 920 Net cash provided by operating activities 5,924 3,669 Cash flows from investing activities: Purchases of investment securities available for sale - ( 9,710 ) Proceeds from calls and maturities of investment securities available for sale 12,733 3,000 Proceeds from sales of investment securities available for sale 3,000 Proceeds from paydowns of investment securities available for sale 4,959 3,859 Proceeds from paydowns of other investment securities 123 37 Purchase of FHLB stock ( 11 ) ( 10 ) Net change in loans ( 13,892 ) ( 13,889 ) Purchases of premises and equipment ( 763 ) ( 128 ) Proceeds from sale of other real estate and repossessions 261 - Net cash provided (used) by investing activities 6,410 ( 16,841 ) Cash flows from financing activities: Net change in deposits 32,838 60,319 Net change in securities sold under agreement to repurchase - ( 27,499 ) Restricted stock units vested 50 - Common stock repurchased - ( 1,998 ) Cash dividends paid on common stock ( 1,968 ) ( 1,929 ) Net cash provided by financing activities 30,920 28,893 Net change in cash and cash equivalents 43,254 15,721 Cash and cash equivalents at beginning of period 59,266 82,375 Cash and cash equivalents at end of period $ 102,520 98,096 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Three Months Ended March 31, 2025 and 2024 (Dollars in thousands) 2025 2024 (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 6,025 6,515 Income taxes $ 352 236 Noncash investing and financing activities: Change in unrealized loss on investment securities available for sale, net $ 5,518 55 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, 2024) 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 9. 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 2024 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2025 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2024. ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2024-03—Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) The ASU requires disaggregated disclosure of income statement expenses for public business entities (PBEs). Annual reporting periods after 12/15/26 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 2025-01, Income Statement—Reporting Comprehensive Income— Expense Disaggregation Disclosures (Subtopic 220- 40) The ASU clarifies that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. Annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027. 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. 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 2024 consolidated financial statements have been reclassified to conform to the 2025 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings. 10 Table of Contents (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 months ended March 31, 2025 and 2024: For the three months ended (dollars in thousands) March 31, 2025 March 31, 2024 Beginning balance $ ( 39,157 ) $ ( 39,365 ) Other comprehensive loss before reclassifications, net 5,614 55 Amounts reclassified from accumulated other comprehensive loss, net 3 - Reduction in state tax rate adjustment, net ( 99 ) - Net current period other comprehensive loss 5,518 55 Ending balance $ ( 33,639 ) $ ( 39,310 ) (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 months ended March 31, 2025 and 2024 is as follows: For the three months ended March 31, 2025 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,345 5,299,155 $ 0.82 Effect of dilutive securities: Restricted stock units - unvested 10,354 Shares held in deferred comp plan by deferred compensation trust 160,130 Diluted earnings per share $ 4,345 5,469,639 $ 0.79 For the three months ended March 31, 2024 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 3,948 5,318,671 $ 0.74 Effect of dilutive securities: Restricted stock units - unvested 18,143 Shares held in deferred comp plan by deferred compensation trust 164,336 Diluted earnings per share $ 3,948 5,501,150 $ 0.72 11 Table of Contents (4) Investment Securities Investment securities available for sale at March 31, 2025 and December 31, 2024 are as follows: (Dollars in thousands) March 31, 2025 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasuries $ 7,983 - 585 7,398 U.S. Government sponsored enterprises 6,129 - 425 5,704 GSE - Mortgage-backed securities 232,114 161 19,422 212,853 Private label mortgage-backed securities 42,091 99 1,117 41,073 State and political subdivisions 129,594 - 22,272 107,322 Total $ 417,911 260 43,821 374,350 (Dollars in thousands) December 31, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Treasuries $ 7,981 - 724 7,257 U.S. Government sponsored enterprises 9,243 - 511 8,732 GSE - Mortgage-backed securities 248,837 162 23,207 225,792 Private label mortgage-backed securities 43,118 74 1,425 41,767 State and political subdivisions 129,659 - 25,204 104,455 Total $ 438,838 236 51,071 388,003 The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2025 and December 31, 2024 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. (Dollars in thousands) March 31, 2025 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ - - 7,398 585 7,398 585 U.S. government sponsored enterprises - - 5,704 425 5,704 425 GSE -Mortgage-backed securities 16,064 284 191,926 19,138 207,990 19,422 Private label mortgage-backed securities 8,932 81 25,595 1,036 34,527 1,117 State and political subdivisions - - 107,322 22,272 107,322 22,272 Total $ 24,996 365 337,945 43,456 362,941 43,821 (Dollars in thousands) December 31, 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 $ - - 7,257 724 7,257 724 U.S. government sponsored enterprises - - 8,732 511 8,732 511 GSE -Mortgage-backed securities 20,458 669 197,497 22,538 217,955 23,207 Private label mortgage-backed securities 4,010 9 21,727 1,416 25,737 1,425 State and political subdivisions - - 104,455 25,204 104,455 25,204 Total $ 24,468 678 339,668 50,393 364,136 51,071 12 Table of Contents At March 31, 2025, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 43.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the March 31, 2025 table above, both of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions contained unrealized losses, all six of the securities issued by U.S. Government sponsored enterprises (“GSE”), 110 of the 115 GSE mortgage-backed securities, and 13 of the 17 private label mortgage-backed securities contained unrealized losses. The Company did not have any reserves on securities at March 31, 2025, as no credit related losses were identified in the Company’s March 31, 2025 analysis. At December 31, 2024, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 51.1 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2024 table 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 GSEs, 114 of the 119 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 securities at December 31, 2024, as no credit related losses were identified in the Company’s December 31, 2024 analysis. The amortized cost and estimated fair value of investment securities available for sale, other than GSE mortgage-backed securities, at March 31, 2025, are shown below by contractual maturity. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. March 31, 2025 (Dollars in thousands) Amortized Cost Fair Value Due within one year $ 4,995 4,982 Due from one to five years 35,616 32,632 Due from five to ten years 74,710 61,835 Due after ten years 70,476 62,048 Mortgage-backed securities 232,114 212,853 Total $ 417,911 374,350 During the three months ended March 31, 2025, proceeds from sales of securities available for sale were $ 12.7 million and resulted in gross losses of $ 47,000 and gross gains of $ 43,000 . No securities available for sale were sold during the three months ended March 31, 2024. Securities with a fair value of approximately $ 36.7 million and $ 40.0 million at March 31, 2025 and December 31, 2024, 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 March 31, 2025 and December 31, 2024 are summarized as follows: (Dollars in thousands) March 31, 2025 December 31, 2024 Real estate loans: Construction and land development $ 126,645 122,328 Single-family residential 387,901 384,509 Commercial 479,194 471,444 Multifamily and farmland 69,470 69,671 Total real estate loans 1,063,210 1,047,952 Loans not secured by real estate: Commercial 63,222 63,837 Farm 481 401 Consumer 6,338 6,475 All other 18,829 19,739 Total loans 1,152,080 1,138,404 Less allowance for credit losses ( 10,047 ) ( 9,995 ) Total net loans $ 1,142,033 1,128,409 The Bank makes loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Wake, Rowan and Forsyth counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below: · Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. · Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. · Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over the loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. · Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. · Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. Loans are considered past due if the required principal and interest payments have not been received within 30 days of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 14 Table of Contents The following tables present an age analysis of past due loans, by loan type, as of March 31, 2025 and December 31, 2024: March 31, 2025 (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 $ 333 35 368 126,277 126,645 - Single-family residential 3,676 4,235 7,911 379,990 387,901 - Commercial 360 416 776 478,418 479,194 - Multifamily and farmland - - - 69,470 69,470 - Total real estate loans 4,369 4,686 9,055 1,054,155 1,063,210 - Loans not secured by real estate: Commercial - 290 290 62,932 63,222 - Farm - - - 481 481 - Consumer 20 7 27 6,311 6,338 - All other - - - 18,829 18,829 - Total loans $ 4,389 4,983 9,372 1,142,708 1,152,080 - December 31, 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 37 168 122,160 122,328 - Single-family residential 5,434 3,720 9,154 375,355 384,509 - Commercial 87 426 513 470,931 471,444 - Multifamily and farmland - - - 69,671 69,671 - Total real estate loans 5,652 4,183 9,835 1,038,117 1,047,952 - Loans not secured by real estate: Commercial 360 248 608 63,229 63,837 - Farm - - - 401 401 - Consumer 33 9 42 6,433 6,475 - All other - - - 19,739 19,739 - Total loans $ 6,045 4,440 10,485 1,127,919 1,138,404 - The following table presents non-accrual loans as of March 31, 2025 and December 31, 2024: March 31, 2025 Nonaccrual Loans Nonaccrual Loans Total With No With Nonaccrual (Dollars in thousands) Allowance Allowance Loans Real estate loans: Construction and land development $ - 35 35 Single-family residential 1,345 2,890 4,235 Commercial 416 - 416 Multifamily and farmland - - - Total real estate loans 1,761 2,925 4,686 Loans not secured by real estate: Commercial 223 67 290 Consumer - 7 7 Total $ 1,984 2,999 4,983 15 Table of Contents December 31, 2024 Nonaccrual Loans Nonaccrual Loans Total With No With Nonaccrual (Dollars in thousands) Allowance Allowance Loans Real estate loans: Construction and land development $ 37 - 37 Single-family residential 3,720 - 3,720 Commercial 426 - 426 Multifamily and farmland - - - Total real estate loans 4,183 - 4,183 Loans not secured by real estate: Commercial 248 - 248 Consumer 9 - 9 Total $ 4,440 - 4,440 No interest income was recognized on non-accrual loans for the three months ended March 31, 2025 and 2024. A loan may be individually evaluated for determining the allowance for credit losses when it is determined that it does not share similar risk characteristics with other assets. Non-accrual loans with an outstanding balance of $ 250,000 or greater are individually evaluated and totaled $ 2.0 million and $ 1.6 million at March 31, 2025 and December 31, 2024, respectively. Non-accrual loans evaluated collectively as a pool totaled $ 3.0 million and $ 2.8 million at March 31, 2025 and December 31, 2024, respectively. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans require an analysis of the collateral. The fair value of the collateral is discounted by estimated liquidation costs. If the discounted fair value of the collateral is greater than the amortized loan balance, no allowance is required. Otherwise the difference between the balance and the collateral is charged off if deemed uncollectible. 16 Table of Contents The following table details the amortized cost of collateral dependent loans and any related allowance at March 31, 2025 and December 31, 2024. March 31, 2025 December 31, 2024 Allowance for Allowance for (Dollars in thousands) Amortized Cost Credit Losses Amortized Cost Credit Losses Real estate loans: Construction and land development $ 34 1 37 - Single-family residential 4,235 26 3,720 - Commercial 416 - 426 - Multifamily and farmland - - - - Total real estate loans 4,685 27 4,183 - Loans not secured by real estate: Commercial 261 - 248 - Consumer - - - - Total $ 4,946 27 4,431 - 17 Table of Contents The following tables provide a breakdown of collateral dependent loans by collateral type and collateral coverage at March 31, 2025 and 2024. These tables also show non-accrual loans not considered to be collateral dependent at March 31, 2025 and December 31, 2024. March 31, 2025 Financial Assets Not Considered (Dollars in thousands) Residential Property Developed Land Commercial Property Business Assets Collateral Dependent Total Real estate loans: Construction and land development $ - 34 - - - 34 Single-family residential 4,235 - - - - 4,235 Commercial - - 416 - - 416 Multifamily and farmland - - - - - - Total real estate loans 4,235 34 416 - - 4,685 Loans not secured by real estate: Commercial - - - 261 - 261 Consumer - - - - 37 37 Total $ 4,235 34 416 261 37 4,983 Collateral Value $ 12,234 88 655 273 December 31, 2024 Financial Assets Not Considered (Dollars in thousands) Residential Property Developed Land Commercial Property Business Assets Collateral Dependent Total Real estate loans: Construction and land development $ - 37 - - - 37 Single-family residential 3,720 - - - - 3,720 Commercial - - 426 - - 426 Multifamily and farmland - - - - - - Total real estate loans 3,720 37 426 - - 4,183 Loans not secured by real estate: Commercial - - - 248 - 248 Consumer - - - - 9 9 Total $ 3,720 37 426 248 9 4,440 Collateral Value $ 9,648 88 944 272 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. No loans to borrowers experiencing financial difficulty were modified during the three months ended March 31, 2025. The following table shows the amortized cost basis at March 31, 2024 of the loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2024, disaggregated by loan class and type of concession granted. (Dollars in thousands) Amortized Cost Basis at March 31, 2024 % of Loan Class Modification Type Financial Effect Loan class: Commercial not secured by real estate 73 0.11 % Term Extension Line of credit converted to amortizing term loan . Total $ 73 18 Table of Contents 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 were modified in the three months ended March 31, 2024. March 31, 2024 (Dollars in thousands) Payment Status (Amortized Cost Basis) Current 30 - 89 Days Past Due 90 + Days Past Due Loan type: Commercial real estate 73 - - Total $ 73 - - 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 an independent 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 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 of the allowance, and any provision, 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. An evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance. 19 Table of Contents The following tables present changes in the allowance for credit losses for the three months ended March 31, 2025 and 2024. (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 March 31, 2025 Allowance for credit losses: Beginning balance $ 3,385 3,386 2,322 246 446 1 209 9,995 Charge-offs - ( 5 ) - - - - ( 107 ) ( 112 ) Recoveries - 5 - - 5 - 71 81 Provision (recovery) for loan losses (1) 78 ( 24 ) 15 ( 4 ) ( 12 ) - 30 83 Ending balance $ 3,463 3,362 2,337 242 439 1 203 10,047 Allowance for credit loss-loans $ 3,463 3,362 2,337 242 439 1 203 10,047 Allowance for credit losses loan commitments 1,274 3 7 1 - - 1 1,286 Total allowance for credit losses $ 4,737 3,365 2,344 243 439 1 204 11,333 (1) Excludes provision for credit losses related to unfunded commitments. Note 7,"Commitments and Contingencies" in the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments. (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 March 31, 2024 Allowance for credit losses: Beginning balance $ 3,913 3,484 2,317 268 812 2 245 11,041 Charge-offs - - - - ( 446 ) - ( 210 ) ( 656 ) Recoveries - 56 201 - 6 - 36 299 Provision (recovery) for loan losses (1) ( 233 ) 57 ( 173 ) 45 300 - 167 163 Ending balance $ 3,680 3,597 2,345 313 672 2 238 10,847 Allowance for credit loss-loans $ 3,680 3,597 2,345 313 672 2 238 10,847 Allowance for credit losses loan commitments 1,692 5 - - - - 1 1,698 Total allowance for credit losses $ 5,372 3,602 2,345 313 672 2 239 12,545 (1) Excludes provision for credit losses related to unfunded commitments. Note 7,"Commitments and Contingencies" in the condensed consolidated financial statements provides more detail concerning the provision for credit losses related to unfunded commitments. 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. 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 March 31, 2025. Term Loans by Origination Year Revolving Loans Converted to (dollars in thousands) 2025 2024 2023 2022 2021 Prior Revolving Loans Term Loans Total Loans March 31, 2025 Real Estate Loans Construction and land development Pass $ 11,959 43,989 28,700 26,681 4,916 9,824 - 72 126,141 Watch - - - - 441 - - - 441 Substandard - - - - - 63 - - 63 Total Construction and land development $ 11,959 43,989 28,700 26,681 5,357 9,887 - 72 126,645 Single family Pass $ 8,864 22,893 34,893 72,155 43,050 85,136 114,182 - 381,173 Watch - - - - - 1,322 - - 1,322 Substandard - - 31 1,345 96 3,617 317 - 5,406 Total single family $ 8,864 22,893 34,924 73,500 43,146 90,075 114,499 - 387,901 Commercial Pass $ 14,052 57,648 45,650 137,429 69,605 148,915 2,377 - 475,676 Watch - - - 453 - 2,253 - - 2,706 Substandard - - - - - 812 - - 812 Total commercial $ 14,052 57,648 45,650 137,882 69,605 151,980 2,377 - 479,194 Multifamily and farmland Pass $ 991 990 8,279 20,616 20,455 17,788 310 - 69,429 Watch - - - - - 41 - - 41 Substandard - - - - - - - - - Total multifamily and farmland $ 991 990 8,279 20,616 20,455 17,829 310 - 69,470 Total real estate loans $ 35,866 125,520 117,553 258,679 138,563 269,771 117,186 72 1,063,210 Loans not secured by real estate Commercial Pass $ 2,239 8,400 12,023 5,105 2,598 12,860 19,386 - 62,611 Watch - - - 136 18 166 1 - 321 Substandard - 13 25 223 - 29 - - 290 Total Commercial $ 2,239 8,413 12,048 5,464 2,616 13,055 19,387 - 63,222 Farm Pass $ 51 49 190 29 - - 162 - 481 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 51 49 190 29 - - 162 - 481 Consumer Pass $ 532 1,496 1,079 574 142 137 2,348 - 6,308 Watch - - - 20 - - - - 20 Substandard - - - - - 8 2 - 10 Total consumer $ 532 1,496 1,079 594 142 145 2,350 - 6,338 All other Pass $ 130 468 - 9,680 351 2,969 5,231 - 18,829 Watch - - - - - - - - - Substandard - - - - - - - - - Total all other $ 130 468 - 9,680 351 2,969 5,231 - 18,829 Total loans not secured by real estate $ 2,952 10,426 13,317 15,767 3,109 16,169 27,130 - 88,870 Total loans $ 38,818 135,946 130,870 274,446 141,672 285,940 144,316 72 1,152,080 21 Table of Contents The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs for the three months ended March 31, 2025. March 31, 2025 Gross Loan Charge-offs by Origination Year Revolving Loans (dollars in thousands) Revolving Converted to Total 2025 2024 2023 2022 2021 Prior Loans Term Loans Loans Real estate loans: Construction and land development $ - - - - - - - - - Single-family residential - - - - - 5 - - 5 Commercial - - - - - - - - - Multifamily and farmland - - - - - - - - - Total real estate loans - - - - - 5 - - 5 Loans not secured by real estate: Commercial - - - - - - - - - Consumer - 5 - - - 102 - - 107 All other - - - - - - - - - Total gross charge-offs $ - 5 - - - 107 - - 112 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, 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 December 31, 2024 Real Estate Loans Construction and land development Pass $ 41,171 29,503 34,495 6,836 5,792 4,020 - - 121,817 Watch - - - 443 - - - - 443 Substandard - - - - - 68 - - 68 Total Construction and land development $ 41,171 29,503 34,495 7,279 5,792 4,088 - - 122,328 Single family Pass $ 22,169 35,865 73,663 43,900 22,363 66,074 113,067 - 377,101 Watch - - - - - 1,469 993 - 2,462 Substandard - 31 1,000 - 124 3,467 324 - 4,946 Total single family $ 22,169 35,896 74,663 43,900 22,487 71,010 114,384 - 384,509 Commercial Pass $ 56,411 46,589 135,881 71,066 58,223 97,122 2,296 - 467,588 Watch - - - - 87 2,943 - - 3,030 Substandard - - - - 400 426 - - 826 Total commercial $ 56,411 46,589 135,881 71,066 58,710 100,491 2,296 - 471,444 Multifamily and farmland Pass $ 998 8,455 20,786 20,638 6,055 12,186 443 - 69,561 Watch - - - - - 43 - - 43 Substandard - - - - - 67 - - 67 Total multifamily and farmland $ 998 8,455 20,786 20,638 6,055 12,296 443 - 69,671 Total real estate loans $ 120,749 120,443 265,825 142,883 93,044 187,885 117,123 - 1,047,952 Loans not secured by real estate Commercial Pass $ 9,153 11,335 6,045 3,107 1,707 11,864 20,032 - 63,243 Watch - - 136 19 23 167 1 - 346 Substandard - 25 223 - - - - - 248 Total Commercial $ 9,153 11,360 6,404 3,126 1,730 12,031 20,033 - 63,837 Farm Pass $ 53 195 17 50 - - 86 - 401 Watch - - - - - - - - - Substandard - - - - - - - - - Total farm $ 53 195 17 50 - - 86 - 401 Consumer Pass $ 1,777 1,232 666 176 99 64 2,397 - 6,411 Watch - - 53 - - - - - 53 Substandard - - - - - 8 3 - 11 Total consumer $ 1,777 1,232 719 176 99 72 2,400 - 6,475 All other Pass $ 972 - 10,002 376 217 2,878 5,164 - 19,609 Watch - - - - - 130 - - 130 Substandard - - - - - - - - - Total all other $ 972 - 10,002 376 217 3,008 5,164 - 19,739 Total loans not secured by real estate $ 11,955 12,787 17,142 3,728 2,046 15,111 27,683 - 90,452 Total loans $ 132,704 133,230 282,967 146,611 95,090 202,996 144,806 - 1,138,404 22 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, 2024. December 31, 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 - - 5 - - 131 Commercial - - - - - - - - - Multifamily and farmland - - - - - - - - - Total real estate loans - - 126 - - 5 - - 131 Loans not secured by real estate: Commercial - 447 397 74 179 37 - - 1,134 Consumer 5 37 9 - 1 557 - - 609 All other - - - - - 107 - - 107 Total gross charge-offs $ 5 484 532 74 180 706 - - 1,981 (6) Leases As of March 31, 2025, the Bank had operating right of use assets of $ 3.8 million and operating lease liabilities of $ 4.0 million. As of December 31, 2024, the Bank had operating right of use assets of $ 4.0 million and operating lease liabilities of $ 4.1 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 March 31, 2025 and 2024. (Dollars in thousands) March 31, 2025 March 31, 2024 Operating lease cost $ 192 $ 815 Other information: Cash paid for amounts included in the measurement of lease liabilities 206 787 Operating cash flows from operating leases - - Right-of-use assets obtained in exchange for new lease liabilities - operating leases - - Weighted-average remaining lease term - operating leases 7.80 8.30 Weighted-average discount rate - operating leases 2.82 % 2.74 % 23 Table of Contents The following table presents lease maturities as of March 31, 2025. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: March 31, 2025 2025 $ 567 2026 650 2027 612 2028 510 2029 422 Thereafter 1,694 Total 4,455 Less: Imputed Interest ( 497 ) Operating Lease Liability $ 3,958 (7) 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 3/31/25 12/31/24 Financial instruments whose contract amount represent credit risk: Commitments to extend credit $ 347,461 $ 348,876 Standby letters of credit $ 1,607 $ 1,675 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 $ 349.1 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 $ 1.3 million and $ 1.1 million at March 31, 2025 and December 31, 2024, 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 months ended March 31, 2025 and 2024. (dollars in thousands) March 31, 2025 March 31, 2024 Beginning Balance $ 1,101 $ 1,770 Provision for (recovery of) credit losses 185 ( 72 ) Ending balance $ 1,286 $ 1,698 (8) 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. 25 Table of Contents Mutual Funds Mutual funds held in the deferred compensation trust are carried at 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. 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 March 31, 2025 and December 31, 2024. (Dollars in thousands) March 31, 2025 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 7,398 - 7,398 - U.S. Government sponsored enterprises 5,704 - 5,704 - GSE - Mortgage-backed securities 212,853 - 212,853 - Private label mortgage-backed securities 41,073 - 41,073 - State and political subdivisions 107,322 - 107,322 - Mutual funds held in deferred compensation trust 2,740 2,740 - - (Dollars in thousands) December 31, 2024 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 7,257 - 7,257 - U.S. Government sponsored enterprises 8,732 - 8,732 - GSE - Mortgage-backed securities 225,792 - 225,792 - Private label mortgage-backed securities 41,767 - 41,767 - State and political subdivisions 104,455 - 104,455 - Mutual funds held in deferred compensation trust 2,726 2,726 - - 26 Table of Contents The fair value measurements for individually evaluated loans and other real estate on a non-recurring basis at March 31, 2025 and December 31, 2024 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. (Dollars in thousands) Fair Value March 31, 2025 Fair Value December 31, 2024 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Individually evaluated loans $ 1,984 $ 1,646 Appraised value Discounts to reflect current market conditions and ultimate collectability 0 - 50% Other real estate $ 125 $ 369 Appraised value Discounts to reflect current market conditions and estimated costs to sell 0 - 25% The carrying amount and estimated fair value of financial instruments at March 31, 2025 and December 31, 2024 are as follows: (Dollars in thousands) Fair Value Measurements at March 31, 2025 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 102,520 102,520 - - 102,520 Investment securities available for sale 374,350 - 374,350 - 374,350 Other investments 2,674 - - 2,674 2,674 Mortgage loans held for sale 544 - 544 - 544 Loans, net 1,142,033 - - 1,139,464 1,139,464 Mutual funds held in deferred compensation trust 2,740 2,740 - - 2,740 Liabilities: Deposits $ 1,517,569 - 1,519,747 - 1,519,747 Junior subordinated debentures 15,464 - 15,464 - 15,464 27 Table of Contents (Dollars in thousands) Fair Value Measurements at December 31, 2024 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 59,266 59,266 - - 59,266 Investment securities available for sale 388,003 - 388,003 - 388,003 Other investments 2,728 - - 2,728 2,728 Mortgage loans held for sale 1,367 - 1,367 - 1,367 Loans, net 1,128,409 - - 1,123,864 1,123,864 Mutual funds held in deferred compensation trust 2,726 2,726 - - 2,726 Liabilities: Deposits $ 1,484,731 - 1,487,475 - 1,487,475 Junior subordinated debentures 15,464 - 15,464 - 15,464 (9) 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 Bank’s executive management team, which is comprised of the Bank’s Chief Executive Officer, Chief Financial Officer and executive vice presidents, is the chief operating decision maker for the Company. The Bank’s executive management team reviews actual net income versus budgeted net income on a quarterly basis to assess segment performance. The following table presents financial information for the reportable segments. Financial results by operating segment, including significant expense categories provided to the chief operating decision maker, are detailed below. Certain prior period amounts have been reclassified to conform to the current presentation. The information provided under the caption “Other” represents the parent company, which is not considered to be a reportable segment, is included to reconcile the results of the operating 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 March 31, 2025 Interest income $ 19,963 - 7 19,970 Interest expense 5,785 - 241 6,026 Net interest income 14,178 - ( 234 ) 13,944 Provision for credit losses 268 - - 268 Noninterest income 3,487 - - 3,487 Appraisal management fee income - 3,042 - 3,042 Salaries and employee benefits 6,466 220 102 6,788 Occupancy 2,018 10 - 2,028 Appraisal management fee expense - 2,419 - 2,419 Noninterest expense 3,083 188 67 3,338 Income tax expense (benefit) 1,325 47 ( 85 ) 1,287 Net income (loss) $ 4,505 158 ( 318 ) 4,345 Total assets $ 1,687,711 4,545 729 1,692,985 As of and for the three months ended March 31, 2024 Interest income $ 19,801 - 9 19,810 Interest expense 6,222 - 284 6,506 Net interest income 13,579 - ( 275 ) 13,304 Provision for credit losses 91 - - 91 Noninterest income 3,624 - - 3,624 Appraisal management fee income - 2,414 - 2,414 Salaries and employee benefits 6,683 196 101 6,980 Occupancy 2,110 1 - 2,111 Appraisal management fee expense - 1,904 - 1,904 Noninterest expense 3,313 147 61 3,521 Income tax expense (benefit) 841 38 ( 92 ) 787 Net income (loss) $ 4,165 128 ( 345 ) 3,948 Total assets $ 1,647,611 3,847 504 1,651,962 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-63 of the Company’s 2024 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2025 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. The Federal Reserve Federal Open Market Committee (“FOMC”) increased the target federal funds rate 500 basis points between March 2022 and July 2023 to address the supply-chain disruption and rising inflation that had developed in the markets prior to the increases in the target rate. In 2024, the FOMC reduced the target federal funds rate to a range of 4.25% to 4.50% at March 31, 2025. Subsequently, economic conditions have stabilized such that businesses in our market area are growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity are now sufficiently stable to allow for reasonable economic growth in our markets. 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. A 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 2024 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2025 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2024. Results of Operations Summary. Net earnings were $4.3 million or $0.82 per share and $0.79 per diluted share for the three months ended March 31, 2025, as compared to $3.9 million or $0.74 per share and $0.72 per diluted share for the prior year period. The increase in first quarter net earnings is primarily the result of increases in net interest income and non-interest income, which were partially offset by an increase in the provision for credit losses and an increase in non-interest expense, compared to the prior year period, as discussed below. The annualized return on average assets was 1.07% for the three months ended March 31, 2025, compared to 0.96% for the same period one year ago, and annualized return on average shareholders’ equity was 13.52% for the three months ended March 31, 2025, compared to 13.51% 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 $13.9 million for the three months ended March 31, 2025, compared to $13.3 million for the three months ended March 31, 2024. The increase in net interest income is due to a $160,000 increase in interest income and a $480,000 decrease in interest expense. The increase in interest income is primarily due to a $878,000 increase in interest income and fees on loans, which was partially offset by a $557,000 decrease in interest income on balances due from banks and a $161,000 decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The decrease in interest income on balances due from banks is due to a reduction in balances outstanding. The decrease in interest income on investment securities is primarily due to a reduction in balances outstanding. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities. Net interest income after the provision for credit losses was $13.7 million for the three months ended March 31, 2025, compared to $13.2 million for the three months ended March 31, 2024. The provision for credit losses for the three months ended March 31, 2025 was $268,000, compared to $91,000 for the three months ended March 31, 2024. The increase in the provision for credit losses is primarily attributable to an increase in unfunded commitments on construction loans and an increase in total loans outstanding. These increases were partially offset by the removal of the $60,000 Hurricane Helene reserve included in the allowance for credit losses at December 31, 2024. 31 Table of Contents Interest income was $20.0 million for the three months ended March 31, 2025, compared to $19.8 million for the three months ended March 31, 2024. The increase is primarily due to a $878,000 increase in interest income and fees on loans, which was partially offset by a $557,000 decrease in interest income on balances due from banks and a $161,000 decrease in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans. The decrease in interest income on balances due from banks is due to a reduction in balances outstanding. The decrease in interest income on investment securities is primarily due to a reduction in balances outstanding. During the three months ended March 31, 2025, average loans were $1.14 billion, an increase of $49.7 million from average loans of $1.09 billion for the three months ended March 31, 2024. During the three months ended March 31, 2025, average investment securities available for sale were $433.2 million, a decrease of $10.3 million from average investment securities available for sale of $443.5 million for the three months ended March 31, 2024. The average yield on loans for the three months ended March 31, 2025 and 2024 was 5.69% and 5.57%, respectively. The average yield on investment securities available for sale was 3.38% and 3.15% for the three months ended March 31, 2025 and 2024, respectively. The average yield on earning assets was 5.03% and 4.96% for the three months ended March 31, 2025 and 2024, respectively. Interest expense was $6.0 million for the three months ended March 31, 2025, compared to $6.5 million for the three months ended March 31, 2024. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities. During the three months ended March 31, 2025, average interest-bearing non-maturity deposits were $747.0 million, an increase of $98.7 million from average interest-bearing non-maturity deposits of $648.3 million for the three months ended March 31, 2024. During the three months ended March 31, 2025, average certificates of deposit were $341.3 million, a decrease of $10.9 million from average certificates of deposit of $352.2 million for the three months ended March 31, 2024. The average rate paid on interest-bearing checking and savings accounts was 1.44% and 1.28% for the three months ended March 31, 2025 and 2024, respectively. The average rate paid on certificates of deposit was 3.72% for the three months ended March 31, 2025, compared to 4.20% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.21% for the three months ended March 31, 2025, compared to 2.40% 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 March 31, 2025 and 2024. 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 March 31, 2025 and 2024 have been adjusted to a tax equivalent basis using an effective tax rate of 22.78% for securities that are both federal and state tax exempt and an effective tax rate of 20.53% 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 March 31, 2025 March 31, 2024 (Dollars in thousands) Average Balance Interest Yield / Rate Average Balance Interest Yield / Rate Interest-earning assets: Loans receivable $ 1,142,331 $ 16,016 5.69 % $ 1,092,658 $ 15,138 5.57 % Investments - taxable 302,060 2,863 3.84 % 310,014 3,008 3.90 % Investments - nontaxable* 134,289 746 2.25 % 136,791 763 2.24 % Due from banks 32,939 350 4.31 % 66,518 907 5.48 % Total interest-earning assets 1,611,619 19,975 5.03 % 1,605,981 19,816 4.96 % Non-interest earning assets: Cash and due from banks 29,509 32,045 Allowance for credit losses (9,987 ) (11,062 ) Other assets 20,195 20,838 Total assets $ 1,651,336 $ 1,647,802 Interest-bearing liabilities: Interest-bearing demand, MMDA & savings deposits $ 746,960 $ 2,652 1.44 % $ 648,306 $ 2,060 1.28 % Time deposits 341,296 3,133 3.72 % 352,247 3,681 4.20 % Junior subordinated debentures 15,464 241 6.32 % 15,464 284 7.39 % Other - - - 72,695 481 2.66 % Total interest-bearing liabilities 1,103,720 6,026 2.21 % 1,088,712 6,506 2.40 % Non-interest bearing liabilities and shareholders' equity: Demand deposits 402,567 427,752 Other liabilities 14,696 13,814 Shareholders' equity 130,353 117,524 Total liabilities and shareholders' equity $ 1,651,336 $ 1,647,802 Net interest spread $ 13,949 2.82 % $ 13,310 2.56 % Net yield on interest-earning assets 3.51 % 3.33 % Taxable equivalent adjustment Investment securities $ 5 $ 6 Net interest income $ 13,944 $ 13,304 *Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $8.6 million in 2025 and $10.9 million in 2024. Tax rates of 2.25% and 2.50% were used to calculate the tax equivalent yields on these securities in 2025 and 2024, respectively. 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. 33 Table of Contents Three months ended March 31, 2025 compared to three months ended March 31, 2024 Three months ended March 31, 2024 compared to three months ended March 31, 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 $ 692 186 878 730 1,525 2,255 Investments - taxable (76 ) (69 ) (145 ) (275 ) 454 179 Investments - nontaxable (14 ) (3 ) (17 ) (11 ) 20 9 Due from banks (407 ) (150 ) (557 ) 433 91 524 Total interest income 195 (36 ) 159 877 2,090 2,967 Interest expense: Interest-bearing demand, MMDA & savings deposits 332 260 592 (323 ) 895 572 Time deposits (107 ) (441 ) (548 ) 1,727 1,438 3,165 Junior subordinated debentures - (43 ) (43 ) - 36 36 Other (241 ) (240 ) (481 ) 177 93 270 Total interest expense (16 ) (464 ) (480 ) 1,581 2,462 4,043 Net interest income $ 211 428 639 (704 ) (372 ) (1,076 ) Provision for Credit Losses. The provision for credit losses for the three months ended March 31, 2025 was $268,000, compared to $91,000 for the three months ended March 31, 2024. The increase in the provision for credit losses is primarily attributable to an increase in unfunded commitments on construction loans and an increase in total loans outstanding. These increases were partially offset by the removal of the $60,000 Hurricane Helene reserve included in the allowance for credit losses at December 31, 2024. Non-Interest Income. Non-interest income was $6.5 million for the three months ended March 31, 2025, compared to $6.0 million for the three months ended March 31, 2024. The increase in non-interest income is primarily attributable to a $628,000 increase in appraisal management fee income due to an increase in appraisal volume, which was partially offset by a $174,000 decrease in miscellaneous non-interest income primarily due to a decrease in income on mutual funds held in the deferred compensation trust due to a decrease in valuations for the assets in the deferred compensation plan. Non-Interest Expense. Non-interest expense was $14.6 million for the three months ended March 31, 2025, compared to $14.5 million for the three months ended March 31, 2024. The increase in non-interest expense is primarily attributable to a $515,000 increase in appraisal management fee expense due to an increase in appraisal volume, which was partially offset by a $192,000 decrease in salaries and employee benefits expense primarily due to a decrease in insurance expense, a $274,000 decrease in other non-interest expense primarily due to a decrease in debit card fraud expense, and a $83,000 decrease in occupancy expense primarily due to a decrease in depreciation expense. Income Taxes. Income tax expense was $1.3 million for the three months ended March 31, 2025, compared to $787,000 for the three months ended March 31, 2024. The effective tax rate was 22.85% for the three months ended March 31, 2025, compared to 16.62% for the three months ended March 31, 2024. The increase in the effective tax rate is primarily due to a $322,000 interest receivable booked during the three months ended March 31, 2024 on a deposit for taxes paid prior to a settlement with the North Carolina Department of Revenue (“NCDOR”) to withdraw the disallowance of certain tax credits previously purchased by the Bank. Analysis of Financial Condition Investment Securities. Available for sale securities were $374.4 million as of March 31, 2025, compared to $388.0 million as of December 31, 2024. Average investment securities available for sale for the three months ended March 31, 2025 were $433.2 million, compared to $442.1 million for the year ended December 31, 2024. Loans. Total loans were $1.15 billion as of March 31, 2025, compared to $1.14 billion at December 31, 2024. Average loans represented 71% and 69% of average earning assets for the three months ended March 31, 2025 and the year ended December 31, 2024, respectively. 34 Table of Contents The Bank had $544,000 and $1.4 million in mortgage loans held for sale as of March 31, 2025 and December 31, 2024, 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 March 31, 2025, the Bank had $123.0 million in residential mortgage loans, $115.4 million in home equity loans and $694.2 million in commercial mortgage loans, which include $546.4 million secured by commercial property and $147.8 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization. The Bank also had construction and land development loans totaling $126.6 million at March 31, 2025. 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 March 31, 2025. 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. 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 decrease 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. The portion of the ACL balance attributable to qualitative factors was $5.4 million and $5.2 million at March 31, 2025 and December 31, 2024, respectively. The risk factors are weighted as follows: Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%. No changes to the risk status of any of the risk factors was made during the three months ended March 31, 2025. 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. 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 represents 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 unfunded commitments was $1.3 million at March 31, 2025, compared to $1.1 million at December 31, 2024. The increase in the allowance for credit losses on unfunded commitments was primarily due to a $275,000 increase in the allowance for construction loans resulting from a $11.5 million increase in unfunded commitments on construction loans during the three months ended March 31, 2025. 35 Table of Contents 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. Since the adoption of Current Expected Credit Loss (“CECL”) methodology 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 $5.1 million or 0.30% of total assets at March 31, 2025, compared to $4.8 million or 0.29% of total assets at December 31, 2024. Non-performing assets include $4.2 million in residential mortgage loans, $451,000 in commercial mortgage loans, $298,000 in other loans, and $125,000 in other real estate owned at March 31, 2025, compared to $3.7 million in residential mortgage loans, $463,000 in commercial mortgage loans, $257,000 in other loans, and $369,000 in other real estate owned at December 31, 2024. The Bank had no repossessed assets as of March 31, 2025 and 2024. Deposits. Deposits were $1.52 billion as of March 31, 2025, compared to $1.48 billion as of December 31, 2024. 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 $1.37 billion at March 31, 2025, compared to $1.34 billion at December 31, 2024. 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 $148.4 million at March 31, 2025, compared to $145.9 million December 31, 2024. Estimated uninsured deposits totaled $354.7 million, or 23.37% of total deposits, at March 31, 2025, compared to $396.5 million, or 26.71% of total deposits, at December 31, 2024. 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 March 31, 2025. 36 Table of Contents Borrowed Funds. There were no borrowed funds outstanding at March 31, 2025 and December 31, 2024. Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million at March 31, 2025 and December 31, 2024. 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. 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 three months ended March 31, 2025 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.10 billion by $507.9 million. Included in the rate sensitive assets are $189.5 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 March 31, 2025, the Company had $124.2 million in loans with interest rate floors. No floors were in effect on loans with floors on interest rates charged at March 31, 2025. 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 March 31, 2025, such unfunded commitments to extend credit were $347.5 million, while commitments in the form of standby letters of credit totaled $1.6 million. As of December 31, 2024, such unfunded commitments to extend credit were $348.9 million, while commitments in the form of standby letters of credit totaled $1.7 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 March 31, 2025, the Bank’s core deposits, a non-GAAP measure, totaled $1.37 billion, or 90% of total deposits. As of December 31, 2024, the Bank’s core deposits totaled $1.34 billion, or 90% of total deposits. The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreement 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 up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit. The Bank did not have any wholesale funding at March 31, 2025 and December 31, 2024. 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 March 31, 2025 and December 31, 2024. At March 31, 2025, the carrying value of loans pledged as collateral to the FHLB totaled $221.3 million compared to $232.9 million at December 31, 2024. The remaining availability under the line of credit with the FHLB was $134.0 million at March 31, 2025 compared to $131.9 million at December 31, 2024. The Bank had no borrowings from the FRB at March 31, 2025 or December 31, 2024. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At March 31, 2025, the carrying value of loans pledged as collateral to the FRB totaled $643.1 million compared to $637.9 million at December 31, 2024. Availability under the line of credit with the FRB was $522.1 million at March 31, 2025 compared to $511.9 million at December 31, 2024. 37 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 March 31, 2025. 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 29.70% at March 31, 2025 and 28.16% at December 31, 2024. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2025 and December 31, 2024. 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 $138.5 million, or 8.18% of total assets, at March 31, 2025, compared to $130.6 million, or 7.90% of total assets, at December 31, 2024. Annualized return on average equity for the three months ended March 31, 2025 was 13.52%, compared to 13.51% for the three months ended March 31, 2024. Total cash dividends paid on common stock were $2.0 million for the three months ended March 31, 2025, compared to $1.9 million for the three months ended March 31, 2024. 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 through February 28, 2025, when the program expired. In March of 2025, the Board of Directors authorized a stock repurchase program, whereby up to $3.0 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 March 31, 2025. 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. 38 Table of Contents 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 March 31, 2025 and December 31, 2024. The Company’s Tier 1 capital ratio was 14.58% and 14.47% at March 31, 2025 and December 31, 2024, 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 15.46% and 15.34% at March 31, 2025 and December 31, 2024, 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 13.41% and 13.29% at March 31, 2025 and December 31, 2024, 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 11.08% and 10.88% at March 31, 2025 and December 31, 2024, respectively. The Bank’s Tier 1 risk-based capital ratio was 14.45% and 14.35% at March 31, 2025 and December 31, 2024, respectively. The total risk-based capital ratio for the Bank was 15.34% and 15.22% at March 31, 2025 and December 31, 2024, respectively. The Bank’s common equity Tier 1 capital ratio was 14.45% and 14.35% at March 31, 2025 and December 31, 2024, respectively. The Bank’s Tier 1 leverage capital ratio was 10.90% and 10.71% at March 31, 2025 and December 31, 2024, 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 March 31, 2025. 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. 39 Table of Contents 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 Not applicable Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ISSUER PURCHASES OF EQUITY SECURITIES 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) January 1 - 31, 2025 - $ - - $ 2,000,000 February 1 - 28, 2025 63 $ 28.96 - $ 2,000,000 March 1 - 31, 2025 3,037 $ 27.55 - $ 3,000,000 Total 3,100 $ 27.58 - (1) The Company purchased 3,100 shares on the open market in the three months ended March 31, 2025 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. $2.0 million authorized in June 2024, expired February 28, 2025. $3.0 million authorized in March 2025, expires February 28, 2026. 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 March 31, 2025, 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. 40 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 February 25, 2022, 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) Third Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(iii) to the Form 8-K filed with the Securities and Exchange Commission on January 17, 2025 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 (4)(ii) Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, incorporated by reference to Exhibit (4)(ii) to the Form 10-K filed with the Securities and Exchange Commission on March 7, 2024 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 March 31, 2025, 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. 41 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. May 6, 2025 /s/ William D. Cable, Sr. Date William D. Cable, Sr. President and Chief Executive Officer (Principal Executive Officer) May 6, 2025 /s/ Jeffrey N. Hooper Date Jeffrey N. Hooper Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) 42