EXHIBIT (13)

The Annual Report to Security Holders is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders and is incorporated herein by reference.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

General Description of Business

Peoples Bancorp of North Carolina, Inc. (the “Company”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. The Company has no operations and conducts no business of its own other than owning the Bank and PEBK Capital Trust II. Accordingly, the discussion of the business which follows primarily concerns the business conducted by the Bank. Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 17 banking offices, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Huntersville, Mooresville, Raleigh, and Cary, North Carolina. The Bank also operates loan production offices in Charlotte, Denver, Salisbury and Winston-Salem North Carolina. The Company’s fiscal year ends December 31. At December 31, 2023, the Company had total assets of $1.6 billion, net loans of $1.1 billion, deposits of $1.4 billion, total securities of $394.8 million, and shareholders’ equity of $121.0 million.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices, which offer the same banking services as our other branches offer, now operate under the same name as our other offices; however, we continue to separately categorize mortgage loans originated from these offices.

The Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s deposit and loan customers are individuals and small-to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated through the Bank’s former Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-19 of the Annual Report, which is included in this Form 10-K as Exhibit (13).

The operations of the Bank are significantly influenced by general economic conditions and by related monetary and fiscal policies of the Company and the Bank’s regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”).

At December 31, 2023, the Company employed 277 full-time employees and 15 part-time employees, which equated to 285 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2023, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies. As a separate legal entity, CBRES’s services and the appraisal process are conducted independent from the financing process of the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and assets obtained in the ordinary course of collecting debts previously contracted. All of the Bank’s subsidiaries are incorporated in the state of North Carolina.

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 Company redeemed $5.0 million of outstanding trust preferred securities in 2019.

A-1

This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were 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 materially include, but are not limited to, (1) competition in the markets served by the Company’s subsidiary, Peoples Bank, (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 environment 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 the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements.

A-2

SELECTED FINANCIAL DATA

Dollars in Thousands Except Per Share Amounts

|  | 2023 |  |  | 2022 |  |  | 2021 |
Summary of Operations |  |  |  |  |  |  |  |  |
Interest income |  | $ | 71,862 |  |  |  | 54,431 |  |  |  | 47,179 |
Interest expense |  |  | 17,143 |  |  |  | 3,323 |  |  |  | 3,205 |
Net interest income |  |  | 54,719 |  |  |  | 51,108 |  |  |  | 43,974 |
Provision for (recovery of) credit losses |  |  | 1,566 |  |  |  | 1,472 |  |  |  | (1,163 | )
Net interest income after provision for credit losses |  |  | 53,153 |  |  |  | 49,636 |  |  |  | 45,137 |
Non-interest income |  |  | 22,914 |  |  |  | 26,689 |  |  |  | 24,919 |
Non-interest expense |  |  | 56,144 |  |  |  | 56,030 |  |  |  | 51,127 |
Earnings before income taxes |  |  | 19,923 |  |  |  | 20,295 |  |  |  | 18,929 |
Income tax expense |  |  | 4,377 |  |  |  | 4,172 |  |  |  | 3,796 |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |
Selected Year-End Balances |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 1,635,910 |  |  |  | 1,620,927 |  |  |  | 1,624,193 |
Investment securities available for sale |  |  | 391,924 |  |  |  | 445,394 |  |  |  | 406,549 |
Net loans |  |  | 1,082,025 |  |  |  | 1,022,114 |  |  |  | 875,514 |
Mortgage loans held for sale |  |  | 686 |  |  |  | 211 |  |  |  | 3,637 |
Interest-earning assets |  |  | 1,538,570 |  |  |  | 1,502,868 |  |  |  | 1,531,975 |
Deposits |  |  | 1,392,045 |  |  |  | 1,435,215 |  |  |  | 1,412,748 |
Interest-bearing liabilities |  |  | 1,061,537 |  |  |  | 975,279 |  |  |  | 950,987 |
Shareholders' equity |  | $ | 121,016 |  |  |  | 105,195 |  |  |  | 142,369 |
Shares outstanding |  |  | 5,534,499 |  |  |  | 5,636,830 |  |  |  | 5,661,569 |
Selected Average Balances |  |  |  |  |  |  |  |  |  |  |  |
Assets |  | $ | 1,605,386 |  |  |  | 1,663,665 |  |  |  | 1,568,417 |
Investment securities available for sale |  |  | 454,823 |  |  |  | 467,484 |  |  |  | 349,647 |
Loans |  |  | 1,061,075 |  |  |  | 949,175 |  |  |  | 908,682 |
Interest-earning assets |  |  | 1,561,825 |  |  |  | 1,601,168 |  |  |  | 1,483,519 |
Deposits |  |  | 1,395,265 |  |  |  | 1,480,113 |  |  |  | 1,372,855 |
Interest-bearing liabilities |  |  | 1,003,479 |  |  |  | 979,315 |  |  |  | 896,903 |
Shareholders' equity |  | $ | 116,295 |  |  |  | 123,887 |  |  |  | 147,740 |
Shares outstanding |  |  | 5,424,890 |  |  |  | 5,480,123 |  |  |  | 5,576,099 |
Profitability Ratios |  |  |  |  |  |  |  |  |  |  |  |
Return on average total assets |  |  | 0.97 | % |  |  | 0.97 | % |  |  | 0.96 | %
Return on average shareholders' equity |  |  | 13.37 | % |  |  | 13.01 | % |  |  | 10.24 | %
Dividend payout ratio |  |  | 32.86 | % |  |  | 30.61 | % |  |  | 24.83 | %
Liquidity and Capital Ratios (averages) |  |  |  |  |  |  |  |  |  |  |  |
Loan to deposit |  |  | 76.05 | % |  |  | 64.13 | % |  |  | 66.19 | %
Shareholders' equity to total assets |  |  | 7.24 | % |  |  | 7.45 | % |  |  | 9.42 | %
Per share of Common Stock |  |  |  |  |  |  |  |  |  |  |  |
Basic net earnings |  | $ | 2.87 |  |  |  | 2.94 |  |  |  | 2.71 |
Diluted net earnings |  | $ | 2.77 |  |  |  | 2.85 |  |  |  | 2.63 |
Cash dividends |  | $ | 0.91 |  |  |  | 0.87 |  |  |  | 0.66 |
Book value |  | $ | 22.53 |  |  |  | 19.24 |  |  |  | 25.89 |

A-3

Management's Discussion and Analysis of Financial Condition

and Results of Operations

The following is a discussion of our financial position and results of operations and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report on Form 10-K and the Company’s consolidated financial statements and notes thereto on pages A-20 through A-62.

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, for the years ended December 31, 2023, 2022 and 2021. The Company is a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the parent company of the “Bank. 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 credit losses.

Prior to the COVID-19 pandemic, economic conditions, while not as robust as the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 500 basis points since March 1, 2022 to a range of 5.25% to 5.50% at December 31, 2023.

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.

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.

A-4

The Company does not have specific plans for additional offices in 2024 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.

Summary of Significant and Critical Accounting Policies

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC and PB Real Estate Holdings, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. The following is a summary of some of the more subjective and complex accounting policies of the Company. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 2, 2024 Annual Meeting of Shareholders.

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 for credit losses that management believes will be adequate in light of anticipated risks and loan losses.

Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The collectability of loans is reflected through the Company’s estimate of the allowance for credit losses. The Company performs periodic and systematic detailed reviews of its lending portfolio to assess overall collectability. In addition, certain assets and liabilities are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived from dealer quotes used by the Company, market comparisons or internally generated modeling techniques. The Company’s internal models generally involve present value of cash flow techniques. The various techniques are discussed in greater detail elsewhere in this management’s discussion and analysis and the Notes to Consolidated Financial Statements.

There are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain of the principles prescribed by those standards. These judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

The Company has an overall interest rate risk management strategy that has, in prior years, incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. When using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimized the credit risk in derivative instruments by entering into transactions with high-quality counterparties that were reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of December 31, 2023 or 2022.

Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the accompanying consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.

Results of Operations

Summary. The Company reported net earnings of $15.5 million or $2.87 per share and $2.77 per diluted share for the year ended December 31, 2023, as compared to $16.1 million or $2.94 per share and $2.85 per diluted share for the year ended December 31, 2022. The decrease in year-to-date net earnings is primarily attributable to a decrease in non-interest income, an increase in the provision for credit losses and an increase in non-interest expense, which were partially offset by an increase in net interest income for the year ended December 31, 2023, compared to the year ended December 31, 2022, as discussed below.

A-5

The Company reported net earnings of $16.1 million or $2.94 per share and $2.85 per diluted share for the year ended December 31, 2022, as compared to $15.1 million or $2.71 per share and $2.63 per diluted share for the prior year. The increase in year-to-date net earnings is primarily attributable to an increase in net interest income and an increase in non-interest income, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense for the year ended December 31, 2022, compared to the year ended December 31, 2021

The return on average assets in 2023 was 0.97%, as compared to 0.97% in 2022 and 0.96% in 2021. The return on average shareholders’ equity was 13.37% in 2023, as compared to 13.01% in 2022 and 10.24% in 2021.

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 in 2023 was $54.7 million, compared to $51.1 million in 2022. The increase in net interest income is due to a $17.4 million increase in interest income, partially offset by a $13.8 million increase in interest expense. The increase in interest income is due to a $12.4 million increase in interest income and fees on loans and a $5.0 million increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve, partially offset by a $948,000 decrease in fee income on Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The increase in interest income on investment securities is primarily due to higher yields on securities purchased during the third and fourth quarter of 2022. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Net interest income increased to $51.1 million in 2022 from $44.0 million in 2021.

Table 1 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 years ended December 31, 2023, 2022 and 2021. 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 that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

A-6

Table 1 - Average Balance Table

|  | December 31, 2023 |  |  | December 31, 2022 |  |  | December 31, 2021 |
(Dollars in thousands) |  | Average Balance |  |  | Interest |  |  | Yield / Rate |  |  | Average Balance |  |  | Interest |  |  | Yield / Rate |  |  | Average Balance |  |  | Interest |  |  | Yield / Rate |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans receivable |  | $ | 1,061,075 |  |  |  | 55,507 |  |  |  | 5.23 | % |  |  | 949,175 |  |  |  | 43,077 |  |  |  | 4.54 | % |  |  | 908,682 |  |  |  | 41,186 |  |  |  | 4.53 | %
Investments - taxable |  |  | 436,114 |  |  |  | 13,374 |  |  |  | 3.07 | % |  |  | 399,036 |  |  |  | 7,159 |  |  |  | 1.79 | % |  |  | 283,521 |  |  |  | 4,381 |  |  |  | 1.55 | %
Investments - nontaxable* |  |  | 21,888 |  |  |  | 836 |  |  |  | 3.82 | % |  |  | 71,943 |  |  |  | 2,355 |  |  |  | 3.27 | % |  |  | 70,413 |  |  |  | 1,802 |  |  |  | 2.56 | %
Due from banks |  |  | 42,748 |  |  |  | 2,216 |  |  |  | 5.18 | % |  |  | 181,014 |  |  |  | 2,223 |  |  |  | 1.23 | % |  |  | 220,903 |  |  |  | 258 |  |  |  | 0.12 | %
Total interest-earning assets |  |  | 1,561,825 |  |  |  | 71,933 |  |  |  | 4.61 | % |  |  | 1,601,168 |  |  |  | 54,814 |  |  |  | 3.42 | % |  |  | 1,483,519 |  |  |  | 47,627 |  |  |  | 3.21 | %
Cash and due from banks |  |  | 35,772 |  |  |  |  |  |  |  |  |  |  |  | 36,778 |  |  |  |  |  |  |  |  |  |  |  | 32,104 |  |  |  |  |  |  |  |  |
Other assets |  |  | 17,820 |  |  |  |  |  |  |  |  |  |  |  | 35,373 |  |  |  |  |  |  |  |  |  |  |  | 62,322 |  |  |  |  |  |  |  |  |
Allowance for credit losses |  |  | (10,031 | ) |  |  |  |  |  |  |  |  |  |  | (9,654 | ) |  |  |  |  |  |  |  |  |  |  | (9,528 | ) |  |  |  |  |  |  |  |
Total assets |  | $ | 1,605,386 |  |  |  |  |  |  |  |  |  |  |  | 1,663,665 |  |  |  |  |  |  |  |  |  |  |  | 1,568,417 |  |  |  |  |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand, MMDA & savings deposits |  | $ | 689,795 |  |  |  | 6,731 |  |  |  | 0.98 | % |  |  | 824,955 |  |  |  | 2,019 |  |  |  | 0.24 | % |  |  | 745,616 |  |  |  | 2,029 |  |  |  | 0.27 | %
Time deposits |  |  | 228,309 |  |  |  | 7,916 |  |  |  | 3.47 | % |  |  | 99,880 |  |  |  | 562 |  |  |  | 0.56 | % |  |  | 105,127 |  |  |  | 752 |  |  |  | 0.72 | %
Junior subordinated debentures |  |  | 15,464 |  |  |  | 1,079 |  |  |  | 6.98 | % |  |  | 15,464 |  |  |  | 529 |  |  |  | 3.42 | % |  |  | 15,464 |  |  |  | 280 |  |  |  | 1.81 | %
Other |  |  | 69,911 |  |  |  | 1,417 |  |  |  | 2.03 | % |  |  | 39,016 |  |  |  | 213 |  |  |  | 0.55 | % |  |  | 30,696 |  |  |  | 144 |  |  |  | 0.47 | %
Total interest-bearing liabilities |  |  | 1,003,479 |  |  |  | 17,143 |  |  |  | 1.71 | % |  |  | 979,315 |  |  |  | 3,323 |  |  |  | 0.34 | % |  |  | 896,903 |  |  |  | 3,205 |  |  |  | 0.36 | %
Demand deposits |  |  | 477,162 |  |  |  |  |  |  |  |  |  |  |  | 555,278 |  |  |  |  |  |  |  |  |  |  |  | 522,114 |  |  |  |  |  |  |  |  |
Other liabilities |  |  | 8,449 |  |  |  |  |  |  |  |  |  |  |  | 5,185 |  |  |  |  |  |  |  |  |  |  |  | 1,659 |  |  |  |  |  |  |  |  |
Shareholders' equity |  |  | 116,296 |  |  |  |  |  |  |  |  |  |  |  | 123,887 |  |  |  |  |  |  |  |  |  |  |  | 147,741 |  |  |  |  |  |  |  |  |
Total liabilities and shareholder's equity |  | $ | 1,605,386 |  |  |  |  |  |  |  |  |  |  |  | 1,663,665 |  |  |  |  |  |  |  |  |  |  |  | 1,568,417 |  |  |  |  |  |  |  |  |
Net interest spread |  |  |  |  |  | $ | 54,790 |  |  |  | 2.90 | % |  |  |  |  |  | $ | 51,491 |  |  |  | 3.08 | % |  |  |  |  |  | $ | 44,422 |  |  |  | 2.85 | %
Net yield on interest-earning assets |  |  |  |  |  |  |  |  |  |  | 3.51 | % |  |  |  |  |  |  |  |  |  |  | 3.22 | % |  |  |  |  |  |  |  |  |  |  | 2.99 | %
Taxable equivalent adjustment Investment securities |  |  |  |  |  | $ | 71 |  |  |  |  |  |  |  |  |  |  | $ | 383 |  |  |  |  |  |  |  |  |  |  | $ | 448 |  |  |  |  |
Net interest income |  |  |  |  |  | $ | 54,719 |  |  |  |  |  |  |  |  |  |  | $ | 51,108 |  |  |  |  |  |  |  |  |  |  | $ | 43,974 |  |  |  |  |

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $11.7 million in 2023, $13.3 million in 2022 and $12.7 million in 2021. A tax rate of 2.50% was used to calculate the tax equivalent yields on these securities in 2023, 2022 and 2021.

Changes in interest income and interest expense can result from variances in both volume and rates. Table 2 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.

A-7

Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis

|  | December 31, 2023 |  |  | December 31, 2022 |
(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 |  | $ | 5,466 |  |  |  | 6,964 |  |  |  | 12,430 |  |  | $ | 1,837 |  |  |  | 54 |  |  |  | 1,891 |
Investments - taxable |  |  | 901 |  |  |  | 5,314 |  |  |  | 6,215 |  |  |  | 1,929 |  |  |  | 849 |  |  |  | 2,778 |
Investments - nontaxable |  |  | (1,775 | ) |  |  | 256 |  |  |  | (1,519 | ) |  |  | 45 |  |  |  | 508 |  |  |  | 553 |
Due from banks |  |  | (4,433 | ) |  |  | 4,426 |  |  |  | (7 | ) |  |  | (268 | ) |  |  | 2,233 |  |  |  | 1,965 |
Total interest income |  |  | 159 |  |  |  | 16,960 |  |  |  | 17,119 |  |  |  | 3,543 |  |  |  | 3,644 |  |  |  | 7,187 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand, MMDA & savings deposits |  |  | (825 | ) |  |  | 5,537 |  |  |  | 4,712 |  |  |  | 205 |  |  |  | (215 | ) |  |  | (10 | )
Time deposits |  |  | 2,588 |  |  |  | 4,766 |  |  |  | 7,354 |  |  |  | (34 | ) |  |  | (156 | ) |  |  | (190 | )
Junior subordinated debentures |  |  | - |  |  |  | 550 |  |  |  | 550 |  |  |  | - |  |  |  | 249 |  |  |  | 249 |
Other |  |  | 397 |  |  |  | 807 |  |  |  | 1,204 |  |  |  | 42 |  |  |  | 27 |  |  |  | 69 |
Total interest expense |  |  | 2,160 |  |  |  | 11,660 |  |  |  | 13,820 |  |  |  | 213 |  |  |  | (95 | ) |  |  | 118 |
Net interest income |  | $ | (2,001 | ) |  |  | 5,300 |  |  |  | 3,299 |  |  | $ | 3,330 |  |  |  | 3,739 |  |  |  | 7,069 |

Net interest income on a tax equivalent basis totaled $54.8 million in 2023, as compared to $51.5 million in 2022. The net interest spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 2.90% in 2023, as compared to 3.08% in 2022. The net yield on interest-earning assets was 3.51% in 2023 and 3.22% in 2022.

Tax equivalent interest income increased $17.1 million in 2023 primarily due to a $12.4 million increase in interest income and fees on loans, a $4.7 million increase in tax equivalent interest income on investment securities, which were partially offset by a $7,000 decrease in interest income on balances due from banks. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve, partially offset by a $948,000 decrease in fee income on SBA PPP loans. The increase in interest income on investment securities is primarily due to higher yields on securities purchased during the third and fourth quarter of 2022. The yield on interest-earning assets was 4.61% in 2023, as compared to 3.42% in 2022.

Interest expense totaled $17.1 million in 2023, as compared to $3.3 million in 2022. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased by $24.2 million to $1.0 billion in 2023, as compared to $979.3 million in 2022. The cost of funds increased to 1.71% in 2023 from 0.34% in 2022.

In 2022, net interest income on a tax equivalent basis was $51.5 million, as compared to $44.4 million in 2021. The net interest spread was 3.08% in 2022, as compared to 2.85% in 2021. The net yield on interest-earning assets was 3.22% in 2022, as compared to 2.99% in 2021.

Provision for Credit Losses. Provisions for credit losses are charged to income in order to bring the total allowance for credit losses to a level deemed appropriate by management of the Company based on factors such as management’s judgment as to losses within the Bank’s loan portfolio, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies and management’s assessment of the quality of the loan portfolio and general economic climate.

The provision for credit losses for the year ended December 31, 2023 was $1.6 million, compared to $1.5 million for the year ended December 31, 2022. The increase in the provision for credit losses is primarily attributable to an increase in reserves on loans, driven by an increase in loan balances, as well as adjustments to reserves due to economic conditions and other factors at December 31, 2023, compared to December 31, 2022.

Net charge-offs for 2023 were $306,000. Net charge-offs for 2022 were $333,000. Net recoveries for 2021 were $610,000. The ratio of net charge-offs/(recoveries) to average total loans was 0.03% in 2023, 0.03% in 2022 and (0.07%) in 2021. The allowance for credit losses was $11.0 million or 1.01% of total loans outstanding at December 31, 2023. For December 31, 2022 and 2021, the allowance for credit losses amounted to $10.5 million or 1.02% of total loans outstanding and $9.4 million, or 1.06% of total loans outstanding, respectively.

A-8

Table 3 presents a summary of net charge off activity for the years ended December 31, 2023, 2022 and 2021.

Table 3 - Net Charge-off Analysis

|  | Net charge-offs/(recoveries) |  |  | Net charge-offs/(recoveries) as a percent of average loans outstanding |
|  | Years ended December 31, |  |  | Years ended December 31, |
(Dollars in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2023 |  |  | 2022 |  |  | 2021 |
Real estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | - |  |  |  | - |  |  |  | (121 | ) |  |  | 0.00 | % |  |  | 0.00 | % |  |  | -0.13 | %
Single-family residential |  |  | (171 | ) |  |  | (101 | ) |  |  | (182 | ) |  |  | -0.05 | % |  |  | -0.03 | % |  |  | -0.07 | %
Single-family residential - Banco de la Gente non-traditional |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
Commercial |  |  | (6 | ) |  |  | (9 | ) |  |  | (52 | ) |  |  | 0.00 | % |  |  | 0.00 | % |  |  | -0.02 | %
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | (3 | ) |  |  | 0.00 | % |  |  | 0.00 | % |  |  | -0.01 | %
Total real estate loans |  |  | (177 | ) |  |  | (110 | ) |  |  | (358 | ) |  |  | -0.02 | % |  |  | -0.01 | % |  |  | -0.05 | %
Loans not secured by real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 62 |  |  |  | (39 | ) |  |  | (493 | ) |  |  | 0.09 | % |  |  | -0.05 | % |  |  | -0.54 | %
Farm loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
Consumer loans (1) |  |  | 422 |  |  |  | 482 |  |  |  | 241 |  |  |  | 5.98 | % |  |  | 7.06 | % |  |  | 3.75 | %
All other loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.00 | % |  |  | 0.00 | % |  |  | 0.00 | %
Total loans |  | $ | 307 |  |  |  | 333 |  |  |  | (610 | ) |  |  | 0.03 | % |  |  | 0.04 | % |  |  | -0.07 | %
Provision for (recovery of) credit losses for the period |  | $ | 1,566 |  |  |  | 1,472 |  |  |  | (1,163 | ) |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses at end of period |  | $ | 11,041 |  |  |  | 10,494 |  |  |  | 9,355 |  |  |  |  |  |  |  |  |  |  |  |  |
Total loans at end of period |  | $ | 1,093,066 |  |  |  | 1,032,608 |  |  |  | 884,869 |  |  |  |  |  |  |  |  |  |  |  |  |
Non-accrual loans at end of period |  | $ | 3,887 |  |  |  | 3,728 |  |  |  | 3,230 |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses as a percent of total loans outstanding at end of period |  |  | 1.01 | % |  |  | 1.02 | % |  |  | 1.06 | % |  |  |  |  |  |  |  |  |  |  |  |
Non-accrual loans as a percent of total loans outstanding at end of period |  |  | 0.36 | % |  |  | 0.36 | % |  |  | 0.37 | % |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses as a percent of nonaccrual loans at end of period |  |  | 284.05 | % |  |  | 281.49 | % |  |  | 289.63 | % |  |  |  |  |  |  |  |  |  |  |  |

(1) The loss ratio for consumer loans is elevated because overdraft charge-offs related to DDA and NOW accounts are reported in consumer loan charge-offs and recoveries. The net overdraft charge-offs are not considered material and are therefore not shown separately.

Please see the section below entitled “Allowance for Credit Losses” for a more complete discussion of the Bank’s policy for addressing potential loan losses.

Non-Interest Income. Non-interest income was $22.9 million for the year ended December 31, 2023, compared to $26.7 million for the year ended December 31, 2022. The decrease in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities and a $2.1 million decrease in appraisal management fee income due to a decrease in appraisal volume related to national trends in real estate purchases, which were partially offset by a $454,000 increase in miscellaneous non-interest income primarily due to an increase in deferred compensation income due to an increase in valuations for the assets in the deferred compensation plan. The securities sales referenced above were executed in January and February 2023 to reduce risk in the investment portfolio, at a time when favorable sale conditions had developed for municipal securities. These sales also provided the Bank with more flexibility to support loan growth and reduce the need for other borrowings.

Non-interest income was $26.7 million for the year ended December 31, 2022, compared to $24.9 million for the year ended December 31, 2021. The increase in non-interest income is primarily attributable to a $2.8 million increase in appraisal management fee income due to an increase in appraisal volume and a $1.4 million increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $2.1 million decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained in the Bank’s portfolio.

The Company periodically evaluates its investments for credit losses. There were no credit losses on investments in 2023, 2022 or 2021.

A-9

Table 4 presents a summary of non-interest income for the years ended December 31, 2023, 2022 and 2021.

Table 4 - Non-Interest Income

(Dollars in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
Service charges |  | $ | 5,496 |  |  | $ | 5,290 |  |  | $ | 3,921 |
Other service charges and fees |  |  | 697 |  |  |  | 734 |  |  |  | 803 |
Loss on sale of securities, net |  |  | (2,488 | ) |  |  | - |  |  |  | - |
Mortgage banking income |  |  | 301 |  |  |  | 393 |  |  |  | 2,505 |
Insurance and brokerage commissions |  |  | 929 |  |  |  | 945 |  |  |  | 1,035 |
Gain on sale of other real estate |  |  | - |  |  |  | - |  |  |  | 21 |
Gain/(loss) on sale of premises and equipment, net |  |  | 184 |  |  |  | (85 | ) |  |  | 105 |
Visa debit card income |  |  | 4,717 |  |  |  | 4,901 |  |  |  | 5,045 |
Appraisal management fee income |  |  | 9,592 |  |  |  | 11,663 |  |  |  | 8,890 |
Deferred comp income |  |  | 844 |  |  |  | (183 | ) |  |  | 190 |
Miscellaneous |  |  | 2,642 |  |  |  | 3,031 |  |  |  | 2,404 |
Total non-interest income |  | $ | 22,914 |  |  | $ | 26,689 |  |  | $ | 24,919 |

Non-Interest Expense. Non-interest expense was $56.1 million for the year ended December 31, 2023 compared to $56.0 million for the year ended December 31, 2022. The increase in non-interest expense is primarily attributable to a $1.2 million increase in other non-interest expenses primarily due to an increase in deferred compensation expense due to an increase in valuations for the assets in the deferred compensation plan and a $510,000 increase in salaries and employee benefits expense primarily due to a reduction in the amortization of loan origination costs, which were partially offset by a $1.7 million decrease in appraisal management fee expense due to a decrease in appraisal volume related to national trends in real estate purchases.

Non-interest expense was $56.0 million for the year ended December 31, 2022, compared to $51.1 million for the year ended December 31, 2021. The increase in non-interest expense is primarily attributable to a $2.2 million increase in appraisal management fee expense due to an increase in appraisal volume and a $1.6 million increase in salaries and employee benefits expense primarily due to increases in insurance costs and salary expense and a $421,000 increase in other non-interest expenses primarily due to increases in consulting expense, online banking expense and office supplies expense.

Table 5 presents a summary of non-interest expense for the years ended December 31, 2023, 2022 and 2021.

Table 5 - Non-Interest Expense

(Dollars in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
Salaries and employee benefits |  | $ | 26,640 |  |  | $ | 26,130 |  |  | $ | 24,506 |
Occupancy expense |  |  | 7,962 |  |  |  | 8,048 |  |  |  | 7,858 |
Office supplies |  |  | 482 |  |  |  | 532 |  |  |  | 374 |
FDIC deposit insurance |  |  | 745 |  |  |  | 461 |  |  |  | 415 |
Visa debit card expense |  |  | 1,255 |  |  |  | 1,224 |  |  |  | 1,000 |
Professional services |  |  | 673 |  |  |  | 451 |  |  |  | 489 |
Postage |  |  | 237 |  |  |  | 238 |  |  |  | 230 |
Telephone |  |  | 664 |  |  |  | 691 |  |  |  | 730 |
Director fees and expense |  |  | 503 |  |  |  | 454 |  |  |  | 381 |
Advertising |  |  | 750 |  |  |  | 693 |  |  |  | 536 |
Consulting fees |  |  | 1,043 |  |  |  | 1,464 |  |  |  | 1,337 |
Taxes and licenses |  |  | 143 |  |  |  | 277 |  |  |  | 254 |
Foreclosure/OREO expense |  |  | 1 |  |  |  | 7 |  |  |  | 5 |
Internet banking expense |  |  | 269 |  |  |  | 949 |  |  |  | 768 |
Appraisal management fee expense |  |  | 7,559 |  |  |  | 9,264 |  |  |  | 7,112 |
Deferred comp expense |  |  | 844 |  |  |  | (183 | ) |  |  | 190 |
Other operating expense |  |  | 6,374 |  |  |  | 5,330 |  |  |  | 4,942 |
Total non-interest expense |  | $ | 56,144 |  |  | $ | 56,030 |  |  | $ | 51,127 |

Income Taxes. The Company reported income tax expense of $4.4 million, $4.2 million and $3.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company’s effective tax rates were 21.97%, 20.56% and 20.05% in 2021, 2022 and 2021, respectively. The increase in the effective tax rate in 2023 and 2022 was primarily due to a reduction in non-taxable investments.

A-10

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 December 31, 2023, such unfunded commitments to extend credit were $367.5 million, while commitments in the form of standby letters of credit totaled $3.7 million.

The Company uses several funding sources to meet its liquidity requirements. The primary funding source is core deposits, a non-GAAP measure, which includes demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000. 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 funding base The Company considers these to be a stable portion of the Company’s liability mix and the result of on-going consumer and commercial banking relationships. As of December 31, 2023, the Company’s core deposits totaled $1.2 billion, or 89% of total deposits.

The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $134.5 million and $117.0 million at December 31, 2023 and 2022, respectively. These balances represent 9.10% of total deposits and securities sold under agreements to repurchase combined at December 31, 2023, as compared to 7.89% of total deposits and securities sold under agreements to repurchase combined at December 31, 2022. Total deposits for the five largest relationships referenced above amounted to $108.4 million, or 7.79% of total deposits at December 31, 2023, as compared to $85.7 million, or 5.97% of total deposits at December 31, 2022. Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $26.2 million, or 30.17% of total securities sold under agreements to repurchase at December 31, 2023, as compared to $31.4 million, or 65.76% of total securities sold under agreements to repurchase at December 31, 2022.

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’s ratio of wholesale funding to total assets was 0.50% as of December 31, 2023.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with no balances outstanding at December 31, 2023. At December 31, 2023, the carrying value of loans pledged as collateral totaled approximately $214.1 million. The remaining availability under the line of credit with the FHLB was $122.2 million at December 31, 2023. The Bank had no borrowings from the FRB at December 31, 2023. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2023, the carrying value of loans pledged as collateral to the FRB totaled approximately $611.2 million. Availability under the line of credit with the FRB was $459.9 million at December 31, 2023. The Bank has completed the necessary steps in order to access the FRB’s Bank Term Funding Program (“BTFP”), should it wish to do so at any time in the future. The Bank has not pledged any collateral to the BTFP as of December 31, 2023.

The Bank also had the ability to borrow up to $90.5 million for the purchase of overnight federal funds from four correspondent financial institutions as of December 31, 2023.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits with banks, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 25.39%, 30.32% and 43.28% at December 31, 2023, 2022 and 2021, respectively. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy for on balance sheet liquidity was 10% at December 31, 2023, 2022 and 2021.

As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $22.8 million during 2023. Net cash used in investing activities was $753,000 during 2023 and net cash used by financing activities was $11.2 million during 2023.

Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. Table 6 presents an interest rate sensitivity analysis for the interest-earning assets and interest-bearing liabilities for the year ended December 31, 2023.

A-11

Table 6 - Interest Sensitivity Analysis

(Dollars in thousands) |  | Immediate |  |  | 1-3 months |  |  | 4-12 months |  |  | Total Within One Year |  |  | Over One Year & Non-sensitive |  |  | Total |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 190,398 |  |  |  | 5,018 |  |  |  | 17,798 |  |  |  | 213,214 |  |  |  | 879,852 |  |  |  | 1,093,066 |
Mortgage loans held for sale |  |  | 686 |  |  |  | - |  |  |  | - |  |  |  | 686 |  |  |  | - |  |  |  | 686 |
Investment securities available for sale |  |  | - |  |  |  | 88,505 |  |  |  | 8,299 |  |  |  | 96,804 |  |  |  | 295,120 |  |  |  | 391,924 |
Interest-bearing deposit accounts |  |  | 49,556 |  |  |  | - |  |  |  | - |  |  |  | 49,556 |  |  |  | - |  |  |  | 49,556 |
Other interest-earning assets |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3,338 |  |  |  | 3,338 |
Total interest-earning assets |  |  | 240,640 |  |  |  | 93,523 |  |  |  | 26,097 |  |  |  | 360,260 |  |  |  | 1,178,310 |  |  |  | 1,538,570 |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
NOW, savings, and money market deposits |  |  | 620,244 |  |  |  | - |  |  |  | - |  |  |  | 620,244 |  |  |  | - |  |  |  | 620,244 |
Time deposits |  |  | 35,824 |  |  |  | 55,535 |  |  |  | 222,663 |  |  |  | 314,022 |  |  |  | 25,092 |  |  |  | 339,114 |
Securities sold under |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
agreement to repurchase |  |  | 86,715 |  |  |  | - |  |  |  | - |  |  |  | 86,715 |  |  |  | - |  |  |  | 86,715 |
Trust preferred securities |  |  | - |  |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |
Total interest-bearing liabilities |  |  | 742,783 |  |  |  | 70,999 |  |  |  | 222,663 |  |  |  | 1,036,445 |  |  |  | 25,092 |  |  |  | 1,061,537 |
Interest-sensitive gap |  | $ | (502,143 | ) |  |  | 22,524 |  |  |  | (196,566 | ) |  |  | (676,185 | ) |  |  | 1,153,218 |  |  |  | 477,033 |
Cumulative interest-sensitive gap |  | $ | (502,143 | ) |  |  | (479,619 | ) |  |  | (676,185 | ) |  |  | (676,185 | ) |  |  | 477,033 |  |  |  |  |
Interest-earning assets as a percentage of interest-bearing liabilities |  |  | 32.40 | % |  |  | 131.72 | % |  |  | 11.72 | % |  |  | 34.76 | % |  |  | 4,695.96 | % |  |  |  |

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 (“AFS”) securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. At December 31, 2023, rate sensitive assets and rate sensitive liabilities totaled $1.6 billion and $1.0 billion, respectively.

Included in the rate sensitive assets are $188.4 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Bank utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At December 31, 2023, the Bank had $119.6 million in loans with interest rate floors. No floors were in effect on these loans at December 31, 2023.

An analysis of the Company’s financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. A discussion of these changes and trends follows.

Analysis of Financial Condition

Investment Securities. The composition of the investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

All of the Company’s investment securities are held in the available for sale (“AFS”) category. At December 31, 2023 the market value of AFS securities totaled $391.9 million, as compared to $445.4 million at December 31, 2022.

The Company’s investment portfolio consists of U.S. Government sponsored enterprise securities, municipal securities, U.S. Treasury securities, U.S. Government sponsored enterprise mortgage-backed securities, private label mortgage-backed securities, trust preferred securities and equity securities. AFS securities averaged $454.8 million in 2023 and $467.5 million in 2022. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields are calculated on a tax equivalent basis. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

A-12

Table 7 presents the book value of AFS securities held by the Company by maturity category at December 31, 2023. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields are calculated on a tax equivalent basis. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

Table 7 - Maturity Distribution and Weighted Average Yield on Investments

|  |  |  |  |  |  |  | After One Year |  |  | After 5 Years |  |  |  |  |  |  |  |  |  |  |  |  |
|  | One Year or Less |  |  | Through 5 Years |  |  | Through 10 Years |  |  | After 10 Years |  |  | Totals |
(Dollars in thousands) |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |  |  | Amount |  |  | Yield |
Book value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasuries |  |  | 2,989 |  |  |  | 1.45 | % |  |  | 7,155 |  |  |  | 1.20 | % |  |  | - |  |  |  | 0.00 | % |  |  | - |  |  |  | - |  |  |  | 10,144 |  |  |  | 1.27 | %
U.S. Government sponsored enterprises |  |  | - |  |  |  | - |  |  |  | 3,362 |  |  |  | 4.39 | % |  |  | 5,737 |  |  |  | 2.99 | % |  |  | 1,416 |  |  |  | 6.69 | % |  |  | 10,515 |  |  |  | 3.72 | %
GSE - Mortgage-backed securities |  |  | - |  |  |  | - |  |  |  | 4,944 |  |  |  | 4.27 | % |  |  | 31,305 |  |  |  | 2.36 | % |  |  | 198,653 |  |  |  | 4.06 | % |  |  | 234,902 |  |  |  | 3.77 | %
Private label mortgage-backed securities |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 0.00 | % |  |  | - |  |  |  | 0.00 | % |  |  | 31,270 |  |  |  | 4.72 | % |  |  | 31,270 |  |  |  | 4.72 | %
State and political subdivisions |  |  | - |  |  |  | - |  |  |  | 7,241 |  |  |  | 2.66 | % |  |  | 39,447 |  |  |  | 1.03 | % |  |  | 58,405 |  |  |  | 1.86 | % |  |  | 105,093 |  |  |  | 1.85 | %
Total securities |  | $ | 2,989 |  |  |  | 1.45 | % |  |  | 22,702 |  |  |  | 3.64 | % |  |  | 76,489 |  |  |  | 2.55 | % |  |  | 289,744 |  |  |  | 3.94 | % |  |  | 391,924 |  |  |  | 3.30 | %

Loans. The loan portfolio is the largest category of the Company’s earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. 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 in North Carolina.

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 December 31, 2023, the Bank had $112.8 million in residential mortgage loans, $107.7 million in home equity loans and $639.9 million in commercial mortgage loans, which include $488.9 million secured by commercial property and $151.0 million secured by residential property. Residential mortgage loans include $17.8 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

The mortgage loans originated in the traditional banking offices are generally 15–30 year fixed rate loans with attributes that prevent the loans from being sellable in the secondary market. These factors may include higher loan-to-value ratio, limited documentation on income, non-conforming appraisal or non-conforming property type. These loans are generally made to existing Bank customers and have been originated throughout the Bank’s seven county service area, with no geographic concentration.

As of December 31, 2023, gross loans outstanding were $1.1 billion, as compared to $1.0 billion at December 31, 2022. Average loans represented 68% and 59% of average total earning assets for the years ended December 31, 2023 and 2022, respectively. The Bank had $686,000 and $211,000 in mortgage loans held for sale as of December 31, 2023 and 2022, respectively.

A-13

Table 8 identifies the maturities of all loans as of December 31, 2023 and addresses the sensitivity of these loans to changes in interest rates.

Table 8 - Maturity and Repricing Data for Loans

(Dollars in Thousands) |  | Within one year or less |  |  | After one year through five years |  |  | After five years through 15 years |  |  | After 15 years |  |  | Total Loans |
Real estate loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 38,761 |  |  | $ | 46,157 |  |  | $ | 49,793 |  |  | $ | 1,552 |  |  | $ | 136,263 |
Single-family residential |  |  | 131,104 |  |  |  | 109,651 |  |  |  | 85,566 |  |  |  | 46,391 |  |  |  | 372,712 |
Commercial |  |  | 38,941 |  |  |  | 255,097 |  |  |  | 125,734 |  |  |  | 5,964 |  |  |  | 425,736 |
Multifamily and farmland |  |  | 1,748 |  |  |  | 25,379 |  |  |  | 17,403 |  |  |  | 18,429 |  |  |  | 62,959 |
Total real estate loans |  |  | 210,554 |  |  |  | 436,284 |  |  |  | 278,496 |  |  |  | 72,336 |  |  |  | 997,670 |
Commercial loans (not secured by real estate) |  |  | 29,747 |  |  |  | 23,872 |  |  |  | 17,243 |  |  |  | - |  |  |  | 70,862 |
Farm loans (not secured by real estate) |  |  | 281 |  |  |  | 159 |  |  |  | 123 |  |  |  | - |  |  |  | 563 |
Consumer loans (not secured by real estate) |  |  | 2,837 |  |  |  | 2,765 |  |  |  | 1,443 |  |  |  | - |  |  |  | 7,045 |
All other loans (not secured by real estate) |  |  | 12,765 |  |  |  | 3,015 |  |  |  | 1,146 |  |  |  | - |  |  |  | 16,926 |
Total loans |  | $ | 256,184 |  |  | $ | 466,095 |  |  | $ | 298,451 |  |  | $ | 72,336 |  |  | $ | 1,093,066 |
Total fixed rate loans |  | $ | 42,970 |  |  | $ | 452,659 |  |  | $ | 269,991 |  |  | $ | 72,336 |  |  | $ | 837,956 |
Total floating rate loans |  |  | 213,214 |  |  |  | 13,436 |  |  |  | 28,460 |  |  |  |  |  |  |  | 255,110 |
Total loans |  | $ | 256,184 |  |  | $ | 466,095 |  |  | $ | 298,451 |  |  | $ | 72,336 |  |  | $ | 1,093,066 |

In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. At December 31, 2023, outstanding loan commitments totaled $367.5 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additional information regarding commitments is provided below in the section entitled “Commitments and Contingencies” and in Note 11 to the Consolidated Financial Statements.

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 December 31, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. 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 reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023.

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

A-14

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 Bank Board reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below $1.5 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank Board.

Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.

Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance. The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023.

Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures. Estimating the amount of the allowance for credit losses requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Credit losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

There are many factors affecting the allowance for credit losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

Beginning December 31, 2012, certain mortgage loans from the former Banco division of the Bank were, prior to the adoption of CECL, analyzed separately from other single-family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers. These loans are included in the single-family residential loan pool in the Company’s CECL model.

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.

A-15

Table 9 presents an analysis of the allowance for loan losses, including charge-off activity.

Table 9 - Analysis of Allowance for Credit Losses

(Dollars in thousands) |  | 2023 |  |  | 2022 |  |  | 2021 |
Allowance for Credit losses at beginning |  | $ | 10,494 |  |  | $ | 9,355 |  |  | $ | 9,908 |
Adjustment for CECL implementation |  |  | 1,058 |  |  |  | - |  |  |  | - |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Single-family residential |  |  | - |  |  |  | 128 |  |  |  | 89 |
Total real estate loans |  |  | - |  |  |  | 128 |  |  |  | 89 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 129 |  |  |  | 33 |  |  |  | 293 |
Consumer loans |  |  | 569 |  |  |  | 591 |  |  |  | 380 |
Total charge offs |  |  | 698 |  |  |  | 752 |  |  |  | 762 |
Recoveries of losses previously charged off: |  |  |  |  |  |  |  |  |  |  |  |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  |  | - |  |  |  | - |  |  |  | 121 |
Single-family residential |  |  | 171 |  |  |  | 229 |  |  |  | 271 |
Commercial |  |  | 6 |  |  |  | 9 |  |  |  | 52 |
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | 3 |
Total real estate loans |  |  | 177 |  |  |  | 238 |  |  |  | 447 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans |  |  | 67 |  |  |  | 72 |  |  |  | 786 |
Consumer loans |  |  | 147 |  |  |  | 109 |  |  |  | 139 |
Total recoveries |  |  | 391 |  |  |  | 419 |  |  |  | 1,372 |
Net loans charged off |  |  | 307 |  |  |  | 333 |  |  |  | (610 | )
Provision for credit losses |  |  | 1,566 |  |  |  | 1,472 |  |  |  | (1,163 | )
Allowance for credit losses at end of year |  | $ | 12,811 |  |  | $ | 10,494 |  |  | $ | 9,355 |
Allowance for credit loss-loans |  | $ | 11,041 |  |  | $ | - |  |  | $ | - |
Allowance for credit loss-unfunded loan commitments |  |  | 1,770 |  |  |  | - |  |  |  | - |
Total allowance for credit losses |  | $ | 12,811 |  |  | $ | - |  |  | $ | - |
Loans charged off net of recoveries, as a percent of average loans outstanding |  |  | 0.03 | % |  |  | 0.04 | % |  |  | -0.07 | %
Allowance for loan losses as a percent of total loans outstanding at end of year |  |  | 1.01 | % |  |  | 1.02 | % |  |  | 1.06 | %

Table 10 presents the allocation of the allowance for credit losses at December 31, 2023.

Table 10 - Allocation of Allowance for Credit Losses

(Dollars in thousands)

|  | December 31, 2023 |  |  | Percent of Total Loans In Category to Total Loans Outstanding |
Construction and land development |  | $ | 3,913 |  |  |  | 12 | %
Single-family residential |  |  | 3,313 |  |  |  | 32 | %
Single-family residential - Banco de la Gente non-traditional |  |  | 171 |  |  |  | 2 | %
Commercial |  |  | 2,317 |  |  |  | 39 | %
Multifamily and farmland |  |  | 268 |  |  |  | 6 | %
Commercial |  |  | 812 |  |  |  | 6 | %
Farm |  |  | 2 |  |  |  | 0 | %
Consumer |  |  | 150 |  |  |  | 1 | %
All other |  |  | 95 |  |  |  | 2 | %
Total allowance for credit losses |  | $ | 1,059 |  |  |  | 100 | %

Non-performing Assets. Non-performing assets were $3.9 million or 0.24% of total assets at December 31, 2023, compared to $3.7 million or 0.23% at December 31, 2022. Non-performing assets include $3.4 million in commercial and residential mortgage loans and $464,000 in other loans at December 31, 2023, compared to $3.7 million in commercial and residential mortgage loans and $8,000 in other loans at December 31, 2022. The Bank had no other real estate owned as of December 31, 2023 and 2022. The Bank had no repossessed assets as of December 31, 2023 and 2022.

A-16

At December 31, 2023, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $3.9 million or 0.36% of total loans. Non-performing loans at December 31, 2022 were $3.7 million or 0.36% of total loans.

Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results, liquidity or capital resources have been classified as non-performing. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performing loans. Management expects the future level of non-accrual loans to continue to be in-line with the level of non-accrual loans at December 31, 2023 and 2022.

It is the general policy of the Bank to stop accruing interest income when a loan is placed on non-accrual status and any interest previously accrued but not collected is reversed against current income. 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.

Deposits. The Bank primarily uses deposits to fund its loan and investment portfolios. The Bank offers a variety of deposit accounts to individuals and businesses. Deposit accounts include checking, savings, money market and time deposits. Total deposits were $1.4 billion as of December 31, 2023 and 2022. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, MMDA, savings and non-brokered certificates of deposit of denominations less than $250,000, were $1.2 billion and $1.4 million at December 31, 2023 and 2022, respectively. 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 funding base.

Certificates of deposit in amounts of more than $250,000 totaled $148.9 million at December 31, 2023, compared to $31.0 million at December 31, 2022. Other time deposits totaled $190.2 million at December 31, 2023, compared to $67.0 million at December 31, 2022. The increases in certificates of deposit in amounts of more than $250,000 and other time deposits are primarily due to promotional rates offered on select certificate of deposit products during the year ended December 31, 2023.

Table 11 is a summary of the maturity distribution of time deposits in amounts of more than $250,000 as of December 31, 2023.

Table 11 - Maturities of Time Deposits over $250,000

(Dollars in thousands) |  | 2023 |
Three months or less |  | $ | 47,587 |
Over three months through six months |  |  | 90,305 |
Over six months through twelve months |  |  | 10,486 |
Over twelve months |  |  | 526 |
Total |  | $ | 148,904 |

Estimated uninsured deposits totaled $382.1 million, or 27.45% of total deposits, at December 31, 2023, compared to $439.8 million, or 30.64% of total deposits, at December 31, 2022. 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 based on the North American Industry Classification System at December 31, 2023 and 2022. The Bank has one customer relationship that had deposits totaling $69.8 million, or 5.02% of total deposits, at December 31, 2023, and $61.8 million, or 4.31% of total deposits, at December 31, 2022.

Borrowed Funds. The Bank has access to various short-term borrowings, including the purchase of federal funds and borrowing arrangements from the FHLB and other financial institutions. There were no FHLB borrowings outstanding at December 31, 2023 and 2022. Average FHLB borrowings for 2023 and 2022 were zero. Additional information regarding FHLB borrowings is provided in Note 7 to the Consolidated Financial Statements.

The Bank had no borrowings from the FRB at December 31, 2023 and 2022. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.

Securities sold under agreements to repurchase were $86.7 million at December 31, 2023, compared to $47.7 million at December 31, 2022. The increase in securities sold under agreements to repurchase is primarily due to customers transferring funds from deposits to securities sold under agreements to repurchase during the year ended December 31, 2023.

A-17

Junior subordinated debentures were $15.5 million at December 31, 2023 and December 31, 2022.

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.

The Company enters into derivative contracts to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk. Therefore, the derivative amounts recorded on the balance sheet do not represent the amounts that may ultimately be paid under these contracts. Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management” beginning on page A-11 and in Note 1 to the Consolidated Financial Statements. There were no derivatives at December 31, 2023 or 2022.

Capital Resources. Shareholders’ equity was $121.0 million, or 7.40% of total assets, at December 31, 2023, compared to $105.2 million, or 6.49% of total assets, at December 31, 2022.

Average shareholders’ equity as a percentage of total average assets was 7.24%, 7.45% and 9.42% for 2023, 2022 and 2021, respectively. The return on average shareholders’ equity was 13.37% at December 31, 2023, as compared to 13.01% and 10.24% at December 31, 2022 and December 31, 2021, respectively. Total cash dividends paid on common stock were $5.1 million, $4.9 million and $3.8 million during 2023, 2022 and 2021, respectively.

The Board of Directors, at its discretion, can issue up to 5,000,000 shares of preferred stock. The Board is authorized to determine the number of shares, voting powers, designations, preferences, limitations and relative rights.

In 2022, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was 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 repurchased approximately $710,000, or 26,200 shares of its common stock, under this stock repurchase program through December 31, 2022.

In the first quarter of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was allocated to repurchase the Company’s common stock. In the fourth quarter of 2023, the Board of Directors authorized an additional $2.0 million to be allocated to repurchase the Company’s common stock, which increased the total amount authorized in 2023 to $4.0 million. 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 repurchased approximately $2.0 million, or 102,522 shares of its common stock, under this stock repurchase program through December 31, 2023.

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.

A-18

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 December 31, 2023 and December 31, 2022. The Company’s Tier 1 capital ratio was 13.94% and 13.21% at December 31, 2023 and December 31, 2022, 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 14.96% and 14.04% at December 31, 2023 and December 31, 2022, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 12.75% and 12.03% at December 31, 2023 and December 31, 2022, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.51% and 9.82% at December 31, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.83% and 13.10% at December 31, 2023 and December 31, 2022, respectively. The total risk-based capital ratio for the Bank was 14.85% and 13.93% at December 31, 2023 and December 31, 2022, respectively. The Bank’s common equity Tier 1 capital ratio was 13.83% and 13.10% at December 31, 2023 and December 31, 2022, respectively. The Bank’s Tier 1 leverage capital ratio was 10.35% and 9.68% at December 31, 2023 and December 31, 2022, 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 December 31, 2023.

A-19

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Financial Statements

December 31, 2023, 2022 and 2021

INDEX

|  | PAGE(S) |
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements PCAOB #149 |  | A-21 - A-22 |
Financial Statements |  |  |
Consolidated Balance Sheets at December 31, 2023 and 2022 |  | A-23 |
Consolidated Statements of Earnings for the years ended December 31, 2023, 2022 and 2021 |  | A-24 |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2023, 2022 and 2021 |  | A-25 |
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2023, 2022 and 2021 |  | A-26 |
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021 |  | A-27 - A-28 |
Notes to Consolidated Financial Statements |  | A-29 - A-62 |

A-20

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Peoples Bancorp of North Carolina, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of earnings, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

A-21

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Credit Losses on Loans

As discussed in Note 3 to the Company’s financial statements, the Company had a gross loan portfolio of approximately $1.1 billion and an associated allowance for credit losses of approximately $11.0 million as of December 31, 2023. As further discussed in Note 1, the Company adopted ASC Topic 326 Financial Instruments – Credit Losses as of January 1, 2023. The Company’s allowance for credit losses utilizes the Weighted Average Remaining Maturity (WARM) methodology. Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life of the loan pool. The lifetime loss rates are then adjusted for qualitative factors.

We identified the Company’s reasonable and supportable forecast and qualitative factors applied to adjust the lifetime loss rate as a critical audit matter. The principal considerations for our determination of the reasonable and supportable forecast and qualitative factors as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the reasonable and supportable forecast and qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included the following:

· | We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in the development of the qualitative factors for collectively evaluated loans.
· | We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, as well as other audit evidence gathered.
· | Analytical procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for credit losses for collectively evaluated loans.
· | We evaluated management’s determination of reasonable and supportable forecasts, including comparing key factors to independent sources.

/s/ Elliott Davis, PLLC

We have served as the Company's auditor since 2015.

Raleigh, North Carolina

March 7, 2024

A-22

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

December 31, 2023 and December 31, 2022

(Dollars in thousands)

|  | December 31, |  |  | December 31, |
Assets |  | 2023 |  |  | 2022 |
|  | (Audited) |  |  | (Audited) |
Cash and due from banks, including reserve requirements of $0 at both 12/31/23 and 12/31/22 |  | $ | 32,819 |  |  |  | 50,061 |
Interest-bearing deposits |  |  | 49,556 |  |  |  | 21,535 |
Cash and cash equivalents |  |  | 82,375 |  |  |  | 71,596 |
Investment securities available for sale |  |  | 391,924 |  |  |  | 445,394 |
Other investments |  |  | 2,874 |  |  |  | 2,656 |
Total securities |  |  | 394,798 |  |  |  | 448,050 |
Mortgage loans held for sale |  |  | 686 |  |  |  | 211 |
Loans |  |  | 1,093,066 |  |  |  | 1,032,608 |
Less allowance for credit losses |  |  | (11,041 | ) |  |  | (10,494 | )
Net loans |  |  | 1,082,025 |  |  |  | 1,022,114 |
Premises and equipment, net |  |  | 16,702 |  |  |  | 18,205 |
Cash surrender value of life insurance |  |  | 18,134 |  |  |  | 17,703 |
Right of use lease asset |  |  | 4,731 |  |  |  | 5,116 |
Accrued interest receivable and other assets |  |  | 36,459 |  |  |  | 37,932 |
Total assets |  | $ | 1,635,910 |  |  |  | 1,620,927 |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |
Noninterest-bearing demand |  | $ | 432,687 |  |  |  | 523,088 |
Interest-bearing demand, MMDA & savings |  |  | 620,244 |  |  |  | 814,128 |
Time, over $250,000 |  |  | 148,904 |  |  |  | 31,001 |
Other time |  |  | 190,210 |  |  |  | 66,998 |
Total deposits |  |  | 1,392,045 |  |  |  | 1,435,215 |
Securities sold under agreements to repurchase |  |  | 86,715 |  |  |  | 47,688 |
Junior subordinated debentures |  |  | 15,464 |  |  |  | 15,464 |
Lease liability |  |  | 4,832 |  |  |  | 5,185 |
Accrued interest payable and other liabilities |  |  | 15,838 |  |  |  | 12,180 |
Total liabilities |  |  | 1,514,894 |  |  |  | 1,515,732 |
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 5,534,499 shares at December 31, 2023 and 5,636,830 shares at December 31, 2022 |  |  | 50,625 |  |  |  | 52,636 |
Common stock held by deferred compensation trust, at cost; 163,702 shares at December 31, 2023 and 169,094 shares at December 31, 2022 |  |  | (1,910 | ) |  |  | (2,181 | )
Deferred compensation |  |  | 1,910 |  |  |  | 2,181 |
Retained earnings |  |  | 109,756 |  |  |  | 100,156 |
Accumulated other comprehensive loss |  |  | (39,365 | ) |  |  | (47,597 | )
Total shareholders' equity |  |  | 121,016 |  |  |  | 105,195 |
Total liabilities and shareholders' equity |  | $ | 1,635,910 |  |  |  | 1,620,927 |

See accompanying Notes to Consolidated Financial Statements.

A-23

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands, except per share amounts)

|  | 2023 |  |  | 2022 |  |  | 2021 |
|  | (Audited) |  |  | (Audited) |  |  | (Audited) |
Interest income: |  |  |  |  |  |  |  |  |
Interest and fees on loans |  | $ | 55,507 |  |  |  | 43,077 |  |  |  | 41,186 |
Interest on due from banks |  |  | 2,216 |  |  |  | 2,223 |  |  |  | 258 |
Interest on investment securities: |  |  |  |  |  |  |  |  |  |  |  |
U.S. Government sponsored enterprises |  |  | 9,365 |  |  |  | 4,150 |  |  |  | 2,478 |
States and political subdivisions |  |  | 2,949 |  |  |  | 4,075 |  |  |  | 3,146 |
Other |  |  | 1,825 |  |  |  | 906 |  |  |  | 111 |
Total interest income |  |  | 71,862 |  |  |  | 54,431 |  |  |  | 47,179 |
Interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits, MMDA & savings deposits |  |  | 6,731 |  |  |  | 2,019 |  |  |  | 2,029 |
Time deposits |  |  | 7,916 |  |  |  | 562 |  |  |  | 752 |
Junior subordinated debentures |  |  | 1,079 |  |  |  | 529 |  |  |  | 280 |
Other |  |  | 1,417 |  |  |  | 213 |  |  |  | 144 |
Total interest expense |  |  | 17,143 |  |  |  | 3,323 |  |  |  | 3,205 |
Net interest income |  |  | 54,719 |  |  |  | 51,108 |  |  |  | 43,974 |
Provision for (recovery of) credit losses |  |  | 1,566 |  |  |  | 1,472 |  |  |  | (1,163 | )
Net interest income after provision for credit losses |  |  | 53,153 |  |  |  | 49,636 |  |  |  | 45,137 |
Non-interest income: |  |  |  |  |  |  |  |  |  |  |  |
Service charges |  |  | 5,496 |  |  |  | 5,290 |  |  |  | 3,921 |
Other service charges and fees |  |  | 697 |  |  |  | 734 |  |  |  | 803 |
Loss on sale of securities, net |  |  | (2,488 | ) |  |  | - |  |  |  | - |
Mortgage banking income |  |  | 301 |  |  |  | 393 |  |  |  | 2,505 |
Insurance and brokerage commissions |  |  | 929 |  |  |  | 945 |  |  |  | 1,035 |
Appraisal management fee income |  |  | 9,592 |  |  |  | 11,663 |  |  |  | 8,890 |
Gain (loss) on sale of premises and equipment |  |  | 184 |  |  |  | (85 | ) |  |  | 105 |
Gain on sale of other real estate, net |  |  | - |  |  |  | - |  |  |  | 21 |
Miscellaneous |  |  | 8,203 |  |  |  | 7,749 |  |  |  | 7,639 |
Total non-interest income |  |  | 22,914 |  |  |  | 26,689 |  |  |  | 24,919 |
Non-interest expense: |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  |  | 26,640 |  |  |  | 26,130 |  |  |  | 24,506 |
Occupancy |  |  | 7,962 |  |  |  | 8,048 |  |  |  | 7,858 |
Professional fees |  |  | 1,716 |  |  |  | 1,915 |  |  |  | 1,826 |
Advertising |  |  | 750 |  |  |  | 693 |  |  |  | 536 |
Debit card expense |  |  | 1,255 |  |  |  | 1,224 |  |  |  | 1,000 |
FDIC insurance |  |  | 745 |  |  |  | 461 |  |  |  | 415 |
Appraisal management fee expense |  |  | 7,559 |  |  |  | 9,264 |  |  |  | 7,112 |
Other |  |  | 9,517 |  |  |  | 8,295 |  |  |  | 7,874 |
Total non-interest expense |  |  | 56,144 |  |  |  | 56,030 |  |  |  | 51,127 |
Earnings before income taxes |  |  | 19,923 |  |  |  | 20,295 |  |  |  | 18,929 |
Income tax expense |  |  | 4,377 |  |  |  | 4,172 |  |  |  | 3,796 |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |
Basic net earnings per share |  | $ | 2.87 |  |  |  | 2.94 |  |  |  | 2.71 |
Diluted net earnings per share |  | $ | 2.77 |  |  |  | 2.85 |  |  |  | 2.63 |
Cash dividends declared per share |  | $ | 0.91 |  |  |  | 0.87 |  |  |  | 0.66 |

See accompanying Notes to Consolidated Financial Statements.

A-24

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income (Loss)

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

|  | 2023 |  |  | 2022 |  |  | 2021 |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gains (losses) on securities available for sale |  |  | 8,199 |  |  |  | (61,919 | ) |  |  | (6,886 | )
Reclassification adjustment for losses on securities available for sale included in net earnings, net |  |  | 2,488 |  |  |  | - |  |  |  | - |
Total other comprehensive income (loss), before income taxes |  |  | 10,687 |  |  |  | (61,919 | ) |  |  | (6,886 | )
Income tax expense (benefit) related to other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |
Unrealized holding gain (losses) on securities available for sale |  |  | 1,884 |  |  |  | (14,226 | ) |  |  | (1,582 | )
Reclassification adjustment for losses on securities available for sale included in net earnings |  |  | 571 |  |  |  | - |  |  |  | - |
Total income tax expense (benefit) related to other comprehensive income (loss) |  |  | 2,455 |  |  |  | (14,226 | ) |  |  | (1,582 | )
Total other comprehensive income (loss), net of tax |  |  | 8,232 |  |  |  | (47,693 | ) |  |  | (5,304 | )
Total comprehensive income (loss) |  | $ | 23,778 |  |  |  | (31,570 | ) |  |  | 9,829 |

See accompanying Notes to Consolidated Financial Statements.

A-25

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

|  |  |  |  |  |  |  |  |  |  |  |  |  | Common Stock |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Held By |  |  | Accumulated |  |  |  |
|  | Common |  |  | Common |  |  |  |  |  |  |  |  | Deferred |  |  | Other |  |  |  |
|  | Stock |  |  | Stock |  |  | Retained |  |  | Deferred |  |  | Compensation |  |  | Comprehensive |  |  |  |
|  | Shares |  |  | Amount |  |  | Earnings |  |  | Compensation |  |  | Trust |  |  | Income (Loss) |  |  | Total |
Balance, December 31, 2020 |  |  | 5,787,504 |  |  | $ | 56,871 |  |  |  | 77,628 |  |  |  | 1,796 |  |  |  | (1,796 | ) |  |  | 5,400 |  |  |  | 139,899 |
Common stock repurchase |  |  | (127,597 | ) |  |  | (3,605 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,605 | )
Cash dividends declared on common stock ($0.66 per share) |  |  | - |  |  |  | - |  |  |  | (3,793 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,793 | )
Restricted stock units exercised |  |  | 1,662 |  |  |  | 39 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 39 |
Equity incentive plan, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 196 |  |  |  | (196 | ) |  |  | - |  |  |  | - |
Net earnings |  |  | - |  |  |  | - |  |  |  | 15,133 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,133 |
Change in accumulated other comprehensive income (loss), net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5,304 | ) |  |  | (5,304 | )
Balance, December 31, 2021 |  |  | 5,661,569 |  |  | $ | 53,305 |  |  |  | 88,968 |  |  |  | 1,992 |  |  |  | (1,992 | ) |  |  | 96 |  |  |  | 142,369 |
Common stock repurchase |  |  | (26,200 | ) |  |  | (710 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (710 | )
Cash dividends declared on common stock ($0.87 per share) |  |  | - |  |  |  | - |  |  |  | (4,935 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (4,935 | )
Restricted stock units exercised |  |  | 1,461 |  |  |  | 41 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 41 |
Equity incentive plan, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 189 |  |  |  | (189 | ) |  |  | - |  |  |  | - |
Net earnings |  |  | - |  |  |  | - |  |  |  | 16,123 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 16,123 |
Change in accumulated other comprehensive income (loss), net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (47,693 | ) |  |  | (47,693 | )
Balance, December 31, 2022 |  |  | 5,636,830 |  |  | $ | 52,636 |  |  |  | 100,156 |  |  |  | 2,181 |  |  |  | (2,181 | ) |  |  | (47,597 | ) |  |  | 105,195 |
Adoption of new accounting standard, net of tax |  |  | - |  |  |  | - |  |  |  | (838 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (838 | )
Common stock repurchase |  |  | (102,522 | ) |  |  | (1,997 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,997 | )
Cash dividends declared on common stock ($0.91 per share) |  |  | - |  |  |  | - |  |  |  | (5,108 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (5,108 | )
Restricted stock units exercised |  |  | 191 |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 6 |
Excise tax on stock repurchase |  |  | - |  |  |  | (20 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (20 | )
Equity incentive plan, net |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (271 | ) |  |  | 271 |  |  |  | - |  |  |  | - |
Net earnings |  |  | - |  |  |  | - |  |  |  | 15,546 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,546 |
Change in accumulated other comprehensive income (loss), net of tax |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 8,232 |  |  |  | 8,232 |
Balance, December 31, 2023 |  |  | 5,534,499 |  |  | $ | 50,625 |  |  |  | 109,756 |  |  |  | 1,910 |  |  |  | (1,910 | ) |  |  | (39,365 | ) |  |  | 121,016 |

See accompanying Notes to Consolidated Financial Statements.

A-26

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

|  | 2023 |  |  | 2022 |  |  | 2021 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |
Adjustments to reconcile net earnings to |  |  |  |  |  |  |  |  |  |  |  |
net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Depreciation, amortization and accretion |  |  | 3,126 |  |  |  | 6,031 |  |  |  | 5,569 |
Provision for (recovery of) credit losses |  |  | 1,566 |  |  |  | 1,472 |  |  |  | (1,163 | )
Deferred income taxes |  |  | (453 | ) |  |  | (541 | ) |  |  | (227 | )
Loss on sale of investment securities, net |  |  | 2,488 |  |  |  | - |  |  |  | - |
Gain on sale of other real estate, net |  |  | - |  |  |  | - |  |  |  | (21 | )
(Gain) loss on sale and write downs of premises and equipment, net |  |  | (184 | ) |  |  | 85 |  |  |  | (105 | )
Restricted stock units expense |  |  | 187 |  |  |  | 249 |  |  |  | 181 |
Proceeds from sales of loans held for sale |  |  | 16,190 |  |  |  | 22,659 |  |  |  | 98,365 |
Origination of loans held for sale |  |  | (16,665 | ) |  |  | (19,233 | ) |  |  | (92,863 | )
Change in: |  |  |  |  |  |  |  |  |  |  |  |
Cash surrender value of life insurance |  |  | (431 | ) |  |  | (403 | ) |  |  | (397 | )
Right of use lease asset |  |  | 755 |  |  |  | 1,222 |  |  |  | 738 |
Other assets |  |  | (310 | ) |  |  | (3,465 | ) |  |  | (554 | )
Lease liability |  |  | (723 | ) |  |  | (1,673 | ) |  |  | (721 | )
Other liabilities |  |  | 1,688 |  |  |  | 131 |  |  |  | 2,965 |
Net cash provided by operating activities |  |  | 22,780 |  |  |  | 22,657 |  |  |  | 26,900 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Purchases of investment securities available for sale |  |  | (9,615 | ) |  |  | (149,738 | ) |  |  | (209,306 | )
Proceeds from sales of investment securities available for sale |  |  | 51,023 |  |  |  | 7,875 |  |  |  | 9,540 |
Proceeds from calls and maturities of investment securities available for sale |  |  | 1,015 |  |  |  | - |  |  |  | - |
Proceeds from paydowns of investment securities available for sale |  |  | 18,250 |  |  |  | 37,400 |  |  |  | 28,536 |
Proceeds from paydowns of other investment securities |  |  | 150 |  |  |  | 1,162 |  |  |  | 201 |
Net change in FHLB stock |  |  | (323 | ) |  |  | (105 | ) |  |  | 331 |
Net change in loans |  |  | (60,765 | ) |  |  | (148,072 | ) |  |  | 64,380 |
Purchases of premises and equipment |  |  | (1,948 | ) |  |  | (4,563 | ) |  |  | (484 | )
Proceeds from sale of premises and equipment |  |  | 1,460 |  |  |  | - |  |  |  | 515 |
Proceeds from sale of other real estate and repossessions |  |  | - |  |  |  | - |  |  |  | 149 |
Proceeds from bank owned life insurance |  |  | - |  |  |  | 65 |  |  |  | - |
Net cash used by investing activities |  |  | (753 | ) |  |  | (255,976 | ) |  |  | (106,138 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Net change in deposits |  |  | (43,170 | ) |  |  | 22,467 |  |  |  | 191,662 |
Net change in securities sold under agreement to repurchase |  |  | 39,027 |  |  |  | 10,594 |  |  |  | 10,893 |
Proceeds from FRB borrowings |  |  | 1 |  |  |  | 1 |  |  |  | 1 |
Repayments of FRB borrowings |  |  | (1 | ) |  |  | (1 | ) |  |  | (1 | )
Proceeds from Fed Funds Purchased |  |  | 43,426 |  |  |  | 162 |  |  |  | 162 |
Repayments of Fed Funds Purchased |  |  | (43,426 | ) |  |  | (162 | ) |  |  | (162 | )
Common stock repurchased |  |  | (1,997 | ) |  |  | (710 | ) |  |  | (3,605 | )
Cash dividends paid on common stock |  |  | (5,108 | ) |  |  | (4,935 | ) |  |  | (3,793 | )
Net cash (used) provided by financing activities |  |  | (11,248 | ) |  |  | 27,416 |  |  |  | 195,157 |
Net change in cash and cash equivalents |  |  | 10,779 |  |  |  | (205,903 | ) |  |  | 115,919 |
Cash and cash equivalents at beginning of period |  |  | 71,596 |  |  |  | 277,499 |  |  |  | 161,580 |
Cash and cash equivalents at end of period |  | $ | 82,375 |  |  |  | 71,596 |  |  |  | 277,499 |

A-27

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

|  | 2023 |  |  | 2022 |  |  | 2021 |
Supplemental disclosures of cash flow information: |  |  |  |  |  |  |  |  |
Cash paid during the year for: |  |  |  |  |  |  |  |  |
Interest |  | $ | 16,487 |  |  |  | 3,284 |  |  |  | 3,224 |
Income taxes |  | $ | 4,448 |  |  |  | 4,659 |  |  |  | 3,669 |
Noncash investing and financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Change in unrealized gain (loss) on investment securities available for sale, net |  | $ | 8,232 |  |  |  | (47,693 | ) |  |  | (5,304 | )
Restricted stock units exercised |  | $ | 6 |  |  |  | 41 |  |  |  | 39 |
Excise tax on stock repurchased |  | $ | (20 | ) |  |  | - |  |  |  | - |
Initial recognition of lease right of use asset and lease liability |  | $ | 370 |  |  |  | 1,726 |  |  |  | 1,927 |
Allowance for credit losses recorded upon adoption of ASU 326, net of tax |  | $ | (838 | ) |  |  | - |  |  |  | - |

See accompanying Notes to Consolidated Financial Statements.

A-28

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Organization

Peoples Bancorp of North Carolina, Inc. (the “Company”) has served as the holding company to Peoples Bank (the “Bank”) since 1999. The Company is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for the Bank.

The Bank commenced business in 1912 upon receipt of its banking charter from the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is primarily regulated by the Commissioner and the Federal Deposit Insurance Corporation (the “FDIC”) and undergoes periodic examinations by these regulatory agencies. The Bank, whose main office is in Newton, North Carolina, provides a full range of commercial and consumer banking services primarily in Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties in North Carolina.

Peoples Investment Services, Inc. (“PIS”) is a wholly owned subsidiary of the Bank and began operations in 1996 to provide investment and trust services through agreements with an outside party.

Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies. In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022.

PB Real Estate Holdings, LLC (“PBREH”) is a wholly owned subsidiary of the Bank and began operation in 2015. PBREH acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a separate division of the Bank under the name Banco de la Gente (“Banco”). These offices, which offer the same banking services as our other branches offer, now operate under the same name as our other offices; however, we continue to separately categorize mortgage loans originated from these offices.

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accounting principles followed by the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for credit losses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.

Business Segments

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 16. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting.

A-29

Cash and Cash Equivalents

Cash, due from banks, interest-bearing deposits and federal funds sold are considered cash and cash equivalents (original maturity date less than 90 days) for cash flow reporting purposes.

Investment Securities

The Company uses three classifications for its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2023 and 2022, the Company classified all of its investment securities as available for sale.

Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.

Management evaluates investment securities for credit losses on a quarterly basis. A decline in the market value of any investment below cost that is deemed a credit loss is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in comprehensive income.

Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

Other investments include equity securities with no readily determinable fair value. These investments are carried at cost.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at the principal amount outstanding, net of the allowance for credit losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.

Accrual of interest is discontinued on a loan when management believes, after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings.

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 credit 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 December 31, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company calculates the allowance for credit losses using a 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 reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of collateral. To identify loans for individual analysis, management reviews all loans over $250,000 with a risk grade of 5 or 6, including loans modified due to the financial stress of the borrower, and other loans with significantly different characteristics from the established pools for potential loss rates that could result in additional provisioning that would be greater than internally established materiality thresholds.

A-30

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

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 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 uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance. The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023.

Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures. Estimating the amount of the allowance for credit losses requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Loan 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.

A-31

Beginning December 31, 2012, certain mortgage loans from the former Banco division of the Bank were, prior to the adoption of CECL, analyzed separately from other single-family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers. These loans are included in the single-family residential loan pool in the Company’s CECL model.

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.

Mortgage Banking Activities

Mortgage banking income represents income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $244,000, $285,000 and $351,000 at December 31, 2023, 2022 and 2021, respectively. Mortgage servicing rights related to these loans are immaterial for all periods presented.

The Bank originates certain fixed rate mortgage loans and commits these loans for sale. The commitments to originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative contracts. The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in the financial statements.

Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are generally as follows:

Buildings and improvements | 10 - 50 years
Furniture and equipment | 3 - 10 years

Other Real Estate

Foreclosed assets include all assets received in full or partial satisfaction of a loan. Foreclosed assets are reported at fair value less estimated selling costs. Any write-downs at the time of foreclosure are charged to the allowance. Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value less estimated selling costs declines below carrying value. Costs relating to the development and improvement of the property are capitalized. Revenues and expenses from operations are included in other expenses. Changes in the valuation allowance are included in loss on sale and write-down of other real estate.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

A-32

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of a deferred tax asset, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Tax effects from an uncertain tax position can be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company assessed the impact of this guidance and determined that it did not have a material impact on the Company’s financial position, results of operations or disclosures.

Revenue Recognition

The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment advisory, and appraisal services. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Appraisal management fee income and expense from CBRES are reported on separate line items under non-interest income and non-interest expense. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to customers. The Company has no contracts in which customers are billed in advance for services to be performed. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated. All of the Company’s contracts create performance obligations that are satisfied at a point in time excluding some immaterial deposit revenues. Revenue is recognized as services are billed to the customers.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, were granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants previously made thereunder. No new awards may be made after May 7, 2019.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of December 31, 2023, the Company did not have any unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted. As of December 31, 2023, a total of 274,550 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan. No new awards may be made after May 7, 2030 (ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company granted 7,060 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021. The Company granted 5,385 restricted stock units under the 2020 Plan at a grant date fair value of $27.99 per share during the first quarter of 2022. The Company granted 5,370 restricted stock units under the 2020 Plan at a grant date fair value of $32.58 per share during the first quarter of 2023. The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for 2020, 2021, 2022 and 2023 grants). As of December 31, 2023, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $287,000.

A-33

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $187,000, $249,000 and $181,000 for the years ended December 31, 2023, 2022 and 2021, respectively.

Net Earnings Per Share

Net earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. The average market price during the year is used to compute equivalent shares.

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2023, 2022 and 2021 are as follows:

For the year ended December 31, 2023 |  |  |  |  |  |  |  |  |
|  | Net Earnings (Dollars in thousands) |  |  | Weighted Average Number of Shares |  |  | Per Share Amount |
Basic earnings per share |  | $ | 15,546 |  |  |  | 5,424,890 |  |  | $ | 2.87 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Restricted stock units - unvested |  |  | - |  |  |  | 18,971 |  |  |  |  |
Shares held in deferred comp plan by deferred compensation trust |  |  |  |  |  |  | 166,353 |  |  |  |  |
Diluted earnings per share |  | $ | 15,546 |  |  |  | 5,610,214 |  |  | $ | 2.77 |

For the year ended December 31, 2022 |  |  |  |  |  |  |  |  |
|  | Net Earnings (Dollars in thousands) |  |  | Weighted Average Number of Shares |  |  | Per Share Amount |
Basic earnings per share |  | $ | 16,123 |  |  |  | 5,480,123 |  |  | $ | 2.94 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Restricted stock units - unvested |  |  | - |  |  |  | 15,467 |  |  |  |  |
Shares held in deferred comp plan by deferred compensation trust |  |  |  |  |  |  | 165,599 |  |  |  |  |
Diluted earnings per share |  | $ | 16,123 |  |  |  | 5,661,189 |  |  | $ | 2.85 |

For the year ended December 31, 2021 |  |  |  |  |  |  |  |  |
|  | Net Earnings (Dollars in thousands) |  |  | Weighted Average Number of Shares |  |  | Per Share Amount |
Basic earnings per share |  | $ | 15,133 |  |  |  | 5,576,099 |  |  | $ | 2.71 |
Effect of dilutive securities: |  |  |  |  |  |  |  |  |  |  |  |
Restricted stock units - unvested |  |  | - |  |  |  | 13,935 |  |  |  |  |
Shares held in deferred comp plan by deferred compensation trust |  |  |  |  |  |  | 158,831 |  |  |  |  |
Diluted earnings per share |  | $ | 15,133 |  |  |  | 5,748,865 |  |  | $ | 2.63 |

A-34

Recent Accounting Pronouncements

The following tables provide a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted.

ASU | Description | Effective Date | Effect on Financial Statements or Other Significant Matters
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates | Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging. | January 1, 2023 | The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses | Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC. | January 1, 2023 | The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.
ASU 2020-03: Codification Improvements to Financial Instruments | Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326. | January 1, 2023 | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures | Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. | January 1, 2023 | The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.

Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

On January 1, 2023, the Company adopted ASC 326, which replaced the incurred loss impairment framework in prior GAAP with a current expected credit loss (“CECL”) framework, which requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Under CECL, financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses (“ACL”).

In addition, the adoption of CECL resulted in changes to the Company’s accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Adoption of ASC 326 resulted in an initial reduction to retained earnings of $838,000, net of tax, due to a $1.1 million increase in the allowance for credit losses, comprised of a $2.3 million increase in the allowance for credit losses on unfunded commitments and a $1.2 million decrease in the allowance for credit losses on loans. There was no impact to the available for sale securities portfolio or other financial instruments. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP (referred to as the “Incurred Loss” methodology).

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2023, the Company did not have any credit losses on investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material.

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest. Accrued interest receivable totaled $5.1 million at December 31, 2023.

A-35

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 December 31, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using the WARM methodology:

- 1-4 family residential construction loans

- Other construction loans and all land development and other land loans

- Secured by farmland (including farm residential and other improvements)

- Home equity loans

- 1-4 family residential loans secured by first liens

- 1-4 family residential loans secured by junior liens

- Secured by multifamily residential properties

- Loans secured by owner-occupied, nonfarm nonresidential properties

- Loans secured by other nonfarm nonresidential properties

- Loans to finance agricultural production and other loans to farmers

- Commercial and industrial loans

- Other revolving credit plans

- Other consumer loans

- Obligations (other than securities and leases) of states and political subdivisions in the US

- Other loans

Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life of the loan pool. The methodology considers historical loss experience and a loss forecast expectation to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses. The Company’s forecast component projects the next four quarters to have similar loss rates to the period between November 1, 2015 and September 30, 2019, and then with a reversion back to the long-term average over four quarters. This period is intended to reflect the environment that began when the Federal Reserve started its last series of rate hikes beginning in November of 2015, and reflects the overall loan loss rates of the Company during this time of no higher than 0.4%. This period has been extended from the prior quarter by three months, and had minor impacts on the loss rates. The Company expects to adjust these time frames for affecting the forecast periods as the rate environment changes to reflect either increasing or decreasing loan loss rates that will adjust the historical loss rates. A straight-line reversion to normalize to an expected, long-term, through-the-cycle average loss rate will be used following the forecast period of four quarters over the remaining life of the pool. This remains constant for the life of loan beyond the reasonable and supportable forecast and reversion period.

A general forecast policy was set for all pools that projects the next four quarters to have similar loss rates of selected historical periods of Federal Reserve rate policy that seem to most likely reflect the current direction of rate policy, and then with a reversion back to the long-term average over four quarters. Starting in March of 2022, the Federal Reserve has been engaged in a restrictive monetary policy. As such, a similar period of restrictive policy has been selected from recent history to serve as the basis for the forecast policy periods.

For the January 1, 2023 model, a general forecast policy was set for all pools that projects the next four quarters to have similar loss rates to the period between November 1, 2015 and December 31, 2018. During this period the Company recognized $2.1 million in net losses, and a maximum and minimum quarterly loss rate of 0.3601% and 0.1346%, respectively.

For the December 31, 2023 model, a general forecast policy was set for all pools that projects the next four quarters to have similar loss rates to the period between November 1, 2015 and September 30, 2019. During this period the Company recognized $2.4 million in net losses, and a maximum and minimum quarterly loss rate of 0.3601% and 0.1346%, respectively. The impact to the December 31, 2023 ACL estimate was a total decrease of $3.6 million from the historical loss rate starting in the second quarter of 2008. This history would include the highest loss rates experienced by the Company from 2008 to 2013. The forecast period is adjusting these peak loss rates, to rates more commensurate with more recent loss experiences.

A-36

The increase in allowance for credit losses as of December 31, 2023 of $2.3 million is composed of a provision for the establishment of unfunded commitments of $1.1 million as part of the adoption of CECL in 2023, a provision for credit losses for loans individually assessed of $432,000, and $877,000 in increases for reserves in the loan pools of 1-4 family residential construction loans, other construction loans and all land development and other land loans, 1-4 family residential secured by first liens, and loans secured by other nonfarm nonresidential properties under the construction, land development, and other land loan categories of the loans secured by real estate. The increases in reserves in these categories were caused mainly by increases in loan balances during 2023 along with increases in the qualitative reserve ratios. Increases in the qualitative reserve ratios were impacted by increases in risk factors for both concentrations of credit and interest rate risk from minor risk to moderate risk for all categories of pooled loans.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023.

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

Reclassification

Certain amounts in the 2022 and 2021 consolidated financial statements have been reclassified to conform to the 2023 presentation.

(2) Investment Securities

Investment securities available for sale at December 31, 2023 and 2022 are as follows:

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2023 |
|  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
U.S. Treasuries |  | $ | 10,974 |  |  |  | - |  |  |  | 830 |  |  |  | 10,144 |
U.S. Government sponsored enterprises |  |  | 11,111 |  |  |  | - |  |  |  | 596 |  |  |  | 10,515 |
GSE - Mortgage-backed securities |  |  | 257,705 |  |  |  | 185 |  |  |  | 22,988 |  |  |  | 234,902 |
Private label mortgage-backed securities |  |  | 33,317 |  |  |  | 16 |  |  |  | 2,063 |  |  |  | 31,270 |
State and political subdivisions |  |  | 129,922 |  |  |  | - |  |  |  | 24,829 |  |  |  | 105,093 |
Total |  | $ | 443,029 |  |  |  | 201 |  |  |  | 51,306 |  |  |  | 391,924 |

A-37

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2022 |
|  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value |
U.S. Treasuries |  | $ | 10,951 |  |  |  | - |  |  |  | 1,137 |  |  |  | 9,814 |
U.S. Government sponsored enterprises |  |  | 12,245 |  |  |  | - |  |  |  | 706 |  |  |  | 11,539 |
GSE - Mortgage-backed securities |  |  | 263,712 |  |  |  | 445 |  |  |  | 23,657 |  |  |  | 240,500 |
Private label mortgage-backed securities |  |  | 35,510 |  |  |  | - |  |  |  | 2,172 |  |  |  | 33,338 |
State and political subdivisions |  |  | 184,768 |  |  |  | 91 |  |  |  | 34,656 |  |  |  | 150,203 |
Total |  | $ | 507,186 |  |  |  | 536 |  |  |  | 62,328 |  |  |  | 445,394 |

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2023 and 2022 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2023 |
|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
|  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
U.S. Treasuries |  | $ | - |  |  |  | - |  |  |  | 10,144 |  |  |  | 830 |  |  |  | 10,144 |  |  |  | 830 |
U.S. government sponsored enterprises |  |  | - |  |  |  | - |  |  |  | 10,515 |  |  |  | 596 |  |  |  | 10,515 |  |  |  | 596 |
GSE -Mortgage-backed securities |  |  | 24,167 |  |  |  | 546 |  |  |  | 203,234 |  |  |  | 22,442 |  |  |  | 227,401 |  |  |  | 22,988 |
Private label mortgage-backed securities |  |  | 3,416 |  |  |  | 43 |  |  |  | 23,095 |  |  |  | 2,020 |  |  |  | 26,511 |  |  |  | 2,063 |
State and political subdivisions |  |  | - |  |  |  | - |  |  |  | 105,093 |  |  |  | 24,829 |  |  |  | 105,093 |  |  |  | 24,829 |
Total |  | $ | 27,583 |  |  |  | 589 |  |  |  | 352,081 |  |  |  | 50,717 |  |  |  | 379,664 |  |  |  | 51,306 |

|  | December 31, 2022 |
|  | Less than 12 Months |  |  | 12 Months or More |  |  | Total |
|  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |  |  | Fair Value |  |  | Unrealized Losses |
U.S. Treasuries |  | $ | 2,878 |  |  |  | 104 |  |  |  | 6,936 |  |  |  | 1,033 |  |  |  | 9,814 |  |  |  | 1,137 |
U.S. government sponsored enterprises |  |  | 2,904 |  |  |  | 87 |  |  |  | 8,635 |  |  |  | 619 |  |  |  | 11,539 |  |  |  | 706 |
GSE -Mortgage-backed securities |  |  | 94,903 |  |  |  | 6,568 |  |  |  | 120,464 |  |  |  | 17,089 |  |  |  | 215,367 |  |  |  | 23,657 |
Private label mortgage-backed securities |  |  | 33,338 |  |  |  | 2,172 |  |  |  | - |  |  |  | - |  |  |  | 33,338 |  |  |  | 2,172 |
State and political subdivisions |  |  | 65,880 |  |  |  | 7,766 |  |  |  | 76,291 |  |  |  | 26,890 |  |  |  | 142,171 |  |  |  | 34,656 |
Total |  | $ | 199,903 |  |  |  | 16,697 |  |  |  | 212,326 |  |  |  | 45,631 |  |  |  | 412,229 |  |  |  | 62,328 |

At December 31, 2023, unrealized losses in the investment securities portfolio relating to debt securities totaled $51.3 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2023 tables above, all three of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions contained unrealized losses, all seven of the securities issued by U.S. Government sponsored enterprises (“GSE”), 114 of the 121 GSE mortgage-backed securities, and 12 of the 14 private label mortgage backed securities contained unrealized losses. The Company does not have an allowance for credit losses on available for sale securities at December 31, 2023, as no credit related losses were identified in the Company’s December 31, 2023 CECL analysis.

The Company periodically evaluates its investments for credit losses. There were no credit losses on investments in 2023, 2022 or 2021.

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2023, by contractual maturity, are shown below. 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.

A-38

December 31, 2023 |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |
|  | Amortized Cost |  |  | Fair Value |
Due within one year |  | $ | 2,998 |  |  |  | 2,989 |
Due from one to five years |  |  | 19,214 |  |  |  | 17,758 |
Due from five to ten years |  |  | 53,239 |  |  |  | 45,184 |
Due after ten years |  |  | 76,556 |  |  |  | 59,821 |
Mortgage-backed securities |  |  | 291,022 |  |  |  | 266,172 |
Total |  | $ | 443,029 |  |  |  | 391,924 |

During 2023, proceeds from sales of securities available for sale were $51.0 million and resulted in gross losses of $2.7 million and gross gains of $177,000. No securities available for sale were sold during 2022 and 2021.

Securities with a fair value of approximately $132.0 million and $96.0 million at December 31, 2023 and 2022, respectively, were pledged to secure public deposits, FHLB borrowings and for other purposes as required by law.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2023 and 2022.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2023 |
|  | Fair Value Measurements |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
U.S. Treasuries |  | $ | 10,144 |  |  |  | - |  |  |  | 10,144 |  |  |  | - |
U.S. Government sponsored enterprises |  |  | 10,515 |  |  |  | - |  |  |  | 10,515 |  |  |  | - |
GSE - Mortgage-backed securities |  |  | 234,902 |  |  |  | - |  |  |  | 234,902 |  |  |  | - |
Private label mortgage-backed securities |  |  | 31,270 |  |  |  | - |  |  |  | 31,270 |  |  |  | - |
State and political subdivisions |  |  | 105,093 |  |  |  | - |  |  |  | 105,093 |  |  |  | - |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2022 |
|  | Fair Value Measurements |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
U.S. Treasuries |  | $ | 9,814 |  |  |  | - |  |  |  | 9,814 |  |  |  | - |
U.S. Government sponsored enterprises |  |  | 11,539 |  |  |  | - |  |  |  | 11,539 |  |  |  | - |
GSE - Mortgage-backed securities |  |  | 240,500 |  |  |  | - |  |  |  | 240,500 |  |  |  | - |
Private label mortgage-backed securities |  |  | 33,338 |  |  |  | - |  |  |  | 33,338 |  |  |  | - |
State and political subdivisions |  |  | 150,203 |  |  |  | - |  |  |  | 150,203 |  |  |  | - |

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.

A-39

(3) Loans

Major classifications of loans at December 31, 2023 and 2022 are summarized as follows:

(Dollars in thousands) |  |  |  |  |  |
|  | December 31, 2023 |  |  | December 31, 2022 |
Real estate loans: |  |  |  |  |  |
Construction and land development |  | $ | 136,263 |  |  |  | 114,291 |
Single-family residential |  |  | 354,896 |  |  |  | 322,111 |
Single-family residential - Banco de la Gente non-traditional |  |  | 17,816 |  |  |  | 20,019 |
Commercial |  |  | 425,736 |  |  |  | 406,622 |
Multifamily and farmland |  |  | 62,959 |  |  |  | 65,481 |
Total real estate loans |  |  | 997,670 |  |  |  | 928,524 |
Loans not secured by real estate: |  |  |  |  |  |  |  |
Commercial |  |  | 70,862 |  |  |  | 81,706 |
Farm |  |  | 563 |  |  |  | 946 |
Consumer |  |  | 7,045 |  |  |  | 6,927 |
All other |  |  | 16,926 |  |  |  | 14,505 |
Total loans |  |  | 1,093,066 |  |  |  | 1,032,608 |
Less allowance for credit losses |  |  | (11,041 | ) |  |  | (10,494 | )
Total net loans |  | $ | 1,082,025 |  |  |  | 1,022,114 |

The above table includes deferred costs, net of deferred fees, totaling $807,000 and $909,000 at December 31, 2023 and December 31, 2022, respectively.

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.

A-40

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP. The Bank participated as a lender in the PPP. Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million. The Bank did not have any PPP loans outstanding at December 31, 2023. The outstanding balance of PPP loans was $103,000 at December 31, 2022. These loans are classified as commercial loans in the tables above. The Bank recognized $948,000 and $3.4 million of PPP loan fee income for the year ended December 31, 2022 and year ended December 31, 2021, respectively. No PPP loan fee income was recognized for the year ended December 31, 2023.

The following tables present an age analysis of past due loans, by loan type, as of December 31, 2023 and 2022:

December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Loans 30-89 Days Past Due |  |  | Loans 90 or More Days Past Due |  |  | Total Past Due Loans |  |  | Total Current Loans |  |  | Total Loans |  |  | Accruing Loans 90 or More Days Past Due |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 50 |  |  |  | - |  |  |  | 50 |  |  |  | 136,213 |  |  |  | 136,263 |  |  |  | - |
Single-family residential |  |  | 2,708 |  |  |  | 297 |  |  |  | 3,005 |  |  |  | 351,891 |  |  |  | 354,896 |  |  |  | - |
Single-family residential - Banco de la Gente non-traditional |  |  | 2,279 |  |  |  | 199 |  |  |  | 2,478 |  |  |  | 15,338 |  |  |  | 17,816 |  |  |  | - |
Commercial |  |  | 13 |  |  |  | - |  |  |  | 13 |  |  |  | 425,723 |  |  |  | 425,736 |  |  |  | - |
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 62,959 |  |  |  | 62,959 |  |  |  | - |
Total real estate loans |  |  | 5,050 |  |  |  | 496 |  |  |  | 5,546 |  |  |  | 992,124 |  |  |  | 997,670 |  |  |  | - |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 125 |  |  |  | - |  |  |  | 125 |  |  |  | 70,737 |  |  |  | 70,862 |  |  |  | - |
Farm |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 563 |  |  |  | 563 |  |  |  | - |
Consumer |  |  | 63 |  |  |  | - |  |  |  | 63 |  |  |  | 6,982 |  |  |  | 7,045 |  |  |  | - |
All other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 16,926 |  |  |  | 16,926 |  |  |  | - |
Total loans |  | $ | 5,238 |  |  |  | 496 |  |  |  | 5,734 |  |  |  | 1,087,332 |  |  |  | 1,093,066 |  |  |  | - |

A-41

December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Loans 30-89 Days Past Due |  |  | Loans 90 or More Days Past Due |  |  | Total Past Due Loans |  |  | Total Current Loans |  |  | Total Loans |  |  | Accruing Loans 90 or More Days Past Due |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 363 |  |  |  | - |  |  |  | 363 |  |  |  | 113,928 |  |  |  | 114,291 |  |  |  | - |
Single-family residential |  |  | 4,318 |  |  |  | 256 |  |  |  | 4,574 |  |  |  | 317,537 |  |  |  | 322,111 |  |  |  | - |
Single-family residential - Banco de la Gente non-traditional |  |  | 2,977 |  |  |  | 264 |  |  |  | 3,241 |  |  |  | 16,778 |  |  |  | 20,019 |  |  |  | - |
Commercial |  |  | 306 |  |  |  | - |  |  |  | 306 |  |  |  | 406,316 |  |  |  | 406,622 |  |  |  | - |
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 65,481 |  |  |  | 65,481 |  |  |  | - |
Total real estate loans |  |  | 7,964 |  |  |  | 520 |  |  |  | 8,484 |  |  |  | 920,040 |  |  |  | 928,524 |  |  |  | - |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 3 |  |  |  | - |  |  |  | 3 |  |  |  | 81,703 |  |  |  | 81,706 |  |  |  | - |
Farm |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 946 |  |  |  | 946 |  |  |  | - |
Consumer |  |  | 71 |  |  |  | - |  |  |  | 71 |  |  |  | 6,856 |  |  |  | 6,927 |  |  |  | - |
All other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 14,505 |  |  |  | 14,505 |  |  |  | - |
Total loans |  | $ | 8,038 |  |  |  | 520 |  |  |  | 8,558 |  |  |  | 1,024,050 |  |  |  | 1,032,608 |  |  |  | - |

The following table presents the Bank’s non-accrual loans as of December 31, 2023 and 2022:

|  | CECL Methodology |  |  | Incurred Loss Methodology |
|  | December 31, 2023 |  |  | December 31, 2022 |
|  | Nonaccrual Loans |  |  | Nonaccrual Loans |  |  | Total |  |  | Total |
|  | With No |  |  | With |  |  | Nonaccrual |  |  | Nonaccrual |
(Dollars in thousands) |  | Allowance |  |  | Allowance |  |  | Loans |  |  | Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 45 |  |  |  | - |  |  |  | 45 |  |  |  | 53 |
Single-family residential |  |  | 1,716 |  |  |  | - |  |  |  | 1,716 |  |  |  | 1,914 |
Single-family residential - Banco de la Gente non-traditional |  |  | 1,586 |  |  |  | - |  |  |  | 1,586 |  |  |  | 1,532 |
Commercial |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 129 |
Multifamily and farmland |  |  | 76 |  |  |  | - |  |  |  | 76 |  |  |  | 91 |
Total real estate loans |  |  | 3,423 |  |  |  | - |  |  |  | 3,423 |  |  |  | 3,719 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 31 |  |  |  | 432 |  |  |  | 463 |  |  |  | - |
Consumer |  |  | 1 |  |  |  | - |  |  |  | 1 |  |  |  | 9 |
Total |  | $ | 3,455 |  |  |  | 432 |  |  |  | 3,887 |  |  |  | 3,728 |

Interest income is not recognized on non-accrual loans.

The following table represents the accrued interest receivables written off by reversing interest income during the year ended December 31, 2023:

(Dollars in thousands) |  |  |
|  | For the Year Ended |
|  | December 31, 2023 |
Real estate loans: |  |  |
Single-family residential |  | $ | 33 |
Total real estate loans |  |  | 33 |
Loans not secured by real estate: |  |  |  |
Commercial |  |  | 12 |
Consumer |  |  | 1 |
Total loans |  | $ | 46 |

A-42

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. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. There were no collateral dependent loans identified in the Company’s December 31, 2023 CECL analysis.

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Bank modifies loans by providing principal forgiveness on certain loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Bank may modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table shows the amortized cost basis at December 31, 2023 of the loans to borrowers experiencing financial difficulty that were modified during the year ended December 31, 2023, disaggregated by loan class and type of concession granted.

(Dollars in thousands) |  |  |  |  |  |
|  | Term Extension |
|  | Amortized Cost Basis at December 31, 2023 |  |  | % of Loan Class |
Loan class: |  |  |  |  |  |
Single-family residential |  | $ | 149 |  |  |  | 0.04 | %
Commercial real estate |  |  | 669 |  |  |  | 0.16 | %
Commercial not secured by real estate |  |  | 350 |  |  |  | 0.49 | %
Total |  | $ | 1,168 |  |  |  |  |

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty.

Term Extension
Loan Class |  | Financial Effect
Single-family residential |  | Forbearance agreement on matured home equity line of credit (HELOC) that was modified to 180 month term.
Commercial real estate |  | Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate.
Commercial not secured by real estate |  | Matured balloon loan converted to amortizing term loan.

Upon the Bank’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

No loans modified in the year ended December 31, 2023 that were made to borrowers experiencing financial difficulty had been written off at December 31, 2023.

The Bank closely monitors the performance of those loans that are modified because borrowers are experiencing financial difficulty so as to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the year ended December 31, 2023.

A-43

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | Payment Status (Amortized Cost Basis) |
|  | Current |  |  | 30 - 89 Days Past Due |  |  | 90 + Days Past Due |
Loan type: |  |  |  |  |  |  |  |  |
Single-family residential |  | $ | 149 |  |  |  | - |  |  |  | - |
Commercial real estate |  |  | 669 |  |  |  | - |  |  |  | - |
Commercial not secured by real estate |  |  | 350 |  |  |  |  |  |  |  |  |
Total |  | $ | 1,168 |  |  |  | - |  |  |  | - |

The following tables present impaired loans as of and for the years ended December 31, 2022 and 2021, under the incurred loss methodology:

December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Unpaid Contractual Principal Balance |  |  | Recorded Investment With No Allowance |  |  | Recorded Investment With Allowance |  |  | Recorded Investment in Impaired Loans |  |  | Related Allowance |  |  | Average Outstanding Impaired Loans |  |  | YTD Interest Income Recognized |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 110 |  |  |  | - |  |  |  | 110 |  |  |  | 110 |  |  |  | 2 |  |  |  | 75 |  |  |  | 8 |
Single-family residential |  |  | 3,912 |  |  |  | 236 |  |  |  | 3,300 |  |  |  | 3,536 |  |  |  | 60 |  |  |  | 5,194 |  |  |  | 194 |
Single-family residential - Banco de la Gente non-traditional |  |  | 10,441 |  |  |  | - |  |  |  | 9,748 |  |  |  | 9,748 |  |  |  | 611 |  |  |  | 8,757 |  |  |  | 552 |
Commercial |  |  | 1,785 |  |  |  | 421 |  |  |  | 1,346 |  |  |  | 1,767 |  |  |  | 9 |  |  |  | 1,916 |  |  |  | 93 |
Multifamily and farmland |  |  | 104 |  |  |  | - |  |  |  | 91 |  |  |  | 91 |  |  |  | - |  |  |  | 96 |  |  |  | 5 |
Total impaired real estate loans |  |  | 16,352 |  |  |  | 657 |  |  |  | 14,595 |  |  |  | 15,252 |  |  |  | 682 |  |  |  | 16,038 |  |  |  | 852 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 116 |  |  |  | - |  |  |  | 116 |  |  |  | 116 |  |  |  | 1 |  |  |  | 137 |  |  |  | 8 |
Consumer |  |  | 11 |  |  |  | - |  |  |  | 9 |  |  |  | 9 |  |  |  | - |  |  |  | 15 |  |  |  | 2 |
Total impaired loans |  | $ | 16,479 |  |  |  | 657 |  |  |  | 14,720 |  |  |  | 15,377 |  |  |  | 683 |  |  |  | 16,190 |  |  |  | 862 |

December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Unpaid Contractual Principal Balance |  |  | Recorded Investment With No Allowance |  |  | Recorded Investment With Allowance |  |  | Recorded Investment in Impaired Loans |  |  | Related Allowance |  |  | Average Outstanding Impaired Loans |  |  | YTD Interest Income Recognized |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 73 |  |  |  | - |  |  |  | 73 |  |  |  | 73 |  |  |  | 3 |  |  |  | 82 |  |  |  | 6 |
Single-family residential |  |  | 5,138 |  |  |  | 524 |  |  |  | 4,374 |  |  |  | 4,898 |  |  |  | 86 |  |  |  | 6,017 |  |  |  | 253 |
Single-family residential - Banco de la Gente non-traditional |  |  | 11,753 |  |  |  | - |  |  |  | 10,922 |  |  |  | 10,922 |  |  |  | 687 |  |  |  | 10,325 |  |  |  | 609 |
Commercial |  |  | 2,138 |  |  |  | 435 |  |  |  | 1,608 |  |  |  | 2,043 |  |  |  | 11 |  |  |  | 2,385 |  |  |  | 109 |
Multifamily and farmland |  |  | 113 |  |  |  | - |  |  |  | 105 |  |  |  | 105 |  |  |  | - |  |  |  | 110 |  |  |  | 6 |
Total impaired real estate loans |  |  | 19,215 |  |  |  | 959 |  |  |  | 17,082 |  |  |  | 18,041 |  |  |  | 787 |  |  |  | 18,919 |  |  |  | 983 |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 282 |  |  |  | 49 |  |  |  | 170 |  |  |  | 219 |  |  |  | 2 |  |  |  | 271 |  |  |  | 19 |
Consumer |  |  | 8 |  |  |  | - |  |  |  | 4 |  |  |  | 4 |  |  |  | - |  |  |  | 11 |  |  |  | 1 |
Total impaired loans |  | $ | 19,505 |  |  |  | 1,008 |  |  |  | 17,256 |  |  |  | 18,264 |  |  |  | 789 |  |  |  | 19,201 |  |  |  | 1,003 |

Impaired loans collectively evaluated for impairment totaled $4.9 million and $5.3 million at December 31, 2022 and 2021, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $44,000 and $48,000 at December 31, 2022 and 2021, respectively.

Past due Troubled Debt Restructurings (“TDR”) loans and non-accrual TDR loans totaled $3.7 million and $2.2 million at December 31, 2022 and December 31, 2021, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at December 31, 2022 and December 31, 2021.

There were no new TDR modifications during the years ended December 31, 2022 and 2021.

A-44

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2022 and 2021. TDR loans are deemed to be in default if they become past due by 90 days or more.

The fair value measurements for mortgage loans held for sale, impaired loans and individually evaluated loans on a non-recurring basis at December 31, 2023 and 2022 are presented below. The Bank’s valuation methodology is discussed in Note 15.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Fair Value Measurements December 31, 2023 |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
Mortgage loans held for sale |  | $ | 686 |  |  |  | - |  |  |  | - |  |  |  | 686 |
Individually evaluated loans |  | $ | - |  |  |  | - |  |  |  | - |  |  |  | - |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Fair Value Measurements December 31, 2022 |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
Mortgage loans held for sale |  | $ | 211 |  |  |  | - |  |  |  | - |  |  |  | 211 |
Impaired loans |  | $ | 14,694 |  |  |  | - |  |  |  | - |  |  |  | 14,694 |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Fair Value December 31, 2023 |  |  | Fair Value December 31, 2022 |  |  | Valuation Technique |  | Significant Unobservable Inputs |  |  | General Range of Significant Unobservable Input Values |
Mortgage loans held for sale |  | $ | 686 |  |  | $ | 211 |  |  | Rate lock commitment |  |  | N/A |  |  |  | N/A |
Individually evaluated loans |  | $ | - |  |  | $ | 14,694 |  |  | Appraised value and discounted cash flows |  | Discounts to reflect current market conditions and ultimate collectability |  |  | 0 - 25% |

The following tables present changes in the allowance for credit losses for the years ended December 31, 2023, 2022 and 2021. The December 31, 2023 table reflects the CECL methodology and the December 31, 2022 and 2021 tables reflects the Incurred Loss methodology. PPP loans are excluded from the allowance for credit losses because PPP loans are guaranteed by SBA. Two loans, totaling $432,000, were individually evaluated as of December 31, 2023.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Construction and Land Development |  |  | Single-Family Residential |  |  | Single-Family Residential - Banco de la Gente non-traditional |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer and All Other |  |  | Unallocated |  |  | Total |
Twelve months ended December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for credit losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,415 |  |  |  | 2,322 |  |  |  | 763 |  |  |  | 3,207 |  |  |  | 164 |  |  |  | 657 |  |  |  | - |  |  |  | 214 |  |  |  | 1,752 |  |  |  | 10,494 |
Adjustment for CECL implementation |  |  | 3,781 |  |  |  | 715 |  |  |  | (576 | ) |  |  | (986 | ) |  |  | 115 |  |  |  | (295 | ) |  |  | 2 |  |  |  | 54 |  |  |  | (1,752 | ) |  |  | 1,058 |
Charge-offs |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (129 | ) |  |  | - |  |  |  | (569 | ) |  |  | - |  |  |  | (698 | )
Recoveries |  |  | - |  |  |  | 171 |  |  |  | - |  |  |  | 6 |  |  |  | - |  |  |  | 67 |  |  |  | - |  |  |  | 147 |  |  |  | - |  |  |  | 391 |
Provision (recovery) for unfunded commitments |  |  | (437 | ) |  |  | (66 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | (6 | ) |  |  | - |  |  |  | (507 | )
Provision (recovery) for credit losses |  |  | 913 |  |  |  | 179 |  |  |  | (16 | ) |  |  | 90 |  |  |  | (10 | ) |  |  | 512 |  |  |  | - |  |  |  | 405 |  |  |  | - |  |  |  | 2,073 |
Ending balance |  | $ | 5,672 |  |  |  | 3,321 |  |  |  | 171 |  |  |  | 2,317 |  |  |  | 269 |  |  |  | 814 |  |  |  | 2 |  |  |  | 245 |  |  |  | - |  |  |  | 12,811 |
Allowance for credit loss-loans |  | $ | 3,913 |  |  |  | 3,313 |  |  |  | 171 |  |  |  | 2,317 |  |  |  | 268 |  |  |  | 812 |  |  |  | 2 |  |  |  | 245 |  |  |  | - |  |  |  | 11,041 |
Allowance for credit loss unfunded loan commitments |  |  | 1,759 |  |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,770 |
Total allowance for credit losses |  | $ | 5,672 |  |  |  | 3,321 |  |  |  | 171 |  |  |  | 2,317 |  |  |  | 269 |  |  |  | 814 |  |  |  | 2 |  |  |  | 245 |  |  |  | - |  |  |  | 12,811 |

A-45

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Construction and Land Development |  |  | Single-Family Residential |  |  | Single-Family Residential - Banco de la Gente Non-traditional |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer and All Other |  |  | Unallocated |  |  | Total |
Twelve months ended December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,193 |  |  |  | 2,013 |  |  |  | 864 |  |  |  | 2,234 |  |  |  | 150 |  |  |  | 711 |  |  |  | - |  |  |  | 110 |  |  |  | 2,080 |  |  |  | 9,355 |
Charge-offs |  |  | - |  |  |  | (128 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (33 | ) |  |  | - |  |  |  | (591 | ) |  |  | - |  |  |  | (752 | )
Recoveries |  |  | - |  |  |  | 229 |  |  |  | - |  |  |  | 9 |  |  |  | - |  |  |  | 72 |  |  |  | - |  |  |  | 109 |  |  |  | - |  |  |  | 419 |
Provision |  |  | 222 |  |  |  | 208 |  |  |  | 101 | ) |  |  | 964 |  |  |  | 14 |  |  |  | (93 | ) |  |  | - |  |  |  | 586 |  |  |  | (328 | ) |  |  | 1,472 |
Ending balance |  | $ | 1,415 |  |  |  | 2,322 |  |  |  | 763 |  |  |  | 3,207 |  |  |  | 164 |  |  |  | 657 |  |  |  | - |  |  |  | 214 |  |  |  | 1,752 |  |  |  | 10,494 |
Allowance for loan losses December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually evaluated for impairment |  | $ | - |  |  |  | 36 |  |  |  | 597 |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 639 |
Ending balance: collectively evaluated for impairment |  |  | 1,415 |  |  |  | 2,286 |  |  |  | 166 |  |  |  | 3,201 |  |  |  | 164 |  |  |  | 657 |  |  |  | - |  |  |  | 214 |  |  |  | 1,752 |  |  |  | 9,855 |
Ending balance |  | $ | 1,415 |  |  |  | 2,322 |  |  |  | 763 |  |  |  | 3,207 |  |  |  | 164 |  |  |  | 657 |  |  |  | - |  |  |  | 214 |  |  |  | 1,752 |  |  |  | 10,494 |
Loans at December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 114,446 |  |  |  | 322,262 |  |  |  | 20,019 |  |  |  | 406,750 |  |  |  | 65,562 |  |  |  | 81,307 |  |  |  | 938 |  |  |  | 21,324 |  |  |  | - |  |  |  | 1,032,608 |
Ending balance: individually evaluated for impairment |  | $ | - |  |  |  | 537 |  |  |  | 8,555 |  |  |  | 1,388 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 10,480 |
Ending balance: collectively evaluated for impairment |  | $ | 114,446 |  |  |  | 321,725 |  |  |  | 11,464 |  |  |  | 405,362 |  |  |  | 65,562 |  |  |  | 81,307 |  |  |  | 938 |  |  |  | 21,324 |  |  |  | - |  |  |  | 1,022,128 |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Construction and Land Development |  |  | Single-Family Residential |  |  | Single-Family Residential - Banco de la Gente Non-traditional |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer and All Other |  |  | Unallocated |  |  | Total |
Twelve months ended December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,196 |  |  |  | 1,843 |  |  |  | 1,052 |  |  |  | 2,212 |  |  |  | 122 |  |  |  | 1,345 |  |  |  | - |  |  |  | 128 |  |  |  | 2,010 |  |  |  | 9,908 |
Charge-offs |  |  | - |  |  |  | (89 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (293 | ) |  |  | - |  |  |  | (380 | ) |  |  | - |  |  |  | (762 | )
Recoveries |  |  | 121 |  |  |  | 271 |  |  |  | - |  |  |  | 52 |  |  |  | 3 |  |  |  | 786 |  |  |  | - |  |  |  | 139 |  |  |  | - |  |  |  | 1,372 |
Provision |  |  | (124 | ) |  |  | (12 | ) |  |  | (188 | ) |  |  | (30 | ) |  |  | 25 |  |  |  | (1,127 | ) |  |  | - |  |  |  | 223 |  |  |  | 70 |  |  |  | (1,163 | )
Ending balance |  | $ | 1,193 |  |  |  | 2,013 |  |  |  | 864 |  |  |  | 2,234 |  |  |  | 150 |  |  |  | 711 |  |  |  | - |  |  |  | 110 |  |  |  | 2,080 |  |  |  | 9,355 |
Allowance for loan losses December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance: individually evaluated for impairment |  | $ | 1 |  |  |  | 57 |  |  |  | 672 |  |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 737 |
Ending balance: collectively evaluated for impairment |  |  | 1,192 |  |  |  | 1,956 |  |  |  | 192 |  |  |  | 2,227 |  |  |  | 150 |  |  |  | 711 |  |  |  | - |  |  |  | 110 |  |  |  | 2,080 |  |  |  | 8,618 |
Ending balance |  | $ | 1,193 |  |  |  | 2,013 |  |  |  | 864 |  |  |  | 2,234 |  |  |  | 150 |  |  |  | 711 |  |  |  | - |  |  |  | 110 |  |  |  | 2,080 |  |  |  | 9,355 |
Loans at December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending balance |  | $ | 95,760 |  |  |  | 266,111 |  |  |  | 23,147 |  |  |  | 337,841 |  |  |  | 58,366 |  |  |  | 91,172 |  |  |  | 796 |  |  |  | 11,676 |  |  |  | - |  |  |  | 884,869 |
Ending balance: individually evaluated for impairment |  | $ | 6 |  |  |  | 1,633 |  |  |  | 9,795 |  |  |  | 1,437 |  |  |  | - |  |  |  | 49 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12,920 |
Ending balance: collectively evaluated for impairment |  | $ | 95,754 |  |  |  | 264,478 |  |  |  | 13,352 |  |  |  | 336,404 |  |  |  | 58,366 |  |  |  | 91,123 |  |  |  | 796 |  |  |  | 11,676 |  |  |  | - |  |  |  | 871,949 |

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.

A-46

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of December 31, 2023.

|  |  |  |  |  |  |  | Revolving |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans |  |  |  |
(dollars in thousands) |  | Term Loans by Origination Year |  |  | Revolving |  |  | Converted to |  |  | Total |
|  | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | Prior |  |  | Loans |  |  | Term Loans |  |  | Loans |
December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Real Estate Loans Construction and land development |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 39,896 |  |  |  | 71,429 |  |  |  | 10,736 |  |  |  | 6,692 |  |  |  | 1,721 |  |  |  | 3,914 |  |  |  | 1,337 |  |  |  | - |  |  |  | 135,725 |
Watch |  |  | - |  |  |  | - |  |  |  | 448 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 448 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 90 |  |  |  | - |  |  |  | - |  |  |  | 90 |
Total Construction and land development |  | $ | 39,896 |  |  |  | 71,429 |  |  |  | 11,184 |  |  |  | 6,692 |  |  |  | 1,721 |  |  |  | 4,004 |  |  |  | 1,337 |  |  |  | - |  |  |  | 136,263 |
Single family |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 32,220 |  |  |  | 76,326 |  |  |  | 47,490 |  |  |  | 24,813 |  |  |  | 12,984 |  |  |  | 49,700 |  |  |  | 106,962 |  |  |  | - |  |  |  | 350,495 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 89 |  |  |  | 717 |  |  |  | 860 |  |  |  | - |  |  |  | 1,666 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 11 |  |  |  | 2,345 |  |  |  | 379 |  |  |  | - |  |  |  | 2,735 |
Total single family |  | $ | 32,220 |  |  |  | 76,326 |  |  |  | 47,490 |  |  |  | 24,813 |  |  |  | 13,084 |  |  |  | 52,762 |  |  |  | 108,201 |  |  |  | - |  |  |  | 354,896 |
Single family-Banco de la Gente non-traditional |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 15,147 |  |  |  | - |  |  |  | - |  |  |  | 15,147 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 672 |  |  |  | - |  |  |  | - |  |  |  | 672 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,997 |  |  |  | - |  |  |  | - |  |  |  | 1,997 |
Total Banco de la Gente non-traditional |  | $ | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 17,816 |  |  |  | - |  |  |  | - |  |  |  | 17,816 |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 45,671 |  |  |  | 109,255 |  |  |  | 78,645 |  |  |  | 61,973 |  |  |  | 29,579 |  |  |  | 92,753 |  |  |  | 2,158 |  |  |  | - |  |  |  | 420,034 |
Watch |  |  | 232 |  |  |  | - |  |  |  | - |  |  |  | 116 |  |  |  | - |  |  |  | 4,943 |  |  |  | - |  |  |  | - |  |  |  | 5,291 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 411 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 411 |
Total commercial |  | $ | 45,903 |  |  |  | 109,255 |  |  |  | 78,645 |  |  |  | 62,500 |  |  |  | 29,579 |  |  |  | 97,696 |  |  |  | 2,158 |  |  |  | - |  |  |  | 425,736 |
Multifamily and farmland |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 7,904 |  |  |  | 13,286 |  |  |  | 21,512 |  |  |  | 6,624 |  |  |  | 3,158 |  |  |  | 9,851 |  |  |  | 501 |  |  |  | - |  |  |  | 62,836 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 47 |  |  |  | - |  |  |  | - |  |  |  | 47 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 76 |  |  |  | - |  |  |  | - |  |  |  | 76 |
Total multifamily and farmland |  | $ | 7,904 |  |  |  | 13,286 |  |  |  | 21,512 |  |  |  | 6,624 |  |  |  | 3,158 |  |  |  | 9,974 |  |  |  | 501 |  |  |  | - |  |  |  | 62,959 |
Total real estate loans |  | $ | 125,923 |  |  |  | 270,296 |  |  |  | 158,831 |  |  |  | 100,629 |  |  |  | 47,542 |  |  |  | 182,252 |  |  |  | 112,197 |  |  |  | - |  |  |  | 997,670 |
Loans not secured by real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 9,879 |  |  |  | 14,122 |  |  |  | 4,841 |  |  |  | 2,942 |  |  |  | 2,232 |  |  |  | 12,030 |  |  |  | 23,411 |  |  |  | - |  |  |  | 69,457 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 57 |  |  |  | 102 |  |  |  | 783 |  |  |  | - |  |  |  | 942 |
Substandard |  |  | 31 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 31 |
Loss |  |  | - |  |  |  | 82 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 350 |  |  |  | - |  |  |  | 432 |
Total Commercial |  | $ | 9,910 |  |  |  | 14,204 |  |  |  | 4,841 |  |  |  | 2,942 |  |  |  | 2,289 |  |  |  | 12,132 |  |  |  | 24,544 |  |  |  | - |  |  |  | 70,862 |
Farm |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 211 |  |  |  | 42 |  |  |  | 83 |  |  |  | - |  |  |  | 1 |  |  |  | 27 |  |  |  | 199 |  |  |  | - |  |  |  | 563 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total farm |  | $ | 211 |  |  |  | 42 |  |  |  | 83 |  |  |  | - |  |  |  | 1 |  |  |  | 27 |  |  |  | 199 |  |  |  | - |  |  |  | 563 |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 2,341 |  |  |  | 1,352 |  |  |  | 404 |  |  |  | 222 |  |  |  | 72 |  |  |  | 58 |  |  |  | 2,591 |  |  |  | - |  |  |  | 7,040 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Substandard |  |  | - |  |  |  | - |  |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 3 |  |  |  | - |  |  |  | 5 |
Total consumer |  | $ | 2,341 |  |  |  | 1,352 |  |  |  | 406 |  |  |  | 222 |  |  |  | 72 |  |  |  | 58 |  |  |  | 2,594 |  |  |  | - |  |  |  | 7,045 |
All other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 87 |  |  |  | 6,401 |  |  |  | 474 |  |  |  | 274 |  |  |  | 599 |  |  |  | 3,698 |  |  |  | 5,256 |  |  |  | - |  |  |  | 16,789 |
Watch |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 74 |  |  |  | 63 |  |  |  | - |  |  |  | 137 |
Substandard |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total all other |  | $ | 87 |  |  |  | 6,401 |  |  |  | 474 |  |  |  | 274 |  |  |  | 599 |  |  |  | 3,772 |  |  |  | 5,319 |  |  |  | - |  |  |  | 16,926 |
Total loans not secured by real estate |  | $ | 12,549 |  |  |  | 21,999 |  |  |  | 5,804 |  |  |  | 3,438 |  |  |  | 2,961 |  |  |  | 15,989 |  |  |  | 32,656 |  |  |  | - |  |  |  | 95,396 |
Total loans |  | $ | 138,472 |  |  |  | 292,295 |  |  |  | 164,635 |  |  |  | 104,067 |  |  |  | 50,503 |  |  |  | 198,241 |  |  |  | 144,853 |  |  |  | - |  |  |  | 1,093,066 |

A-47

The following table presents by credit quality indicator, loan class and year of origination, gross loan charge-offs as of December 31, 2023.

|  |  |  |  |  |  |  | Revolving |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans |  |  |  |
(dollars in thousands) |  | Gross Loan Charge-offs by Origination Year |  |  | Revolving |  |  | Converted to |  |  | Total |
|  | 2023 |  |  | 2022 |  |  | 2021 |  |  | 2020 |  |  | 2019 |  |  | Prior |  |  | Loans |  |  | Term Loans |  |  | Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Single-family residential |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Single-family residential - |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Banco de la Gente non-traditional |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Commercial |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Multifamily and farmland |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total real estate loans |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Loans not secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | - |  |  |  | 49 |  |  |  | 51 |  |  |  | 16 |  |  |  | - |  |  |  | 13 |  |  |  | - |  |  |  | - |  |  |  | 129 |
Farm |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Consumer |  |  | - |  |  |  | 41 |  |  |  | 53 |  |  |  | 6 |  |  |  | 1 |  |  |  | 468 |  |  |  | - |  |  |  | - |  |  |  | 569 |
All other |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Total gross charge-offs |  | $ | - |  |  |  | 90 |  |  |  | 104 |  |  |  | 22 |  |  |  | 1 |  |  |  | 481 |  |  |  | - |  |  |  | - |  |  |  | 698 |

The following table presents the credit risk profile of each loan type based on credit quality indicators as of December 31, 2022:

December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Real Estate Loans |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Construction and Land Development |  |  | Single-Family Residential |  |  | Single-Family Residential - Banco de la Gente non-traditional |  |  | Commercial |  |  | Multifamily and Farmland |  |  | Commercial |  |  | Farm |  |  | Consumer |  |  | All Other |  |  | Total |
Pass |  | $ | 114,127 |  |  |  | 317,699 |  |  |  | 16,410 |  |  |  | 402,108 |  |  |  | 65,267 |  |  |  | 80,995 |  |  |  | 946 |  |  |  | 6,911 |  |  |  | 14,360 |  |  |  | 1,018,823 |
Watch |  |  | 54 |  |  |  | 922 |  |  |  | 1,136 |  |  |  | 3,963 |  |  |  | 123 |  |  |  | 711 |  |  |  | - |  |  |  | 1 |  |  |  | 145 |  |  |  | 7,055 |
Substandard |  |  | 110 |  |  |  | 3,490 |  |  |  | 2,473 |  |  |  | 551 |  |  |  | 91 |  |  |  | - |  |  |  | - |  |  |  | 15 |  |  |  | - |  |  |  | 6,730 |
Total |  | $ | 114,291 |  |  |  | 322,111 |  |  |  | 20,019 |  |  |  | 406,622 |  |  |  | 65,481 |  |  |  | 81,706 |  |  |  | 946 |  |  |  | 6,927 |  |  |  | 14,505 |  |  |  | 1,032,608 |

(4) Premises and Equipment

Major classifications of premises and equipment at December 31, 2023 and 2022 are summarized as follows:

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Land |  | $ | 4,373 |  |  |  | 3,851 |
Buildings and improvements |  |  | 19,054 |  |  |  | 18,371 |
Furniture and equipment |  |  | 20,607 |  |  |  | 26,156 |
Construction in process |  |  | 532 |  |  |  | 3,028 |
Total premises and equipment |  |  | 44,566 |  |  |  | 51,406 |
Less accumulated depreciation |  |  | (27,864 | ) |  |  | (33,201 | )
Total net premises and equipment |  | $ | 16,702 |  |  |  | 18,205 |

The Bank recognized depreciation expense totaling $2.2 million, $2.4 million and $2.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.

The Bank had $184,000 net gains on the sale of and write-downs on premises and equipment for the year ended December 31, 2023. The Bank had $85,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2022. The Bank had $105,000 net gains on the sale of and write-downs on premises and equipment for the year ended December 31, 2021.

A-48

(5) Leases

The Bank leases various office spaces for banking and operational facilities and equipment under operating lease arrangements.

Total rent expense was approximately $804,000, $976,000 and $703,000 for the years ended December 31, 2023, 2022 and 2021, respectively.

As of December 31, 2023, the Bank had operating right of use assets of $4.7 million and operating lease liabilities of $4.8 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 December 31, 2023.

(Dollars in thousands) |  |  |
|  | December 31, 2023 |
Operating lease cost |  | $ | 815 |
Other information: |  |  |  |
Cash paid for amounts included in the measurement of lease liabilities |  |  | 787 |
Operating cash flows from operating leases |  |  | - |
Right-of-use assets obtained in exchange for new lease liabilities - operating leases |  |  | 370 |
Weighted-average remaining lease term - operating leases |  |  | 8.45 |
Weighted-average discount rate - operating leases |  |  | 2.73 | %

The following table presents lease maturities as of December 31, 2023.

(Dollars in thousands) |  |  |
Maturity Analysis of Operating Lease Liabilities: |  | December 31, 2023 |
2024 |  | $ | 819 |
2025 |  |  | 773 |
2026 |  |  | 650 |
2027 |  |  | 612 |
2028 |  |  | 510 |
Thereafter |  |  | 2,115 |
Total |  |  | 5,479 |
Less: Imputed Interest |  |  | (647 | )
Operating Lease Liability |  | $ | 4,832 |

(6) Deposits

The composition of deposits at December 31, 2023 and 2022 is as follows:

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2023 |  |  | December 31, 2022 |
|  |  |  |  | Percentage |  |  |  |  |  | Percentage |
|  | Amount |  |  | of Total |  |  | Amount |  |  | of Total |
Noninterest-bearing demand |  | $ | 432,687 |  |  |  | 31 | % |  | $ | 523,088 |  |  |  | 36 | %
Interest-bearing demand, MMDA & savings |  |  | 620,244 |  |  |  | 44 | % |  |  | 814,128 |  |  |  | 57 | %
Time, $250,000 and over |  |  | 151,154 |  |  |  | 11 | % |  |  | 31,001 |  |  |  | 2 | %
Other time |  |  | 187,960 |  |  |  | 14 | % |  |  | 66,998 |  |  |  | 5 | %
Total |  | $ | 1,392,045 |  |  |  | 100 | % |  | $ | 1,435,215 |  |  |  | 100 | %

A-49

At December 31, 2023, the scheduled maturities of time deposits are as follows:

|  | Time Deposits |  |  | Other |
(Dollars in thousands) |  | $250,000 and over |  |  | Time Deposits |
2024 |  | $ | 140,142 |  |  | $ | 177,173 |
2025 |  |  | 9,436 |  |  | $ | 8,509 |
2026 |  |  | 1,050 |  |  | $ | 2,806 |
2027 |  |  | 252 |  |  | $ | 857 |
2028 |  |  | 274 |  |  | $ | 865 |
Thereafter |  |  | - |  |  |  | - |
Total |  | $ | 151,154 |  |  | $ | 190,210 |

At December 31, 2023 and 2022, the Bank had $8.1 million in time deposits purchased through third party brokers.

(7) Federal Home Loan Bank (FHLB) and Federal Reserve Bank Borrowings

The Bank had no borrowings from the FHLB at December 31, 2023 and 2022. FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns. At December 31, 2023, the carrying value of loans pledged as collateral totaled approximately $214.1 million. The remaining availability under the line of credit with the FHLB was $122.2 million at December 31, 2023.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $1.1 million and $812,000 of FHLB stock, included in other investments, at December 31, 2023 and 2022, respectively.

As of December 31, 2023 and 2022, the Bank had no borrowings from the Federal Reserve Bank (“FRB”). FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2023, the carrying value of loans pledged as collateral totaled approximately $611.2 million. Availability under the line of credit with the FRB was $459.9 million at December 31, 2023. The Bank has completed the necessary steps in order to access the FRB’s Bank Term Funding Program (“BTFP”). The Bank has not pledged any collateral to the BTFP as of December 31, 2023.

(8) Junior Subordinated Debentures

In June 2006, the Company formed a second wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. All of the common securities of PEBK Trust II are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company. The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole assets of PEBK Trust II. PEBK Trust II is not included in the consolidated financial statements. The Company redeemed $5.0 million of outstanding trust preferred securities in 2019.

Prior to September 15, 2023, the trust preferred securities accrued and paid interest quarterly at a floating rate of three-month LIBOR plus 163 basis points. The three-month USD LIBOR rate ceased to be published after June 30, 2023. Effective September 15, 2023, the trust preferred securities accrue and pay interest quarterly at a floating rate of three-month Secured Overnight Financing Rate (SOFR) plus 189 basis points, including a 26 basis point credit spread adjustment.

These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.

A-50

(9) Income Taxes

The provision for income taxes is summarized as follows:

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | 2021 |
Current expense |  | $ | 4,830 |  |  |  | 4,713 |  |  |  | 4,023 |
Deferred income tax benefit |  |  | (453 | ) |  |  | (541 | ) |  |  | (227 | )
Total income tax |  | $ | 4,377 |  |  |  | 4,172 |  |  |  | 3,796 |

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | 2021 |
Tax expense at statutory rate |  | $ | 4,184 |  |  |  | 4,262 |  |  |  | 3,975 |
State income tax, net of federal income tax effect |  |  | 395 |  |  |  | 395 |  |  |  | 339 |
Tax-exempt interest income |  |  | (182 | ) |  |  | (445 | ) |  |  | (497 | )
Increase in cash surrender value of life insurance |  |  | (91 | ) |  |  | (71 | ) |  |  | (83 | )
Tax credits |  |  | (246 | ) |  |  | (230 | ) |  |  | (234 | )
Nondeductible interest and other expense |  |  | 30 |  |  |  | 24 |  |  |  | 30 |
Other |  |  | 287 |  |  |  | 237 |  |  |  | 266 |
Total |  | $ | 4,377 |  |  |  | 4,172 |  |  |  | 3,796 |

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities. The net deferred tax asset is included as a component of other assets at December 31, 2023 and 2022.

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Deferred tax assets: |  |  |  |  |  |
Allowance for credit losses |  | $ | 2,944 |  |  |  | 2,411 |
Accrued retirement expense |  |  | 1,210 |  |  |  | 1,174 |
Restricted stock |  |  | 249 |  |  |  | 245 |
Interest income on nonaccrual loans |  |  | 5 |  |  |  | 1 |
Lease liability |  |  | 1,110 |  |  |  | 1,191 |
Unrealized loss on available for sale securities |  |  | 11,741 |  |  |  | 14,197 |
Total gross deferred tax assets |  |  | 17,259 |  |  |  | 19,219 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Deferred loan fees |  |  | 186 |  |  |  | 209 |
Accumulated depreciation |  |  | 375 |  |  |  | 438 |
Prepaid expenses |  |  | 3 |  |  |  | 3 |
ROU Asset |  |  | 1,087 |  |  |  | 1,175 |
Other |  |  | 124 |  |  |  | (93 | )
Total gross deferred tax liabilities |  |  | 1,775 |  |  |  | 1,732 |
Net deferred tax asset |  | $ | 15,484 |  |  |  | 17,487 |

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded that it has no liability related to uncertain tax positions.

As of December 31, 2023, the Company’s Federal income tax filings for years 2020 through 2022 are open to audit by the Internal Revenue Service. The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2020, 2021 and 2022 remain open to audit by the North Carolina Department of Revenue.

A-51

(10) Related Party Transactions

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. In accordance with Regulation O of the Federal Reserve, it is the policy of the Bank that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2023 and 2022:

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Beginning balance |  | $ | 3,381 |  |  |  | 2,687 |
Disbursements |  |  | 1,976 |  |  |  | 4,090 |
Repayments |  |  | (1,788 | ) |  |  | (3,396 | )
Ending balance |  | $ | 3,569 |  |  |  | 3,381 |

At December 31, 2023 and 2022, the Company had deposit relationships with related parties of approximately $52.5 million and $44.5 million, respectively.

(11) 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, standby letters of credit and financial guarantees. 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 and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations 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 |
|  | 2023 |  |  | 2022 |
Financial instruments whose contract amount represent credit risk: |  |  |  |  |  |
Commitments to extend credit |  |  | $367,482 |  |  |  | 382,699 |
Standby letters of credit |  |  | $3,721 |  |  |  | 4,352 |

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 $371.2 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.

In the normal course of business, the Company is a party (both as plaintiff and defendant) to lawsuits. In the opinion of management and counsel, none of these cases should have a material adverse effect on the financial position of the Company.

The Company and the Bank have entered into employment agreements with certain key employees. The agreements, among other things, include salary, bonus, incentive compensation, and change in control provisions.

The Company has $90.5 million available for the purchase of overnight federal funds from four correspondent financial institutions as of December 31, 2023.

At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property. As of December 31, 2023, the Bank had an unfunded commitment of $27,000. At December 31, 2023, the Bank had $1.9 million in unfunded commitments for SBA Small Business Investment Company (“SBIC”) investments.

A-52

(12) Employee and Director Benefit Programs

The Bank has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Bank matched employee contributions to a maximum of 4.00% of annual compensation in 2021, 2022 and 2023. The Company’s contribution pursuant to this formula was approximately $759,000, $719,000 and $709,000 for the years ended December 31, 2023, 2022 and 2021, respectively. Investments made available under the 401(k) plan are determined by a committee comprised of senior management. No investments in Company stock are available under the 401(k) plan. Contributions to the 401(k) plan are vested immediately.

In December 2001, the Company initiated a retirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries. Under the postretirement benefit plan, the Company purchased life insurance policies on the lives of the key officers and each director. The increase in cash surrender value of the policies constitutes the Company’s contribution to the postretirement benefit plan each year. Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $430,000, $369,000 and $447,000 for the years ended December 31, 2023, 2022 and 2021, respectively.

The Company paid medical benefits for certain retired employees through the first quarter of 2022. The Company did not incur any postretirement medical benefits expense in 2022 and 2021 due to an excess accrual balance.

The following table sets forth the change in the accumulated benefit obligation for the Company’s two postretirement benefit plans described above:

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Benefit obligation at beginning of period |  | $ | 5,110 |  |  |  | 5,011 |
Service cost |  |  | 363 |  |  |  | 325 |
Interest cost |  |  | 70 |  |  |  | 63 |
Benefits paid |  |  | (275 | ) |  |  | (289 | )
Benefit obligation at end of period |  | $ | 5,268 |  |  |  | 5,110 |

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2023 and 2022 are shown in the following two tables:

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Benefit obligation |  | $ | 5,268 |  |  |  | 5,110 |
Fair value of plan assets |  |  | - |  |  |  | - |

(Dollars in thousands) |  |  |  |  |  |
|  | 2023 |  |  | 2022 |
Funded status |  | $ | (5,268 | ) |  |  | (5,110 | )
Unrecognized prior service cost/benefit |  |  | - |  |  |  | - |
Unrecognized net actuarial loss |  |  | - |  |  |  | - |
Net amount recognized |  | $ | (5,268 | ) |  |  | (5,110 | )
Unfunded accrued liability |  | $ | (5,268 | ) |  |  | (5,110 | )
Intangible assets |  |  | - |  |  |  | - |
Net amount recognized |  | $ | (5,268 | ) |  |  | (5,110 | )

A-53

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2023, 2022 and 2021 consisted of the following:

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | 2021 |
Service cost |  | $ | 363 |  |  |  | 325 |  |  |  | 359 |
Interest cost |  |  | 70 |  |  |  | 63 |  |  |  | 70 |
Net periodic cost |  | $ | 433 |  |  |  | 388 |  |  |  | 429 |
Weighted average discount rate assumption used to determine benefit obligation |  |  | 5.50 | % |  |  | 5.50 | % |  |  | 5.50 | %

The Company paid postretirement plan benefits totaling $275,000, $289,000 and $288,000 during the years ended December 31, 2023, 2022 and 2021, respectively. Information about the expected benefit payments for the Company’s postretirement benefit plan is as follows:

(Dollars in thousands) |  |  |
Year ending December 31, |  |  |
2024 |  | $ | 292 |
2025 |  | $ | 413 |
2026 |  | $ | 472 |
2027 |  | $ | 501 |
2028 |  | $ | 509 |
Thereafter |  | $ | 7,469 |

(13) Regulatory Matters

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum capital ratios in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for credit losses, up to 1.25% of risk-weighted assets and other adjustments. Management believes, as of December 31, 2023, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2023, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

In 2013, the Federal Reserve 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. 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.

A-54

The Company’s and the Bank’s actual capital amounts and ratios are presented below:

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Actual |  |  | Minimum Regulatory Capital Ratio |  |  | Minimum Ratio plus Capital Conservation Buffer |
|  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
As of December 31, 2023: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 188,192 |  |  |  | 14.96 | % |  |  | 100,636 |  |  |  | 8.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 186,774 |  |  |  | 14.85 | % |  |  | 100,636 |  |  |  | 8.00 | % |  |  | 132,085 |  |  |  | 10.50 | %
Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,381 |  |  |  | 13.94 | % |  |  | 75,477 |  |  |  | 6.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 173,963 |  |  |  | 13.83 | % |  |  | 75,477 |  |  |  | 6.00 | % |  |  | 106,926 |  |  |  | 8.50 | %
Tier 1 Capital (to Average Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,381 |  |  |  | 10.51 | % |  |  | 66,757 |  |  |  | 4.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 173,963 |  |  |  | 10.35 | % |  |  | 67,254 |  |  |  | 4.00 | % |  |  | 67,254 |  |  |  | 4.00 | %
Common Equity Tier 1 (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 170,381 |  |  |  | 12.75 | % |  |  | 56,608 |  |  |  | 4.50 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 173,963 |  |  |  | 13.83 | % |  |  | 56,608 |  |  |  | 4.50 | % |  |  | 88,057 |  |  |  | 7.00 | %

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Actual |  |  | Minimum Regulatory Capital Ratio |  |  | Minimum Ratio plus Capital Conservation Buffer |
|  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |  |  | Amount |  |  | Ratio |
As of December 31, 2022: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 178,286 |  |  |  | 14.04 | % |  |  | 101,608 |  |  |  | 8.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 176,923 |  |  |  | 13.93 | % |  |  | 101,606 |  |  |  | 8.00 | % |  |  | 133,357 |  |  |  | 10.50 | %
Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 167,792 |  |  |  | 13.21 | % |  |  | 76,206 |  |  |  | 6.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 166,429 |  |  |  | 13.10 | % |  |  | 76,204 |  |  |  | 6.00 | % |  |  | 107,956 |  |  |  | 8.50 | %
Tier 1 Capital (to Average Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 167,792 |  |  |  | 9.82 | % |  |  | 68,347 |  |  |  | 4.00 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 166,429 |  |  |  | 9.68 | % |  |  | 68,780 |  |  |  | 4.00 | % |  |  | 68,780 |  |  |  | 4.00 | %
Common Equity Tier 1 (to Risk-Weighted Assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 152,792 |  |  |  | 12.03 | % |  |  | 57,154 |  |  |  | 4.50 | % |  |  | N/A |  |  |  | N/A |
Bank |  | $ | 166,429 |  |  |  | 13.10 | % |  |  | 57,153 |  |  |  | 4.50 | % |  |  | 88,905 |  |  |  | 7.00 | %

(14) Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2023, 2022 and 2021 included the following items:

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | 2021 |
Visa debit card income |  | $ | 4,717 |  |  |  | 4,901 |  |  |  | 5,045 |
Bank owned life insurance income |  |  | 432 |  |  |  | 458 |  |  |  | 397 |
Other |  |  | 3,054 |  |  |  | 2,390 |  |  |  | 2,197 |
|  | $ | 8,203 |  |  |  | 7,749 |  |  |  | 7,639 |

A-55

Other non-interest expense for the years ended December 31, 2023, 2022 and 2021 included the following items:

(Dollars in thousands) |  |  |  |  |  |  |  |  |
|  | 2023 |  |  | 2022 |  |  | 2021 |
ATM expense |  | $ | 565 |  |  |  | 629 |  |  |  | 619 |
Data processing |  |  | 758 |  |  |  | 777 |  |  |  | 643 |
Deposit program expense |  |  | 362 |  |  |  | 348 |  |  |  | 415 |
Dues and subscriptions |  |  | 698 |  |  |  | 628 |  |  |  | 588 |
Internet banking expense |  |  | 996 |  |  |  | 949 |  |  |  | 768 |
Office supplies |  |  | 482 |  |  |  | 532 |  |  |  | 374 |
Telephone |  |  | 664 |  |  |  | 691 |  |  |  | 730 |
Other |  |  | 4,992 |  |  |  | 3,741 |  |  |  | 3,737 |
|  | $ | 9,517 |  |  |  | 8,295 |  |  |  | 7,874 |

(15) Fair Value of Financial Instruments

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

| · | Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
| · | Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
| · | Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

Loans

The fair value of loans, excluding previously presented impaired 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.

A-56

Mutual Funds

For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on the balance sheet and reported in the Level 1 fair value category.

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category.

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.

FHLB Borrowings

The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category.

Junior Subordinated Debentures

Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category.

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term and 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.

A-57

The fair value presentation for recurring assets is presented in Note 2. There were no recurring liabilities at December 31, 2023 and 2022. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2023 and 2022. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2023 and 2022 are as follows:

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurements at December 31, 2023 |
|  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 82,375 |  |  |  | 82,375 |  |  |  | - |  |  |  | - |  |  |  | 82,375 |
Investment securities available for sale |  |  | 391,924 |  |  |  | - |  |  |  | 391,924 |  |  |  | - |  |  |  | 391,924 |
Other investments |  |  | 2,874 |  |  |  | - |  |  |  | - |  |  |  | 2,874 |  |  |  | 2,874 |
Mortgage loans held for sale |  |  | 686 |  |  |  | - |  |  |  | - |  |  |  | 686 |  |  |  | 686 |
Loans, net |  |  | 1,082,025 |  |  |  | - |  |  |  | - |  |  |  | 1,071,178 |  |  |  | 1,071,178 |
Mutual funds held in deferred compensation trust |  |  | 2,171 |  |  |  | 2,171 |  |  |  | - |  |  |  | - |  |  |  | 2,171 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,392,045 |  |  |  | - |  |  |  | - |  |  |  | 1,397,351 |  |  |  | 1,397,351 |
Securities sold under agreements to repurchase |  |  | 86,715 |  |  |  | - |  |  |  | 86,715 |  |  |  | - |  |  |  | 86,715 |
Junior subordinated debentures |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  | Fair Value Measurements at December 31, 2022 |
|  | Carrying Amount |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 71,596 |  |  |  | 71,596 |  |  |  | - |  |  |  | - |  |  |  | 71,596 |
Investment securities available for sale |  |  | 445,394 |  |  |  | - |  |  |  | 445,394 |  |  |  | - |  |  |  | 445,394 |
Other investments |  |  | 2,656 |  |  |  | - |  |  |  | - |  |  |  | 2,656 |  |  |  | 2,656 |
Mortgage loans held for sale |  |  | 211 |  |  |  | - |  |  |  | - |  |  |  | 211 |  |  |  | 211 |
Loans, net |  |  | 1,022,114 |  |  |  | - |  |  |  | - |  |  |  | 998,587 |  |  |  | 998,587 |
Mutual funds held in deferred compensation trust |  |  | 1,327 |  |  |  | 1,327 |  |  |  | - |  |  |  | - |  |  |  | 1,327 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | $ | 1,435,215 |  |  |  | - |  |  |  | - |  |  |  | 1,434,871 |  |  |  | 1,434,871 |
Securities sold under agreements to repurchase |  |  | 47,688 |  |  |  | - |  |  |  | 47,688 |  |  |  | - |  |  |  | 47,688 |
Junior subordinated debentures |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |  |  |  | - |  |  |  | 15,464 |

The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of December 31, 2023 and 2022.

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2023 |
|  | Fair Value Measurements |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
Mutual funds held in deferred compensation trust |  | $ | 2,171 |  |  |  | - |  |  |  | 2,171 |  |  |  | - |

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | December 31, 2022 |
|  | Fair Value Measurements |  |  | Level 1 Valuation |  |  | Level 2 Valuation |  |  | Level 3 Valuation |
Mutual funds held in deferred compensation trust |  | $ | 1,327 |  |  |  | - |  |  |  | 1,327 |  |  |  | - |

(16) Reportable Segments

The Company has two reportable segments as described below.

Banking Operations – This segment reflects the consolidated Bank, excluding CBRES. The primary source of revenue for this segment is net interest income.

CBRES – A Bank subsidiary that provides appraisal management services to community banks. The primary source of revenue for this segment is appraisal management fee income.

The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents 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.

A-58

(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Banking |  |  |  |  |  |  |  |  |  |
|  | Operations |  |  | CBRES |  |  | Other |  |  | Consolidated |
As of and for the year ended December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 71,830 |  |  | $ | - |  |  | $ | 32 |  |  | $ | 71,862 |
Interest expense |  |  | 16,066 |  |  |  | - |  |  |  | 1,077 |  |  |  | 17,143 |
Net interest income |  |  | 55,764 |  |  |  | - |  |  |  | (1,045 | ) |  |  | 54,719 |
Provision for loan losses |  |  | 1,566 |  |  |  | - |  |  |  | - |  |  |  | 1,566 |
Noninterest income |  |  | 13,322 |  |  |  | - |  |  |  | - |  |  |  | 13,322 |
Appraisal management fee income |  |  | - |  |  |  | 9,592 |  |  |  | - |  |  |  | 9,592 |
Noninterest expense |  |  | 46,519 |  |  |  | 1,436 |  |  |  | 630 |  |  |  | 48,585 |
Appraisal management fee expense |  |  | - |  |  |  | 7,559 |  |  |  | - |  |  |  | 7,559 |
Income tax expense (benefit) |  |  | 4,591 |  |  |  | 138 |  |  |  | (352 | ) |  |  | 4,377 |
Net income (loss) |  | $ | 16,410 |  |  | $ | 459 |  |  | $ | (1,323 | ) |  | $ | 15,546 |
Total assets |  | $ | 1,631,767 |  |  | $ | 3,681 |  |  | $ | 462 |  |  | $ | 1,635,910 |
As of and for the year ended December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 54,416 |  |  | $ | - |  |  | $ | 15 |  |  | $ | 54,431 |
Interest expense |  |  | 2,796 |  |  |  | - |  |  |  | 527 |  |  |  | 3,323 |
Net interest income |  |  | 51,620 |  |  |  | - |  |  |  | (512 | ) |  |  | 51,108 |
Provision for credit losses |  |  | 1,472 |  |  |  | - |  |  |  | - |  |  |  | 1,472 |
Noninterest income |  |  | 15,012 |  |  |  | 14 |  |  |  | - |  |  |  | 15,026 |
Appraisal management fee income |  |  | - |  |  |  | 11,663 |  |  |  | - |  |  |  | 11,663 |
Noninterest expense |  |  | 44,433 |  |  |  | 1,695 |  |  |  | 638 |  |  |  | 46,766 |
Appraisal management fee expense |  |  | - |  |  |  | 9,264 |  |  |  | - |  |  |  | 9,264 |
Income tax expense (benefit) |  |  | 4,248 |  |  |  | 166 |  |  |  | (242 | ) |  |  | 4,172 |
Net income (loss) |  | $ | 16,479 |  |  | $ | 552 |  |  | $ | (908 | ) |  | $ | 16,123 |
Total assets |  | $ | 1,617,212 |  |  | $ | 3,227 |  |  | $ | 488 |  |  | $ | 1,620,927 |
As of and for the year ended December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income |  | $ | 47,171 |  |  | $ | - |  |  | $ | 8 |  |  | $ | 47,179 |
Interest expense |  |  | 2,930 |  |  |  | - |  |  |  | 275 |  |  |  | 3,205 |
Net interest income |  |  | 44,241 |  |  |  | - |  |  |  | (267 | ) |  |  | 43,974 |
Recovery of loan losses |  |  | (1,163 | ) |  |  | - |  |  |  | - |  |  |  | (1,163 | )
Noninterest income |  |  | 16,014 |  |  |  | 15 |  |  |  | - |  |  |  | 16,029 |
Appraisal management fee income |  |  | - |  |  |  | 8,890 |  |  |  | - |  |  |  | 8,890 |
Noninterest expense |  |  | 42,239 |  |  |  | 1,163 |  |  |  | 613 |  |  |  | 44,015 |
Appraisal management fee expense |  |  | - |  |  |  | 7,112 |  |  |  | - |  |  |  | 7,112 |
Income tax expense (benefit) |  |  | 3,836 |  |  |  | 145 |  |  |  | (185 | ) |  |  | 3,796 |
Net income (loss) |  | $ | 15,343 |  |  | $ | 485 |  |  | $ | (695 | ) |  | $ | 15,133 |
Total assets |  | $ | 1,620,933 |  |  | $ | 2,692 |  |  | $ | 568 |  |  | $ | 1,624,193 |

A-59

(17) Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements

Balance Sheets

December 31, 2023 and 2022

(Dollars in thousands)

Assets |  | 2023 |  |  | 2022 |
Cash |  | $ | 590 |  |  |  | 384 |
Interest-bearing time deposit |  |  | 1,000 |  |  |  | 1,000 |
Investment in subsidiaries |  |  | 134,598 |  |  |  | 118,832 |
Investment in PEBK Capital Trust II |  |  | 464 |  |  |  | 464 |
Other assets |  |  | - |  |  |  | 24 |
Total assets |  | $ | 136,652 |  |  |  | 120,704 |
Liabilities and Shareholders' Equity |  |  |  |  |  |  |  |
Junior subordinated debentures |  | $ | 15,464 |  |  |  | 15,464 |
Other liabilities |  |  | 172 |  |  |  | 45 |
Shareholders' equity |  |  | 121,016 |  |  |  | 105,195 |
Total liabilities and shareholders' equity |  | $ | 136,652 |  |  |  | 120,704 |

Statements of Earnings

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

Revenues: |  | 2023 |  |  | 2022 |  |  | 2021 |
Interest and dividend from subsidiary |  | $ | 8,531 |  |  |  | 6,240 |  |  |  | 7,419 |
Total revenues |  |  | 8,531 |  |  |  | 6,240 |  |  |  | 7,419 |
Expenses: |  |  |  |  |  |  |  |  |  |  |  |
Interest |  |  | 1,079 |  |  |  | 529 |  |  |  | 280 |
Other operating expenses |  |  | 630 |  |  |  | 639 |  |  |  | 613 |
Total expenses |  |  | 1,709 |  |  |  | 1,168 |  |  |  | 893 |
Income before income tax benefit and equity in undistributed earnings of subsidiaries |  |  | 6,822 |  |  |  | 5,072 |  |  |  | 6,526 |
Income tax benefit |  |  | 352 |  |  |  | 242 |  |  |  | 185 |
Income before equity in undistributed earnings of subsidiaries |  |  | 7,174 |  |  |  | 5,314 |  |  |  | 6,711 |
Equity in undistributed earnings of subsidiaries |  |  | 8,372 |  |  |  | 10,809 |  |  |  | 8,422 |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |

A-60

Statements of Cash Flows

For the Years Ended December 31, 2023, 2022 and 2021

(Dollars in thousands)

|  | 2023 |  |  | 2022 |  |  | 2021 |
Cash flows from operating activities: |  |  |  |  |  |  |  |  |
Net earnings |  | $ | 15,546 |  |  |  | 16,123 |  |  |  | 15,133 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |  |  |  |  |  |  |  |  |  |
Equity in undistributed earnings of subsidiaries |  |  | (8,372 | ) |  |  | (10,809 | ) |  |  | (8,422 | )
Change in: |  |  |  |  |  |  |  |  |  |  |  |
Other assets |  |  | 24 |  |  |  | 81 |  |  |  | 545 |
Other liabilities |  |  | 127 |  |  |  | 32 |  |  |  | - |
Net cash provided by operating activities |  |  | 7,325 |  |  |  | 5,427 |  |  |  | 7,256 |
Cash flows from investing activities: |  |  |  |  |  |  |  |  |  |  |  |
Net cash provided by investing activities |  |  | - |  |  |  | - |  |  |  | - |
Cash flows from financing activities: |  |  |  |  |  |  |  |  |  |  |  |
Cash dividends paid on common stock |  |  | (5,108 | ) |  |  | (4,935 | ) |  |  | (3,793 | )
Stock repurchase |  |  | (1,997 | ) |  |  | (710 | ) |  |  | (3,605 | )
Excise tax on stock repurchase |  |  | (20 | ) |  |  | - |  |  |  | - |
Proceeds from exercise of restricted stock units |  |  | 6 |  |  |  | 41 |  |  |  | 39 |
Net cash used by financing activities |  |  | (7,119 | ) |  |  | (5,604 | ) |  |  | (7,359 | )
Net change in cash |  |  | 206 |  |  |  | (177 | ) |  |  | (103 | )
Cash at beginning of year |  |  | 384 |  |  |  | 561 |  |  |  | 664 |
Cash at end of year |  | $ | 590 |  |  |  | 384 |  |  |  | 561 |

(18) Quarterly Data

|  | 2023 |  |  | 2022 |
(Dollars in thousands, except per share amounts) |  | First |  |  | Second |  |  | Third |  |  | Fourth |  |  | First |  |  | Second |  |  | Third |  |  | Fourth |
Total interest income |  | $ | 16,801 |  |  |  | 17,599 |  |  |  | 18,306 |  |  |  | 19,156 |  |  | $ | 11,329 |  |  |  | 11,992 |  |  |  | 14,611 |  |  |  | 16,499 |
Total interest expense |  |  | 2,463 |  |  |  | 3,828 |  |  |  | 4,966 |  |  |  | 5,886 |  |  |  | 663 |  |  |  | 644 |  |  |  | 818 |  |  |  | 1,198 |
Net interest income |  |  | 14,338 |  |  |  | 13,771 |  |  |  | 13,340 |  |  |  | 13,270 |  |  |  | 10,666 |  |  |  | 11,348 |  |  |  | 13,793 |  |  |  | 15,301 |
Provision for credit losses |  |  | 224 |  |  |  | 375 |  |  |  | 562 |  |  |  | 405 |  |  |  | 71 |  |  |  | 410 |  |  |  | 408 |  |  |  | 583 |
Other income |  |  | 3,611 |  |  |  | 6,403 |  |  |  | 6,774 |  |  |  | 6,126 |  |  |  | 7,046 |  |  |  | 7,328 |  |  |  | 6,793 |  |  |  | 5,522 |
Other expense |  |  | 13,702 |  |  |  | 13,619 |  |  |  | 14,255 |  |  |  | 14,568 |  |  |  | 13,341 |  |  |  | 14,243 |  |  |  | 13,455 |  |  |  | 14,991 |
Income before income taxes |  |  | 4,023 |  |  |  | 6,180 |  |  |  | 5,297 |  |  |  | 4,423 |  |  |  | 4,300 |  |  |  | 4,023 |  |  |  | 6,723 |  |  |  | 5,249 |
Income tax expense |  |  | 851 |  |  |  | 1,372 |  |  |  | 1,170 |  |  |  | 984 |  |  |  | 848 |  |  |  | 806 |  |  |  | 1,416 |  |  |  | 1,102 |
Net earnings |  |  | 3,172 |  |  |  | 4,808 |  |  |  | 4,127 |  |  |  | 3,439 |  |  |  | 3,452 |  |  |  | 3,217 |  |  |  | 5,307 |  |  |  | 4,147 |
Basic net earnings per share |  | $ | 0.58 |  |  |  | 0.88 |  |  |  | 0.77 |  |  |  | 0.64 |  |  | $ | 0.63 |  |  |  | 0.59 |  |  |  | 0.96 |  |  |  | 0.76 |
Diluted net earnings per share |  | $ | 0.56 |  |  |  | 0.85 |  |  |  | 0.74 |  |  |  | 0.62 |  |  | $ | 0.61 |  |  |  | 0.57 |  |  |  | 0.93 |  |  |  | 0.74 |

(19) Subsequent Events

The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. Management has concluded that there were no material subsequent events.

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DIRECTORS AND OFFICERS OF THE COMPANY

DIRECTORS

Robert C. Abernethy – Chairman

Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank

President, Secretary and Treasurer, Carolina Glove Company, Inc. (glove manufacturer)

Secretary and Assistant Treasurer, Midstate Contractors, Inc. (paving company)

James S. Abernethy

Vice President, Carolina Glove Company, Inc. (glove manufacturer)

President and Assistant Secretary, Midstate Contractors, Inc. (paving company)

Vice President, Secretary and Chairman of the Board of Directors, Alexander Railroad Company

Kimberly Boyd-Leaks

Executive Vice President – Chief Retail Banking Support Officer, Peoples Bank

Douglas S. Howard

Vice President and Treasurer, Denver Equipment Company of Charlotte, Inc.

John W. Lineberger, Jr.

Vice President, Lineberger Brothers, Inc. (real estate development)

Gary E. Matthews

President and Director, Matthews Construction Company, Inc. (general contractor)

Director, Conover Metal Products

Billy L. Price, Jr. MD

Practitioner of Internal Medicine, BL Price Jr. Medical Consultants, PLLC

Larry E. Robinson

Chairman of the Board and Chief Executive Officer, The Blue Ridge Distributing Co., Inc. (beer and wine distributor)

Director, United Beverages of North Carolina, LLC (beer distributor)

William Gregory (Greg) Terry

President, Clemson Legacy Designs

President, Collegiate Legacy Designs

Director/Consultant, Drum & Willis-Reynolds Funeral Homes & Crematory

Dan Ray Timmerman, Sr.

Chairman of the Board and Chief Executive Officer, Timmerman Manufacturing, Inc. (wrought iron furniture, railings and gates manufacturer)

Benjamin I. Zachary

President, Treasurer, General Manager and Director, Alexander Railroad Company

OFFICERS

Lance A. Sellers

President and Chief Executive Officer

Jeffrey N. Hooper

Executive Vice President, Chief Financial Officer, Corporate Treasurer and Assistant Corporate Secretary

William D. Cable, Sr.

Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer

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