# PEOPLES BANCORP OF NORTH CAROLINA INC (PEBK) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PEOPLES BANCORP OF NORTH CAROLINA INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1093672/000165495425002689/pebk_10k.htm
Accession: 0001654954-25-002689
Filing date: 2025-03-12
Report date: 2024-12-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Published MD&A gate trimmed front/tail over-capture. Source document followed from filing index: pebk_ex13.htm.
Confidence: high

Company profile: /company/PEBK/
All MD&A years: /company/PEBK/mda/
Previous year: /company/PEBK/mda/fy2023/ (FY 2023)
Next year: /company/PEBK/mda/fy2025/ (FY 2025)

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, 2024, 2023 and 2022. 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 loan losses.

Prior to the COVID-19 pandemic, economic conditions, while not as robust as the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 500 basis points between March 2022 and July 2023 before being reduced to a range of 4.25% to 4.50% at December 31, 2024.

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends. Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plants and inventories. During periods of high inflation there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans, and deposits. Also, general increases in the price of goods and services can be expected to result in increased operating expenses.

A-4

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.

The Company does not have specific plans for additional offices in 2025 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.

Summary of 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. The following is a summary of the Company’s critical accounting policy, which is the most 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 2024 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 1, 2025 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.

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. 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.

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.

A-5

Results of Operations

Summary. The Company reported net earnings of $16.4 million or $3.08 per share and $2.98 per diluted share for the year ended December 31, 2024, compared to $15.5 million or $2.87 per share and $2.77 per diluted share for the year ended December 31, 2023. The increase in net earnings is primarily attributable to an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year, as discussed below.

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 return on average assets in 2024 was 0.99%, as compared to 0.97% in 2023 and 2022. The return on average shareholders’ equity was 12.59% in 2024, as compared to 13.37% in 2023 and 13.01% in 2022.

Net Interest Income. Net interest income, the major component of the Company’s net income, is the amount by which interest and fees generated by interest-earning assets exceed the total cost of funds used to carry them. Net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned and rates paid. Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.

Net interest income was $54.1 million for the year ended December 31, 2024, compared to $54.7 million for the year ended December 31, 2023. The decrease in net interest income is due to a $9.5 million increase in interest expense, partially offset by a $8.9 million increase in interest income. The increase in interest income reflects a $7.4 million increase in interest income and fees on loans, a $580,000 increase in interest income on balances due from banks and a $878,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases implemented by the Federal Reserve between December 2022 and July 2023. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and Federal Reserve rate increases. The increase in interest income on investment securities is primarily due to increases in yields on variable rate securities and higher yields on securities held during the more recent reporting period. The increase in interest expense is due to an increase in balances of interest-bearing liabilities and an increase in rates paid on interest-bearing liabilities. Net interest income increased to $54.7 million in 2023 from $51.1 million in 2022.

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, 2024, 2023 and 2022. 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

[[GREPCENT_TABLE]]
[["Table 1 - Average Balance Table"],["","","December 31, 2024","","","December 31, 2023","","","December 31, 2022"],["(Dollars in thousands)","","Average Balance","","","Interest","","","Yield / Rate","","","Average Balance","","","Interest","","","Yield / Rate","","","Average Balance","","","Interest","","","Yield / Rate"],["Interest-earning assets:"],["Loans receivable","","$","1,113,488","","","","62,920","","","","5.65","%","","","1,061,075","","","","55,507","","","","5.23","%","","","949,175","","","","43,077","","","","4.54","%"],["Investments - taxable","","","431,205","","","","14,592","","","","3.38","%","","","436,114","","","","13,374","","","","3.07","%","","","399,036","","","","7,159","","","","1.79","%"],["Investments - nontaxable*","","","14,146","","","","449","","","","3.17","%","","","21,888","","","","836","","","","3.82","%","","","71,943","","","","2,355","","","","3.27","%"],["Due from banks","","","52,977","","","","2,796","","","","5.28","%","","","42,748","","","","2,216","","","","5.18","%","","","181,014","","","","2,223","","","","1.23","%"],["Total interest-earning assets","","","1,611,816","","","","80,757","","","","5.01","%","","","1,561,825","","","","71,933","","","","4.61","%","","","1,601,168","","","","54,814","","","","3.42","%"],["Cash and due from banks","","","30,207","","","","","","","","","","","","35,772","","","","","","","","","","","","36,778"],["Other assets","","","21,919","","","","","","","","","","","","17,820","","","","","","","","","","","","35,373"],["Allowance for credit losses","","","(10,586",")","","","","","","","","","","","(10,031",")","","","","","","","","","","","(9,654",")"],["Total assets","","$","1,653,356","","","","","","","","","","","","1,605,386","","","","","","","","","","","","1,663,665"],["Interest-bearing liabilities:"],["Interest-bearing demand,"],["MMDA & savings deposits","","$","699,690","","","","10,237","","","","1.46","%","","","689,795","","","","6,731","","","","0.98","%","","","824,955","","","","2,019","","","","0.24","%"],["Time deposits","","","346,246","","","","14,316","","","","4.13","%","","","228,309","","","","7,916","","","","3.47","%","","","99,880","","","","562","","","","0.56","%"],["Junior subordinated debentures","","","15,464","","","","1,116","","","","7.22","%","","","15,464","","","","1,079","","","","6.98","%","","","15,464","","","","529","","","","3.42","%"],["Other","","","33,299","","","","985","","","","2.96","%","","","69,911","","","","1,417","","","","2.03","%","","","39,016","","","","213","","","","0.55","%"],["Total interest-bearing liabilities","","","1,094,699","","","","26,654","","","","2.43","%","","","1,003,479","","","","17,143","","","","1.71","%","","","979,315","","","","3,323","","","","0.34","%"],["Demand deposits","","","420,029","","","","","","","","","","","","477,162","","","","","","","","","","","","555,278"],["Other liabilities","","","8,762","","","","","","","","","","","","8,449","","","","","","","","","","","","5,185"],["Shareholders' equity","","","129,866","","","","","","","","","","","","116,296","","","","","","","","","","","","123,887"],["Total liabilities and shareholder's equity","","$","1,653,356","","","","","","","","","","","","1,605,386","","","","","","","","","","","","1,663,665"],["Net interest spread","","","","","","$","54,103","","","","2.58","%","","","","","","$","54,790","","","","2.90","%","","","","","","$","51,491","","","","3.08","%"],["Net yield on interest-earning assets","","","","","","","","","","","3.36","%","","","","","","","","","","","3.51","%","","","","","","","","","","","3.22","%"],["Taxable equivalent adjustment"],["Investment securities","","","","","","$","24","","","","","","","","","","","$","71","","","","","","","","","","","$","383"],["Net interest income","","","","","","$","54,079","","","","","","","","","","","$","54,719","","","","","","","","","","","$","51,108"],["*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $10.2 million in 2024, $11.7 million in 2023 and $13.3 million in 2022. A tax rate of 2.50% was used to calculate the tax equivalent yields on these securities in 2024, 2023 and 2022."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis"],["","","December 31, 2024","","","December 31, 2023"],["(Dollars in thousands)","","Changes in average volume","","","Changes in average rates","","","Total Increase (Decrease)","","","Changes in average volume","","","Changes in average rates","","","Total Increase (Decrease)"],["Interest income:"],["Loans: Net of unearned income","","$","2,852","","","","4,561","","","","7,413","","","$","5,466","","","","6,964","","","","12,430"],["Investments - taxable","","","(158",")","","","1,376","","","","1,218","","","","901","","","","5,314","","","","6,215"],["Investments - nontaxable","","","(271",")","","","(116",")","","","(387",")","","","(1,775",")","","","256","","","","(1,519",")"],["Due from banks","","","535","","","","45","","","","580","","","","(4,433",")","","","4,426","","","","(7",")"],["Total interest income","","","2,958","","","","5,866","","","","8,824","","","","159","","","","16,960","","","","17,119"],["Interest expense:"],["Interest-bearing demand,"],["MMDA & savings deposits","","","121","","","","3,385","","","","3,506","","","","(825",")","","","5,537","","","","4,712"],["Time deposits","","","4,483","","","","1,917","","","","6,400","","","","2,588","","","","4,766","","","","7,354"],["Junior subordinated debentures","","","-","","","","37","","","","37","","","","-","","","","550","","","","550"],["Other","","","(913",")","","","481","","","","(432",")","","","397","","","","807","","","","1,204"],["Total interest expense","","","3,691","","","","5,820","","","","9,511","","","","2,160","","","","11,660","","","","13,820"],["Net interest income","","$","(733",")","","","46","","","","(687",")","","$","(2,001",")","","","5,300","","","","3,299"]]
[[/GREPCENT_TABLE]]

Net interest income on a tax equivalent basis totaled $54.1 million in 2024, as compared to $54.8 million in 2023. The net interest spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 2.58% in 2024, as compared to 2.90% in 2023. The net yield on interest-earning assets was 3.36% in 2024 and 3.51% in 2023.

Tax equivalent interest income increased $8.8 million in 2024 primarily due to a $7.4 million increase in interest income and fees on loans, a $831,000 increase in tax equivalent interest income on investment securities, and a $580,000 increase 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 implemented by the Federal Reserve between December 2022 and July 2023. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and Federal Reserve rate increases. The increase in interest income on investment securities is primarily due to increases in yields on variable rate securities and higher yields on securities held during the more recent reporting period. The yield on interest-earning assets was 5.01% in 2024, as compared to 4.61% in 2023.

Interest expense totaled $26.7 million in 2024, as compared to $17.1 million in 2023. The increase in interest expense is due to an increase in increase in balances of interest-bearing liabilities and an increase in rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased by $91.2 million to $1.09 billion in 2024, as compared to $1.00 billion in 2023. The cost of funds increased to 2.43% in 2024 from 1.71% in 2023.

In 2023, net interest income on a tax equivalent basis was $54.8 million, as compared to $51.5 million in 2022. The net interest spread was 2.90% in 2023, as compared to 3.08% in 2022. The net yield on interest-earning assets was 3.51% in 2023, as compared to 3.22% in 2022.

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, 2024 was a recovery of $285,000, compared to an expense of $1.6 million for the year ended December 31, 2023. Loan balances in 2024 increased by about $45.3 million, but decreases in balances for funded and unfunded loans with higher loss rates than other categories of loans in the portfolio resulted in a decrease in provision for the year ended December 31, 2024. The decrease in the provision for credit losses during the year ended December 31, 2024 is primarily attributable to a negative provision of $1.2 million related to funded and unfunded balance reductions of $37.9 million in construction loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates, a $385,000 negative provision for loans secured by owner-occupied real estate resulting from a recovery of $200,000, and offset by a $713,000 provision related to $432,000 in charge-offs of individually evaluated loans.

A-8

During the fourth quarter 2024 an update to the general forecast function in the model was set for all pools that projects the next four quarters to have similar loss rates to the period between December 2018 and February 2020, followed by a reversion to the long-term average over four quarters. This is intended to reflect the Bank's experience when the Federal Reserve began its last series of rate cuts beginning in July 2019 up to, but excluding, the two March 2020 cuts that occurred at the outset of COVID. This adjusted the previous general forecast function in the model during 2024 that utilized historical loss rates for the period between November 2015 and September 2019, reflecting a period of interest rate increases. The general forecast function adjustment resulted in a reduction of ACL for 2024 of approximately $409,000.

Net charge-offs for the year ended December 31, 2024 were $1.4 million, compared to $306,000 for the year ended December 31, 2023. The increase in net charge-offs during the year ended December 31, 2024, compared to the year ended December 31, 2023, is primarily due to commercial and industrial loan charge-offs of $432,000 during the year ended December 31 2024, which were previously reflected in reserves on individually evaluated loans.

The ratio of net charge-offs/(recoveries) to average total loans was 0.13% in 2024, 0.04% in 2023 and 0.03% in 2022. The allowance for credit losses was $10.0 million or 0.88% of total loans outstanding at December 31, 2024. For December 31, 2023 and 2022, the allowance for credit losses amounted to $11.0 million or 1.01% of total loans outstanding and $10.5 million, or 1.02% of total loans outstanding, respectively. The decrease as a percentage of total loans outstanding from December 31, 2023 to December 31, 2024 is primarily due to the general forecast function adjustment in 2024.

Table 3 presents a summary of net charge off activity for the years ended December 31, 2024, 2023 and 2022.

[[GREPCENT_TABLE]]
[["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)","","2024","","","2023","","","2022","","","2024","","","2023","","","2022"],["Real estate loans"],["Construction and land development","","$","-","","","","-","","","","-","","","","0.00","%","","","0.00","%","","","0.00","%"],["Single-family residential","","","4","","","","(171",")","","","(101",")","","","0.00","%","","","-0.05","%","","","-0.03","%"],["Commercial","","","(202",")","","","(6",")","","","(9",")","","","-0.05","%","","","0.00","%","","","0.00","%"],["Multifamily and farmland","","","-","","","","-","","","","-","","","","0.00","%","","","0.00","%","","","0.00","%"],["Total real estate loans","","","(198",")","","","(177",")","","","(110",")","","","-0.02","%","","","-0.02","%","","","-0.01","%"],["Loans not secured by real estate"],["Commercial loans","","","1,078","","","","62","","","","(39",")","","","1.60","%","","","0.08","%","","","-0.05","%"],["Farm loans","","","-","","","","-","","","","-","","","","0.00","%","","","0.00","%","","","0.00","%"],["Consumer loans (1)","","","445","","","","421","","","","482","","","","6.57","%","","","6.07","%","","","7.27","%"],["All other loans","","","107","","","","-","","","","-","","","","0.58","%","","","0.00","%","","","0.00","%"],["Total loans","","$","1,432","","","","306","","","","333","","","","0.13","%","","","0.04","%","","","0.03","%"],["Provision for (recovery of) credit losses"],["for the period","","$","(285",")","","","1,566","","","","1,472"],["Allowance for credit losses at end of period","","$","9,995","","","","11,041","","","","10,494"],["Total loans at end of period","","$","1,138,404","","","","1,093,066","","","","1,032,608"],["Non-accrual loans at end of period","","$","440","","","","3,887","","","","3,728"],["Allowance for credit losses as a percent of"],["total loans outstanding at end of period","","","0.88","%","","","1.01","%","","","1.02","%"],["Non-accrual loans as a percent of"],["total loans outstanding at end of period","","","0.04","%","","","0.36","%","","","0.36","%"],["Allowance for credit losses as a percent of"],["nonaccrual loans at end of period","","","225.11","%","","","284.05","%","","","281.49","%"],["(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."]]
[[/GREPCENT_TABLE]]

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.

A-9

Non-Interest Income. Non-interest income was $27.7 million for the year ended December 31, 2024, compared to $22.9 million for the year ended December 31, 2023. The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the year ended December 31, 2023 compared to a $5,000 net gain on the sales of securities during the year ended December 31, 2024, and a $2.1 million increase in appraisal management fee income due to an increase in appraisal volume in 2024.

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 income on mutual funds held in deferred compensation trust due to an increase in valuations for the assets in the deferred compensation plan.

The Company periodically evaluates its investments for credit losses. There were no credit losses on investments in 2024, 2023 or 2022.

Table 4 presents a summary of non-interest income for the years ended December 31, 2024, 2023 and 2022.

[[GREPCENT_TABLE]]
[["Table 4 - Non-Interest Income"],["(Dollars in thousands)","","2024","","","2023","","","2022"],["Service charges","","$","5,653","","","$","5,496","","","$","5,290"],["Other service charges and fees","","","685","","","","697","","","","734"],["Gain (loss) on sale of securities, net","","","5","","","","(2,488",")","","","-"],["Mortgage banking income","","","357","","","","301","","","","393"],["Insurance and brokerage commissions","","","989","","","","929","","","","945"],["Gain/(loss) on sale of premises and equipment, net","","","-","","","","184","","","","(85",")"],["Bank owned life insurance income","","","783","","","","432","","","","458"],["Visa debit card income","","","4,417","","","","4,717","","","","4,901"],["Appraisal management fee income","","","11,691","","","","9,592","","","","11,663"],["Income on mutual funds held in deferred compensation trust","","","555","","","","844","","","","(183",")"],["Miscellaneous","","","2,580","","","","2,210","","","","2,573"],["Total non-interest income","","$","27,715","","","$","22,914","","","$","26,689"]]
[[/GREPCENT_TABLE]]

Non-Interest Expense. Non-interest expense was $61.2 million for the year ended December 31, 2024, compared to $56.1 million for the year ended December 31, 2023. The increase in non-interest expense is primarily attributable to a $1.6 million increase in salaries and employee benefits expense primarily due to increases in salary and supplemental executive retirement plan expenses, a $724,000 increase in occupancy expense that includes a $362,000 write-off of leasehold improvements for the Bank’s branch in Cary, North Carolina, which was closed in June 2024, a $1.7 million increase in appraisal management fee expense due to an increase in appraisal volume and a $1.0 million increase in other non-interest expense primarily due to increases in consulting fees and debit card fraud 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.

A-10

Table 5 presents a summary of non-interest expense for the years ended December 31, 2024, 2023 and 2022.

[[GREPCENT_TABLE]]
[["Table 5 - Non-Interest Expense"],["(Dollars in thousands)","","2024","","","2023","","","2022"],["Salaries and employee benefits","","$","28,209","","","$","26,640","","","$","26,130"],["Occupancy expense","","","8,686","","","","7,962","","","","8,048"],["Office supplies","","","534","","","","482","","","","532"],["FDIC deposit insurance","","","764","","","","745","","","","461"],["Visa debit card expense","","","1,391","","","","1,255","","","","1,224"],["Professional services","","","673","","","","673","","","","451"],["Postage","","","202","","","","237","","","","238"],["Telephone","","","595","","","","664","","","","691"],["Director fees and expense","","","564","","","","503","","","","454"],["Advertising","","","791","","","","750","","","","693"],["Consulting fees","","","1,643","","","","1,043","","","","1,464"],["Taxes and licenses","","","202","","","","143","","","","277"],["Foreclosure/OREO expense","","","19","","","","1","","","","7"],["Internet banking expense","","","1,067","","","","996","","","","949"],["Appraisal management fee expense","","","9,263","","","","7,559","","","","9,264"],["Deferred comp expense (benefit)","","","555","","","","844","","","","(183",")"],["Other operating expense","","","5,992","","","","5,647","","","","5,330"],["Total non-interest expense","","$","61,150","","","$","56,144","","","$","56,030"]]
[[/GREPCENT_TABLE]]

Income Taxes. The Company reported income tax expense of $4.6 million, $4.4 million and $4.2 million for the years ended December 31, 2024, 2023 and 2022, respectively. The Company’s effective tax rates were 21.86%, 21.97 % and 20.56% in 2024, 2023 and 2022, respectively. Income tax expense for the year ended December 31, 2024 reflects the revaluation of the deferred tax asset due to planned reductions in the North Carolina corporate income tax rate, which will be phased out over a five year period, starting in 2025.

Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of December 31, 2024, such unfunded commitments to extend credit were $348.9 million, while commitments in the form of standby letters of credit totaled $1.7 million.

The 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, 2024, the Company’s core deposits totaled $1.34 billion, or 90% of total deposits.

The Bank’s two largest deposit relationships, including securities sold under agreements to repurchase, amounted to $117.0 million and $106.9 million at December 31, 2024 and 2023, respectively. These balances represent 7.88% of total deposits at December 31, 2024, as compared to 7.23% of total deposits and securities sold under agreements to repurchase combined at December 31, 2023.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreement to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Bank’s policies include the ability to access wholesale funding up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit. The Bank did not have any wholesale funding at December 31, 2024.

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, 2024. At December 31, 2024, the carrying value of loans pledged as collateral totaled approximately $232.9 million. The availability under the line of credit with the FHLB was $131.9 million at December 31, 2024. The Bank had no borrowings from the FRB at December 31, 2024. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns that are not pledged to the FHLB. At December 31, 2024, the carrying value of loans pledged as collateral to the FRB totaled approximately $637.9 million. Availability under the line of credit with the FRB was $511.9 million at December 31, 2024.

A-11

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2024.

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 28.16%, 25.39% and 30.32% at December 31, 2024, 2023 and 2022, 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, 2024, 2023 and 2022.

As disclosed in the Company’s Consolidated Statements of Cash Flows, net cash provided by operating activities was $20.6 million during 2024. Net cash used in investing activities was $42.6 million during 2024 and net cash used by financing activities was $1.0 million during 2024.

Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. Table 6 presents an interest rate sensitivity analysis for the interest-earning assets and interest-bearing liabilities for the year ended December 31, 2024.

[[GREPCENT_TABLE]]
[["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","","$","194,074","","","","4,229","","","","15,485","","","","213,788","","","","924,616","","","","1,138,404"],["Mortgage loans held for sale","","","1,367","","","","-","","","","-","","","","1,367","","","","-","","","","1,367"],["Investment securities available for sale","","","-","","","","86,320","","","","7,615","","","","93,935","","","","294,068","","","","388,003"],["Interest-bearing deposit accounts","","","28,347","","","","-","","","","-","","","","28,347","","","","-","","","","28,347"],["Other interest-earning assets","","","-","","","","-","","","","-","","","","-","","","","3,192","","","","3,192"],["Total interest-earning assets","","","223,788","","","","90,549","","","","23,100","","","","337,437","","","","1,221,876","","","","1,559,313"],["Interest-bearing liabilities:"],["NOW, savings, and money market deposits","","","741,363","","","","-","","","","-","","","","741,363","","","","-","","","","741,363"],["Time deposits","","","32,625","","","","74,148","","","","218,188","","","","324,961","","","","16,153","","","","341,114"],["Trust preferred securities","","","-","","","","15,464","","","","-","","","","15,464","","","","-","","","","15,464"],["Total interest-bearing liabilities","","","773,988","","","","89,612","","","","218,188","","","","1,081,788","","","","16,153","","","","1,097,941"],["Interest-sensitive gap","","$","(550,200",")","","","937","","","","(195,088",")","","","(744,351",")","","","1,205,723","","","","461,372"],["Cumulative interest-sensitive gap","","$","(550,200",")","","","(549,263",")","","","(744,351",")","","","(744,351",")","","","461,372"],["Interest-earning assets as a percentage of interest-bearing liabilities","","","28.91","%","","","101.05","%","","","10.59","%","","","31.19","%","","","7,564.39","","","%"]]
[[/GREPCENT_TABLE]]

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. The 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, 2024, rate sensitive assets and rate sensitive liabilities totaled $1.61 billion and $1.09 billion, respectively.

A-12

Included in the rate sensitive assets are $189.4 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, 2024, the Bank had $127.2 million in loans with interest rate floors. No floors were in effect on these loans at December 31, 2024.

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, 2024 the market value of AFS securities totaled $388.0 million, as compared to $391.9 million at December 31, 2023.

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 $442.1 million in 2024 and $454.8 million in 2023.

Table 7 presents the book value of AFS securities held by the Company by maturity category at December 31, 2024. 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.

[[GREPCENT_TABLE]]
[["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","","","-","","","","-","","","","7,257","","","","1.20","%","","","-","","","","-","","","","-","","","","-","","","","7,257","","","","1.20","%"],["U.S. Government sponsored enterprises","","","2,991","","","","3.02","%","","","198","","","","1.78","%","","","4,416","","","","2.68","%","","","1,127","","","","6.52","%","","","8,732","","","","3.46","%"],["GSE - Mortgage-backed securities","","","-","","","","-","","","","5,052","","","","2.19","%","","","24,836","","","","2.17","%","","","195,904","","","","3.88","%","","","225,792","","","","3.58","%"],["Private label mortgage-backed securities","","","5,000","","","","5.60","%","","","-","","","","-","","","","-","","","","-","","","","36,767","","","","5.24","%","","","41,767","","","","5.27","%"],["State and political subdivisions","","","-","","","","-","","","","11,452","","","","2.58","%","","","55,574","","","","2.07","%","","","37,429","","","","1.88","%","","","104,455","","","","1.85","%"],["Total securities","","$","7,991","","","","4.31","%","","","23,959","","","","2.09","%","","","84,826","","","","2.35","%","","","271,227","","","","4.23","%","","","388,003","","","","3.25","%"]]
[[/GREPCENT_TABLE]]

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, 2024, the Bank had $121.5 million in residential mortgage loans, $115.0 million in home equity loans and $688.5 million in commercial mortgage loans, which include $541.1 million secured by commercial property and $147.4 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization. The Bank also had construction and land development loans totaling $122.3 million at December 31, 2024.

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.

A-13

As of December 31, 2024, gross loans outstanding were $1.14 billion, as compared to $1.09 billion at December 31, 2023. Average loans represented 69% and 68% of average total earning assets for the years ended December 31, 2024 and 2023, respectively. The Bank had $1.4 million and $686,000 in mortgage loans held for sale as of December 31, 2024 and 2023, respectively.

Table 8 identifies the maturities of all loans as of December 31, 2024 and addresses the sensitivity of these loans to changes in interest rates.

[[GREPCENT_TABLE]]
[["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","","$","39,182","","","$","58,438","","","$","24,388","","","$","320","","","$","122,328"],["Single-family residential","","","134,740","","","","132,315","","","","71,864","","","","45,590","","","","384,509"],["Commercial","","","52,377","","","","325,983","","","","88,958","","","","4,126","","","","471,444"],["Multifamily and farmland","","","6,593","","","","25,140","","","","20,774","","","","17,164","","","","69,671"],["Total real estate loans","","","232,892","","","","541,876","","","","205,984","","","","67,200","","","","1,047,952"],["Commercial loans (not secured by real estate)","","","23,389","","","","23,863","","","","16,585","","","","-","","","","63,837"],["Farm loans (not secured by real estate)","","","151","","","","131","","","","119","","","","-","","","","401"],["Consumer loans (not secured by real estate)","","","2,589","","","","3,150","","","","736","","","","-","","","","6,475"],["All other loans (not secured by real estate)","","","12,195","","","","6,560","","","","984","","","","-","","","","19,739"],["Total loans","","$","271,216","","","$","575,580","","","$","224,408","","","$","67,200","","","$","1,138,404"],["Total fixed rate loans","","$","57,428","","","$","557,284","","","$","190,123","","","$","67,200","","","$","872,035"],["Total floating rate loans","","","213,788","","","","18,296","","","","34,285","","","","","","","","266,369"],["Total loans","","$","271,216","","","$","575,580","","","$","224,408","","","$","67,200","","","$","1,138,404"]]
[[/GREPCENT_TABLE]]

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, 2024. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company calculates the allowance for credit losses using a Weighted Average Remaining Maturity (“WARM”) methodology.

A-14

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

The portion of the ACL balance attributable to qualitative factors was $5.2 million at December 31, 2024 and December 31, 2023. The risk factors are weighted as follows: Local, State and National Economic Outlook – 30%, Concentrations of Credit – 5%, Interest Rate Risk – 5%, Trends in Terms of Volume, Mix and Size of Loans – 15%, Seasoning of the Loan Portfolio – 10%, Experience of Staff – 10%, and Levels and Trends of Delinquencies – 25%. No changes to the risk status of any of the risk factors was made during year ended 2024.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. There were no loans individually evaluated as of December 31, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023, which were fully reserved for at December 31, 2023.

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

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

The allowance for credit losses on unfunded commitments was $1.1 million at December 31, 2024, compared to $1.8 million at December 31, 2023. The decrease in the allowance for credit losses on unfunded commitments was primarily due to a $503,000 decrease in the allowance for other construction loans and all land development and other land loans resulting from a $19.6 million decrease in unfunded commitments in this category during the year ended December 31, 2024.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by the third-party credit review firm (as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The board of directors of the Bank (the “Bank Board”) reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

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

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

A-15

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

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations. Management believes it has established the allowance for credit losses pursuant to CECL, and has taken into account the views of its regulators and the current economic environment. Management considers the allowance adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements. Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.

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

[[GREPCENT_TABLE]]
[["Table 9 - Analysis of Allowance for Credit Losses"],["(Dollars in thousands)","","2024","","","2023","","","2022"],["Allowance for Credit losses at beginning of year","","$","12,811","","","$","10,494","","","$","9,355"],["Adjustment for CECL implementation","","","-","","","","1,058","","","","-"],["Real estate loans:"],["Single-family residential","","","131","","","","-","","","","128"],["Total real estate loans","","","131","","","","-","","","","128"],["Loans not secured by real estate:"],["Commercial loans","","","1,134","","","","129","","","","33"],["Consumer loans","","","716","","","","569","","","","591"],["Total chargeoffs","","","1,981","","","","698","","","","752"],["Recoveries of losses previously charged off:"],["Real estate loans:"],["Single-family residential","","","129","","","","171","","","","229"],["Commercial","","","202","","","","6","","","","9"],["Total real estate loans","","","331","","","","177","","","","238"],["Loans not secured by real estate:"],["Commercial loans","","","55","","","","67","","","","72"],["Consumer loans","","","165","","","","147","","","","109"],["Total recoveries","","","551","","","","391","","","","419"],["Net loans charged off","","","1,430","","","","307","","","","333"],["Provision for (recovery of)credit losses","","","(285",")","","","1,566","","","","1,472"],["Allowance for credit losses at end of year","","$","11,096","","","$","12,811","","","$","10,494"],["Allowance for credit loss-loans","","$","9,995","","","$","11,041","","","$","-"],["Alowance for credit loss-unfunded loan commitments","","","1,101","","","","1,770","","","","-"],["Total allowance for credit losses","","$","11,096","","","$","12,811","","","$","-"],["Loans charged off net of recoveries, as"],["a percent of average loans outstanding","","","0.13","%","","","0.03","%","","","0.04","%"],["Allowance for loan losses as a percent"],["of total loans outstanding at end of year","","","0.88","%","","","1.01","%","","","1.02","%"]]
[[/GREPCENT_TABLE]]

A-16

Table 10 presents the allocation of the allowance for credit losses on loans at December 31, 2024.

[[GREPCENT_TABLE]]
[["Table 10 - Allocation of Allowance for Credit Losses on Loans"],["(Dollars in thousands)"],["","","December 31, 2024","","","Percent of Total Loans In Category to Total Loans Outstanding","","","December 31, 2023","","","Percent of Total Loans In Category to Total Loans Outstanding","","","December 31, 2022","","","Percent of Total Loans In Category to Total Loans Outstanding"],["Construction and land development","","$","3,385","","","","11","%","","","3,913","","","","12","%","","","1,415","","","","11","%"],["Single-family residential","","","3,386","","","","34","%","","","3,484","","","","34","%","","","3,085","","","","33","%"],["Commercial","","","2,322","","","","41","%","","","2,317","","","","39","%","","","3,207","","","","39","%"],["Multifamily and farmland","","","246","","","","6","%","","","268","","","","6","%","","","164","","","","6","%"],["Commercial","","","446","","","","5","%","","","812","","","","6","%","","","657","","","","8","%"],["Farm","","","1","","","","0","%","","","2","","","","0","%","","","-","","","","0","%"],["Consumer","","","134","","","","1","%","","","150","","","","1","%","","","204","","","","1","%"],["All other","","","75","","","","2","%","","","95","","","","2","%","","","1,762","","","","2","%"],["Total allowance for credit losses on loans","","$","9,995","","","","100","%","","","11,041","","","","100","%","","","10,494","","","","100","%"]]
[[/GREPCENT_TABLE]]

Non-performing Assets. Non-performing assets were $4.8 million or 0.29% of total assets at December 31, 2024, compared to $3.9 million or 0.24% of total assets December 31, 2023. Non-accrual loans over $250,000 are individually evaluated for specific reserves. Non-performing assets include $3.7 million in residential mortgage loans, $463,000 in commercial mortgage loans, $257,000 in other loans, and $369,000 in other real estate owned at December 31, 2024, compared to $3.3 million in residential mortgage loans, $76,000 in commercial mortgage loans, and $464,000 in other loans at December 31, 2023. The Bank had no other real estate owned at December 31, 2023. The Bank had no repossessed assets as of December 31, 2024 and 2023.

At December 31, 2024, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $4.4 million or 0.39% of total loans. Non-performing loans at December 31, 2023 were $3.9 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, 2024 and 2023.

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. Deposits were $1.48 billion as of December 31, 2024, compared to $1.39 billion as of December 31, 2023. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.34 billion at December 31, 2024, compared to $1.24 billion at December 31, 2023. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability.

Certificates of deposit in amounts of more than $250,000 totaled $145.9 million at December 31, 2024, compared to $148.9 million at December 31, 2023. Other time deposits totaled $195.2 million at December 31, 2024, compared to $190.2 million at 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, 2024.

[[GREPCENT_TABLE]]
[["Table 11 - Maturities of Time Deposits over $250,000"],["(Dollars in thousands)","","2024"],["Three months or less","","$","43,504"],["Over three months through six months","","","99,032"],["Over six months through twelve months","","","3,146"],["Over twelve months","","","257"],["Total","","$","145,939"]]
[[/GREPCENT_TABLE]]

A-17

Estimated uninsured deposits totaled $396.5 million, or 26.71% of total deposits, at December 31, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations based on the North American Industry Classification System at December 31, 2024 and 2023. The Bank has two customer relationships that had deposits totaling $117.0 million, or 7.88% of total deposits, at December 31, 2024, and $106.9 million, or 7.68% of total deposits, at December 31, 2023.

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, 2024 and 2023. Average FHLB borrowings for 2024 and 2023 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, 2024 and 2023. 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 zero at December 31, 2024, compared to $86.7 million at December 31, 2023. The decrease in securities sold under agreements to repurchase is due to customers transferring funds from securities sold under agreements to repurchase to deposits held via the IntraFi network’s Insured Cash Sweep (“ICS”) program during the year ended December 31, 2024.

Junior subordinated debentures were $15.5 million at December 31, 2024 and December 31, 2023.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit.

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-12 and in Note 1 to the Consolidated Financial Statements. There were no derivatives at December 31, 2024 or 2023.

Capital Resources. Shareholders’ equity was $130.6 million, or 7.90% of total assets, at December 31, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Average shareholders’ equity as a percentage of total average assets was 7.85%, 7.24% and 7.45% for 2024, 2023 and 2022, respectively. The return on average shareholders’ equity was 12.59% at December 31, 2024, as compared to 13.37% and 13.01% at December 31, 2023 and December 31, 2022, respectively. Total cash dividends paid on common stock were $5.0 million, $5.1 million and $4.9 million during 2024, 2023 and 2022, 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 the first quarter of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was allocated to repurchase the Company’s common stock. In the fourth quarter of 2023, the Board of Directors authorized an additional $2.0 million to be allocated to repurchase the Company’s common stock, which increased the total amount authorized in 2023 to $4.0 million. The Company repurchased approximately $4.0 million, or 181,022 shares of its common stock, under this stock repurchase program through March 31, 2024, when the program expired.

In June of 2024, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company had not repurchased any shares of its common stock under this stock repurchase program as of December 31, 2024.

A-18

In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019). This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions.

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at December 31, 2024 and December 31, 2023. The Company’s Tier 1 capital ratio was 14.47% and 13.94% at December 31, 2024 and December 31, 2023, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.34% and 14.96% at December 31, 2024 and December 31, 2023, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.29% and 12.75% at December 31, 2024 and December 31, 2023, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.88% and 10.51% at December 31, 2024 and December 31, 2023, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.35% and 13.83% at December 31, 2024 and December 31, 2023, respectively. The total risk-based capital ratio for the Bank was 15.22% and 14.85% at December 31, 2024 and December 31, 2023, respectively. The Bank’s common equity Tier 1 capital ratio was 14.35% and 13.83% at December 31, 2024 and December 31, 2023, respectively. The Bank’s Tier 1 leverage capital ratio was 10.71% and 10.35% at December 31, 2024 and December 31, 2023, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at December 31, 2024.

A-19

[[GREPCENT_TABLE]]