PEOPLES BANCORP OF NORTH CAROLINA INC

Previous wording

Prior to the COVID-19 pandemic, economic conditions, while not as robust as the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 500 basis points since March 1, 2022 to a range of 5.25% to 5.50% at June 30, 2024.

Current wording

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 4.75% to 5.00% in September 2024.

Previous wording

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. The following is a summary of some of the more subjective and complex accounting policies of the Company. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2024 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2023.

Current wording

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. A complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2023 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2024 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2023.

Previous wording

*Summary.*Net earnings were $4.9 million or $0.93 per share and $0.89 per diluted share for the three months ended June 30, 2024, compared to $4.8 million or $0.88 per share and $0.85 per diluted share for the prior year period. The increase in second quarter 2024 net earnings is primarily the result of an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Current wording

*Summary.*Net earnings were $4.0 million or $0.74 per share and $0.72 per diluted share for the three months ended September 30, 2024, compared to $4.1 million or $0.76 per share and $0.74 per diluted share for the prior year period. The decrease in third quarter net earnings is primarily the result of a decrease in non-interest income and an increase in non-interest expense, which were partially offset by an increase in net interest income and a decrease in the provision for credit losses, compared to the prior year period, as discussed below.

Previous wording

Net earnings were $8.8 million or $1.67 per share and $1.61 per diluted share for the six months ended June 30, 2024, compared to $8.0 million or $1.46 per share and $1.41 per diluted share for the prior year period. The increase in second quarter net earnings is primarily attributable to an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Current wording

Net earnings were $12.8 million or $2.41 per share and $2.33 per diluted share for the nine months ended September 30, 2024, compared to $12.1 million or $2.22 per share and $2.15 per diluted share for the prior year period. The increase in year-to-date net earnings is primarily attributable to an increase in non-interest income and a decrease in the provision for credit losses, which were partially offset by a decrease in net interest income and an increase in non-interest expense, compared to the prior year period, as discussed below.

Previous wording

The annualized return on average assets was 1.08% for the six months ended June 30, 2024, compared to 1.01% for the same period one year ago, and annualized return on average shareholders’ equity was 14.69% for the six months ended June 30, 2024, compared to 14.12% for the same period one year ago.

Current wording

The annualized return on average assets was 0.95% for the nine months ended September 30, 2024, compared to 1.02% for the same period one year ago, and annualized return on average shareholders’ equity was 13.59% for the nine months ended September 30, 2024, compared to 13.97% for the same period one year ago.

Previous wording

Interest income was $39.9 million for the six months ended June 30, 2024, compared to $34.4 million for the six months ended June 30, 2023. The increase in interest income is due to a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities, and higher yields on securities purchased during the six months ended June 30, 2024. During the six months ended June 30, 2024, average loans were $1.10 billion, an increase of $54.0 million from average loans of $1.05 billion for the six months ended June 30, 2023. During the six months ended June 30, 2024, average investment securities available for sale were $444.3 million, a decrease of $19.1 million from average investment securities available for sale of $463.4 million for the six months ended June 30, 2023. The average yield on loans for the six months ended June 30, 2024 and 2023 was 5.61% and 5.12%, respectively. The average yield on investment securities available for sale was 3.36% and 3.00% for the six months ended June 30, 2024 and 2023, respectively. The average yield on earning assets was 4.99% and 4.48% for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Interest income was $20.5 million for the three months ended September 30, 2024, compared to $18.3 million for the three months ended September 30, 2023. The increase in interest income is primarily due to a $2.0 million increase in interest income and fees on loans and a $206,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve through July 2023. The increase in interest income on investment securities is primarily due to increases in yields on variable rate securities and higher yields on securities purchased since September 30, 2023. During the three months ended September 30, 2024, average loans were $1.12 billion, an increase of $56.4 million from average loans of $1.06 billion for the three months ended September 30, 2023. During the three months ended September 30, 2024, average investment securities available for sale were $440.5 million, a decrease of $7.5 million from average investment securities available for sale of $448.0 million for the three months ended September 30, 2023. The average yield on loans for the three months ended September 30, 2024 and 2023 was 5.72% and 5.27%, respectively. The average yield on investment securities available for sale was 3.38% and 3.15% for the three months ended September 30, 2024 and 2023, respectively. The average yield on earning assets was 5.06% and 4.65% for the three months ended September 30, 2024 and 2023, respectively.

Previous wording

Interest expense was $6.7 million for the three months ended June 30, 2024, compared to $3.8 million for the three months ended June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the three months ended June 30, 2024, average interest-bearing non-maturity deposits were $684.8 million, a decrease of $18.7 million from average interest-bearing non-maturity deposits of $703.5 million for the three months ended June 30, 2023. During the three months ended June 30, 2024, average certificates of deposit were $349.5 million, an increase of $143.8 million from average certificates of deposit of $205.7 million for the three months ended June 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.43% and 0.94% for the three months ended June 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.17% for the three months ended June 30, 2024, compared to 3.19% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.46% for the three months ended June 30, 2024, compared to 1.56% for the same period one year ago.

Current wording

Interest expense was $6.9 million for the three months ended September 30, 2024, compared to $5.0 million for the three months ended September 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the three months ended September 30, 2024, average interest-bearing non-maturity deposits were $725.0 million, an increase of $72.3 million from average interest-bearing non-maturity deposits of $652.7 million for the three months ended September 30, 2023. During the three months ended September 30, 2024, average certificates of deposit were $342.8 million, an increase of $74.1 million from average certificates of deposit of $268.7 million for the three months ended September 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.59% and 1.06% for the three months ended September 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.19% for the three months ended September 30, 2024, compared to 3.71% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.51% for the three months ended September 30, 2024, compared to 1.92% for the same period one year ago.

Previous wording

Year to date net interest income was $26.7 million for the six months ended June 30, 2024, compared to $28.1 million for the six months ended June 30, 2023. The decrease in net interest income is due to a $6.9 million increase in interest expense, partially offset by a $5.5 million increase in interest income. The increase in interest income reflects a $4.2 million increase in interest income and fees on loans, a $732,000 increase in interest income on balances due from banks and a $589,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities and higher yields on securities purchased since June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Net interest income after the provision for credit losses was $27.1 million for the six months ended June 30, 2024, compared to $27.5 million for the six months ended June 30, 2023. The provision for credit losses for the six months ended June 30, 2024 was a recovery of $377,000, compared to an expense of $599,000 for the six months ended June 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding composed mostly of approximately $29.1 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the first six months ending June 30, 2024. In addition, the high rate environment is slowing additional construction activity resulting in a decrease in unfunded construction loan commitments with approximately $12.4 million in new commitments offset by the $19.5 million in commitments being utilized to fund loan balances or being closed-out with unused amounts for the six months ended June 30, 2024. Provision for credit loss recoveries noted above were partially offset by an increase in net charge-offs during the six months ended June 30, 2024, compared to the six months ended June 30, 2023, primarily due to commercial and industrial loan charge-offs during the six months ended June 30 2024, which were previously reflected in reserves on individually evaluated loans.

Current wording

Year to date net interest income was $40.3 million for the nine months ended September 30, 2024, compared to $41.4 million for the nine months ended September 30, 2023. The decrease in net interest income is due to a $8.8 million increase in interest expense, partially offset by a $7.6 million increase in interest income. The increase in interest income reflects a $6.1 million increase in interest income and fees on loans, a $734,000 increase in interest income on balances due from banks and a $795,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve through 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 purchased since September 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. Net interest income after the provision for credit losses was $40.3 million for the nine months ended September 30, 2024 and 2023. The provision for credit losses for the nine months ended September 30, 2024 was a recovery of $80,000, compared to an expense of $1.2 million for the nine months ended September 30, 2023. The decrease in the provision for credit losses is primarily attributable to a reduction in reserves on construction loans, which was primarily due to a decrease in construction loan balances outstanding with approximately $34.3 million in loans being paid off or transitioning to permanent financing in loan categories within the portfolio with lower loss rates than the construction pool during the nine months ended September 30, 2024. This reduction of provision of $948,000 due to change in loan mix was partially offset by a $669,000 additional qualitative reserve established during the nine months ended September 30, 2024 for expected losses associated with Hurricane Helene, which heavily impacted western North Carolina in late September 2024. Net charge-offs for the nine months ended September 30, 2024 were $956,000, compared to $297,000 for the nine months ended September 30, 2023. The increase in net charge-offs during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, is primarily due to commercial and industrial loan charge-offs during the nine months ended September 30 2024, which were previously reflected in reserves on individually evaluated loans.

Previous wording

Interest income was $20.1 million for the three months ended June 30, 2024, compared to $17.6 million for the three months ended June 30, 2023. The increase in interest income is due to a $1.9 million increase in interest income and fees on loans, a $208,000 increase in interest income on balances due from banks and a $359,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve. The increase in interest income on balances due from banks is also due to an increase in average balances outstanding and rate increases by the Federal Reserve. The increase in interest income on investment securities is primarily due to increases on yields on variable rate securities, and higher yields on securities purchased during the six months ended June 30, 2024. During the three months ended June 30, 2024, average loans were $1.11 billion, an increase of $52.6 million from average loans of $1.06 billion for the three months ended June 30, 2023. During the three months ended June 30, 2024, average investment securities available for sale were $445.1 million, a decrease of $5.6 million from average investment securities available for sale of $450.7 million for the three months ended June 30, 2023. The average yield on loans for the three months ended June 30, 2024 and 2023 was 5.65% and 5.19%, respectively. The average yield on investment securities available for sale was 3.36% and 3.01% for the three months ended June 30, 2024 and 2023, respectively. The average yield on earning assets was 5.01% and 4.55% for the three months ended June 30, 2024 and 2023, respectively.

Current wording

Interest income was $60.3 million for the nine months ended September 30, 2024, compared to $52.7 million for the nine months ended September 30, 2023. The increase in interest income reflects a $6.1 million increase in interest income and fees on loans, a $734,000 increase in interest income on balances due from banks and a $795,000 increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve through 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 purchased since September 30, 2023. During the nine months ended September 30, 2024, average loans were $1.11 billion, an increase of $54.8 million from average loans of $1.05 billion for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, average investment securities available for sale were $443.0 million, a decrease of $15.2 million from average investment securities available for sale of $458.2 million for the nine months ended September 30, 2023. The average yield on loans for the nine months ended September 30, 2024 and 2023 was 5.65% and 5.17%, respectively. The average yield on investment securities available for sale was 3.37% and 3.05% for the nine months ended September 30, 2024 and 2023, respectively. The average yield on earning assets was 5.01% and 4.54% for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Interest expense was $13.2 million for the six months ended June 30, 2024, compared to $6.3 million for the six months ended June 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the six months ended June 30, 2024, average interest-bearing non-maturity deposits were $666.5 million, a decrease of $72.6 million from average interest-bearing non-maturity deposits of $739.1 million for the six months ended June 30, 2023. During the six months ended June 30, 2024, average certificates of deposit were $350.9 million, an increase of $188.4 million from average certificates of deposit of $162.5 million for the six months ended June 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.36% and 0.86% for the six months ended June 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.19% for the six months ended June 30, 2024, compared to 2.67% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.43% for the six months ended June 30, 2024, compared to 1.31% for the same period one year ago.

Current wording

Interest expense was $20.1 million for the nine months ended September 30, 2024, compared to $11.3 million for the nine months ended September 30, 2023. The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities. During the nine months ended September 30, 2024, average interest-bearing non-maturity deposits were $686.2 million, a decrease of $23.8 million from average interest-bearing non-maturity deposits of $710.0 million for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, average certificates of deposit were $348.2 million, an increase of $149.9 million from average certificates of deposit of $198.3 million for the nine months ended September 30, 2023. The average rate paid on interest-bearing checking and savings accounts was 1.44% and 0.92% for the nine months ended September 30, 2024 and 2023, respectively. The average rate paid on certificates of deposit was 4.19% for the nine months ended September 30, 2024, compared to 3.15% for the same period one year ago. The average rate paid on interest-bearing liabilities was 2.46% for the nine months ended September 30, 2024, compared to 1.53% for the same period one year ago.

Previous wording

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the six months ended June 30, 2024 and 2023. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the six months ended June 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Current wording

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the nine months ended September 30, 2024 and 2023. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value of available for sale investment securities that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the nine months ended September 30, 2024 and 2023 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Previous wording

*Non-Interest Income.*Non-interest income was $7.5 million for the three months ended June 30, 2024, compared to $6.4 million for the three months ended June 30, 2023. The increase in non-interest income is primarily attributable to a $591,000 increase in appraisal management fee income due to an increase in appraisal volume and a $444,000 increase in miscellaneous non-interest income primarily due to an increase in income on Small Business Investment Company (SBIC) investments.

Current wording

Non-Interest Income. Non-interest income was $7.1 million for the three months ended September 30, 2024, compared to $6.8 million for the three months ended September 30, 2023. The increase in non-interest income is primarily attributable to a $288,000 increase in appraisal management fee income due to an increase in appraisal volume.

Previous wording

Non-interest income was $13.6 million for the six months ended June 30, 2024, compared to $10.0 million for the six months ended June 30, 2023. The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the six months ended June 30, 2023 compared to no losses in the six months ended June 30, 2024, and a $911,000 increase in appraisal management fee income due to an increase in appraisal volume.

Current wording

Non-interest income was $20.7 million for the nine months ended September 30, 2024, compared to $16.8 million for the nine months ended September 30, 2023. The increase in non-interest income is primarily attributable to a $2.5 million net loss on the sales of securities during the nine months ended September 30, 2023 compared to a $5,000 net gain on the sales of securities during the nine months ended September 30, 2024, and a $1.2 million increase in appraisal management fee income due to an increase in appraisal volume.

Previous wording

*Non-Interest Expense.*Non-interest expense was $15.1 million for the three months ended June 30, 2024, compared to $13.6 million for the three months ended June 30, 2023. The increase in non-interest expense is primarily attributable to a $541,000 increase in salaries and employee benefits expense primarily due to increases in salary and restricted stock expenses, a $474,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $185,000 increase in professional fees, a $143,000 increase in debit card expense and a $174,000 increase in miscellaneous non-interest expense.

Current wording

Non-Interest Expense. Non-interest expense was $15.0 million for the three months ended September 30, 2024, compared to $14.3 million for the three months ended September 30, 2023. The increase in non-interest expense is primarily attributable to a $458,000 increase in occupancy expense primarily due to a $362,000 write-off of leasehold improvements for the Bank’s branch in Cary, North Carolina, which was closed in June 2024, a $254,000 increase in appraisal management fee expense due to an increase in appraisal volume and a $184,000 increase in professional fees primarily due to an increase in consulting fees. Increases noted above were partially offset by a $120,000 decrease in salaries and employee benefits expense primarily due to a decrease in medical insurance expense.

Previous wording

Non-interest expense was $29.6 million for the six months ended June 30, 2024, compared to $27.3 million for the six months ended June 30, 2023. The increase in non-interest expense is primarily attributable to a $1.0 million increase in salaries and employee benefits expense primarily due to increases in salary, medical insurance and restricted stock expenses, a $728,000 increase in appraisal management fee expense due to an increase in appraisal volume, A $221,000 increase in occupancy expense, a $178,000 increase in professional fees and a $182,000 increase in debit card expense.

Current wording

Non-interest expense was $44.7 million for the nine months ended September 30, 2024, compared to $41.6 million for the nine months ended September 30, 2023. The increase in non-interest expense is primarily attributable to a $901,000 increase in salaries and employee benefits expense primarily due to annual salary increases and an increase in medical insurance expenses, a $679,000 increase in occupancy expense primarily due to a $362,000 write-off of leasehold improvements for the Bank’s branch in Cary, North Carolina, which was closed in June 2024, a $362,000 increase in professional fees primarily due to an increase in consulting fees and a $982,000 increase in appraisal management fee expense due to an increase in appraisal volume.

Previous wording

*Income Taxes.*Income tax expense was $1.4 million for the three months ended June 30, 2024 and 2023. The effective tax rate was 22.09% for the three months ended June 30, 2024, compared to 22.20% for the three months ended June 30, 2023. Income tax expense was $2.2 million for the six months ended June 30, 2024 and 2023. The effective tax rate was 19.74% for the six months ended June 30, 2024, compared to 21.79% for the six months ended June 30, 2023.

Current wording

*Income Taxes.*Income tax expense was $1.4 million for the three months ended September 30, 2024, compared to $1.2 million for the three months ended September 30, 2023. The effective tax rate was 25.76% for the three months ended September 30, 2024, compared to 22.09% for the three months ended September 30, 2023. The increase in the effective tax rate is primarily due to the revaluation of the deferred tax asset during the three months ended September 30, 2024 due to upcoming reductions in the North Carolina corporate income tax rate, which will be decreased to zero over a five year period starting in 2025. Income tax expense was $3.5 million for the nine months ended September 30, 2024, compared to $3.4 million for the nine months ended September 30, 2023. The effective tax rate was 21.70% for the nine months ended September 30, 2024, compared to 21.89% for the nine months ended September 30, 2023.

Previous wording

*Investment Securities.*Available for sale securities were $393.3 million as of June 30, 2024, compared to $391.9 million as of December 31, 2023. Average investment securities available for sale for the six months ended June 30, 2024 were $444.3 million, compared to $454.8 million for the year ended December 31, 2023.

Current wording

*Investment Securities.*Available for sale securities were $398.6 million as of September 30, 2024, compared to $391.9 million as of December 31, 2023. Average investment securities available for sale for the nine months ended September 30, 2024 were $443.0 million, compared to $454.8 million for the year ended December 31, 2023.

Previous wording

*Loans.*Total loans were $1.11 billion as of June 30, 2024, compared to $1.09 billion at December 31, 2023. Average loans represented 68% of average earning assets for the three months ended June 30, 2024 and the year ended December 31, 2023.

Current wording

*Loans.*Total loans were $1.12 billion as of September 30, 2024, compared to $1.09 billion at December 31, 2023. Average loans represented 69% of average earning assets for the nine months ended September 30, 2024 and the year ended December 31, 2023.

Previous wording

The Bank had $1.3 million and $686,000 in mortgage loans held for sale as of June 30, 2024 and December 31, 2023, respectively.

Current wording

The Bank had $1.2 million and $686,000 in mortgage loans held for sale as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At June 30, 2024, the Bank had $117.9 million in residential mortgage loans, $108.6 million in home equity loans and $675.8 million in commercial mortgage loans, which include $256.8 million secured by commercial property and $149.0 million secured by residential property. At December 31, 2023, the Bank had $112.8 million in residential mortgage loans, $107.7 million in home equity loans and $639.9 million in commercial mortgage loans, which include $488.9 million secured by commercial property and $151.0 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization

Current wording

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 September 30, 2024, the Bank had $120.9 million in residential mortgage loans, $109.5 million in home equity loans and $680.4 million in commercial mortgage loans, which include $532.8 million secured by commercial property and $147.6 million secured by residential property. At December 31, 2023, the Bank had $112.8 million in residential mortgage loans, $107.7 million in home equity loans and $639.9 million in commercial mortgage loans, which include $488.9 million secured by commercial property and $151.0 million secured by residential property. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization

Previous wording

The ACL balance was $10.0 million at June 30, 2024 as compared to $11.0 million at December 31, 2023. The decrease is primarily composed of a $541,000 decrease in allowance for other construction loans, all land development, and other land loans as a result of loan balance decreases in this category during the six months ended June 30, 2024 and a $442,000 decrease in allowance for commercial and industrial loans primarily due to a $432,000 decrease in reserves on individually evaluated loans in this category at June 30, 2024 as compared to December 31, 2023.

Current wording

The allowance for credit losses on loans was $10.6 million at September 30, 2024 as compared to $11.0 million at December 31, 2023. The decrease in the allowance for credit losses on loans is primarily due to a $471,000 decrease in allowance for other construction loans, all land development, and other land loans as a result of loan balance decreases in this category during the nine months ended September 30, 2024 and a $360,000 decrease in allowance for commercial and industrial loans primarily due to a $432,000 decrease in reserves on individually evaluated loans in this category at September 30, 2024 as compared to December 31, 2023 due to charge offs during the first quarter of 2024. No other commercial loans have been identified for individual analysis which would require additional reserves for the commercial loans category. These decreases were partially offset by a $669,000 additional qualitative reserve for expected losses associated with established Hurricane Helene during the three months ended September 30, 2024.

Previous wording

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate. There were no loans individually evaluated as of June 30, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023. Reserves on individually evaluated loans were $432,000 at December 31, 2023.

Current wording

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 September 30, 2024, and two loans totaling $432,000 were individually evaluated as of December 31, 2023, which were fully reserved for at December 31, 2023.

Previous wording

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.

Current wording

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.

Previous wording

The allowance for credit losses on off-balance sheet credit exposures was $1.6 million and $1.8 million at June 30, 2024 and December 31, 2023, respectively. The decrease of $205,000 during the six months ended June 30, 2024 was primarily due to a $239,000 decrease in the allowance balance for other construction loans and all land development and other land loans. The overall balances in this category decreased $22.4 million during the six months ended June 30, 2024. While off balance sheet credit exposures increased in total from December 31, 2023 to June 30, 2024, the majority of the increase was in unfunded commitments on commercial real estate loans and commercial loans not secured by real estate that have lower reserve rates than other construction loans and all land development and other land loans, which resulted in the overall decrease in the allowance for credit losses on off-balance sheet credit exposures.

Current wording

The allowance for credit losses on off-balance sheet credit exposures was $1.2 million and $1.8 million at September 30, 2024 and December 31, 2023, respectively. The decrease in the allowance for credit losses on unfunded commitments was primarily due to a $506,000 decrease in the allowance balance for other construction loans and all land development and other land loans resulting from a $16.3 million decrease in unfunded commitments in this category during the nine months ended September 30, 2024.

Previous wording

*Non-performing Assets.*Non-performing assets were $4.2 million or 0.25% of total assets at June 30, 2024, compared to $3.9 million or 0.24% of total assets at December 31, 2023. Non-accrual loans were $4.2 million at June 30, 2024, compared to $3.9 million at December 31, 2023. As a percentage of total loans outstanding, non-accrual loans were 0.37% at June 30, 2024, compared to 0.36% at December 31, 2023. Non-accrual loans over $250,000 are individually evaluated for specific reserves. Non-performing assets include $3.9 million in commercial and residential mortgage loans and $267,000 in other loans at June 30, 2024, compared to $3.4 million in commercial and residential mortgage loans and $464,000 in other loans at December 31, 2023. The Bank had no loans 90 days past due and still accruing at June 30, 2024 and December 31, 2023. The Bank had no other real estate owned at June 30, 2024 and December 31, 2023.

Current wording

*Non-performing Assets.*Non-performing assets were $3.9 million or 0.24% of total assets at September 30, 2024 and December 31, 2023. Non-accrual loans were $3.9 million at September 30, 2024 and December 31, 2023. As a percentage of total loans outstanding, non-accrual loans were 0.35% at September 30, 2024, compared to 0.36% at December 31, 2023. Non-accrual loans over $250,000 are individually evaluated for specific reserves. Non-performing assets include $3.7 million in residential mortgage loans and $266,000 in other loans at September 30, 2024, compared to $3.4 million in residential mortgage loans and $464,000 in other loans at December 31, 2023. The Bank had no loans 90 days past due and still accruing at September 30, 2024 and December 31, 2023. The Bank had no other real estate owned at September 30, 2024 and December 31, 2023.

Previous wording

*Deposits.*Deposits were $1.48 billion as of June 30, 2024, compared to $1.39 billion as of December 31, 2023. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.33 billion at June 30, 2024, compared to $1.24 billion at December 31, 2023. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability. Certificates of deposit in amounts of more than $250,000 totaled $147.3 million at June 30, 2024, compared to $148.9 million December 31, 2023.

Current wording

*Deposits.*Deposits were $1.48 billion as of September 30, 2024, compared to $1.39 billion as of December 31, 2023. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.34 billion at September 30, 2024, compared to $1.24 billion at December 31, 2023. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s overall cost of funds and profitability. Certificates of deposit in amounts of more than $250,000 totaled $143.6 million at September 30, 2024, compared to $148.9 million December 31, 2023.

Previous wording

Estimated uninsured deposits totaled $378.6 million, or 25.65% of total deposits, at June 30, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at June 30, 2024.

Current wording

Estimated uninsured deposits totaled $398.3 million, or 26.91% of total deposits, at September 30, 2024, compared to $382.1 million, or 27.45% of total deposits, at December 31, 2023. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at September 30, 2024.

Previous wording

*Borrowed Funds.*There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023. Securities sold under agreements to repurchase were $18.8 million at June 30, 2023, compared to $86.7 million at December 31, 2023. The decrease in securities sold under agreements to repurchase is primarily due to customers transferring funds from securities sold under agreements to repurchase to deposits via the IntraFi network’s Insured Cash Sweep (“ICS”) during the six months ended June 30, 2024

Current wording

*Borrowed Funds.*There were no FHLB borrowings outstanding at September 30, 2024 and December 31, 2023. Repurchase agreements were $8.4 million at September 30, 2023, compared to $86.7 million at December 31, 2023. The decrease in repurchase agreements is primarily due to customers transferring funds from repurchase agreements to deposits via the IntraFi network’s Insured Cash Sweep (“ICS”) during the nine months ended September 30, 2024

Previous wording

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the six months ended June 30, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $519.4 million.

Current wording

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the nine months ended September 30, 2024 totaled $1.61 billion, exceeding average rate sensitive liabilities of $1.09 billion by $517.1 million.

Previous wording

Included in the rate sensitive assets are $181.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate. At June 30, 2024, the Company had $124.1 million in loans with interest rate floors. No floors were in effect on loans with floors on interest rates charged at June 30, 2024.

Current wording

Included in the rate sensitive assets are $185.6 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. Certain variable rate loans are structured to establish floors on interest rates charged to protect against downward movements in the prime rate. At September 30, 2024, the Company had $125.0 million in loans with interest rate floors. No floors were in effect on loans with floors on interest rates charged at September 30, 2024.

Previous wording

*Liquidity.*The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of June 30, 2024, such unfunded commitments to extend credit were $372.8 million, while commitments in the form of standby letters of credit totaled $3.8 million. As of December 31, 2023, such unfunded commitments to extend credit were $367.5 million, while commitments in the form of standby letters of credit totaled $3.7 million.

Current wording

*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 September 30, 2024, such unfunded commitments to extend credit were $355.4 million, while commitments in the form of standby letters of credit totaled $3.8 million. As of December 31, 2023, such unfunded commitments to extend credit were $367.5 million, while commitments in the form of standby letters of credit totaled $3.7 million.

Previous wording

The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of June 30, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.33 billion, or 90% of total deposits. As of December 31, 2023, the Bank’s core deposits totaled $1.24 billion, or 89% of total deposits.

Current wording

The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of September 30, 2024, the Bank’s core deposits, a non-GAAP measure, totaled $1.34 billion, or 90% of total deposits. As of December 31, 2023, the Bank’s core deposits totaled $1.24 billion, or 89% of total deposits.

Previous wording

The other sources of funding for the Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Bank’s policies include the ability to access wholesale funding of up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Bank’s ratio of wholesale funding to total assets was 0.49% and 0.50% as of June 30, 2024 and December 31, 2023, respectively.

Current wording

The other sources of funding for the Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Bank’s policies include the ability to access wholesale funding of up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Bank had no wholesale funding at September 30, 2024, compared to $8.1 million at December 31, 2023. The Bank’s ratio of wholesale funding to total assets was zero and 0.50% as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at June 30, 2024 and December 31, 2023. At June 30, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $215.9 million compared to $214.1 million at December 31, 2023. The remaining availability under the line of credit with the FHLB was $125.0 million at June 30, 2024 compared to $122.2 million at December 31, 2023. The Bank had no borrowings from the FRB at June 30, 2024 or December 31, 2023. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At June 30, 2024, the carrying value of loans pledged as collateral to the FRB totaled $619.3 million compared to $611.2 million at December 31, 2023. Availability under the line of credit with the FRB was $483.9 million at June 30, 2024 compared to $445.1 million at December 31, 2023.

Current wording

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at September 30, 2024 and December 31, 2023. At September 30, 2024, the carrying value of loans pledged as collateral to the FHLB totaled $218.6 million compared to $214.1 million at December 31, 2023. The remaining availability under the line of credit with the FHLB was $125.2 million at September 30, 2024 compared to $122.2 million at December 31, 2023. The Bank had no borrowings from the FRB at September 30, 2024 or December 31, 2023. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At September 30, 2024, the carrying value of loans pledged as collateral to the FRB totaled $633.5 million compared to $611.2 million at December 31, 2023. Availability under the line of credit with the FRB was $508.6 million at September 30, 2024 compared to $445.1 million at December 31, 2023.

Previous wording

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.91% at June 30, 2024 and 25.39% at December 31, 2023. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2024 and December 31, 2023.

Current wording

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 29.26% at September 30, 2024 and 25.39% at December 31, 2023. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2024 and December 31, 2023.

Previous wording

*Capital Resources.*Shareholders’ equity was $124.3 million, or 7.51% of total assets, at June 30, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Current wording

*Capital Resources.*Shareholders’ equity was $136.3 million, or 8.20% of total assets, at September 30, 2024, compared to $121.0 million, or 7.40% of total assets, at December 31, 2023.

Previous wording

Annualized return on average equity for the six months ended June 30, 2024 was 14.69%, compared to 14.12% for the six months ended June 30, 2023. Total cash dividends paid on common stock were $3.0 million for the six months ended June 30, 2024 and 2023.

Current wording

Annualized return on average equity for the nine months ended September 30, 2024 was 13.59%, compared to 13.97% for the nine months ended September 30, 2023. Total cash dividends paid on common stock were $4.0 million for the nine months ended September 30, 2024, compared to $4.1 million for the nine months ended September 30, 2023.

Previous wording

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at June 30, 2024 and December 31, 2023. The Company’s Tier 1 capital ratio was 14.15% and 13.94% at June 30, 2024 and December 31, 2023, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.07% and 14.96% at June 30, 2024 and December 31, 2023, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 12.97% and 12.75% at June 30, 2024 and December 31, 2023, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.60% and 10.51% at June 30, 2024 and December 31, 2023, respectively.

Current wording

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 September 30, 2024 and December 31, 2023. The Company’s Tier 1 capital ratio was 14.35% and 13.94% at September 30, 2024 and December 31, 2023, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.28% and 14.96% at September 30, 2024 and December 31, 2023, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.17% and 12.75% at September 30, 2024 and December 31, 2023, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.78% and 10.51% at September 30, 2024 and December 31, 2023, respectively.

Previous wording

The Bank’s Tier 1 risk-based capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively. The total risk-based capital ratio for the Bank was 14.95% and 14.85% at June 30, 2024 and December 31, 2023, respectively. The Bank’s common equity Tier 1 capital ratio was 14.04% and 13.83% at June 30, 2024 and December 31, 2023, respectively. The Bank’s Tier 1 leverage capital ratio was 10.43% and 10.35% at June 30, 2024 and December 31, 2023, respectively.

Current wording

The Bank’s Tier 1 risk-based capital ratio was 14.23% and 13.83% at September 30, 2024 and December 31, 2023, respectively. The total risk-based capital ratio for the Bank was 15.16% and 14.85% at September 30, 2024 and December 31, 2023, respectively. The Bank’s common equity Tier 1 capital ratio was 14.23% and 13.83% at September 30, 2024 and December 31, 2023, respectively. The Bank’s Tier 1 leverage capital ratio was 10.61% and 10.35% at September 30, 2024 and December 31, 2023, respectively.