Financial Performance - Net earnings for Q4 2024 were $3.6 million, or $0.67 per share, compared to $3.4 million, or $0.64 per share, in Q4 2023, reflecting a 5.9% increase in earnings per share [3]. - For the full year 2024, net earnings were $16.4 million, or $3.08 per share, compared to $15.5 million, or $2.87 per share, in 2023, indicating a 7.4% increase in earnings per share [8]. - Net earnings for the year ended December 31, 2024, reached $16,353 thousand, up 5.2% from $15,546 thousand in 2023 [21]. - Basic net earnings per share for the year ended December 31, 2024, were $3.08, up from $2.87 in 2023, representing a growth of 7.3% [21]. Income and Expenses - Net interest income for Q4 2024 was $13.8 million, up from $13.3 million in Q4 2023, driven by a $1.2 million increase in interest income [4]. - Non-interest income for Q4 2024 was $7.1 million, an increase from $6.1 million in Q4 2023, primarily due to a $900,000 rise in appraisal management fee income [6]. - Non-interest expense for Q4 2024 was $16.5 million, compared to $14.6 million in Q4 2023, reflecting a 12.9% increase [7]. - Interest income for the year ended December 31, 2024, was $80,733 thousand, a 12.3% increase from $71,862 thousand in 2023 [21]. Loans and Deposits - Total loans increased to $1.14 billion as of December 31, 2024, compared to $1.09 billion a year earlier, marking a 4.6% growth [5]. - Total deposits reached $1.48 billion as of December 31, 2024, up from $1.39 billion a year prior, representing a 6.5% increase [16]. - Total deposits increased to $1,484,731 thousand in 2024, compared to $1,392,045 thousand in 2023, an increase of 6.6% [19]. - Net loans rose to $1,128,409 thousand in 2024, up from $1,082,025 thousand in 2023, marking an increase of 4.3% [19]. Credit Quality - The provision for credit losses for Q4 2024 was a recovery of $205,000, compared to an expense of $405,000 in Q4 2023, indicating improved credit quality [4]. - Non-performing assets were $4.4 million, or 0.27% of total assets, at December 31, 2024, compared to $3.9 million, or 0.24% of total assets, at December 31, 2023 [5]. - The allowance for credit losses on loans decreased to $10.0 million, or 0.88% of total loans, at December 31, 2024, down from $11.0 million, or 1.01%, at December 31, 2023 [15]. - The allowance for credit losses on loans decreased to $9,995 thousand in 2024 from $11,041 thousand in 2023, a reduction of 9.5% [25]. - Non-performing assets increased to $4,809 thousand in 2024, compared to $3,887 thousand in 2023, reflecting a rise of 23.7% [25]. Assets and Margins - Total assets increased to $1,651,962 thousand as of December 31, 2024, compared to $1,635,910 thousand in 2023, reflecting a growth of 0.8% [19]. - The net interest margin (tax equivalent) improved to 3.39% for the three months ended December 31, 2024, compared to 3.32% in 2023 [24]. - The return on average assets for the year ended December 31, 2024, was 0.85%, slightly up from 0.84% in 2023 [24]. Tax and Risk - The Company benefits from tax-exempt loans and securities, computed using an effective tax rate of 22.98% [26]. - For the years ended December 31, 2024 and 2023, the risk grade remains at 0.00% [27].

Core Viewpoint - Peoples Bancorp of North Carolina, Inc. has declared a special cash dividend of $0.16 per share, which will be paid on February 14, 2025, to shareholders of record on February 3, 2025 [1] Company Information - Peoples Bank operates 16 banking offices across North Carolina, specifically in Catawba, Alexander, Lincoln, Mecklenburg, Iredell, and Wake Counties, and has loan production offices in Lincoln, Mecklenburg, Rowan, and Forsyth Counties [3] - The company's common stock is publicly traded on the Nasdaq Global Market under the symbol "PEBK" [3] Dividend Information - Shareholders are encouraged to enroll in the Company's Dividend Reinvestment and Stock Purchase Plan, with contact details provided for inquiries [2]

Financial Performance - The Company reported a net earnings of $3,958,000 for the three months ended September 30, 2024, resulting in a basic earnings per share of $0.74 and diluted earnings per share of $0.72[35]. - For the nine months ended September 30, 2024, net earnings totaled $12,794,000, leading to a basic earnings per share of $2.41 and diluted earnings per share of $2.33[35]. - The company reported a net income of $3,958,000 for the three months ended September 30, 2024, compared to $4,127,000 for the same period in 2023, indicating a decrease of 4.1%[115]. - Year-to-date net earnings for the nine months ended September 30, 2024, were $12.8 million, or $2.41 per share, compared to $12.1 million, or $2.22 per share, for the same period in 2023[126]. Comprehensive Income - The accumulated other comprehensive loss decreased from $(50,989,000) as of September 30, 2023, to $(30,938,000) as of September 30, 2024[32]. - The Company reported a net current period other comprehensive gain of $8,372,000 for the three months ended September 30, 2024[32]. Investment Securities - The fair value of investment securities available for sale as of September 30, 2024, was $398,573,000, with gross unrealized losses of $40,594,000[36]. - The Company’s total amortized cost of investment securities was $438,738,000 as of September 30, 2024, compared to $443,029,000 as of December 31, 2023[37]. - The Company experienced unrealized losses on U.S. Treasuries amounting to $606,000 as of September 30, 2024[36]. - The Company’s investment in GSE - Mortgage-backed securities had a fair value of $229,917,000 as of September 30, 2024, with gross unrealized losses of $17,900,000[36]. - As of September 30, 2024, unrealized losses in the investment securities portfolio related to debt securities totaled $40.6 million, attributed to changing interest rates and considered temporary[39]. - The total unrealized losses across all investment securities as of September 30, 2024, were $51.3 million, reflecting the impact of interest rate fluctuations[39]. Loans and Credit Quality - Total loans as of September 30, 2024, amounted to $1,124.2 million, an increase from $1,093.1 million at December 31, 2023, representing a growth of approximately 2.8%[43]. - The total net loans as of September 30, 2024, were $1,113.6 million, compared to $1,082.0 million at December 31, 2023, indicating an increase of about 2.9%[43]. - The company reported a total of 5,841 past due loans as of September 30, 2024, with 3,922 classified as nonaccrual loans[49]. - The company has a diversified loan portfolio, with a significant portion collateralized by real estate, which is subject to market fluctuations[43]. - As of September 30, 2024, total nonaccrual loans amounted to $3,922, with $3,656 in real estate loans and $250 in commercial loans[53]. - The allowance for credit losses increased to $10,616 as of September 30, 2024, up from $10,016 at the end of the previous quarter[64]. - During the three months ended September 30, 2024, the provision for loan losses was $703, contributing to the ending balance of the allowance for credit losses[64]. - The total allowance for credit losses, including loan commitments, reached $11,775 as of September 30, 2024[64]. - The bank modified one $30,000 loan for a borrower experiencing financial difficulty during the three months ended September 30, 2024, compared to no modifications in the same period of 2023[57]. - Charge-offs for the nine months ended September 30, 2024, totaled $1,436, with significant charge-offs in the commercial segment[64]. - The amortized cost basis of loans modified due to financial difficulty was $301 as of September 30, 2024, with no loans written off in the nine months ended September 30, 2024[59]. - The bank's allowance for credit losses on commercial loans was $2,553 as of September 30, 2024, reflecting a focus on managing credit risk in this segment[64]. - The bank closely monitors the performance of modified loans, with all modified loans remaining current as of September 30, 2024[60]. Deposits and Funding - Total deposits as of September 30, 2024, were $1,479,977,000, an increase from $1,392,045,000 as of December 31, 2023, reflecting a growth of 6.3%[109]. - The Bank's core deposits totaled $1.34 billion, representing 90% of total deposits as of September 30, 2024, an increase from $1.24 billion or 89% of total deposits at December 31, 2023[184]. - Estimated uninsured deposits were $398.3 million, or 26.91% of total deposits, at September 30, 2024, slightly down from $382.1 million, or 27.45% at December 31, 2023[176]. Interest Income and Expense - Net interest income for the three months ended September 30, 2024, was $13,549,000, compared to $13,340,000 for the same period in 2023, reflecting an increase of 1.57%[115]. - The company’s interest expense for the three months ended September 30, 2024, was $6,918,000, compared to $4,966,000 for the same period in 2023, indicating an increase of 39.2%[115]. - Interest income for Q3 2024 was $20.5 million, up from $18.3 million in Q3 2023, primarily due to increased loan volumes and interest rates[131]. - The average yield on loans increased to 5.72% in Q3 2024 from 5.27% in Q3 2023[131]. - Year-to-date net interest income for the nine months ended September 30, 2024, was $40.3 million, a decrease from $41.4 million for the same period in 2023, primarily due to an $8.8 million increase in interest expense[137]. - Interest expense rose to $20.1 million for the nine months ended September 30, 2024, compared to $11.3 million for the same period in 2023, driven by an increase in time deposits and rates on interest-bearing liabilities[140]. Capital and Liquidity - Shareholders' equity increased to $136.3 million, or 8.20% of total assets, at September 30, 2024, up from $121.0 million, or 7.40% of total assets, at December 31, 2023[189]. - The Company's Tier 1 capital ratio was 14.35% at September 30, 2024, compared to 13.94% at December 31, 2023[195]. - The total risk-based capital ratio for the Bank was 15.16% at September 30, 2024, up from 14.85% at December 31, 2023[196]. - The liquidity ratio for the Bank improved to 29.26% at September 30, 2024, compared to 25.39% at December 31, 2023, exceeding the minimum required ratio of 10%[188]. Operating Expenses - Non-interest expense for the three months ended September 30, 2024, was $15.0 million, up from $14.3 million in the same period in 2023, primarily due to increased occupancy and appraisal management fees[151]. Miscellaneous - The Company has not adopted several recent Accounting Standards Updates (ASUs) as of September 30, 2024, which are not expected to have a material impact on its financial statements[28]. - The bank's operating right of use assets were valued at $4.2 million as of September 30, 2024, with operating lease liabilities at $4.3 million[84].

Financial Performance - Net earnings for Q2 2024 were $4.9 million, or $0.93 per share, compared to $4.8 million, or $0.88 per share, in Q2 2023, reflecting a year-over-year increase of 2.08%[4] - Net earnings for the three months ended June 30, 2024, were $4,888 thousand, slightly up from $4,808 thousand in the prior year, reflecting a growth of 1.7%[22] - Basic net earnings per share increased to $0.93 for the three months ended June 30, 2024, compared to $0.88 in the same period last year, a rise of 5.7%[22] Income and Expenses - Net interest income decreased to $13.4 million in Q2 2024 from $13.8 million in Q2 2023, primarily due to a $2.8 million increase in interest expense[5] - Non-interest income increased to $7.5 million in Q2 2024, up from $6.4 million in Q2 2023, driven by a $591,000 increase in appraisal management fee income[8] - Interest income for the three months ended June 30, 2024, was $20,070 thousand, representing a 14.1% increase from $17,599 thousand in the same period last year[23] - Non-interest income totaled $7,521 thousand for the three months ended June 30, 2024, up from $6,403 thousand, marking a growth of 17.5%[23] - Total non-interest expenses increased to $15,131 thousand for the three months ended June 30, 2024, compared to $13,619 thousand in the previous year, an increase of 11.1%[23] Assets and Loans - Total loans reached $1.11 billion as of June 30, 2024, compared to $1.09 billion at December 31, 2023, indicating a growth of 1.83%[6] - Net loans reached $1,100,656 thousand, up from $1,047,935 thousand year-over-year, indicating a growth of 5.0%[21] - Total assets increased to $1,655,398 thousand as of June 30, 2024, compared to $1,611,574 thousand a year earlier, reflecting a growth of 2.7%[21] Deposits - Total deposits increased to $1.48 billion as of June 30, 2024, up from $1.39 billion at December 31, 2023, representing a growth of 6.47%[18] - Total deposits rose to $1,475,956 thousand, a 7.8% increase from $1,369,524 thousand in the previous year[21] - Core deposits, a non-GAAP measure, increased to $1.33 billion, or 90.02% of total deposits, as of June 30, 2024, compared to $1.24 billion, or 89.30%, at December 31, 2023[18] Credit Quality - Non-performing assets were $4.2 million, or 0.25% of total assets, as of June 30, 2024, compared to $3.9 million, or 0.24% of total assets, at December 31, 2023[16] - The allowance for credit losses on loans was $10.0 million, or 0.90% of total loans, as of June 30, 2024, down from $11.0 million, or 1.01%, at December 31, 2023[17] - The provision for credit losses was $(468) thousand for the three months ended June 30, 2024, compared to $375 thousand in the same period last year, indicating a decrease in provisions[22] - Allowance for credit losses on loans rose to $10,016 million in June 2024 from $9,789 million in June 2023[25] - Total non-performing assets increased to $4,156 million in June 2024 from $3,561 million in June 2023[25] - Non-performing assets to total assets ratio was 0.25% in June 2024, up from 0.22% in June 2023[25] - Allowance for credit losses on loans to non-performing assets ratio was 241.00% in June 2024, down from 274.89% in June 2023[25] Shareholder Returns - Cash dividends for the first half of 2024 were $0.54 per share, compared to $0.53 per share for the same period in 2023[6] - Shareholders' equity increased to $124,312 thousand as of June 30, 2024, from $112,370 thousand a year earlier, reflecting a growth of 10.7%[21] Ratios and Margins - The effective tax rate for Q2 2024 was 22.09%, slightly down from 22.20% in Q2 2023[14] - Net interest margin (tax equivalent) decreased to 3.35% in June 2024 from 3.56% in June 2023[25] - Return on average assets improved to 1.19% in June 2024 compared to 1.08% in June 2023[25] - Return on average shareholders' equity increased to 16.46% in June 2024 from 14.69% in June 2023[25] Loan Quality - Risk Grade 1 (excellent quality) loans represented 0.29% of total loans in June 2024, slightly up from 0.27% in June 2023[25] - Risk Grade 3 (good quality) loans accounted for 72.99% of total loans in June 2024, down from 73.82% in June 2023[25] - There were two relationships exceeding $1.0 million in the Watch risk grade totaling $3.0 million as of June 30, 2024[25]

Core Points - Peoples Bancorp of North Carolina, Inc. declared a regular cash dividend of $0.19 per share for the second quarter of 2024 [1] - The dividend will be paid on June 14, 2024, to shareholders of record on June 3, 2024 [1] Company Overview - Peoples Bank, a wholly-owned subsidiary of Peoples Bancorp of North Carolina, operates 17 banking offices in North Carolina, specifically in Catawba, Alexander, Lincoln, Mecklenburg, Iredell, and Wake Counties [3] - The bank also has loan production offices in Lincoln, Mecklenburg, Rowan, and Forsyth Counties [3] - The company's common stock is publicly traded on the Nasdaq Global Market under the symbol "PEBK" [3]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2024 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ 000-27205 (Commission File No.) Peoples Bancorp of North Carolina, Inc. (Exact name of registrant as specified in its charter) North Carolina 5 ...

EX-99.(A) 2 pebk_ex99a.htm PRESS RELEASE EARNINGS RELEASE EXHIBIT (99)(A) April 22, 2024 Contact: Lance A. Sellers President and Chief Executive Officer Jeffrey N. Hooper Executive Vice President and Chief Financial Officer 828-464-5620, Fax 828-465-6780 For Immediate Release PEOPLES BANCORP ANNOUNCES FIRST QUARTER 2024 RESULTS Peoples Bancorp of North Carolina, Inc. (NASDAQ: PEBK) (the "Company"), the parent company of Peoples Bank (the "Bank"), reported first quarter 2024 results with highlights as follow ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2023 000-27205 (Commission File No.) Peoples Bancorp of North Carolina, Inc. (Exact Name of Registrant as Specified in Its Charter) North Carolina 56-2132396 (State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.) Securities Registered Pursuant to Section 12(g) of the Act: Indica ...

[FORM 10-Q Filing Information](index=1&type=section&id=FORM%2010-Q%20Filing%20Information) [Registrant Information](index=1&type=section&id=Registrant%20Information) This section provides the basic identification details for Peoples Bancorp of North Carolina, Inc., including its filing status and common stock shares outstanding - Registrant is Peoples Bancorp of North Carolina, Inc., a **non-accelerated filer** and **smaller reporting company**[2](index=2&type=chunk)[3](index=3&type=chunk)[4](index=4&type=chunk) Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | Value | | :--- | :--- | | Quarterly Period Ended | September 30, 2023 | | Commission File No. | 000-27205 | | State of Incorporation | North Carolina | | IRS Employer Identification No. | 56-2132396 | | Common Stock Outstanding (Oct 31, 2023) | 5,542,299 shares | [Table of Contents](index=2&type=section&id=INDEX) [Part I. Financial Information](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Peoples Bancorp of North Carolina, Inc. for the quarter and nine months ended September 30, 2023, alongside comparative data [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | Sep 30, 2023 (Unaudited) | Dec 31, 2022 (Audited) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $1,607,264 | $1,620,927 | $(13,663) | -0.84% | | Total Liabilities | $1,499,912 | $1,515,732 | $(15,820) | -1.04% | | Total Shareholders' Equity | $107,352 | $105,195 | $2,157 | 2.05% | | Loans, Net | $1,067,888 | $1,022,114 | $45,774 | 4.48% | | Total Deposits | $1,380,768 | $1,435,215 | $(54,447) | -3.79% | | Investment Securities Available for Sale | $378,794 | $445,394 | $(66,600) | -14.95% | [Consolidated Statements of Earnings](index=4&type=section&id=Consolidated%20Statements%20of%20Earnings) Consolidated Statements of Earnings Highlights (Dollars in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $18,306 | $14,611 | $3,695 | 25.29% | | Total Interest Expense | $4,966 | $818 | $4,148 | 507.09% | | Net Interest Income | $13,340 | $13,793 | $(453) | -3.28% | | Provision for Credit Losses | $562 | $408 | $154 | 37.75% | | Total Non-Interest Income | $6,774 | $6,793 | $(19) | -0.28% | | Total Non-Interest Expense | $14,255 | $13,455 | $800 | 5.95% | | Net Earnings | $4,127 | $5,307 | $(1,180) | -22.23% | | Basic Net Earnings Per Share | $0.76 | $0.96 | $(0.20) | -20.83% | | Diluted Net Earnings Per Share | $0.74 | $0.93 | $(0.19) | -20.43% | | Cash Dividends Declared Per Share | $0.19 | $0.18 | $0.01 | 5.56% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $52,706 | $37,932 | $14,774 | 38.95% | | Total Interest Expense | $11,257 | $2,125 | $9,132 | 429.74% | | Net Interest Income | $41,449 | $35,807 | $5,642 | 15.76% | | Provision for Credit Losses | $1,161 | $889 | $272 | 30.59% | | Total Non-Interest Income | $16,787 | $21,167 | $(4,380) | -20.69% | | Total Non-Interest Expense | $41,576 | $41,039 | $537 | 1.31% | | Net Earnings | $12,106 | $11,976 | $130 | 1.09% | | Basic Net Earnings Per Share | $2.22 | $2.18 | $0.04 | 1.83% | | Diluted Net Earnings Per Share | $2.15 | $2.11 | $0.04 | 1.90% | | Cash Dividends Declared Per Share | $0.72 | $0.69 | $0.03 | 4.35% | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20%28Loss%29) Consolidated Statements of Comprehensive Income (Loss) Highlights (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $4,127 | $5,307 | $(1,180) | -22.23% | | Total Other Comprehensive Loss, Net of Tax | $(7,246) | $(12,770) | $5,524 | -43.26% | | Total Comprehensive Income (Loss) | $(3,119) | $(7,463) | $4,344 | -58.21% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $12,106 | $11,976 | $130 | 1.09% | | Total Other Comprehensive Loss, Net of Tax | $(3,392) | $(45,953) | $42,561 | -92.62% | | Total Comprehensive Income (Loss) | $8,714 | $(33,977) | $42,691 | -125.65% | [Consolidated Statements of Changes in Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders%27%20Equity) Shareholders' Equity Changes (Dollars in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Shareholders' Equity (End of Period) | $107,352 | $105,195 | $2,157 | 2.05% | | Retained Earnings (End of Period) | $107,372 | $100,156 | $7,216 | 7.20% | | Accumulated Other Comprehensive Loss (End of Period) | $(50,989) | $(47,597) | $(3,392) | 7.13% | | Common Stock Shares Outstanding (End of Period) | 5,549,799 | 5,636,830 | (87,031) | -1.54% | Key Changes for Nine Months Ended September 30, 2023 (Dollars in thousands) | Item | Amount | | :--- | :--- | | Net Earnings | $12,106 | | Cash Dividends Declared | $(4,052) | | Common Stock Repurchase | $(1,673) | | Change in Accumulated Other Comprehensive Loss, Net of Tax | $(3,392) | | Adjustment for CECL Implementation (Net of Tax) | $(838) | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30, Dollars in thousands) | Cash Flow Activity | 2023 (Unaudited) | 2022 (Unaudited) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $17,066 | $17,314 | $(248) | -1.43% | | Net Cash Provided (Used) by Investing Activities | $12,793 | $(224,078) | $236,871 | -105.71% | | Net Cash Provided (Used) by Financing Activities | $(24,836) | $84,726 | $(109,562) | -129.31% | | Net Change in Cash and Cash Equivalents | $5,023 | $(122,038) | $127,061 | -104.11% | | Cash and Cash Equivalents at End of Period | $76,619 | $155,461 | $(78,842) | -50.72% | [Notes to Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20%28Unaudited%29) This section provides detailed explanations and disclosures for the consolidated financial statements, covering significant accounting policies, investment securities, loans, and fair value measurements [(1) Summary of Significant Accounting Policies](index=8&type=section&id=%281%29%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the Company's consolidation principles, the treatment of PEBK Capital Trust II, and the operational structure of its banking offices - The Company's consolidated financial statements include Peoples Bancorp of North Carolina, Inc. and its wholly-owned subsidiary, Peoples Bank, along with the Bank's subsidiaries[25](index=25&type=chunk) - The Bank operates three banking offices focused on the Latino population, now operating under the same name as other offices but categorizing mortgage loans originated from these offices separately[27](index=27&type=chunk) - The Company has two significant operating segments: **Banking Operations** and **CBRES** (appraisal management services)[29](index=29&type=chunk) - The only significant change in accounting policies since December 31, 2022, is the adoption of **ASC 326 (CECL)**[30](index=30&type=chunk) [Recent Accounting Pronouncements](index=8&type=section&id=Recent%20Accounting%20Pronouncements) The Company adopted several Accounting Standards Updates (ASUs) effective January 1, 2023, primarily ASC 326 (CECL), which replaced the incurred loss impairment framework - Adopted **ASC 326 (CECL)** effective January 1, 2023, replacing the incurred loss impairment framework with a current expected credit loss framework[35](index=35&type=chunk) - Adoption of ASC 326 resulted in an initial reduction to retained earnings of **$838,000**, net of tax[37](index=37&type=chunk) - The **$838,000 reduction** was due to a **$1.1 million increase** in the allowance for credit losses, comprising a **$2.3 million increase** for unfunded commitments and a **$1.2 million decrease** for loans[37](index=37&type=chunk) [Allowance for Credit Losses on Loans](index=9&type=section&id=Allowance%20for%20Credit%20Losses%20on%20Loans) The allowance for credit losses (ACL) on loans is a valuation account reflecting management's estimate of lifetime credit losses, determined using historical experience, current conditions, and reasonable forecasts - ACL on loans is a valuation account for lifetime expected credit losses, estimated using historical data, current conditions, and forecasts[39](index=39&type=chunk)[40](index=40&type=chunk) - The **Weighted Average Remaining Maturity (WARM)** methodology is used for pooled loans, considering historical loss experience and a forecast component[40](index=40&type=chunk)[41](index=41&type=chunk) - Qualitative adjustments are made for factors such as economic outlook, delinquencies, loan volume/mix, staff experience, credit concentrations, and interest rate risk[42](index=42&type=chunk) - Allowance for credit losses on off-balance sheet credit exposures is recorded using the same methodologies as portfolio loans, considering funding likelihood and third-party guarantees[45](index=45&type=chunk) [Reclassification](index=10&type=section&id=Reclassification) Certain amounts in the 2022 consolidated financial statements were reclassified to align with the 2023 presentation, with no impact on shareholders' equity or net earnings - Reclassifications in 2022 financial statements to conform to 2023 presentation had **no impact on shareholders' equity or net earnings**[46](index=46&type=chunk) [(2) Investment Securities](index=10&type=section&id=%282%29%20Investment%20Securities) Investment securities available for sale decreased by $66.6 million from December 31, 2022, to September 30, 2023, primarily due to sales and maturities Investment Securities Available for Sale (Dollars in thousands) | Category | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | U.S Treasuries | $9,838 | $9,814 | $24 | 0.24% | | U.S. Government sponsored enterprises | $10,745 | $11,539 | $(794) | -6.88% | | Mortgage-backed securities | $259,867 | $273,838 | $(13,971) | -5.10% | | State and political subdivisions | $98,344 | $150,203 | $(51,859) | -34.53% | | **Total Securities** | **$378,794** | **$445,394** | **$(66,600)** | **-14.95%** | Unrealized Losses on Investment Securities (Dollars in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Gross Unrealized Losses | $66,266 | $62,328 | $3,938 | 6.32% | | Unrealized Losses (12 Months or More) | $64,930 | $45,631 | $19,299 | 42.29% | - Unrealized losses of **$66.3 million** at September 30, 2023, are considered temporary and not credit impaired, primarily due to changing interest rates[51](index=51&type=chunk) - Proceeds from sales of securities available for sale were **$51.0 million** during the nine months ended September 30, 2023, resulting in **$2.7 million gross losses** and **$177,000 gross gains**[52](index=52&type=chunk) [(3) Loans](index=12&type=section&id=%283%29%20Loans) Total loans increased to $1.078 billion at September 30, 2023, from $1.033 billion at December 31, 2022, with the portfolio heavily collateralized by real estate Major Classifications of Loans (Dollars in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Real Estate Loans | $985,092 | $929,039 | $56,053 | 6.03% | | Construction and land development | $127,706 | $114,446 | $13,260 | 11.59% | | Single-family residential | $344,415 | $322,262 | $22,153 | 6.87% | | Commercial | $430,270 | $406,750 | $23,520 | 5.78% | | Total Loans | $1,078,173 | $1,032,608 | $45,565 | 4.41% | | Less allowance for credit losses | $(10,285) | $(10,494) | $209 | -1.99% | | Total Net Loans | $1,067,888 | $1,022,114 | $45,774 | 4.48% | - The Bank's loan portfolio is primarily within the Catawba Valley region of North Carolina and is substantially collateralized by real estate[54](index=54&type=chunk) [Major Classifications of Loans](index=12&type=section&id=Major%20Classifications%20of%20Loans) This section details the composition of the loan portfolio, showing an increase in total loans, particularly in real estate categories like construction and commercial loans Loan Portfolio Composition (Dollars in thousands) | Loan Type | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Construction and land development | $127,706 | $114,446 | $13,260 | 11.59% | | Single-family residential | $344,415 | $322,262 | $22,153 | 6.87% | | Commercial real estate | $430,270 | $406,750 | $23,520 | 5.78% | | Total Real Estate Loans | $985,092 | $929,039 | $56,053 | 6.03% | | Total Loans | $1,078,173 | $1,032,608 | $45,565 | 4.41% | [Age Analysis of Past Due Loans](index=13&type=section&id=Age%20Analysis%20of%20Past%20Due%20Loans) The total past due loans (30-89 days and 90+ days) significantly decreased from $8.558 million at December 31, 2022, to $3.115 million at September 30, 2023 Past Due Loans (Dollars in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Loans 30-89 Days Past Due | $2,710 | $8,038 | $(5,328) | -66.29% | | Loans 90 or More Days Past Due | $405 | $520 | $(115) | -22.12% | | Total Past Due Loans | $3,115 | $8,558 | $(5,443) | -63.60% | [Non-accrual Loans](index=13&type=section&id=Non-accrual%20Loans) Total non-accrual loans slightly decreased from $3.728 million at December 31, 2022, to $3.614 million at September 30, 2023 Non-accrual Loans (Dollars in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Real Estate Loans | $3,579 | $3,719 | $(140) | -3.77% | | Single-family residential | $1,878 | $1,914 | $(36) | -1.88% | | Single-family residential - Banco de la Gente non-traditional | $1,575 | $1,532 | $43 | 2.81% | | Total Nonaccrual Loans | $3,614 | $3,728 | $(114) | -3.06% | [Modified Loans to Borrowers Experiencing Financial Difficulty](index=14&type=section&id=Modified%20Loans%20to%20Borrowers%20Experiencing%20Financial%20Difficulty) During the nine months ended September 30, 2023, the Bank modified $827,000 in loans to borrowers experiencing financial difficulty, primarily through term extensions Modified Loans to Borrowers Experiencing Financial Difficulty (Nine Months Ended Sep 30, 2023, Dollars in thousands) | Loan Class | Amortized Cost Basis at Sep 30, 2023 | % of Loan Class | | :--- | :--- | :--- | | Single-family residential | $154 | 0.04% | | Commercial real estate | $673 | 0.16% | | Total | $827 | N/A | - No loans modified in the nine months ended September 30, 2023, due to financial difficulty had been written off at September 30, 2023[66](index=66&type=chunk) [Changes in the Allowance for Credit Losses](index=15&type=section&id=Changes%20in%20the%20Allowance%20for%20Credit%20Losses) The allowance for credit losses (ACL) increased to $12.416 million at September 30, 2023, from $10.494 million at December 31, 2022, primarily due to a CECL implementation adjustment Allowance for Credit Losses (ACL) Changes (Dollars in thousands) | Metric | Sep 30, 2023 (CECL) | Dec 31, 2022 (Incurred Loss) | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | ACL Beginning Balance (Nine Months) | $10,494 | $9,355 | $1,139 | 12.18% | | Adjustment for CECL Implementation | $1,058 | N/A | N/A | N/A | | Charge-offs (Nine Months) | $(579) | $(590) | $11 | -1.86% | | Recoveries (Nine Months) | $282 | $376 | $(94) | -25.00% | | Provision for Loan Losses (Nine Months) | $1,307 | $889 | $418 | 47.02% | | ACL Ending Balance (Sep 30, 2023) | $12,416 | $10,030 (Sep 30, 2022) | $2,386 | 23.79% | | ACL - Loans (Sep 30, 2023) | $10,285 | N/A | N/A | N/A | | ACL - Unfunded Loan Commitments (Sep 30, 2023) | $2,131 | N/A | N/A | N/A | [Credit Quality Indicators](index=17&type=section&id=Credit%20Quality%20Indicators) The Bank categorizes loans into 'Pass,' 'Watch,' or 'Substandard' based on credit risk, with the vast majority in the 'Pass' category as of September 30, 2023 - Loans are categorized into Pass, Watch, or Substandard based on credit quality indicators[73](index=73&type=chunk)[78](index=78&type=chunk) Loan Credit Quality (Dollars in thousands) | Category | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Pass Loans | $1,075,058 (Total Loans Current) | $1,018,823 | $56,235 | 5.52% | | Watch Loans | $7,055 | $7,055 | $0 | 0.00% | | Substandard Loans | $6,730 | $6,730 | $0 | 0.00% | | Total Loans | $1,078,173 | $1,032,608 | $45,565 | 4.41% | [(4) Net Earnings Per Share](index=19&type=section&id=%284%29%20Net%20Earnings%20Per%20Share) Basic net earnings per share for the three months ended September 30, 2023, was $0.76, and diluted EPS was $0.74 Net Earnings Per Share (EPS) (Dollars in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $4,127 | $5,307 | $12,106 | $11,976 | | Basic EPS | $0.76 | $0.96 | $2.22 | $2.18 | | Diluted EPS | $0.74 | $0.93 | $2.15 | $2.11 | | Weighted Average Shares (Basic) | 5,402,048 | 5,473,443 | 5,442,788 | 5,484,063 | | Weighted Average Shares (Diluted) | 5,587,286 | 5,657,568 | 5,629,786 | 5,664,194 | [(5) Fair Value](index=20&type=section&id=%285%29%20Fair%20Value) The Company discloses fair value information for financial instruments, categorizing them into Level 1, 2, or 3 based on input observability - Fair value measurements are categorized into **Level 1** (quoted prices in active markets), **Level 2** (observable inputs other than quoted prices), and **Level 3** (unobservable inputs)[87](index=87&type=chunk)[94](index=94&type=chunk) - Investment securities available for sale are primarily **Level 2**, while loans and deposits are generally **Level 3** due to subjective pricing and unobservable inputs[88](index=88&type=chunk)[91](index=91&type=chunk)[95](index=95&type=chunk) Fair Value of Financial Instruments (Dollars in thousands) | Asset/Liability | Sep 30, 2023 Carrying Amount | Sep 30, 2023 Total Fair Value | Dec 31, 2022 Carrying Amount | Dec 31, 2022 Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $76,619 | $76,619 | $71,596 | $71,596 | | Investment securities available for sale | $378,794 | $378,794 | $445,394 | $445,394 | | Loans, net | $1,067,888 | $1,053,008 | $1,022,114 | $998,587 | | Deposits | $1,380,768 | $1,384,977 | $1,435,215 | $1,434,871 | | Securities sold under agreements to repurchase | $83,024 | $83,024 | $47,688 | $47,688 | [Fair Value Hierarchy](index=20&type=section&id=Fair%20Value%20Hierarchy) The Company categorizes financial instruments into a three-level hierarchy for fair value measurement, based on the observability of inputs used - **Level 1**: Valuation based on quoted prices for identical instruments in active markets (e.g., Cash and Cash Equivalents)[87](index=87&type=chunk)[94](index=94&type=chunk) - **Level 2**: Valuation based on quoted prices for similar instruments or model-based techniques with observable inputs (e.g., Investment Securities Available for Sale, Securities Sold Under Agreements to Repurchase, Junior Subordinated Debentures)[88](index=88&type=chunk)[94](index=94&type=chunk)[96](index=96&type=chunk)[98](index=98&type=chunk) - **Level 3**: Valuation generated from model-based techniques using at least one significant unobservable assumption (e.g., Other Investments, Mortgage Loans Held for Sale, Loans, Deposits, FHLB Borrowings)[89](index=89&type=chunk)[90](index=90&type=chunk)[91](index=91&type=chunk)[95](index=95&type=chunk)[97](index=97&type=chunk) [Financial Instruments Measured at Fair Value on a Recurring Basis](index=21&type=section&id=Financial%20Instruments%20Measured%20at%20Fair%20Value%20on%20a%20Recurring%20Basis) As of September 30, 2023, all recurring fair value measurements for investment securities and mutual funds were categorized as Level 2 Recurring Fair Value Measurements (Dollars in thousands) | Instrument | Sep 30, 2023 Fair Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasuries | $9,838 | - | $9,838 | - | | U.S. Government sponsored enterprises | $10,745 | - | $10,745 | - | | Mortgage-backed securities | $259,867 | - | $259,867 | - | | State and political subdivisions | $98,344 | - | $98,344 | - | | Mutual funds held in deferred compensation trust | $1,850 | - | $1,850 | - | [Fair Value Measurements for Mortgage Loans Held for Sale and Individually Evaluated Loans](index=22&type=section&id=Fair%20Value%20Measurements%20for%20Mortgage%20Loans%20Held%20for%20Sale%20and%20Individually%20Evaluated%20Loans) Mortgage loans held for sale significantly increased to $1.848 million at September 30, 2023, with all fair value measurements considered Level 3 Non-Recurring Fair Value Measurements (Dollars in thousands) | Instrument | Sep 30, 2023 Fair Value | Dec 31, 2022 Fair Value | Level 3 Valuation | | :--- | :--- | :--- | :--- | | Mortgage loans held for sale | $1,848 | $211 | $1,848 (Sep 30, 2023) / $211 (Dec 31, 2022) | | Individually evaluated loans | - | $14,694 | - (Sep 30, 2023) / $14,694 (Dec 31, 2022) | - All fair value measurements for mortgage loans held for sale and individually evaluated loans are considered **Level 3**, relying on certified appraisals, market-based information, and management's judgment on unobservable inputs[103](index=103&type=chunk)[104](index=104&type=chunk) [Carrying Amount and Estimated Fair Value of Financial Instruments](index=23&type=section&id=Carrying%20Amount%20and%20Estimated%20Fair%20Value%20of%20Financial%20Instruments) This section provides a comprehensive comparison of the carrying amounts and estimated fair values for all financial instruments Carrying Amount vs. Fair Value (Dollars in thousands) | Asset/Liability | Sep 30, 2023 Carrying Amount | Sep 30, 2023 Total Fair Value | Dec 31, 2022 Carrying Amount | Dec 31, 2022 Total Fair Value | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $76,619 | $76,619 | $71,596 | $71,596 | | Investment securities available for sale | $378,794 | $378,794 | $445,394 | $445,394 | | Other investments | $2,900 | $2,900 | $2,656 | $2,656 | | Mortgage loans held for sale | $1,848 | $1,848 | $211 | $211 | | Loans, net | $1,067,888 | $1,053,008 | $1,022,114 | $998,587 | | Mutual funds held in deferred compensation trust | $1,850 | $1,850 | $1,327 | $1,327 | | Deposits | $1,380,768 | $1,384,977 | $1,435,215 | $1,434,871 | | Securities sold under agreements to repurchase | $83,024 | $83,024 | $47,688 | $47,688 | | Junior subordinated debentures | $15,464 | $15,464 | $15,464 | $15,464 | [(6) Leases](index=23&type=section&id=%286%29%20Leases) As of September 30, 2023, the Bank had operating right-of-use assets of $4.9 million and operating lease liabilities of $5.0 million, primarily for branch facilities Lease Information (Dollars in thousands) | Metric | Sep 30, 2023 | Sep 30, 2022 | | :--- | :--- | :--- | | Operating Right-of-Use Assets | $4,908 | N/A | | Operating Lease Liabilities | $5,002 | N/A | | Operating Lease Cost (9 months) | $605 | $617 | | Weighted-Average Remaining Lease Term | 8.61 years | 9.01 years | | Weighted-Average Discount Rate | 2.71% | 2.30% | Operating Lease Liabilities Maturity Analysis (Dollars in thousands, Sep 30, 2023) | Year | Amount | | :--- | :--- | | 2023 | $203 | | 2024 | $819 | | 2025 | $773 | | 2026 | $650 | | 2027 | $612 | | Thereafter | $2,625 | | Total | $5,682 | | Less: Imputed Interest | $(680) | | Operating Lease Liability | $5,002 | [(7) Reportable Segments](index=23&type=section&id=%287%29%20Reportable%20Segments) The Company operates two reportable segments: Banking Operations and CBRES (appraisal management services), with Banking Operations generating the majority of net income - The Company has two reportable segments: **Banking Operations** (primary revenue from net interest income) and **CBRES** (appraisal management services, primary revenue from appraisal management fee income)[109](index=109&type=chunk) Segment Net Income (Loss) (Dollars in thousands) | Segment | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Banking Operations | $4,313 | $5,527 | $12,712 | $12,119 | | CBRES | $156 | $18 | $380 | $484 | | Other | $(342) | $(238) | $(986) | $(627) | | Consolidated Net Income | $4,127 | $5,307 | $12,106 | $11,976 | CBRES Appraisal Management Fee Income (Dollars in thousands) | Period | 2023 | 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | 3 Months Ended Sep 30 | $2,785 | $2,711 | $74 | 2.73% | | 9 Months Ended Sep 30 | $7,469 | $9,656 | $(2,187) | -22.65% | [(8) Subsequent Events](index=24&type=section&id=%288%29%20Subsequent%20Events) Management has reviewed subsequent events through the financial statement issuance date and concluded that there were no material subsequent events requiring disclosure - No material subsequent events were identified through the financial statement issuance date[112](index=112&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial performance and condition, detailing the impact of rising interest rates, CECL adoption, and changes in income and expenses [Introduction](index=25&type=section&id=Introduction) This section introduces the Management's Discussion and Analysis, emphasizing its role in understanding the consolidated financial condition and results of operations of Peoples Bancorp of North Carolina, Inc - The Company is Peoples Bancorp of North Carolina, Inc., a registered bank holding company and parent of Peoples Bank, operating under Federal Reserve supervision[115](index=115&type=chunk) [Overview](index=25&type=section&id=Overview) The Company's profitability is primarily driven by net interest income, influenced by interest rates, loan demand, and local economic conditions, with a focus on community-oriented financial services - Profitability depends primarily on net interest income, affected by loan and investment yields versus cost of funds[116](index=116&type=chunk) - Federal Reserve increased target federal funds rate by **500 basis points** since March 1, 2022, to **5.25%-5.50%** at September 30, 2023[118](index=118&type=chunk) - The Company's strategy is to operate as a well-capitalized, profitable, and independent community-oriented financial institution, focusing on local market growth and expansion[120](index=120&type=chunk) [Summary of Significant Accounting Policies](index=25&type=section&id=Summary%20of%20Significant%20Accounting%20Policies) This section reiterates the importance of the Company's accounting policies, particularly those requiring significant judgment in asset and liability valuation, such as the allowance for credit losses (ACL) - The allowance for credit losses reflects management's assessment of credit risks and loan portfolio quality[122](index=122&type=chunk) - Many assets and liabilities are recorded using techniques requiring significant judgment, including fair value estimates based on quoted market prices, dealer quotes, or internal modeling[124](index=124&type=chunk) - The adoption of **ASC 326 (CECL)** is the only significant change to accounting policies since December 31, 2022[121](index=121&type=chunk) [Results of Operations](index=26&type=section&id=Results%20of%20Operations) Net earnings for the three months ended September 30, 2023, decreased by 22.23% to $4.1 million, while year-to-date net earnings slightly increased by 1.09% to $12.1 million [Summary](index=26&type=section&id=Summary) Net earnings for Q3 2023 decreased to $4.1 million ($0.76 basic EPS) from $5.3 million ($0.96 basic EPS) in Q3 2022, mainly due to lower net interest income, higher credit loss provision, and increased non-interest expense Net Earnings Summary (Dollars in thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $4,127 | $5,307 | $(1,180) | -22.23% | | Basic EPS | $0.76 | $0.96 | $(0.20) | -20.83% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Earnings | $12,106 | $11,976 | $130 | 1.09% | | Basic EPS | $2.22 | $2.18 | $0.04 | 1.83% | Annualized Returns (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | Change (Absolute) | | :--- | :--- | :--- | :--- | | Return on Average Assets | 1.01% | 0.96% | 0.05% | | Return on Average Shareholders' Equity | 13.97% | 12.53% | 1.44% | [Net Interest Income](index=26&type=section&id=Net%20Interest%20Income) Net interest income decreased by 3.28% to $13.3 million for Q3 2023, primarily due to a significant increase in interest expense outpacing the rise in interest income Net Interest Income (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $13,340 | $13,793 | $(453) | -3.28% | | Total Interest Income | $18,306 | $14,611 | $3,695 | 25.29% | | Total Interest Expense | $4,966 | $818 | $4,148 | 507.09% | | Net Interest Spread | 2.73% | 3.26% | -0.53% | N/A | | Net Yield on Interest-Earning Assets | 3.39% | 3.39% | 0.00% | N/A | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $41,449 | $35,807 | $5,642 | 15.76% | | Total Interest Income | $52,706 | $37,932 | $14,774 | 38.95% | | Total Interest Expense | $11,257 | $2,125 | $9,132 | 429.74% | | Net Interest Spread | 2.99% | 3.00% | -0.01% | N/A | | Net Yield on Interest-Earning Assets | 3.39% | 3.39% | 0.00% | N/A | - Increase in interest income for Q3 2023 was driven by a **$3.1 million increase** in interest and fees on loans and an **$895,000 increase** in investment securities interest, partially offset by a **$294,000 decrease** in interest on due from banks[131](index=131&type=chunk)[132](index=132&type=chunk) - Increase in interest expense for Q3 2023 was primarily due to increased time deposits and higher rates paid on interest-bearing liabilities[131](index=131&type=chunk)[134](index=134&type=chunk) [Provision for Credit Losses](index=30&type=section&id=Provision%20for%20Credit%20Losses) The provision for credit losses increased to $562,000 for Q3 2023 and to $1.2 million for the nine months ended September 30, 2023, mainly due to higher loan balances and qualitative adjustments Provision for Credit Losses (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Provision for Credit Losses | $562 | $408 | $154 | 37.75% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Provision for Credit Losses | $1,161 | $889 | $272 | 30.59% | - The increase is primarily due to higher loan balances and qualitative adjustments for economic conditions, including a **$127,000 credit** to the provision on unfunded commitments for Q3 2023 and a **$146,000 credit** for the nine months ended September 30, 2023[146](index=146&type=chunk)[147](index=147&type=chunk) [Non-Interest Income](index=30&type=section&id=Non-Interest%20Income) Total non-interest income remained stable at $6.8 million for Q3 2023, but decreased by 20.69% to $16.8 million for the nine months ended September 30, 2023 Total Non-Interest Income (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Non-Interest Income | $6,774 | $6,793 | $(19) | -0.28% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Non-Interest Income | $16,787 | $21,167 | $(4,380) | -20.69% | - The year-to-date decrease was primarily due to a **$2.5 million net loss on securities sales** (executed in Q1 2023 to reduce risk and support loan growth) and a **$2.2 million decrease** in appraisal management fee income due to national real estate trends[149](index=149&type=chunk) [Non-Interest Expense](index=30&type=section&id=Non-Interest%20Expense) Total non-interest expense increased by 5.95% to $14.3 million for Q3 2023, mainly due to a $545,000 rise in salaries and employee benefits Total Non-Interest Expense (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Non-Interest Expense | $14,255 | $13,455 | $800 | 5.95% | | Salaries and employee benefits | $6,722 | $6,177 | $545 | 8.82% | | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Non-Interest Expense | $41,576 | $41,039 | $537 | 1.31% | | Salaries and employee benefits | $19,508 | $18,469 | $1,039 | 5.62% | | Appraisal management fee expense | $5,881 | $7,680 | $(1,799) | -23.42% | - The increase in salaries and employee benefits was primarily due to a reduction in the amortization of loan origination costs and an increase in supplemental retirement plan expense[150](index=150&type=chunk)[151](index=151&type=chunk) [Income Taxes](index=30&type=section&id=Income%20Taxes) Income tax expense for Q3 2023 was $1.2 million (effective tax rate of 22.09%), down from $1.4 million (21.06%) in Q3 2022 Income Tax Expense and Effective Tax Rate (Dollars in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Income Tax Expense | $1,170 | $1,416 | $3,393 | $3,070 | | Effective Tax Rate | 22.09% | 21.06% | 21.89% | 20.40% | - The increase in the effective tax rate for the nine months ended September 30, 2023, was primarily due to a reduction in non-taxable investments[152](index=152&type=chunk) [Analysis of Financial Condition](index=30&type=section&id=Analysis%20of%20Financial%20Condition) This section analyzes the Company's financial position, highlighting changes in investment securities, deposits, and loans, alongside credit loss management and capital resources [Investment Securities](index=30&type=section&id=Investment%20Securities) Available for sale securities decreased by 14.95% to $378.8 million at September 30, 2023, from $445.4 million at December 31, 2022 Investment Securities Available for Sale (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Available for Sale Securities | $378.8 | $445.4 | $(66.6) | -14.95% | | Average Investment Securities (9 months) | $458.2 | $467.5 (Year Ended Dec 31, 2022) | $(9.3) | -1.99% | [Loans](index=30&type=section&id=Loans) Total loans increased by 4.41% to $1.1 billion at September 30, 2023, from $1.0 billion at December 31, 2022, representing 68% of average earning assets Loan Portfolio Overview (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Loans | $1,100 | $1,000 | $100 | 10.00% | | Mortgage Loans Held for Sale | $1.8 | $0.211 | $1.629 | 771.09% | | Residential Mortgage Loans | $107.1 | $101.5 | $5.6 | 5.52% | | Home Equity Loans | $103.1 | $101.1 | $2.0 | 1.98% | | Commercial Mortgage Loans | $644.6 | $610.0 | $34.6 | 5.67% | - Loans represented **68% of average earning assets** for the nine months ended September 30, 2023, up from 59% for the year ended December 31, 2022[154](index=154&type=chunk) [Allowance for Credit Losses (ACL)](index=31&type=section&id=Allowance%20for%20Credit%20Losses%20%28ACL%29) The ACL reflects management's estimate of lifetime expected credit losses, calculated using the WARM methodology and qualitative adjustments, with continuous monitoring of loan performance - ACL is management's estimate of lifetime expected credit losses, using WARM methodology and qualitative adjustments for economic outlook, delinquencies, and other risk factors[158](index=158&type=chunk)[159](index=159&type=chunk) - The Bank uses an internal loan grading system (Pass, Watch, Substandard) and engages an independent third party for credit review to monitor asset quality[163](index=163&type=chunk)[164](index=164&type=chunk) - Management believes the allowance is adequate to cover estimated losses inherent in the loan portfolio, but future additions may be necessary due to changing conditions[170](index=170&type=chunk) [Non-performing Assets](index=32&type=section&id=Non-performing%20Assets) Non-performing assets remained stable at $3.7 million (0.23% of total assets) at September 30, 2023, compared to December 31, 2022 Non-performing Assets (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Non-performing Assets | $3.7 | $3.7 | $0 | 0.00% | | Non-performing Assets as % of Total Assets | 0.23% | 0.23% | 0.00% | 0.00% | | Non-accrual Loans | $3.6 | $3.7 | $(0.1) | -2.70% | | Non-accrual Loans as % of Total Loans | 0.34% | 0.36% | -0.02% | -5.56% | | Loans 90 Days Past Due and Still Accruing | $0.099 | $0 | $0.099 | N/A | | Other Real Estate Owned | $0 | $0 | $0 | 0.00% | [Deposits](index=32&type=section&id=Deposits) Total deposits remained stable at $1.4 billion at September 30, 2023, while core deposits decreased to $1.2 billion (90.03% of total deposits) Deposits Overview (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Deposits | $1,400 | $1,400 | $0 | 0.00% | | Core Deposits (Non-GAAP) | $1,200 | $1,400 | $(200) | -14.29% | | Core Deposits as % of Total Deposits | 90.03% | 97.84% | -7.81% | N/A | | Certificates of Deposit > $250,000 | $137.7 | $31.0 | $106.7 | 344.19% | | Other Time Deposits | $165.4 | $67.0 | $98.4 | 146.87% | | Estimated Uninsured Deposits | $376.6 | $439.8 | $(63.2) | -14.00% | | Estimated Uninsured Deposits as % of Total Deposits | 27.27% | 30.64% | -3.37% | N/A | - Increases in large certificates of deposit and other time deposits are primarily due to promotional rates offered[172](index=172&type=chunk) [Borrowed Funds](index=32&type=section&id=Borrowed%20Funds) There were no FHLB borrowings outstanding at September 30, 2023, while securities sold under agreements to repurchase increased to $83.0 million from $47.7 million Borrowed Funds (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | FHLB Borrowings Outstanding | $0 | $0 | $0 | 0.00% | | Securities Sold Under Agreements to Repurchase | $83.0 | $47.7 | $35.3 | 74.00% | - The increase in securities sold under agreements to repurchase is primarily due to customers transferring funds from deposits[174](index=174&type=chunk) [Junior Subordinated Debentures (related to Trust Preferred Securities)](index=32&type=section&id=Junior%20Subordinated%20Debentures%20%28related%20to%20Trust%20Preferred%20Securities%29) Junior subordinated debentures remained stable at $15.5 million, with the interest rate transitioning from LIBOR to SOFR effective September 15, 2023 Junior Subordinated Debentures (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Junior Subordinated Debentures | $15.5 | $15.5 | $0 | 0.00% | - Effective September 15, 2023, interest on trust preferred securities transitioned from **three-month LIBOR plus 163 basis points** to **three-month SOFR plus 189 basis points** (including a 26 basis point credit spread adjustment)[178](index=178&type=chunk) [Asset Liability and Interest Rate Risk Management](index=33&type=section&id=Asset%20Liability%20and%20Interest%20Rate%20Risk%20Management) The Company's ALCO manages interest rate risk to minimize fluctuations in net interest income, with rate-sensitive assets exceeding rate-sensitive liabilities by $567.8 million - ALCO manages interest rate risk to minimize fluctuations in net interest income by balancing rate-sensitive assets and liabilities[179](index=179&type=chunk)[180](index=180&type=chunk) - Average rate sensitive assets (**$1.6 billion**) exceeded average rate sensitive liabilities (**$985.9 million**) by **$567.8 million** for the nine months ended September 30, 2023[181](index=181&type=chunk) - The Company uses interest rate floors on **$114.8 million** in variable rate loans to protect against downward prime rate movements, though no floors were in effect at September 30, 2023[183](index=183&type=chunk) [Liquidity](index=33&type=section&id=Liquidity) The Company maintains liquidity to meet loan demand, deposit withdrawals, and regulatory requirements, with core deposits decreasing and significant borrowing capacity available Liquidity Metrics (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Unfunded Commitments to Extend Credit | $397.3 | $382.7 | $14.6 | 3.81% | | Core Deposits | $1,200 | $1,400 | $(200) | -14.29% | | Core Deposits as % of Total Deposits | 90.03% | 97.84% | -7.81% | N/A | | Wholesale Funding as % of Total Assets | 1.86% | 0.92% | 0.94% | 102.17% | | FHLB Availability | $121.0 | $86.5 | $34.5 | 39.88% | | FRB Availability | $437.9 | $445.1 | $(7.2) | -1.62% | | Liquidity Ratio | 24.38% | 30.32% | -5.94% | -19.59% | - The Bank has completed necessary steps to access the FRB's **Bank Term Funding Program (BTFP)**[188](index=188&type=chunk) [Contractual Obligations and Off-Balance Sheet Arrangements](index=34&type=section&id=Contractual%20Obligations%20and%20Off-Balance%20Sheet%20Arrangements) The Company's contractual obligations include junior subordinated debentures and lease agreements, while off-balance sheet arrangements primarily consist of commitments to extend credit and standby letters of credit - Contractual obligations include junior subordinated debentures and lease agreements[191](index=191&type=chunk) Off-Balance Sheet Arrangements (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Unfunded Commitments to Extend Credit | $397.3 | $382.7 | $14.6 | 3.81% | | Standby Letters of Credit | $4.3 | $4.4 | $(0.1) | -2.27% | [Capital Resources](index=34&type=section&id=Capital%20Resources) Shareholders' equity increased to $107.4 million (6.68% of total assets) at September 30, 2023, with the Company maintaining strong capital ratios exceeding 'well capitalized' thresholds Capital Resources (Dollars in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change (Absolute) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Shareholders' Equity | $107.4 | $105.2 | $2.2 | 2.09% | | Shareholders' Equity as % of Total Assets | 6.68% | 6.49% | 0.19% | N/A | | Annualized Return on Average Equity (9 months) | 13.97% | 12.53% | 1.44% | N/A | | Common Stock Repurchased (9 months) | $1.7 | N/A | N/A | N/A | Regulatory Capital Ratios (Company) | Ratio | Sep 30, 2023 | Dec 31, 2022 | Well Capitalized Threshold | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 Capital Ratio | 12.48% | 12.03% | 6.5% | | Tier 1 Capital Ratio | 13.66% | 13.21% | 8.0% | | Total Risk-Based Capital Ratio | 14.64% | 14.04% | 10.0% | | Tier 1 Leverage Capital Ratio | 10.52% | 9.82% | 5.0% | - The Company's Board authorized a **$2.0 million stock repurchase program** in March 2023, under which **$1.7 million (87,222 shares)** of common stock had been repurchased as of September 30, 2023[193](index=193&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=35&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This item is marked as 'Not applicable' in the report, indicating no specific quantitative or qualitative disclosures about market risk are provided - This item is marked as 'Not applicable'[198](index=198&type=chunk) [Item 4. Controls and Procedures](index=35&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2023, concluding they are effective for timely and accurate reporting - CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2023[198](index=198&type=chunk) - No material changes to internal control over financial reporting occurred during or subsequent to the period[198](index=198&type=chunk) [Part II. Other Information](index=35&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=35&type=section&id=Item%201.%20Legal%20Proceedings) The Bank is contesting a $1.4 million proposed adjustment from the NCDOR for disallowed tax credits from 2014-2016, with recent court decisions supporting the Bank's position - The Bank is contesting a **$1.4 million proposed adjustment** from the NCDOR for disallowed tax credits (2014-2016)[199](index=199&type=chunk) - The Bank paid **$1.2 million** in Q2 2019 to stop interest accrual, and a Guaranty Agreement limits exposure to approximately **$125,000**[199](index=199&type=chunk) - Recent NC Business Court decisions in related cases, if upheld on appeal, support the Bank's position against the NCDOR's disallowance of tax credits[199](index=199&type=chunk) [Item 1A. Risk Factors](index=35&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K filed on March 17, 2023 - No material changes to risk factors previously disclosed in the Form 10-K filed March 17, 2023[200](index=200&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the three months ended September 30, 2023, the Company repurchased 43,551 shares of its common stock at an average price of $20.55 per share Issuer Purchases of Equity Securities (Three Months Ended Sep 30, 2023) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under Programs | | :--- | :--- | :--- | :--- | :--- | | July 1 - 31, 2023 | 1,701 | $21.45 | - | $1,167,354 | | August 1 - 31, 2023 | 25,000 | $20.21 | 25,000 | $662,198 | | September 1 - 30, 2023 | 16,850 | $20.97 | 16,000 | $327,222 | | **Total** | **43,551** | **$20.55** | **41,000** | N/A | - **2,551 shares** were purchased on the open market for the deferred compensation plan, funded by participant contributions[202](index=202&type=chunk) [Item 3. Defaults Upon Senior Securities](index=36&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is marked as 'Not applicable' in the report, indicating no defaults upon senior securities occurred during the period - This item is marked as 'Not applicable'[203](index=203&type=chunk) [Item 4. Mine Safety Disclosures](index=36&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is marked as 'Not applicable' in the report, indicating no mine safety disclosures are required for the Company - This item is marked as 'Not applicable'[203](index=203&type=chunk) [Item 5. Other Information](index=36&type=section&id=Item%205.%20Other%20Information) On October 19, 2023, the Company adopted an Excess Incentive-Based Compensation Recovery Policy (Clawback Policy) in compliance with SEC and Nasdaq rules - On October 19, 2023, the Company adopted an **Excess Incentive-Based Compensation Recovery Policy (Clawback Policy)** in compliance with SEC and Nasdaq rules[203](index=203&type=chunk) - The Clawback Policy mandates recovery of erroneously awarded incentive-based compensation from current and former executive officers if an accounting restatement is required, regardless of misconduct[203](index=203&type=chunk) - Employment agreements for named executive officers (Lance A. Sellers, Jeffrey N. Hooper, William D. Cable, Sr.) were amended on November 1, 2023, to implement the Clawback Policy[203](index=203&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, specimen stock certificate, and various certifications - Exhibits include organizational documents (Articles of Incorporation, Bylaws), a specimen stock certificate, and the First Amendment to Employment Agreement for named executive officers[203](index=203&type=chunk)[205](index=205&type=chunk) - Certifications pursuant to the Sarbanes-Oxley Act (Sections 302 and 906) and XBRL formatted financial statements are also filed as exhibits[205](index=205&type=chunk) [Signatures](index=37&type=section&id=SIGNATURES) [Signatures](index=37&type=section&id=Signatures) The report is duly signed on November 7, 2023, by Lance A. Sellers, President and Chief Executive Officer, and Jeffrey N. Hooper, Executive Vice President and Chief Financial Officer - The report was signed on November 7, 2023, by Lance A. Sellers (President and CEO) and Jeffrey N. Hooper (EVP and CFO)[209](index=209&type=chunk)

Credit Losses and Allowances - The adoption of ASC 326 resulted in an initial reduction to retained earnings of $838,000, net of tax, due to a $1.1 million increase in the allowance for credit losses[38]. - As of June 30, 2023, the allowance for credit losses on loans is estimated using relevant available information, with no loans individually evaluated[41]. - The Company has identified various portfolio segments for calculating the allowance for credit losses, using a Weighted Average Remaining Maturity (WARM) methodology[42]. - 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[47]. - The allowance for credit losses on unfunded commitments is included in other liabilities on the Company's consolidated balance sheets[47]. - The allowance for credit losses decreased to $9.8 million as of June 30, 2023, from $10.5 million at December 31, 2022, showing a reduction of about 6.7%[56]. - The total impaired real estate loans as of December 31, 2022, amounted to $15,252,000, with a related allowance of $682,000[72]. - The bank's allowance for credit losses increased by $1,058,000 due to the implementation of the CECL methodology[76]. - The allowance for credit losses as of June 30, 2023, was $12,048,000, reflecting an increase from the previous balance due to adjustments and provisions for loan losses[76]. - The provision for loan losses for the six months ended June 30, 2023, was $617,000, indicating a proactive approach to managing credit risk[76]. - The average impaired loan balance for the twelve months ended December 31, 2022, was $16,190,000, with interest income recognized totaling $862,000[74]. - The bank closely monitors modified loans to assess the effectiveness of its modification efforts, ensuring financial stability for borrowers[69]. - The provision for credit losses for the three months ended June 30, 2023, was $375, compared to $410 for the same period in 2022, indicating a slight decrease of 8.5%[118]. Investment Securities - The total amortized cost of investment securities available for sale as of June 30, 2023, is $450,873,000, with a fair value of $394,084,000, reflecting unrealized losses of $56,856,000[48]. - The fair value of mortgage-backed securities as of June 30, 2023, is $264,779,000, with unrealized losses of $28,480,000[50]. - The fair value of investment securities available for sale was $394.1 million as of June 30, 2023, compared to an amortized cost of $450.9 million, resulting in an unrealized loss of $56.8 million[54]. - No securities available for sale were sold during the three months ended June 30, 2023, while proceeds from sales during the six months ended June 30, 2023, were $51.0 million, resulting in gross losses of $2.7 million[54]. - The company executed a securities sale transaction in January and February 2023, resulting in a $2.5 million net loss, aimed at reducing risk in the investment portfolio[4]. - The company has not recorded an allowance for credit losses on available-for-sale securities as of June 30, 2023, indicating a stable credit environment[52]. Loans and Deposits - The total net loans increased to $1,047.9 million as of June 30, 2023, compared to $1,022.1 million at December 31, 2022, reflecting a growth of about 2.5%[56]. - The total loans outstanding as of June 30, 2023, were $1,057.7 million, up from $1,032.6 million at December 31, 2022, representing an increase of approximately 2.4%[56]. - The total real estate loans amounted to $960.1 million as of June 30, 2023, compared to $929.0 million at December 31, 2022, reflecting an increase of approximately 3.3%[56]. - Total loans were $1.1 billion as of June 30, 2023, compared to $1.0 billion as of December 31, 2022[9]. - Total deposits as of June 30, 2023, were $1,369,524, down from $1,435,215 as of December 31, 2022, reflecting a decrease of approximately 4.6%[108]. - Total deposits remained stable at $1.4 billion as of June 30, 2023, with core deposits decreasing to $1.3 billion from $1.4 billion at December 31, 2022[178]. - Estimated uninsured deposits decreased to $361.8 million, or 26.42% of total deposits, from $439.8 million, or 30.64% at December 31, 2022[179]. Financial Performance - As of June 30, 2023, basic earnings per share were $0.88, with diluted earnings per share at $0.85, compared to $0.59 and $0.57 for the same period in 2022, representing an increase of 49.15% and 48.25% respectively[85]. - For the six months ended June 30, 2023, basic earnings per share were $1.46, while diluted earnings per share were $1.41, compared to $1.21 and $1.18 for the same period in 2022, indicating a growth of 20.67% and 19.49% respectively[86]. - The company reported a net income of $4,808 for the three months ended June 30, 2023, compared to $3,217 for the same period in 2022, marking an increase of 49.5%[119]. - Year-to-date net earnings for the first half of 2023 were $8.0 million, or $1.46 per share, compared to $6.7 million, or $1.21 per share, in the same period last year[133]. - Net interest income for Q2 2023 was $13.8 million, up from $11.3 million in Q2 2022, driven by a $5.6 million increase in interest income[137]. - Interest income for the six months ended June 30, 2023, was $34.4 million, compared to $23.3 million for the same period in 2022, reflecting an increase of $11.1 million[145]. - The annualized return on average assets for the first half of 2023 was 1.01%, compared to 0.81% for the same period last year[134]. - The annualized return on average equity for the six months ended June 30, 2023, was 14.12%, compared to 10.39% for the same period in 2022[198]. Capital and Liquidity - The Company's Tier 1 capital ratio was 13.80% at June 30, 2023, up from 13.21% at December 31, 2022[201]. - The total risk-based capital ratio was 14.77% at June 30, 2023, compared to 14.04% at December 31, 2022[201]. - The common equity Tier 1 capital ratio increased to 12.59% at June 30, 2023, from 12.03% at December 31, 2022[201]. - The Company's Tier 1 leverage capital ratio was 10.41% at June 30, 2023, an increase from 9.82% at December 31, 2022[201]. - The liquidity ratio was 26.98% at June 30, 2023, down from 30.32% at December 31, 2022, with a minimum required ratio of 10%[196]. - The Bank was considered "well capitalized" at June 30, 2023, based on regulatory capital guidelines[203]. Interest Rates and Expenses - Interest expense for Q2 2023 was $3.8 million, compared to $644,000 in Q2 2022, primarily due to increased rates on interest-bearing liabilities[139]. - The average rate paid on certificates of deposit rose to 3.19% in Q2 2023 from 0.56% in the same period last year[139]. - Interest expense for the six months ended June 30, 2023, was $6.3 million, up from $1.3 million for the same period in 2022, indicating a significant increase due to higher rates on interest-bearing liabilities[146]. - The average rate paid on interest-bearing liabilities increased to 1.31% for the six months ended June 30, 2023, from 0.27% for the same period in 2022[146]. Miscellaneous - The company has not experienced any material impact on its results of operations or financial position from the recent accounting standards updates adopted[34]. - The company has no material subsequent events as of the date the financial statements were issued[120]. - The company aims to achieve growth through local market expansion and potential acquisitions, although acquisitions are not deemed necessary for continued shareholder returns[126]. - The company maintains high levels of balance sheet liquidity and actively monitors asset quality to mitigate risks from unfavorable economic trends[126].