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]

Financial Performance - For the three months ended March 31, 2024, basic earnings per share increased to $0.74 from $0.58 in the same period of 2023, reflecting a growth of 27.6%[38] - Net earnings for Q1 2024 were $3.9 million, or $0.74 per share, compared to $3.2 million, or $0.58 per share, in Q1 2023, reflecting a year-over-year increase[114] - Noninterest income for Q1 2024 was $3.6 million, compared to $1.5 million in Q1 2023, driven by increased appraisal management fee income[114] - Non-interest income for Q1 2024 was $6.0 million, compared to $3.6 million in Q1 2023, largely due to the absence of losses on securities sales[128] - The annualized return on average assets increased to 0.96% in Q1 2024 from 0.81% in the same period last year[115] - The annualized return on average shareholders' equity rose to 13.51% in Q1 2024, compared to 11.78% in Q1 2023[115] Loan and Credit Quality - The total net loans as of March 31, 2024, amounted to $1,095.8 million, up from $1,082.0 million at December 31, 2023, representing an increase of 1.3%[43] - The total real estate loans increased to $1,015.1 million as of March 31, 2024, compared to $998.1 million at December 31, 2023, indicating a growth of 1.7%[43] - The Company’s total loans not secured by real estate amounted to $91.0 million as of March 31, 2024, down from $94.5 million at December 31, 2023[43] - The total allowance for credit losses decreased to $10,847,000 by the end of Q1 2024, down from $11,041,000 at the beginning of the quarter[59] - Charge-offs during the three months ended March 31, 2024, totaled $656,000, while recoveries amounted to $299,000[59] - The allowance for credit losses for single-family residential loans was $3,597,000, reflecting a provision recovery of $57,000 during the quarter[59] - Non-accrual loans as of March 31, 2024, totaled $3,991,000, with $3,567,000 having no allowance[48] - The total real estate loans past due increased from $7,202,000 on December 31, 2023, to $10,140,000 by March 31, 2024[46][47] - The total allowance for credit losses (ACL) was $10.8 million as of March 31, 2024, down from $11.0 million at December 31, 2023, primarily due to a $213,000 decrease in allowance for other construction loans[136] Investment Securities - The unrealized losses in the investment securities portfolio totaled $51.2 million as of March 31, 2024, slightly down from $51.3 million at December 31, 2023[41] - The total fair value of investment securities available for sale decreased to $394.7 million at March 31, 2024, compared to $391.9 million at December 31, 2023[42] - The fair value of U.S. Treasuries increased to $7.1 million as of March 31, 2024, from $9.8 million at December 31, 2023, reflecting a decrease of approximately 27.7%[96][97] - The fair value of mortgage-backed securities decreased to $237.1 million as of March 31, 2024, down from $273.8 million at December 31, 2023, a decline of about 13.4%[96][97] - The total fair value of investment securities available for sale was reported at $352.5 million as of March 31, 2024, compared to $371.5 million at December 31, 2023, indicating a decrease of approximately 5.1%[96][97] Deposits and Funding - Total deposits increased to $1.45 billion as of March 31, 2024, up from $1.39 billion at December 31, 2023, with core deposits rising to $1.30 billion[152] - Estimated uninsured deposits were $390.2 million, or 26.86% of total deposits, at March 31, 2024, compared to $382.1 million, or 27.45% at December 31, 2023[153] - The Company had no loans 90 days past due and still accruing as of March 31, 2024[151] - The liquidity ratio increased to 27.33% at March 31, 2024, up from 25.39% at December 31, 2023, exceeding the minimum required ratio of 10%[167] Capital and Regulatory Compliance - The Company’s Tier 1 capital ratio was 13.84% at March 31, 2024, compared to 13.94% at December 31, 2023[172] - The total risk-based capital ratio for the Bank was 14.72% at March 31, 2024, down from 14.85% at December 31, 2023[173] - The Bank was considered "well capitalized" at March 31, 2024, meeting all regulatory capital requirements[175] Operating Expenses - Operating lease costs increased to $815,000 in March 2024 from $206,000 in March 2023[76] - Non-interest expense increased to $14.5 million in Q1 2024 from $13.7 million in Q1 2023, mainly due to higher salaries and employee benefits[129]

Financial Performance - Net earnings for Q1 2024 were $3.9 million, or $0.74 per share, compared to $3.2 million, or $0.58 per share, in Q1 2023, representing a 21.88% increase in earnings per share [3]. - Net earnings for Q1 2024 were $3,948,000, representing a 24.5% increase from $3,172,000 in Q1 2023 [15]. - Basic net earnings per share increased to $0.74, up from $0.58 in the prior year, marking a growth of 27.6% [15]. - The return on average assets improved to 0.96% in Q1 2024, compared to 0.81% in Q1 2023 [16]. Income and Expenses - Net interest income decreased to $13.3 million in Q1 2024 from $14.3 million in Q1 2023, primarily due to a $4.0 million increase in interest expense [4]. - Total interest income for Q1 2024 was $19,810,000, an increase of 17.9% from $16,801,000 in Q1 2023 [15]. - Net interest income after provision for credit losses was $13,213,000, compared to $14,114,000 in the same period last year, reflecting a decrease of 6.4% [15]. - Total non-interest income increased significantly to $6.0 million in Q1 2024 from $3.6 million in Q1 2023, attributed to the absence of losses on securities sales [5]. - Total non-interest income increased significantly to $6,038,000, up 67.3% from $3,611,000 in Q1 2023 [15]. - Total non-interest expenses rose to $14,516,000, an increase of 5.9% from $13,702,000 in Q1 2023 [15]. Assets and Liabilities - Total assets grew to $1.7 billion as of March 31, 2024, compared to $1.6 billion at December 31, 2023 [8]. - Total loans remained stable at $1.1 billion as of March 31, 2024, consistent with December 31, 2023 [5]. - Total deposits increased to $1.5 billion as of March 31, 2024, up from $1.4 billion at December 31, 2023 [5]. Credit Quality - Non-performing assets were $4.0 million, or 0.24% of total assets, unchanged from December 31, 2023 [9]. - Non-performing assets totaled $3,991,000, slightly increasing from $3,644,000 in the previous year [16]. - The allowance for credit losses on loans was $10.9 million, or 0.98% of total loans, down from $11.0 million, or 1.01%, at December 31, 2023 [10]. - The allowance for credit losses on loans was $10,847,000, up from $9,617,000 in Q1 2023 [16]. Dividends and Tax - Cash dividends increased to $0.35 per share in Q1 2024, compared to $0.34 per share in the prior year [5]. - The effective tax rate decreased to 16.62% in Q1 2024 from 21.15% in Q1 2023, primarily due to a tax credit adjustment [7]. Margins - The net interest margin (tax equivalent) decreased to 3.33% from 3.77% year-over-year [16].

Financial Position - As of December 31, 2023, the Company had total assets of $1.6 billion, net loans of $1.1 billion, deposits of $1.4 billion, total securities of $394.8 million, and shareholders' equity of $121.0 million[15]. - The Bank's legal lending limit was $28.0 million, with the largest credit relationship being $19.1 million as of December 31, 2023[30]. - The Company had total deposits of $1.4 billion as of December 31, 2023, which are subject to fluctuations due to competitive pressures and changes in interest rates[110]. - The five largest deposit relationships amounted to $134.5 million, representing 9.10% of total deposits as of December 31, 2023[108]. - As of December 31, 2023, the Bank's Tier 1 leverage capital ratio was 10.35%, and the common equity Tier 1 risk-based capital ratio was 13.83%[54]. - The Company exceeded its minimum capital requirements with a total risk-based capital ratio of 14.96% as of December 31, 2023[54]. - The minimum common equity Tier 1 risk-based capital ratio required is 7.0%, with a minimum Tier 1 risk-based capital ratio of 8.5% and a total risk-based capital ratio of 10.5%[64]. Employee and Corporate Culture - The Company employed 277 full-time employees and 15 part-time employees, equating to 285 full-time equivalent employees as of December 31, 2023[19]. - The Company is committed to fostering a culture of diversity and inclusion, with ongoing training and development programs for employees[46]. - The Board of Directors emphasizes the importance of corporate culture in achieving the Company's strategic goals[43]. - The Company is dedicated to providing a workplace that is inclusive and free of discrimination, promoting top-quality talent regardless of various characteristics[45]. Regulatory Compliance - The Company is subject to the Dodd-Frank Act and the Economic Growth Act, which have significant regulatory impacts on the financial services industry[51]. - The Company has not opted to utilize the Community Bank Leverage Ratio and continues to use the Basel III standards[52]. - The Company is subject to various federal and state regulations, including the Bank Secrecy Act, which mandates a risk-based system of internal controls to prevent money laundering[82]. - The Sarbanes-Oxley Act of 2002 has been implemented to enhance corporate governance and protect investors, with compliance efforts believed to strengthen the Company's governance structure[84]. - The Company must obtain Federal Reserve approval for acquiring control of more than 5% of voting stock or merging with another bank[68]. - Regulatory authorities routinely examine financial institutions for compliance with anti-money laundering obligations, with potential serious consequences for non-compliance[74]. - Future regulatory changes may impact the Company's business, but the specific effects cannot be predicted[89]. Risk Factors - The Company is exposed to credit risk, with potential losses if borrowers fail to repay loans, particularly in a downturn in economic conditions[99]. - Non-performing assets negatively impact net income, as interest income on non-accrual loans is not recorded[106]. - Changes in interest rates can adversely affect the Company's profitability, as the income is derived from the spread between interest earned on loans and interest paid on deposits[107]. - The allowance for credit losses may be insufficient, which could adversely affect the Company's earnings if future losses exceed reserves[105]. - The Company relies heavily on customer deposits for funding, and any loss of this deposit base could limit lending ability and negatively impact financial condition[110]. - Cybersecurity incidents pose a risk to business operations and could lead to reputational damage and increased costs[112]. - The Company’s business continuity plans may prove inadequate, potentially resulting in disruptions that negatively impact operations[113]. - Adverse economic conditions, including inflation and unemployment, could weaken the economies of the communities served, affecting financial performance[95]. - Operational risks include potential losses from errors or fraudulent behavior by employees and third parties, which could materially affect operations[149]. Investment and Securities - The Bank's investment policy aims to maximize earnings while maintaining liquidity and ensuring the safety of principal[34]. - The Bank's available for sale investment securities portfolio had unrealized losses totaling $51.3 million as of December 31, 2023, primarily due to changing interest rates[132]. - In January and February 2023, the Bank sold securities available for sale totaling $53.5 million, resulting in gross losses of $2.7 million and gross gains of $177,000[132]. - Management assesses impairment of investment securities and deferred tax assets, which could negatively impact earnings if not realized[146]. Competition - The Bank faces strong competition for deposits and loans from other commercial banks, credit unions, and mortgage banking companies in its primary market area[24]. - The Bank faces substantial competition from various financial institutions, which could affect its growth and profitability[133]. - The Bank's ability to compete successfully depends on maintaining long-term customer relationships and expanding its market position[140]. Shareholder Information - As of February 29, 2024, the Company had 668 shareholders of record[181]. - The Company's common stock is listed on NASDAQ under the symbol "PEBK" and is supported by market makers such as Raymond James Financial, Inc. and Hovde Group, LLC[179]. - The Company repurchased a total of 16,709 shares in Q4 2023 at an average price of $21.25 per share[187]. - The total dollar value available for repurchase under the Company's stock repurchase program at the end of the period was approximately $2,003,184[188]. - The Company’s cumulative shareholder return from December 31, 2018, to December 31, 2023, was 47.27%, compared to 36.17% for the NASDAQ Composite Index[185]. Internal Controls - The Company maintained effective internal control over financial reporting as of December 31, 2023, according to management's assessment[196]. - There were no changes in internal control over financial reporting during the quarter ended December 31, 2023, that materially affected the Company's internal controls[193]. - The company may face material adverse effects on its business and financial condition due to ineffective internal controls and potential regulatory non-compliance[145].

[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].

Accounting Standards and Credit Losses - The Company adopted ASC 326 on January 1, 2023, resulting in an initial reduction to retained earnings of $838,000 due to a $1.1 million increase in the allowance for credit losses[34]. - The allowance for credit losses on loans is estimated using relevant information, with no loans individually evaluated as of March 31, 2023[38]. - The allowance for credit losses on off-balance sheet credit exposures is estimated using the same methodologies as portfolio loans[43]. - The allowance for credit losses on unfunded commitments increased by $2.3 million as part of the ASC 326 adoption[34]. - The allowance for credit losses decreased to $9.617 million as of March 31, 2023, from $10.494 million at December 31, 2022, indicating a reduction of about 8.3%[52]. - The total allowance for credit losses on loans was $9,617,000 as of March 31, 2023, with $2,075,000 allocated for loan commitments[72]. - The allowance for credit losses reflects management's assessment of credit risks, with qualitative adjustments for economic conditions[147]. - Provision for credit losses was $224,000 for the three months ended March 31, 2023, compared to $71,000 for the same period in 2022, indicating increased credit risk assessment[134]. - Provision for credit losses increased to $224,000 in Q1 2023 from $71,000 in Q1 2022, attributed to higher loan balances and economic adjustments[140]. Investment Securities - The Company’s total investment securities available for sale as of March 31, 2023, amounted to $399,148,000, with unrealized losses of $50,719,000[45]. - The fair value of U.S. Treasuries decreased to $10,008,000 as of March 31, 2023, with unrealized losses of $949,000[45]. - The Company’s mortgage-backed securities had a fair value of $273,820,000 with unrealized losses of $23,040,000 as of March 31, 2023[45]. - The Company did not have any other than-temporarily impaired investment securities as of December 31, 2022[35]. - As of March 31, 2023, unrealized losses in the investment securities portfolio related to debt securities totaled $50.7 million, down from $62.3 million at December 31, 2022, indicating a reduction of approximately 18.5%[48]. - The total amortized cost of investment securities available for sale was $449.031 million, with a fair value of $399.148 million, reflecting a decrease in fair value of about 11.1%[50]. - During the three months ended March 31, 2023, proceeds from sales of securities available for sale were $53.5 million, resulting in gross losses of $2.7 million and gross gains of $177,000[50]. - The fair value of investment securities available for sale was $399,148,000 as of March 31, 2023, down from $445,394,000 as of December 31, 2022[106][107]. Loans and Lending Operations - Total loans increased to $1.050871 billion as of March 31, 2023, compared to $1.032608 billion at December 31, 2022, representing a growth of approximately 1.8%[52]. - The total net loans amounted to $1.041254 billion as of March 31, 2023, compared to $1.022114 billion at December 31, 2022, reflecting an increase of about 1.9%[52]. - The company has a diversified loan portfolio, with real estate loans making up a significant portion, totaling $947.425 million as of March 31, 2023[52]. - The company reported that no securities available for sale were sold during the three months ended March 31, 2022, highlighting a change in strategy in the current period[50]. - The average balance of impaired loans collectively evaluated for impairment was $5.3 million at March 31, 2022, and $4.9 million at December 31, 2022[70]. - The total impaired real estate loans included $10,441,000 in non-traditional single-family residential loans, with an allowance of $611,000[67]. - The total loans not secured by real estate reached $103,446,000, indicating a diverse loan portfolio[80]. - The company’s commercial loans totaled $410,775,000, demonstrating strong performance in this segment[80]. - The company has a total of $1,050,871,000 in loans, reflecting a robust lending operation[80]. Financial Performance - The company reported net earnings of $3,172,000 for the three months ended March 31, 2023, resulting in a basic earnings per share of $0.58 and diluted earnings per share of $0.56[84]. - Net income for the three months ended March 31, 2023, was $3.2 million, or $0.58 per share, compared to $3.5 million, or $0.63 per share, for the same period in 2022, reflecting a decrease in non-interest income and an increase in non-interest expense[131]. - Net interest income increased to $14.3 million for the three months ended March 31, 2023, from $10.7 million for the same period in 2022, driven by a $5.5 million increase in interest income[134]. - Interest income rose to $16.8 million for the three months ended March 31, 2023, compared to $11.3 million for the same period in 2022, primarily due to a $3.1 million increase in interest income and fees on loans[135]. - The annualized return on average assets was 0.81% for the three months ended March 31, 2023, down from 0.85% for the same period in 2022[132]. - The annualized return on average shareholders' equity increased to 11.78% for the three months ended March 31, 2023, compared to 10.10% for the same period in 2022[132]. - Total assets as of March 31, 2023, were $1.602 billion, compared to $1.663 billion as of March 31, 2022[134]. - Non-interest expense increased to $12.1 million for the three months ended March 31, 2023, from $10.6 million for the same period in 2022[134]. Deposits and Funding - The company reported total deposits of $1,413,441,000 as of March 31, 2023, with a fair value of $1,415,287,000[107]. - Total deposits were $1.4 billion at March 31, 2023, consistent with December 31, 2022[162]. - Core deposits totaled $1.3 billion at March 31, 2023, down from $1.4 billion at December 31, 2022, representing 96.33% of total deposits[175]. - Estimated uninsured deposits were $407.8 million, or 28.85% of total deposits, at March 31, 2023, compared to $439.8 million, or 30.64% at December 31, 2022[163]. - The Bank's ratio of wholesale funding to total assets was 1.29% as of March 31, 2023, compared to 0.92% at December 31, 2022[176]. Capital and Liquidity - Shareholders' equity increased to $114.8 million, or 7.16% of total assets, at March 31, 2023, compared to $105.2 million, or 6.49% of total assets, at December 31, 2022[182]. - The liquidity ratio decreased to 28.23% at March 31, 2023, from 30.32% at December 31, 2022, while the minimum required liquidity ratio remained at 10%[180]. - The Company's Tier 1 capital ratio was 13.34% at March 31, 2023, compared to 13.21% at December 31, 2022[186]. - The total risk-based capital ratio was 14.27% at March 31, 2023, up from 14.04% at December 31, 2022[186]. - The Bank's Tier 1 risk-based capital ratio was 13.24% at March 31, 2023, compared to 13.10% at December 31, 2022[187]. - The Company has authorized a stock repurchase program of up to $2.0 million, with no shares repurchased as of March 31, 2023[184]. - The Bank had no borrowings from the Federal Reserve Bank (FRB) as of March 31, 2023, and the availability under the line of credit with the FRB was $449.2 million[178]. Other Financial Metrics - The average yield on loans for the three months ended March 31, 2023, was 5.04%, compared to 4.46% for the same period in 2022[135]. - The average number of shares outstanding for diluted earnings per share calculation was 5,656,250 for the first quarter of 2023[84]. - The total carrying amount of loans, net, was $1,041,254,000 as of March 31, 2023, with a fair value of $1,021,007,000[106]. - The fair value of mortgage loans held for sale increased to $417,000 as of March 31, 2023, compared to $211,000 as of December 31, 2022[104][106]. - The total operating lease liability as of March 31, 2023, was $5,033,000 after accounting for imputed interest[111]. - The fair value of mutual funds held in deferred compensation trust was $1,787,000 as of March 31, 2023, compared to $1,327,000 as of December 31, 2022[106][107]. - The total proposed adjustments sought by the North Carolina Department of Revenue (NCDOR) was approximately $1.4 million, which the Bank is contesting[190].

[Part I](index=3&type=section&id=PART%20I) [Business](index=3&type=section&id=Item%201.%20Business) Peoples Bancorp of North Carolina, Inc is a bank holding company for Peoples Bank, a state-chartered commercial bank with **$1.6 billion in assets**, a **$1.0 billion loan portfolio**, and **$1.4 billion in deposits** as of December 31, 2022 Financial Metric | Financial Metric | Value (as of Dec 31, 2022) | | :--- | :--- | | Total Assets | $1.6 billion | | Net Loans | $1.0 billion | | Deposits | $1.4 billion | | Total Securities | $448.1 million | | Shareholders' Equity | $105.2 million | - The Company operates as the holding company for Peoples Bank, with its primary income derived from dividends paid by the Bank[13](index=13&type=chunk) - The Bank serves its market through 17 banking offices and several loan production offices across various communities in North Carolina, including Charlotte, Raleigh, and Cary[14](index=14&type=chunk) - As of December 31, 2022, the Company had **291 full-time equivalent employees**[17](index=17&type=chunk)[41](index=41&type=chunk) [General Business and Subsidiaries](index=3&type=section&id=General%20Business%20and%20Subsidiaries) The Company's primary operation is owning Peoples Bank, which has four main subsidiaries for investment and real estate services, and a trust that issued **$20.6 million** in securities - The Bank's subsidiaries provide a range of financial services including investment counseling, real estate appraisal, brokerage, and management of foreclosed assets[19](index=19&type=chunk) - The Company formed PEBK Capital Trust II, a Delaware statutory trust, to issue **$20.6 million** of trust preferred securities, of which **$5.0 million** was redeemed in 2019[20](index=20&type=chunk) - The Bank's loan portfolio includes Individual Taxpayer Identification Number (ITIN) mortgage loans originated through its former Banco de la Gente offices, which are now integrated under the Peoples Bank name[15](index=15&type=chunk)[16](index=16&type=chunk) [Market Area and Competition](index=4&type=section&id=Market%20Area%20and%20Competition) The Bank's primary market is the competitive Catawba Valley region of North Carolina, where it holds a significant deposit market share in its core counties Deposit Market Share (as of June 30, 2022) | County | Deposit Market Share (as of June 30, 2022) | Rank | | :--- | :--- | :--- | | Catawba County | 20.73% | 2nd of 11 banks | | Lincoln County | 18.98% | 2nd of 9 banks | | Alexander County | 17.57% | 4th of 5 banks | - The Bank's primary market area is diversified across manufacturing, retail, technology, services, and utilities, with major employers including Catawba County Schools, CommScope, and Duke LifePoint/Frye Regional Medical Center[22](index=22&type=chunk) [Lending and Investment Policies](index=4&type=section&id=Lending%20and%20Investment%20Policies) The Bank's lending and investment activities are governed by Board-approved policies focused on sound portfolio management, liquidity, and safety of principal - The Bank's legal lending limit was **$26.5 million** as of December 31, 2022, with the largest credit relationship at **$19.7 million**[28](index=28&type=chunk) - The Bank Board receives monthly, quarterly, semi-annual, and annual reports to monitor the loan portfolio's quality, performance, and risk concentrations[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) - Investment objectives include maximizing earnings, providing liquidity, mitigating interest rate risk, ensuring principal safety, managing tax liabilities, and meeting pledging requirements[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) [Human Capital Management](index=6&type=section&id=Human%20Capital%20Management) The Company employed **291 full-time equivalent employees** at year-end 2022 and fosters a culture built on integrity, customer service, and diversity, equity, and inclusion - The company's culture is guided by core values including being informed, fair, accountable, progressive, and focused on exceptional customer service[43](index=43&type=chunk)[50](index=50&type=chunk) - The company promotes a culture of diversity and inclusion, embracing employee differences and providing training on valuing differences, supported by a "Courageous Conversations" initiative[43](index=43&type=chunk)[46](index=46&type=chunk) [Supervision and Regulation](index=7&type=section&id=Supervision%20and%20Regulation) The Company and Bank are subject to extensive regulation, adhere to Basel III standards, exceeded all minimum capital requirements as of year-end 2022, and adopted the CECL standard in 2023 Capital Ratios (as of Dec 31, 2022) | Capital Ratios (as of Dec 31, 2022) | The Bank | The Company | | :--- | :--- | :--- | | Tier 1 Leverage Capital Ratio | 9.68% | 9.82% | | Common Equity Tier 1 Risk-Based Capital | 13.10% | 12.03% | | Tier 1 Risk-Based Capital Ratio | 13.10% | 13.21% | | Total Risk-Based Capital Ratio | 13.93% | 14.04% | - The Company adopted the Current Expected Credit Loss (CECL) accounting standard on January 1, 2023, which requires recognizing lifetime expected credit losses on financial assets[79](index=79&type=chunk) - The Bank received a **"satisfactory" rating** in its last Community Reinvestment Act (CRA) examination conducted in January 2020[69](index=69&type=chunk) - FDIC insurance expense was approximately **$461,000 in 2022**, compared to **$415,000 in 2021** and **$263,000 in 2020**[66](index=66&type=chunk) [Risk Factors](index=15&type=section&id=Item%201A.%20Risk%20Factors) The Company faces material risks from economic conditions, credit concentrations, interest rate fluctuations, cybersecurity, and common stock volatility [Risks Related to Our Business](index=15&type=section&id=RISK%20FACTORS%20RELATED%20TO%20OUR%20BUSINESS) Business risks include economic downturns, credit concentration in the Catawba Valley, interest rate changes, cybersecurity threats, and the impact of adopting the CECL standard - The adoption of the **CECL accounting standard** on January 1, 2023, requires estimating lifetime credit losses and may increase the allowance for loan losses and its volatility[104](index=104&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) - The Bank's five largest deposit relationships accounted for **$117.0 million**, or **7.89% of total deposits** and repurchase agreements, as of December 31, 2022, posing a concentration risk[111](index=111&type=chunk) - The available-for-sale investment securities portfolio had **unrealized losses of $62.3 million** at year-end 2022, and sales in early 2023 resulted in a **net loss of approximately $2.5 million**[133](index=133&type=chunk) - The company faces risks from extensive regulation, including potential noncompliance with the Bank Secrecy Act (BSA) and fair lending laws, which could result in fines and reputational damage[123](index=123&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk) [Risks Related to the Company's Stock](index=24&type=section&id=RISKS%20RELATED%20TO%20THE%20COMPANY'S%20STOCK) The Company's common stock (PEBK) is subject to price volatility from low trading volume, is not FDIC insured, and dividend payments are not guaranteed - The trading volume for the company's common stock (PEBK) is **relatively low**, which could lead to price volatility and difficulty in reselling shares[157](index=157&type=chunk) - The ability to pay dividends on common stock is **not guaranteed** and depends on the Bank's financial condition and regulatory guidelines from the Federal Reserve[159](index=159&type=chunk) - The company's common stock is not a deposit and is **not insured by the FDIC** or any other government agency, subjecting it to investment risk, including the possible loss of principal[158](index=158&type=chunk) [Unresolved Staff Comments](index=25&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The Company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[162](index=162&type=chunk) [Properties](index=25&type=section&id=Item%202.%20Properties) The Company owns its corporate office and 13 other properties while leasing 9 locations, including branches and loan production offices - The company **owns its corporate office** in Newton, NC, and 13 other properties[163](index=163&type=chunk)[164](index=164&type=chunk) - The company **leases 9 properties**, which include branch offices and loan production offices in key growth markets such as Charlotte, Raleigh, Cary, and Winston-Salem[163](index=163&type=chunk)[165](index=165&type=chunk) [Legal Proceedings](index=26&type=section&id=Item%203.%20Legal%20Proceedings) The Company is in a dispute with the NCDOR over a **$1.4 million** tax credit adjustment, though potential exposure is believed to be limited to approximately **$125,000** - The NCDOR is seeking to disallow tax credits from 2014-2016, with a proposed adjustment of approximately **$1.4 million** (including tax, penalties, and interest)[166](index=166&type=chunk) - The Bank paid **$1.2 million** to the NCDOR to halt interest accrual while contesting the disallowance[166](index=166&type=chunk) - Management believes a purchased Guaranty Agreement limits the Bank's potential exposure in the NCDOR matter to approximately **$125,000**[166](index=166&type=chunk) [Mine Safety Disclosures](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The Company has no mine safety disclosures to report - There are no mine safety disclosures[168](index=168&type=chunk) [Part II](index=28&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The Company's stock (PEBK) trades on NASDAQ, with dividend payments subject to regulatory limits, and **4,200 shares** were repurchased in Q4 2022 - The Company's common stock is listed on the NASDAQ Global Market under the symbol **"PEBK"**[170](index=170&type=chunk) Issuer Purchases of Equity Securities | Period (2022) | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | Oct 1 - 31 | 3,200 | $27.50 | 3,200 | | Nov 1 - 30 | 2,446 | $28.43 | 1,000 | | Dec 1 - 31 | 269 | $30.71 | 0 | | **Q4 Total** | **5,915** | **$28.03** | **4,200** | - The stock repurchase program authorized in February 2022 expired in February 2023; as of December 31, 2022, approximately **$1.29 million remained available** for repurchase under the plan[176](index=176&type=chunk)[178](index=178&type=chunk) [Selected Financial Data](index=30&type=section&id=Item%206.%20Selected%20Financial%20Data) Information for this item is incorporated by reference from the "Selected Financial Data" section of the Company's 2022 Annual Report - Selected Financial Data is incorporated by reference from page A-3 of the Annual Report (Exhibit 13)[179](index=179&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=30&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Information for this item is incorporated by reference from the "Management's Discussion and Analysis" section of the Company's 2022 Annual Report - Management's Discussion and Analysis is incorporated by reference from pages A-4 through A-18 of the Annual Report (Exhibit 13)[180](index=180&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The Company has no information to report for this item - This item is not applicable[181](index=181&type=chunk) [Financial Statements and Supplementary Data](index=30&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The consolidated financial statements and supplementary data are incorporated by reference from the Company's 2022 Annual Report - The consolidated financial statements and supplementary data are incorporated by reference from pages A-19 through A-59 of the Annual Report (Exhibit 13)[181](index=181&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=31&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The Company reports no changes in or disagreements with its accountants on accounting and financial disclosure - This item is not applicable[182](index=182&type=chunk) [Controls and Procedures](index=31&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the Company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the Company's disclosure controls and procedures were **effective** as of the end of the period covered by this report[182](index=182&type=chunk) - Management assessed internal control over financial reporting based on the COSO framework and believes it was **effective** as of December 31, 2022[187](index=187&type=chunk) - As a smaller reporting company, this annual report **does not include an attestation report** from its independent registered public accounting firm regarding internal control over financial reporting[188](index=188&type=chunk) [Other Information](index=31&type=section&id=Item%209B.%20Other%20Information) The Company has no other information to report - This item is not applicable[189](index=189&type=chunk) [Part III](index=32&type=section&id=PART%20III) [Directors and Executive Officers and Corporate Governance](index=32&type=section&id=Item%2010.%20Directors%20and%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[191](index=191&type=chunk) [Executive Compensation](index=32&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from the Proxy Statement[192](index=192&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=32&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference, with **279,920 securities available for future issuance** under approved equity compensation plans Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 28,440 | $0.00 | 279,920 | | Equity compensation plans not approved by security holders | - | - | - | | **Total** | **28,440** | **$0.00** | **279,920** | - The securities to be issued consist of restricted stock units granted under the 2009 and 2020 Omnibus Stock Ownership and Long Term Incentive Plans, which do not have an exercise price[195](index=195&type=chunk)[196](index=196&type=chunk) [Certain Relationships and Related Transactions and Director Independence](index=33&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%20and%20Director%20Independence) Information on related transactions and director independence is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the Proxy Statement[197](index=197&type=chunk) [Principal Accountant Fees and Services](index=33&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Information on principal accountant fees and services is incorporated by reference from the Company's 2023 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement[198](index=198&type=chunk) [Part IV](index=34&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=34&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all exhibits filed with the Form 10-K, including the 2022 Annual Report, material contracts, and required SOX certifications - The Company's 2022 Annual Report is attached as **Exhibit (13)** and contains the consolidated financial statements[202](index=202&type=chunk)[207](index=207&type=chunk) - Exhibits include key corporate governance documents, material contracts such as employment agreements and trust agreements for securities, and required **SOX certifications**[204](index=204&type=chunk)[205](index=205&type=chunk)[206](index=206&type=chunk) - Financial data formatted in eXtensible Business Reporting Language (XBRL) is included as **Exhibit (101)**[207](index=207&type=chunk)

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations [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 three and nine months ended September 30, 2022, and the audited balance sheet as of December 31, 2021 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates Consolidated Balance Sheets Table | Metric | Sep 30, 2022 (Unaudited, in millions) | Dec 31, 2021 (Audited, in millions) | | :-------------------------------- | :----------------------- | :--------------------- | | Total assets | $1,676.3 million | $1,624.2 million | | Total liabilities | $1,572.4 million | $1,481.8 million | | Total shareholders' equity | $103.9 million | $142.4 million | [Consolidated Statements of Earnings](index=4&type=section&id=Consolidated%20Statements%20of%20Earnings) This section outlines the company's financial performance over periods, showing net interest income, non-interest income and expense, and net earnings Consolidated Statements of Earnings Table | Metric | 3 Months Ended Sep 30, 2022 (in millions, except per share) | 3 Months Ended Sep 30, 2021 (in millions, except per share) | 9 Months Ended Sep 30, 2022 (in millions, except per share) | 9 Months Ended Sep 30, 2021 (in millions, except per share) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $13.8 million | $10.6 million | $35.8 million | $33.3 million | | Provision for (recovery of) loan losses | $0.4 million | ($0.2 million) | $0.9 million | ($0.9 million) | | Total non-interest income | $6.8 million | $6.0 million | $21.2 million | $18.0 million | | Total non-interest expense | $13.5 million | $12.6 million | $41.0 million | $37.0 million | | Net earnings | $5.3 million | $3.4 million | $12.0 million | $12.1 million | | Basic net earnings per share | $0.96 | $0.61 | $2.18 | $2.16 | | Diluted net earnings per share | $0.93 | $0.59 | $2.11 | $2.10 | | Cash dividends declared per share | $0.18 | $0.17 | $0.69 | $0.49 | [Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This section presents net earnings alongside other comprehensive income or loss components, reflecting changes in equity not from transactions with owners Consolidated Statements of Comprehensive Income (Loss) Table | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net earnings | $5.3 million | $3.4 million | $12.0 million | $12.1 million | | Unrealized holding losses on securities available for sale | ($16.6 million) | ($0.8 million) | ($59.7 million) | ($2.7 million) | | Total comprehensive income (loss) | ($7.5 million) | $2.7 million | ($34.0 million) | $10.0 million | [Consolidated Statements of Changes in Shareholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity) This section details the movements in shareholders' equity, including common stock repurchases, cash dividends, net earnings, and other comprehensive loss Consolidated Statements of Changes in Shareholders' Equity Table | Metric | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | | Common stock repurchase | ($0.6 million) | ($3.6 million) | | Cash dividends declared on common stock | ($3.9 million) | ($2.8 million) | | Net earnings | $12.0 million | $12.1 million | | Change in accumulated other comprehensive loss, net of tax | ($46.0 million) | ($2.1 million) | | Total shareholders' equity (End of Period) | $103.9 million | $143.5 million | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section categorizes cash inflows and outflows from operating, investing, and financing activities, showing the net change in cash and cash equivalents Consolidated Statements of Cash Flows Table | Metric | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $17.3 million | $17.3 million | | Net cash used by investing activities | ($224.1 million) | ($104.1 million) | | Net cash provided by financing activities | $84.7 million | $188.6 million | | Net change in cash and cash equivalents | ($122.0 million) | $101.7 million | | Cash and cash equivalents at end of period | $155.5 million | $263.3 million | [Notes to Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed disclosures and explanations supporting the consolidated financial statements, including accounting policies and specific account breakdowns [Summary of Significant Accounting Policies](index=8&type=section&id=(1)%20Summary%20of%20Significant%20Accounting%20Policies) This section outlines the key accounting principles and methods used in preparing the consolidated financial statements, including consolidation scope - The Consolidated Financial Statements include Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank, along with the Bank's wholly owned subsidiaries (Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC, and PB Real Estate Holdings, LLC)[22](index=22&type=chunk) - PEBK Capital Trust II, a wholly owned Delaware statutory trust, is not included in the Consolidated Financial Statements[23](index=23&type=chunk) - The Bank operates three banking offices focused on the Latino population, formerly known as Banco de la Gente, which now operate under the same name as other offices but continue to categorize mortgage loans originated from these offices separately[24](index=24&type=chunk) [Recent Accounting Pronouncements](index=8&type=section&id=Recent%20Accounting%20Pronouncements) This section discusses the potential impact of recently issued accounting standards on the company's financial reporting and operations - The Company is evaluating the impact of ASU 2016-13 (CECL) and expects to record a one-time adjustment to retained earnings to increase the allowance for loan losses upon adoption on January 1, 2023[28](index=28&type=chunk) - The adoption of other ASUs (2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-03, 2020-04, 2022-02) is not expected to have a material impact on the Company's results of operations, financial position, or disclosures[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) [Investment Securities](index=10&type=section&id=(2)%20Investment%20Securities) This section details the company's investment securities portfolio, including fair values, amortized costs, and unrealized gains or losses Investment Securities Table | Metric | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :-------------------------------------- | :----------- | :----------- | | Investment securities available for sale (Fair Value) | $444.4 million | $406.5 million | | Total amortized cost | $503.9 million | $406.4 million | | Total gross unrealized losses | $59.8 million | $5.5 million | - Unrealized losses on debt securities totaled **$59.8 million** at September 30, 2022, primarily due to changing interest rates, and are considered temporary[37](index=37&type=chunk) - Securities with a fair value of approximately **$101.8 million** at September 30, 2022, were pledged to secure public deposits and for other purposes[39](index=39&type=chunk) [Loans](index=11&type=section&id=(3)%20Loans) This section provides a comprehensive breakdown of the loan portfolio, including classifications, past due status, impaired loans, and the allowance for loan losses Loans Table | Loan Classification | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :--------------------------------- | :----------- | :----------- | | Total loans | $1,004.9 million | $884.9 million | | Less allowance for loan losses | ($10.0 million) | ($9.4 million) | | Net loans | $994.9 million | $875.5 million | Past Due Loans Table | Past Due Loans | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :------------------------------ | :----------- | :----------- | | Total Past Due Loans (30-89 days & 90+ days) | $3.9 million | $6.2 million | | Non-accrual loans | $3.7 million | $3.2 million | | Impaired loans | $15.7 million | $18.3 million | Allowance for Loan Losses Table | Allowance for Loan Losses | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $9.4 million | $9.9 million | | Charge-offs | ($0.6 million) | ($0.5 million) | | Recoveries | $0.4 million | $0.5 million | | Provision | $0.9 million | ($0.9 million) | | Ending balance | $10.0 million | $9.0 million | Loan Risk Grade Table | Loan Risk Grade | Sep 30, 2022 | Dec 31, 2021 | | :---------------------- | :----------- | :----------- | | 1- Excellent Quality | 0.57% | 0.78% | | 2- High Quality | 19.68% | 19.12% | | 3- Good Quality | 72.87% | 70.41% | | 4- Management Attention | 5.63% | 7.70% | | 5- Watch | 0.59% | 1.23% | | 6- Substandard | 0.66% | 0.76% | | 7- Doubtful | 0.00% | 0.00% | | 8- Loss | 0.00% | 0.00% | - Outstanding PPP loans decreased significantly from **$18.0 million** at December 31, 2021, to **$103,000** at September 30, 2022[63](index=63&type=chunk) [Net Earnings Per Share](index=18&type=section&id=(4)%20Net%20Earnings%20Per%20Share) This section presents the calculation of basic and diluted net earnings per share, along with weighted average shares outstanding Net Earnings Per Share Table | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic earnings per share | $0.96 | $0.61 | $2.18 | $2.16 | | Diluted earnings per share | $0.93 | $0.59 | $2.11 | $2.10 | | Weighted average shares outstanding (basic) | 5,473,443 | 5,544,596 | 5,484,063 | 5,601,879 | | Weighted average shares outstanding (diluted) | 5,657,568 | 5,719,083 | 5,664,194 | 5,773,108 | [Fair Value](index=19&type=section&id=(5)%20Fair%20Value) This section describes the methodologies and classifications used for fair value measurements of financial instruments, categorizing them into Level 1, 2, and 3 - The Company classifies financial instruments into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs) for fair value measurement[69](index=69&type=chunk)[70](index=70&type=chunk) Fair Value Table | Asset/Liability | Fair Value Sep 30, 2022 (in millions) | Fair Value Dec 31, 2021 (in millions) | | :----------------------------- | :---------------------- | :---------------------- | | Investment securities available for sale | $444.4 million (Level 2) | $406.5 million (Level 2) | | Loans, net | $970.0 million (Level 3) | $855.8 million (Level 3) | | Deposits | $1,500.6 million (Level 3) | $1,401.8 million (Level 3) | - Mortgage loans held for sale and impaired loans are measured at Level 3 fair value, relying on certified appraisals and management judgment[84](index=84&type=chunk)[87](index=87&type=chunk) [Leases](index=22&type=section&id=(6)%20Leases) This section details the company's lease obligations, including operating lease costs, right-of-use assets, and weighted-average lease terms and discount rates Leases Table | Metric | Sep 30, 2022 (in millions, except years/percent) | Sep 30, 2021 (in millions, except years/percent) | | :-------------------------------------- | :----------- | :----------- | | Operating lease cost | $0.6 million | $0.5 million | | Right-of-use assets obtained in exchange for new lease liabilities - operating leases | $1.7 million | $1.0 million | | Weighted-average remaining lease term - operating leases | 9.01 years | 6.72 years | | Weighted-average discount rate - operating leases | 2.30% | 2.71% | | Operating Lease Liability | $5.8 million | N/A | [Subsequent Events](index=23&type=section&id=(7)%20Subsequent%20Events) This section discloses any material events that occurred after the balance sheet date but before the financial statements were issued - Management has reviewed and concluded that there were no material subsequent events through the date the financial statements were issued[95](index=95&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition, including an overview of its business, significant accounting policies, operating results, and financial condition [Introduction & Overview](index=23&type=section&id=Introduction%20%26%20Overview) This section provides an overview of the company's business model, primary revenue drivers, and the significant external factors influencing its operations - The Company's business primarily involves attracting deposits and investing these funds in commercial, real estate mortgage, real estate construction, and consumer loans[98](index=98&type=chunk) - Profitability is mainly driven by net interest income, which is the difference between income from loans/investments and the cost of deposits/borrowed funds, alongside other income and operating expenses[98](index=98&type=chunk) - Operations are significantly influenced by local economic conditions, regulatory policies, and interest rate changes, with the Federal Reserve increasing the target federal funds rate by **300 basis points** in 2022[99](index=99&type=chunk)[100](index=100&type=chunk) [Summary of Significant Accounting Policies](index=24&type=section&id=Summary%20of%20Significant%20Accounting%20Policies) This section highlights critical accounting policies and estimates, such as the allowance for loan losses, which require significant management judgment - The allowance for loan losses (ALLL) is a critical accounting policy, reflecting management's assessment of credit risks and loan portfolio quality[104](index=104&type=chunk) - Many assets and liabilities are recorded using techniques requiring significant judgment, particularly regarding recoverability of loans and fair value measurements[105](index=105&type=chunk) - The preparation of Consolidated Financial Statements in conformity with GAAP involves numerous estimates and assumptions, which could lead to actual results differing from these estimates[107](index=107&type=chunk) [Results of Operations](index=25&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance over the reporting periods, focusing on key income and expense components [Summary of Net Earnings](index=25&type=section&id=Summary%20of%20Net%20Earnings) This section summarizes the company's net earnings and key profitability metrics, including return on average assets and shareholders' equity Summary of Net Earnings Table | Metric | 3 Months Ended Sep 30, 2022 (in millions, except per share/percent) | 3 Months Ended Sep 30, 2021 (in millions, except per share/percent) | 9 Months Ended Sep 30, 2022 (in millions, except per share/percent) | 9 Months Ended Sep 30, 2021 (in millions, except per share/percent) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net earnings (in millions) | $5.3 | $3.4 | $12.0 | $12.1 | | Basic net earnings per share | $0.96 | $0.61 | $2.18 | $2.16 | | Diluted net earnings per share | $0.93 | $0.59 | $2.11 | $2.10 | | Annualized return on average assets | 1.25% | 0.83% | 0.96% | 1.05% | | Annualized return on average shareholders' equity | 18.42% | 9.30% | 12.53% | 11.04% | [Net Interest Income](index=25&type=section&id=Net%20Interest%20Income) This section analyzes the components of net interest income, including interest income from assets and interest expense on liabilities, and related spreads Net Interest Income Table | Metric | 3 Months Ended Sep 30, 2022 (in millions, except percent) | 3 Months Ended Sep 30, 2021 (in millions, except percent) | 9 Months Ended Sep 30, 2022 (in millions, except percent) | 9 Months Ended Sep 30, 2021 (in millions, except percent) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $13.8 million | $10.6 million | $35.8 million | $33.3 million | | Total interest income | $14.6 million | $11.4 million | $37.9 million | $35.9 million | | Total interest expense | $0.8 million | $0.9 million | $2.1 million | $2.5 million | | Net interest spread | 3.26% | 2.62% | 2.91% | 2.93% | | Net yield on interest-earning assets | 3.39% | 2.76% | 3.02% | 3.08% | - The increase in net interest income for the three months ended September 30, 2022, was driven by a **$3.2 million** increase in interest income and a **$43,000** decrease in interest expense, primarily due to higher loan and investment securities balances and Federal Reserve rate increases, partially offset by lower PPP loan fee income[113](index=113&type=chunk) - For the nine months ended September 30, 2022, net interest income increased due to a **$2.1 million** increase in interest income and a **$393,000** decrease in interest expense, with investment securities and balances due from banks contributing to interest income growth, while PPP loan fee income declined[118](index=118&type=chunk)[119](index=119&type=chunk)[120](index=120&type=chunk) [Provision for Loan Losses](index=29&type=section&id=Provision%20for%20Loan%20Losses) This section discusses the provision for loan losses, reflecting management's assessment of credit risk and changes in the loan portfolio Provision for Loan Losses Table | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for (recovery of) loan losses | $0.4 million | ($0.2 million) | $0.9 million | ($0.9 million) | - The increase in provision for loan losses for both the three and nine months ended September 30, 2022, is primarily due to an increase in reserves from a net increase in the volume of loans in the general reserve pool[126](index=126&type=chunk)[127](index=127&type=chunk) [Non-Interest Income](index=29&type=section&id=Non-Interest%20Income) This section details the various sources of non-interest income, such as appraisal management fees, service charges, and mortgage banking income Non-Interest Income Table | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-interest income | $6.8 million | $6.0 million | $21.2 million | $18.0 million | | Appraisal management fee income | $2.7 million | $2.0 million | $9.7 million | $5.8 million | | Service charges | $1.5 million | $1.0 million | $4.0 million | $2.9 million | | Mortgage banking income | $0.1 million | $0.5 million | $0.4 million | $2.1 million | - The increase in non-interest income was primarily driven by a **$757,000** increase in appraisal management fee income and a **$435,000** increase in service charge income for the three months ended September 30, 2022, partially offset by a **$457,000** decrease in mortgage banking income[128](index=128&type=chunk) [Non-Interest Expense](index=29&type=section&id=Non-Interest%20Expense) This section outlines the company's non-interest operating expenses, including appraisal management fees and salaries and employee benefits Non-Interest Expense Table | Metric | 3 Months Ended Sep 30, 2022 (in millions) | 3 Months Ended Sep 30, 2021 (in millions) | 9 Months Ended Sep 30, 2022 (in millions) | 9 Months Ended Sep 30, 2021 (in millions) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-interest expense | $13.5 million | $12.6 million | $41.0 million | $37.0 million | | Appraisal management fee expense | $2.2 million | $1.6 million | $7.7 million | $4.6 million | | Salaries and employee benefits | $6.2 million | $6.1 million | $18.5 million | $17.9 million | - The increase in non-interest expense for the three months ended September 30, 2022, was mainly due to a **$595,000** increase in appraisal management fee expense and a **$123,000** increase in salaries and employee benefits[130](index=130&type=chunk) [Income Taxes](index=29&type=section&id=Income%20Taxes) This section presents the company's income tax expense and effective tax rates for the reported periods Income Taxes Table | Metric | 3 Months Ended Sep 30, 2022 (in millions, except percent) | 3 Months Ended Sep 30, 2021 (in millions, except percent) | 9 Months Ended Sep 30, 2022 (in millions, except percent) | 9 Months Ended Sep 30, 2021 (in millions, except percent) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $1.4 million | $0.8 million | $3.1 million | $3.1 million | | Effective tax rate | 21.06% | 19.55% | 20.40% | 20.17% | [Analysis of Financial Condition](index=29&type=section&id=Analysis%20of%20Financial%20Condition) This section provides an in-depth review of the company's balance sheet accounts, including assets, liabilities, and capital resources [Investment Securities](index=29&type=section&id=Investment%20Securities) This section analyzes the company's investment securities portfolio, focusing on available-for-sale securities and average balances Investment Securities Table | Metric | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :-------------------------------------- | :----------- | :----------- | | Available for sale securities | $444.4 | $406.5 | | Average investment securities available for sale (9 months) | $490.6 | $349.6 (Year Ended) | [Loans](index=29&type=section&id=Loans) This section details the composition and changes in the company's loan portfolio, including PPP loans, mortgage loans, and commercial loans Loans Table | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------------- | :----------- | :----------- | | Total loans | $1.0 billion | $884.9 million | | PPP loans outstanding | $0.103 million | $18.0 million | | Mortgage loans held for sale | $0.975 million | $3.6 million | | Residential mortgage loans | $97.7 million | $101.5 million | | Home equity loans | $97.4 million | $85.6 million | | Commercial mortgage loans | $596.4 million | $494.4 million | - Total loans increased to **$1.0 billion** at September 30, 2022, despite a **$17.9 million** reduction in PPP loans during the nine months ended September 30, 2022[135](index=135&type=chunk) - Past due TDR loans and non-accrual TDR loans totaled **$2.4 million** at September 30, 2022, with no new TDR modifications during the three and nine months ended September 30, 2022 and 2021[138](index=138&type=chunk)[139](index=139&type=chunk) [Allowance for Loan Losses (ALLL)](index=29&type=section&id=Allowance%20for%20Loan%20Losses%20(ALLL)) This section explains the methodology and components of the allowance for loan losses, including specific, general, and unallocated reserves - The ALLL is comprised of specific, general, and unallocated reserves, with general reserves based on historical net charge-offs adjusted for current conditions[146](index=146&type=chunk)[147](index=147&type=chunk) - Loans previously modified due to COVID-19, totaling **$74.0 million** at September 30, 2022, are grouped into a higher-risk pool with a higher reserve rate[147](index=147&type=chunk) - PPP loans are excluded from the ALLL as they are **100%** guaranteed by the SBA[151](index=151&type=chunk) [Credit Risk Profile](index=31&type=section&id=Credit%20Risk%20Profile) This section presents the credit quality of the loan portfolio through various risk grades, indicating the percentage of loans in each category Credit Risk Profile Table | Risk Grade | Sep 30, 2022 | Dec 31, 2021 | | :---------------------- | :----------- | :----------- | | 1- Excellent Quality | 0.57% | 0.78% | | 2- High Quality | 19.68% | 19.12% | | 3- Good Quality | 72.87% | 70.41% | | 4- Management Attention | 5.63% | 7.70% | | 5- Watch | 0.59% | 1.23% | | 6- Substandard | 0.66% | 0.76% | | 7- Doubtful | 0.00% | 0.00% | | 8- Loss | 0.00% | 0.00% | [Non-performing Assets](index=31&type=section&id=Non-performing%20Assets) This section provides an overview of non-performing assets, including non-accrual loans and their ratios to total assets and loans Non-performing Assets Table | Metric | Sep 30, 2022 (in millions, except percent) | Dec 31, 2021 (in millions, except percent) | | :-------------------------------------- | :----------- | :----------- | | Total non-performing assets | $3.7 | $3.2 | | Non-accrual loans | $3.7 | $3.2 | | Non-performing assets as % of total assets | 0.22% | 0.20% | | Non-accrual loans as % of total loans | 0.37% | 0.37% | [Deposits](index=31&type=section&id=Deposits) This section analyzes the company's deposit base, including total deposits and core deposits, and their proportion to total deposits Deposits Table | Metric | Sep 30, 2022 (in billions, except percent) | Dec 31, 2021 (in billions, except percent) | | :-------------------------------------- | :----------- | :----------- | | Total deposits | $1.5 | $1.4 | | Core deposits (non-GAAP) | $1.5 | $1.4 | | Core deposits as % of total deposits | 97.99% | 98.14% | [Borrowed Funds](index=31&type=section&id=Borrowed%20Funds) This section details the company's borrowed funds, including FHLB borrowings, securities sold under repurchase agreements, and junior subordinated debentures Borrowed Funds Table | Metric | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :-------------------------------------- | :----------- | :----------- | | FHLB borrowings outstanding | $0 | $0 | | Securities sold under agreements to repurchase | $38.0 | $37.1 | | Junior subordinated debentures | $15.5 | $15.5 | - Junior subordinated debentures are tied to three-month LIBOR, which will continue to be published through June 30, 2023[161](index=161&type=chunk) [Asset Liability and Interest Rate Risk Management](index=32&type=section&id=Asset%20Liability%20and%20Interest%20Rate%20Risk%20Management) This section describes the company's strategies for managing interest rate risk and maintaining a balanced asset/liability structure - The Asset/Liability Committee (ALCO) manages interest rate risk by minimizing fluctuations in net interest income due to interest rate movements[162](index=162&type=chunk)[163](index=163&type=chunk) - Average rate sensitive assets exceeded average rate sensitive liabilities by **$619.1 million** for the nine months ended September 30, 2022[164](index=164&type=chunk) - The Company had no interest rate derivatives outstanding at September 30, 2022, but utilizes interest rate floors on **$110.8 million** in variable rate loans[165](index=165&type=chunk)[166](index=166&type=chunk) [Liquidity](index=32&type=section&id=Liquidity) This section outlines the company's liquidity sources, unfunded commitments, and standby letters of credit, along with its liquidity ratio - Primary liquidity sources include core deposits, FHLB lines of credit (**$88.2 million** available at Sep 30, 2022), FRB lines of credit (**$427.2 million** available at Sep 30, 2022), and correspondent bank lines (**$110.5 million** available)[168](index=168&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) Liquidity Table | Metric | Sep 30, 2022 (in millions, except percent) | Dec 31, 2021 (in millions, except percent) | | :-------------------------------------- | :----------- | :----------- | | Unfunded commitments to extend credit | $373.9 million | $304.3 million | | Standby letters of credit | $5.5 million | $4.9 million | | Liquidity ratio | 34.62% | 43.28% | [Contractual Obligations and Off-Balance Sheet Arrangements](index=33&type=section&id=Contractual%20Obligations%20and%20Off-Balance%20Sheet%20Arrangements) This section details the company's future financial commitments and off-balance sheet arrangements, such as debentures and lease obligations Contractual Obligations and Off-Balance Sheet Arrangements Table | Obligation | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :-------------------------------------- | :----------- | :----------- | | Junior subordinated debentures | $15.5 million | $15.5 million | | Operating lease obligations | $6.5 million | $5.2 million | | Commitments to extend credit | $373.9 million | $304.3 million | | Standby letters of credit and financial guarantees written | $5.5 million | $4.9 million | [Capital Resources](index=33&type=section&id=Capital%20Resources) This section analyzes the company's capital structure, including shareholders' equity, capital ratios, and compliance with regulatory requirements Capital Resources Table | Metric | Sep 30, 2022 (in millions, except percent) | Dec 31, 2021 (in millions, except percent) | | :-------------------------------------- | :----------- | :----------- | | Shareholders' equity | $103.9 million | $142.4 million | | Shareholders' equity as % of total assets | 6.78% | 8.77% | | Annualized return on average equity (9 months) | 12.53% | 11.04% | | Total cash dividends paid on common stock (9 months) | $3.9 million | $2.8 million | | Common stock repurchased (9 months) | $0.6 million (22,000 shares) | N/A | Regulatory Capital Ratios Table | Regulatory Capital Ratios | Company Sep 30, 2022 | Company Dec 31, 2021 | Bank Sep 30, 2022 | Bank Dec 31, 2021 | | :-------------------------------------- | :------------------- | :------------------- | :---------------- | :---------------- | | Tier 1 capital ratio | 13.39% | 15.43% | 13.27% | 15.27% | | Total risk-based capital ratio | 14.20% | 16.35% | 14.08% | 16.19% | | Common equity Tier 1 capital ratio | 12.17% | 13.96% | 13.27% | 15.27% | | Tier 1 leverage capital ratio | 9.58% | 9.64% | 9.43% | 9.50% | - The Bank was considered 'well capitalized' at September 30, 2022, meeting all minimum regulatory capital requirements[181](index=181&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section confirms no material changes in the company's quantitative and qualitative disclosures about market risk since its last annual report - There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Item 7A of Part II of the Company's Annual Report on Form 10-K[182](index=182&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's disclosure controls and procedures and internal control over financial reporting - The chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of September 30, 2022[183](index=183&type=chunk) - No change in internal control over financial reporting occurred during the period that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[183](index=183&type=chunk) [PART II. OTHER INFORMATION](index=34&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, other information, exhibits, and signatures [Item 1. Legal Proceedings](index=34&type=section&id=Item%201.%20Legal%20Proceedings) This section details an ongoing legal dispute with the NCDOR regarding disallowed tax credits, where the Bank believes its exposure is limited by a Guaranty Agreement - The Bank is contesting proposed adjustments from the NCDOR regarding disallowed tax credits for tax years 2014-2016, totaling approximately **$1.4 million**[184](index=184&type=chunk) - The Bank paid **$1.2 million** in taxes and interest to the NCDOR, stopping the accrual of interest, and believes its exposure is limited to approximately **$125,000** due to a Tax Credit Guaranty Agreement[184](index=184&type=chunk) [Item 1A. Risk Factors](index=34&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors previously disclosed in the company's Annual Report on Form 10-K, confirming no material changes have occurred - There have been no material changes to the risk factors previously disclosed in the Form 10-K filed on March 18, 2022[185](index=185&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) This section reports on the Company's purchases of its own equity securities for its deferred compensation plan and the status of its publicly announced stock repurchase program Unregistered Sales of Equity Securities and Use of Proceeds Table | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------- | :----------------------------- | :--------------------------- | | July 1 - 31, 2022 | 1,297 | $27.10 | | August 1 - 31, 2022 | 320 | $26.20 | | September 1 - 30, 2022 | 288 | $25.91 | | Total (3 months) | 1,905 | $26.81 | - The Company purchased **1,905 shares** for its deferred compensation plan during the three months ended September 30, 2022, funded by participant contributions[186](index=186&type=chunk) - As of September 30, 2022, **$1,405,790** remained available for repurchase under the stock repurchase program authorized in February 2022[186](index=186&type=chunk)[187](index=187&type=chunk) [Item 3. Defaults Upon Senior Securities](index=35&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there are no applicable defaults upon senior securities - Not applicable[188](index=188&type=chunk) [Item 5. Other Information](index=35&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - Not applicable[188](index=188&type=chunk) [Item 6. Exhibits](index=35&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, certifications, and XBRL financial statements - Exhibits include Articles of Incorporation, Articles of Amendment, Bylaws, Specimen Stock Certificate, Certifications (302 and 906), and XBRL formatted financial statements[189](index=189&type=chunk) [SIGNATURES](index=36&type=section&id=SIGNATURES) This section contains the required signatures from the company's principal executive and financial officers, certifying the accuracy of the report - The report is signed by Lance A. Sellers, President and Chief Executive Officer, and Jeffrey N. Hooper, Executive Vice President and Chief Financial Officer, on November 4, 2022[192](index=192&type=chunk)