Peoples Bancorp of North Carolina(PEBK) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION 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 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 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 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) 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 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 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) This section provides detailed disclosures and explanations supporting the consolidated financial statements, including accounting policies and specific account breakdowns Summary of Significant Accounting Policies 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] - PEBK Capital Trust II, a wholly owned Delaware statutory trust, is not included in the Consolidated Financial Statements[23] - 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] Recent Accounting Pronouncements 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] - 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][32][33] Investment Securities 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] - 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] Loans 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] Net Earnings Per Share 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 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][70] 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][87] Leases 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 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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] - 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] - 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][100] Summary of Significant Accounting Policies 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] - Many assets and liabilities are recorded using techniques requiring significant judgment, particularly regarding recoverability of loans and fair value measurements[105] - 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] Results of Operations This section analyzes the company's financial performance over the reporting periods, focusing on key income and expense components Summary of Net Earnings 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 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] - 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][119][120] Provision for Loan Losses 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][127] Non-Interest Income 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] Non-Interest Expense 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] Income Taxes 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 This section provides an in-depth review of the company's balance sheet accounts, including assets, liabilities, and capital resources Investment Securities 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 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] - 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][139] Allowance for Loan Losses (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][147] - 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] - PPP loans are excluded from the ALLL as they are 100% guaranteed by the SBA[151] Credit Risk Profile 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 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 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 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] Asset Liability and Interest Rate Risk Management 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][163] - Average rate sensitive assets exceeded average rate sensitive liabilities by $619.1 million for the nine months ended September 30, 2022[164] - 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][166] 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][170][171] 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 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 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - 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] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, other information, exhibits, and signatures Item 1. Legal Proceedings 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] - 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - As of September 30, 2022, $1,405,790 remained available for repurchase under the stock repurchase program authorized in February 2022[186][187] Item 3. Defaults Upon Senior Securities This section states that there are no applicable defaults upon senior securities - Not applicable[188] Item 5. Other Information This section states that there is no other information to report - Not applicable[188] Item 6. Exhibits 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] 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]