Peoples Bancorp of North Carolina(PEBK) - 2022 Q4 - Annual Report

Part I Business 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] - 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] - As of December 31, 2022, the Company had 291 full-time equivalent employees[17][41] General Business and Subsidiaries 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] - 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] - 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][16] Market Area and Competition 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] Lending and Investment Policies 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] - The Bank Board receives monthly, quarterly, semi-annual, and annual reports to monitor the loan portfolio's quality, performance, and risk concentrations[30][31][32] - Investment objectives include maximizing earnings, providing liquidity, mitigating interest rate risk, ensuring principal safety, managing tax liabilities, and meeting pledging requirements[34][35][36] Human Capital Management 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][50] - 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][46] Supervision and Regulation 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] - The Bank received a "satisfactory" rating in its last Community Reinvestment Act (CRA) examination conducted in January 2020[69] - FDIC insurance expense was approximately $461,000 in 2022, compared to $415,000 in 2021 and $263,000 in 2020[66] Risk Factors The Company faces material risks from economic conditions, credit concentrations, interest rate fluctuations, cybersecurity, and common stock volatility Risks Related to Our Business 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][106][107] - 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] - 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] - 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][125][126] Risks Related to the Company's Stock 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] - 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] - 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] Unresolved Staff Comments The Company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[162] Properties 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][164] - 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][165] Legal Proceedings 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] - The Bank paid $1.2 million to the NCDOR to halt interest accrual while contesting the disallowance[166] - Management believes a purchased Guaranty Agreement limits the Bank's potential exposure in the NCDOR matter to approximately $125,000[166] Mine Safety Disclosures The Company has no mine safety disclosures to report - There are no mine safety disclosures[168] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] 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][178] Selected Financial Data 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] Management's Discussion and Analysis of Financial Condition and Results of Operations 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] Quantitative and Qualitative Disclosures About Market Risk The Company has no information to report for this item - This item is not applicable[181] Financial Statements and Supplementary Data 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] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The Company reports no changes in or disagreements with its accountants on accounting and financial disclosure - This item is not applicable[182] Controls and Procedures 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] - Management assessed internal control over financial reporting based on the COSO framework and believes it was effective as of December 31, 2022[187] - 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] Other Information The Company has no other information to report - This item is not applicable[189] Part III Directors and Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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][196] Certain Relationships and Related Transactions and Director Independence 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] Principal Accountant Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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][207] - Exhibits include key corporate governance documents, material contracts such as employment agreements and trust agreements for securities, and required SOX certifications[204][205][206] - Financial data formatted in eXtensible Business Reporting Language (XBRL) is included as Exhibit (101)[207]