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PEOPLES BANCORP OF NORTH CAROLINA INC - Quarter Report: 2023 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2023

 

OR

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

000-27205

(Commission File No.)

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina

 

56-2132396

 (State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

518 West C Street, Newton, North Carolina

 

28658

(Address of principal executive offices)

 

(Zip Code)

 

(828) 464-5620

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name on each exchange on which registered

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐     No ☒

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,637,021 shares of common stock, outstanding at April 30, 2023.

 

 

 

 

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

PAGE(S)

 

Item 1.

Financial Statements

 

 4

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2023 (Unaudited) and December 31, 2022 (Audited)

 

4

 

 

 

 

 

 

 

Consolidated Statements of Earnings for the three months ended March 31, 2023 and 2022 (Unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022 (Unaudited)

 

6

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2023 and 2022 (Unaudited)

 

7

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited)

 

8-9

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

10-28

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

29-38

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

39

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

39

 

 

PART II.  OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

40

 

Item 1A.

Risk Factors

 

40

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

Item 3.

Defaults upon Senior Securities

 

40

 

Item 5.

Other Information

 

40

 

Item 6.

Exhibits

 

41

 

Signatures

 

42

 

Certifications

 

 

 

 

 
2

Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

Statements made in this Quarterly Report on Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Quarterly Report on Form 10-Q was prepared.  These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by the registrant and its subsidiaries, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

 
3

Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

 

March 31, 2023 and December 31, 2022

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

March 31,

 

 

December 31,

 

Assets

 

 2023

 

 

 2022

 

 

 

 (Unaudited)

 

 

 (Audited)

 

 

 

 

 

 

 

 

Cash and due from banks, including reserve requirements of $0 at both 3/31/23 and 12/31/22

 

$40,100

 

 

 

50,061

 

Interest-bearing deposits

 

 

42,921

 

 

 

21,535

 

Cash and cash equivalents

 

 

83,021

 

 

 

71,596

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale

 

 

399,148

 

 

 

445,394

 

Other investments

 

 

2,628

 

 

 

2,656

 

Total securities

 

 

401,776

 

 

 

448,050

 

 

 

 

 

 

 

 

 

 

Mortgage loans held for sale

 

 

417

 

 

 

211

 

 

 

 

 

 

 

 

 

 

Loans

 

 

1,050,871

 

 

 

1,032,608

 

Less allowance for credit losses

 

 

(9,617)

 

 

(10,494)

Net loans

 

 

1,041,254

 

 

 

1,022,114

 

 

 

 

 

 

 

 

 

 

Premises and equipment, net

 

 

18,194

 

 

 

18,205

 

Cash surrender value of life insurance

 

 

17,806

 

 

 

17,703

 

Right of use lease asset

 

 

4,949

 

 

 

5,116

 

Accrued interest receivable and other assets

 

 

35,275

 

 

 

37,932

 

Total assets

 

$1,602,692

 

 

 

1,620,927

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$502,702

 

 

 

523,088

 

Interest-bearing demand, MMDA & savings

 

 

742,473

 

 

 

814,128

 

Time, over $250,000

 

 

67,595

 

 

 

31,001

 

Other time

 

 

100,671

 

 

 

66,998

 

Total deposits

 

 

1,413,441

 

 

 

1,435,215

 

 

 

 

 

 

 

 

 

 

Securities sold under agreements to repurchase

 

 

39,535

 

 

 

47,688

 

Junior subordinated debentures

 

 

15,464

 

 

 

15,464

 

Lease liability

 

 

5,033

 

 

 

5,185

 

Accrued interest payable and other liabilities

 

 

14,436

 

 

 

12,180

 

Total liabilities

 

 

1,487,909

 

 

 

1,515,732

 

 

 

 

 

 

 

 

 

 

Commitments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,637,021 shares at March 31, 2023 and 5,636,830 shares at December 31, 2022

 

 

52,642

 

 

 

52,636

 

Common stock held by deferred compensation trust, at cost; 158,356 shares at March 31, 2023 and 163,883 shares at December 31, 2022

 

 

(1,837)

 

 

(2,181)

Deferred compensation

 

 

1,837

 

 

 

2,181

 

Retained earnings

 

 

100,565

 

 

 

100,156

 

Accumulated other comprehensive loss

 

 

(38,424)

 

 

(47,597)

Total shareholders' equity

 

 

114,783

 

 

 

105,195

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$1,602,692

 

 

 

1,620,927

 

  

See accompanying Notes to Consolidated Financial Statements.                 

 

 
4

Table of Contents

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

Consolidated Statements of Earnings

 

 

 

 

 

 Three Months Ended March 31, 2023 and 2022

 

 

 

 

 

(Dollars in thousands, except per share amounts)

 

 

 

 

 

 2023

 

 

 2022

 

 

 

 (Unaudited)

 

 

 (Unaudited)

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

Interest and fees on loans

 

$12,883

 

 

 

9,742

 

Interest on due from banks

 

 

383

 

 

 

111

 

Interest on investment securities:

 

 

 

 

 

 

 

 

U.S. Government sponsored enterprises

 

 

2,230

 

 

 

505

 

State and political subdivisions

 

 

862

 

 

 

943

 

Other

 

 

443

 

 

 

28

 

Total interest income

 

 

16,801

 

 

 

11,329

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Interest-bearing demand, MMDA & savings deposits

 

 

1,488

 

 

 

403

 

Time deposits

 

 

516

 

 

 

146

 

Junior subordinated debentures

 

 

248

 

 

 

75

 

Other

 

 

211

 

 

 

39

 

Total interest expense

 

 

2,463

 

 

 

663

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

14,338

 

 

 

10,666

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

224

 

 

 

71

 

 

 

 

 

 

 

 

 

 

Net interest income after provision for credit losses

 

 

14,114

 

 

 

10,595

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

Service charges

 

 

1,341

 

 

 

1,168

 

Other service charges and fees

 

 

182

 

 

 

193

 

Loss on sale of securities, net

 

 

(2,488)

 

 

-

 

Mortgage banking income

 

 

93

 

 

 

200

 

Insurance and brokerage commissions

 

 

228

 

 

 

240

 

Appraisal management fee income

 

 

2,094

 

 

 

3,506

 

Miscellaneous

 

 

2,161

 

 

 

1,739

 

Total non-interest income

 

 

3,611

 

 

 

7,046

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

6,500

 

 

 

5,849

 

Occupancy

 

 

2,014

 

 

 

1,916

 

Professional fees

 

 

399

 

 

 

373

 

Advertising

 

 

189

 

 

 

165

 

Debit card expense

 

 

273

 

 

 

276

 

FDIC insurance

 

 

110

 

 

 

110

 

Appraisal management fee expense

 

 

1,650

 

 

 

2,772

 

Other

 

 

2,567

 

 

 

1,880

 

Total non-interest expense

 

 

13,702

 

 

 

13,341

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

4,023

 

 

 

4,300

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

851

 

 

 

848

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$3,172

 

 

 

3,452

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$0.58

 

 

 

0.63

 

Diluted net earnings per share

 

$0.56

 

 

 

0.61

 

Cash dividends declared per share

 

$0.34

 

 

 

0.33

 

            

See accompanying Notes to Consolidated Financial Statements.                 

  

 
5

Table of Contents

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

 

 

 

Three Months Ended March 31, 2023 and 2022

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 2023

 

 

 2022

 

 

 

 (Unaudited)

 

 

 (Unaudited)

 

 

 

 

 

 

 

 

Net earnings

 

$3,172

 

 

 

3,452

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale

 

 

9,421

 

 

 

(23,813)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses on securities available for sale included in net earnings

 

 

2,488

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), before income taxes

 

 

11,909

 

 

 

(23,813)

 

 

 

 

 

 

 

 

 

Income tax benefit related to other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on securities available for sale

 

 

2,164

 

 

 

(5,471)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses on sales of securities available for sale included in net earnings

 

 

572

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Total income tax expense (benefit) related to other comprehensive income (loss)

 

 

2,736

 

 

 

(5,471)

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

 

9,173

 

 

 

(18,342)

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$12,345

 

 

 

(14,890)

 

See accompanying Notes to Consolidated Financial Statements.                 

 

 
6

Table of Contents

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2023 and 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held By

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Retained

 

 

Deferred

 

 

Compensation

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Compensation

 

 

Trust

 

 

Loss

 

 

Total

 

 

 

(Unaudited)

 

 

 (Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited)

 

 

(Unaudited) 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2022

 

 

5,636,830

 

 

$52,636

 

 

 

100,156

 

 

 

2,181

 

 

 

(2,181)

 

 

(47,597)

 

 

105,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of new accounting standard, net of tax

 

 

-

 

 

 

-

 

 

 

(838)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(838)

Cash dividends declared on common stock

 

 

-

 

 

 

-

 

 

 

(1,925)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,925)

Restricted stock units exercised

 

 

191

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6

 

Equity incentive plan, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(344)

 

 

344

 

 

 

-

 

 

 

-

 

Net earnings

 

 

-

 

 

 

-

 

 

 

3,172

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,172

 

Change in accumulated other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,173

 

 

 

9,173

 

Balance, March 31, 2023

 

 

5,637,021

 

 

$52,642

 

 

 

100,565

 

 

 

1,837

 

 

 

(1,837)

 

 

(38,424)

 

 

114,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2021

 

 

5,661,569

 

 

$53,305

 

 

 

88,968

 

 

 

1,992

 

 

 

(1,992)

 

 

96

 

 

 

142,369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchase

 

 

(7,000)

 

 

(199)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(199)

Cash dividends declared on common stock

 

 

-

 

 

 

-

 

 

 

(1,877)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,877)

Restricted stock units exercised

 

 

1,461

 

 

 

41

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

41

 

Equity incentive plan, net

 

 

-

 

 

 

-

 

 

 

-

 

 

 

50

 

 

 

(50)

 

 

-

 

 

 

-

 

Net earnings

 

 

-

 

 

 

-

 

 

 

3,452

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,452

 

Change in accumulated other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18,342)

 

 

(18,342)
Balance, March 31, 2022

 

 

5,656,030

 

 

$53,147

 

 

 

90,543

 

 

 

2,042

 

 

 

(2,042)

 

 

(18,246)

 

 

125,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 See accompanying Notes to Consolidated Financial Statements.

 

 
7

Table of Contents

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Three Months Ended March 31, 2023 and 2022

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$3,172

 

 

 

3,452

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

903

 

 

 

1,616

 

Provision for credit losses

 

 

224

 

 

 

71

 

Deferred income taxes

 

 

(229)

 

 

(10)

Loss on sale of investment securities, net

 

 

2,488

 

 

 

-

 

Restricted stock expense

 

 

(49)

 

 

(56)

Proceeds from sales of mortgage loans held for sale

 

 

4,621

 

 

 

10,817

 

Origination of mortgage loans held for sale

 

 

(4,827)

 

 

(8,065)

Change in:

 

 

 

 

 

 

 

 

Cash surrender value of life insurance

 

 

(103)

 

 

(101)

Right of use lease asset

 

 

167

 

 

 

167

 

Other assets

 

 

(380)

 

 

(700)

Lease liability

 

 

(152)

 

 

(161)

Other liabilities

 

 

2,207

 

 

 

133

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

8,042

 

 

 

7,163

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of investment securities available for sale

 

 

-

 

 

 

(41,600)

Proceeds from sales, calls and maturities of investment securities available for sale

 

 

52,023

 

 

 

6,440

 

Proceeds from paydowns of investment securities available for sale

 

 

3,305

 

 

 

8,829

 

Proceeds from paydowns of other investment securities

 

 

37

 

 

 

215

 

Redemption (purchase) of FHLB stock

 

 

2

 

 

 

(105)

Net change in loans

 

 

(19,566)

 

 

(4,889)

Purchases of premises and equipment

 

 

(566)

 

 

(151)

Proceeds from bank owned life insurance

 

 

-

 

 

 

65

 

 

 

 

 

 

 

 

 

 

Net cash provided (used) by investing activities

 

 

35,235

 

 

 

(31,196)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net change in deposits

 

 

(21,774)

 

 

55,987

 

Net change in securities sold under agreement to repurchase

 

 

(8,153)

 

 

(2,271)

Proceeds from Fed Funds purchased

 

 

43,275

 

 

 

-

 

Repayments of Fed Funds purchased

 

 

(43,275)

 

 

-

 

Common stock repurchased

 

 

-

 

 

 

(199)

Cash dividends paid on common stock

 

 

(1,925)

 

 

(1,877)

 

 

 

 

 

 

 

 

 

Net cash provided (used) by financing activities

 

 

(31,852)

 

 

51,640

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

11,425

 

 

 

27,607

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

71,596

 

 

 

277,499

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$83,021

 

 

 

305,106

 

 

 
8

Table of Contents

  

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

 

 

 

 

Consolidated Statements of Cash Flows, continued

 

 

 

 

 

Three Months Ended March 31, 2023 and 2022

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$2,275

 

 

 

653

 

Income taxes

 

$-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Change in unrealized loss on investment securities available for sale, net

 

$9,173

 

 

 

(18,342)

Issuance of accrued restricted stock units

 

$6

 

 

 

41

 

Initial recognition of lease right-of-use asset and lease liability

 

$-

 

 

 

1,759

 

Allowance for credit losses record upon adoption of ASU 326

 

$(838)

 

 

-

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements.

   

 
9

Table of Contents

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

Notes to Consolidated Financial Statements (Unaudited)

 

(1) Summary of Significant Accounting Policies

 

The Consolidated Financial Statements include the financial statements of Peoples Bancorp of North Carolina, Inc. (the “Company”) and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

 

In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), to facilitate the issuance of $20.6 million of trust preferred securities. PEBK Trust II is not included in the Consolidated Financial Statements.

 

The Bank operates three banking offices focused on the Latino population that were formerly operated as a separate division of the Bank under the name Banco de la Gente (“Banco”). These offices, which offer the same banking services as our other branches offer, now operate under the same name as our other offices; however, we continue to separately categorize mortgage loans originated from these offices.

 

The Consolidated Financial Statements in this report (other than the Consolidated Balance Sheet at December 31, 2022) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segment: Banking Operations and CBRES, as discussed more fully in Note 7. In determining the appropriateness of segment definition, the Company considers the criteria of Accounting Standards Codification (“ASC”) 280, Segment Reporting.

 

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the adoption of ASC 326 noted below.

 

 
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Table of Contents

 

Recent Accounting Pronouncements

 

The following table provides a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted.

 

ASU

Description

Effective Date

Effect on Financial Statements or Other Significant Matters

ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates

Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.

January 1, 2023

The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.

ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses

Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.

January 1, 2023

The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.

ASU 2020-03: Codification Improvements to Financial Instruments

Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.

January 1, 2023

The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures

Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination.

January 1, 2023

The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position but did impact disclosure requirements.

 

Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

On January 1, 2023, the Company adopted ASC 326, which replaced the incurred loss impairment framework in prior GAAP with a current expected credit loss (“CECL”) framework, which requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost are presented at the net amount expected to be collected by using an allowance for credit losses (“ACL”).

 

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.

 

The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. 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, comprised of a $2.3 million increase in the allowance for credit losses on unfunded commitments and a $1.2 million decrease in the allowance for credit losses on loans.  There was no impact to the available-for-sale securities portfolio or other financial instruments.  Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP (referred to as the “Incurred Loss” methodology).

 

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material.

 

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

 

 
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Table of Contents

 

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. No loans were individually evaluated as of March 31, 2023. The Company has identified the following portfolio segments and calculates the allowance for credit losses for each using a Weighted Average Remaining Maturity methodology:

 

 

-

1-4 family residential construction loans

 

-

Other construction loans and all land development and other land loans

 

-

Secured by farmland (including farm residential and other improvements)

 

-

Home equity loans

 

-

1-4 family residential loans secured by first liens

 

-

1-4 family residential loans secured by junior liens

 

-

Secured by multifamily residential properties

 

-

Loans secured by owner-occupied, nonfarm nonresidential properties

 

-

Loans secured by other nonfarm nonresidential properties

 

-

Loans to finance agricultural production and other loans to farmers

 

-

Commercial and industrial loans

 

-

Other revolving credit plans

 

-

Other consumer loans

 

-

Obligations (other than securities and leases) of states and political subdivisions in the US

 

-

Other loans

 

Under the WARM methodology, lifetime losses are calculated by determining the remaining life of the loan pool and then applying a loss rate which includes a forecast component over this remaining life of the loan. The methodology considers historical loss experience and a loss forecast expectation to estimate credit losses for the remaining balance of the loan pool. The calculated loss rate is applied to the contractual term (adjusted for prepayments) to determine the loan pool’s current expected credit losses. The Company’s forecast period for all pools projects the next four quarters to have similar loss rates to the period between November 1, 2015 and March 31, 2019, and then with a reversion back to the long-term average over four quarters.

 

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk.

 

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date unadjusted for selling costs as appropriate. The Company did not have any loans evaluated on an individual basis at March 31, 2023.

 

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

 

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. 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 using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

 

 
12

Table of Contents

 

(2) Investment Securities

 

Investment securities available for sale at March 31, 2023 and December 31, 2022 are as follows:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

 

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Fair Value

 

U.S Treasuries

 

$10,957

 

 

 

-

 

 

 

949

 

 

 

10,008

 

U.S. Government sponsored enterprises

 

 

11,925

 

 

 

-

 

 

 

621

 

 

 

11,304

 

Mortgage-backed securities

 

 

296,024

 

 

 

836

 

 

 

23,040

 

 

 

273,820

 

State and political subdivisions

 

 

130,125

 

 

 

-

 

 

 

26,109

 

 

 

104,016

 

Total

 

$449,031

 

 

 

836

 

 

 

50,719

 

 

 

399,148

 

  

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 December 31, 2022

 

 

 

 Amortized Cost

 

 

 Gross Unrealized Gains

 

 

 Gross Unrealized Losses

 

 

 Fair Value

 

U.S Treasuries

 

$10,951

 

 

 

-

 

 

 

1,137

 

 

 

9,814

 

U.S. Government sponsored enterprises

 

 

12,245

 

 

 

-

 

 

 

706

 

 

 

11,539

 

Mortgage-backed securities

 

 

299,222

 

 

 

445

 

 

 

25,829

 

 

 

273,838

 

State and political subdivisions

 

 

184,768

 

 

 

91

 

 

 

34,656

 

 

 

150,203

 

Total

 

$507,186

 

 

 

536

 

 

 

62,328

 

 

 

445,394

 

 

The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2023 and December 31, 2022 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

U.S. Treasuries

 

$-

 

 

 

-

 

 

 

10,008

 

 

 

949

 

 

 

10,008

 

 

 

949

 

U.S. Government sponsored enterprises

 

 

2,926

 

 

 

66

 

 

 

8,378

 

 

 

555

 

 

 

11,304

 

 

 

621

 

Mortgage-backed securities

 

 

78,542

 

 

 

5,043

 

 

 

161,848

 

 

 

17,997

 

 

 

240,390

 

 

 

23,040

 

State and political subdivisions

 

 

4,142

 

 

 

279

 

 

 

99,874

 

 

 

25,829

 

 

 

104,016

 

 

 

26,109

 

Total

 

$85,610

 

 

 

5,388

 

 

 

280,108

 

 

 

45,330

 

 

 

365,718

 

 

 

50,719

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

Less than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

 

Fair Value

 

 

Unrealized Losses

 

U.S. Treasuries

 

$2,878

 

 

 

104

 

 

 

6,936

 

 

 

1,033

 

 

 

9,814

 

 

 

1,137

 

U.S. Government sponsored enterprises

 

 

2,904

 

 

 

87

 

 

 

8,635

 

 

 

619

 

 

 

11,539

 

 

 

706

 

Mortgage-backed securities

 

 

128,241

 

 

 

8,740

 

 

 

120,464

 

 

 

17,089

 

 

 

248,705

 

 

 

25,829

 

State and political subdivisions

 

 

65,880

 

 

 

7,766

 

 

 

76,291

 

 

 

26,890

 

 

 

142,171

 

 

 

34,656

 

Total

 

$199,903

 

 

 

16,697

 

 

 

212,326

 

 

 

45,631

 

 

 

412,229

 

 

 

62,328

 

 

 
13

Table of Contents

 

At March 31, 2023, unrealized losses in the investment securities portfolio relating to debt securities totaled $50.7 million.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the March 31, 2023 tables above, all three of the U.S. Treasury securities, all 108 of the securities issued by state and political subdivisions , all seven of the securities issued by U.S. Government sponsored enterprises and 119 of the 132 mortgage-backed securities contained unrealized losses.  These unrealized losses are not related to credit impairment because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities.  The Company does not have an allowance for credit losses on available for sale securities at March 31, 2023.  At December 31, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $62.3 million.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the December 31, 2022 tables above, all three of the U.S. Treasury securities, 149 of the 158 securities issued by state and political subdivisions, all seven of the securities issued by U.S. Government sponsored enterprises and 123 of the 133 mortgage-backed securities contained unrealized losses.  These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities.

 

The amortized cost and estimated fair value of investment securities available for sale at March 31, 2023, presented by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

 

March 31, 2023

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Fair Value

 

Due within one year

 

$2,985

 

 

 

2,905

 

Due from one to five years

 

 

13,811

 

 

 

12,663

 

Due from five to ten years

 

 

45,941

 

 

 

39,331

 

Due after ten years

 

 

90,270

 

 

 

70,429

 

Mortgage-backed securities

 

 

296,024

 

 

 

273,820

 

Total

 

$449,031

 

 

 

399,148

 

 

During the three months ended March 31, 2023, proceeds from sales of securities available for sale were $53.5 million and resulted in gross losses of $2.7 million and gross gains of $177,000. No securities available for sale were sold during the three months ended March 31, 2022.

 

Securities with a fair value of approximately $99.6 million and $96.0 million at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits and for other purposes as required by law.

 

 
14

Table of Contents

 

(3) Loans

 

Major classifications of loans at March 31, 2023 and December 31, 2022 are summarized as follows:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

March 31,

2023

 

 

December 31,

2022

 

Real estate loans:

 

 

 

 

 

 

Construction and land development

 

$120,836

 

 

 

114,446

 

Single-family residential

 

 

327,260

 

 

 

322,262

 

Single-family residential -

 

 

 

 

 

 

 

 

Banco de la Gente non-traditional

 

 

19,415

 

 

 

20,019

 

Commercial

 

 

410,775

 

 

 

406,750

 

Multifamily and farmland

 

 

69,139

 

 

 

65,562

 

Total real estate loans

 

 

947,425

 

 

 

929,039

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

Commercial loans

 

 

79,252

 

 

 

81,307

 

Farm loans

 

 

632

 

 

 

938

 

Consumer loans

 

 

7,240

 

 

 

6,834

 

All other loans

 

 

16,322

 

 

 

14,490

 

 

 

 

 

 

 

 

 

 

Total loans

 

 

1,050,871

 

 

 

1,032,608

 

 

 

 

 

 

 

 

 

 

Less allowance for credit losses

 

 

(9,617)

 

 

(10,494)

 

 

 

 

 

 

 

 

 

Total net loans

 

$1,041,254

 

 

 

1,022,114

 

 

The Bank makes loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Wake, Rowan and Forsyth counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

 

 

·

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral.

 

 

 

 

·

Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.

 

 

 

 

·

Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over the loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.

 

 

 

 

·

Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business.

 

 

 

 

·

Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans.

   

Loans are considered past due if the required principal and interest payments have not been received within 30 days of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

 
15

Table of Contents

 

The following tables present an age analysis of past due loans, by loan type, as of March 31, 2023 and December 31, 2022:

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 30-89 Days Past Due

 

 

Loans 90 or More Days Past Due

 

 

Total Past Due Loans

 

 

Total Current Loans

 

 

Total Loans

 

 

Accruing Loans 90 or More Days Past Due

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$94

 

 

 

-

 

 

 

94

 

 

 

120,742

 

 

 

120,836

 

 

 

-

 

Single-family residential

 

 

3,313

 

 

 

455

 

 

 

3,768

 

 

 

323,492

 

 

 

327,260

 

 

 

-

 

Single-family residential -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco de la Gente non-traditional

 

 

2,443

 

 

 

82

 

 

 

2,525

 

 

 

16,890

 

 

 

19,415

 

 

 

-

 

Commercial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

410,775

 

 

 

410,775

 

 

 

-

 

Multifamily and farmland

 

 

-

 

 

 

-

 

 

 

-

 

 

 

69,139

 

 

 

69,139

 

 

 

-

 

Total real estate loans

 

 

5,850

 

 

 

537

 

 

 

6,387

 

 

 

941,038

 

 

 

947,425

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

156

 

 

 

-

 

 

 

156

 

 

 

79,096

 

 

 

79,252

 

 

 

-

 

Farm loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

632

 

 

 

632

 

 

 

-

 

Consumer loans

 

 

47

 

 

 

-

 

 

 

47

 

 

 

7,193

 

 

 

7,240

 

 

 

-

 

All other loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,322

 

 

 

16,322

 

 

 

-

 

Total loans

 

$6,053

 

 

 

537

 

 

 

6,590

 

 

 

1,044,281

 

 

 

1,050,871

 

 

 

-

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans 30-89 Days Past Due

 

 

Loans 90 or More Days Past Due

 

 

Total Past Due Loans

 

 

Total Current Loans

 

 

Total Loans

 

 

Accruing Loans 90 or More Days Past Due

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$363

 

 

 

-

 

 

 

363

 

 

 

114,083

 

 

 

114,446

 

 

 

-

 

Single-family residential

 

 

4,318

 

 

 

256

 

 

 

4,574

 

 

 

317,688

 

 

 

322,262

 

 

 

-

 

Single-family residential -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco de la Gente non-traditional

 

 

2,977

 

 

 

264

 

 

 

3,241

 

 

 

16,778

 

 

 

20,019

 

 

 

-

 

Commercial

 

 

306

 

 

 

-

 

 

 

306

 

 

 

406,444

 

 

 

406,750

 

 

 

-

 

Multifamily and farmland

 

 

-

 

 

 

-

 

 

 

-

 

 

 

65,562

 

 

 

65,562

 

 

 

-

 

Total real estate loans

 

 

7,964

 

 

 

520

 

 

 

8,484

 

 

 

920,555

 

 

 

929,039

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

3

 

 

 

-

 

 

 

3

 

 

 

81,304

 

 

 

81,307

 

 

 

-

 

Farm loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

938

 

 

 

938

 

 

 

-

 

Consumer loans

 

 

71

 

 

 

-

 

 

 

71

 

 

 

6,763

 

 

 

6,834

 

 

 

-

 

All other loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,490

 

 

 

14,490

 

 

 

-

 

Total loans

 

$8,038

 

 

 

520

 

 

 

8,558

 

 

 

1,024,050

 

 

 

1,032,608

 

 

 

-

 

 

 
16

Table of Contents

 

The following table presents non-accrual loans as of March 31, 2023 and December 31, 2022:

 

 

 

CECL

 

 

Incurred Loss

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Nonaccrual Loans

 

 

Nonaccrual Loans

 

 

Total

 

 

Total

 

 

 

With No

 

 

With

 

 

Nonaccrual

 

 

Nonaccrual

 

(Dollars in thousands)

 

Allowance

 

 

Allowance

 

 

Loans

 

 

Loans

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$50

 

 

 

-

 

 

 

50

 

 

 

53

 

Single-family residential

 

 

2,029

 

 

 

-

 

 

 

2,029

 

 

 

1,914

 

Single-family residential -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco de la Gente non-traditional

 

 

1,350

 

 

 

-

 

 

 

1,350

 

 

 

1,532

 

Commercial

 

 

125

 

 

 

-

 

 

 

125

 

 

 

129

 

Multifamily and farmland

 

 

87

 

 

 

-

 

 

 

87

 

 

 

91

 

Total real estate loans

 

 

3,641

 

 

 

-

 

 

 

3,641

 

 

 

3,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer loans

 

 

3

 

 

 

-

 

 

 

3

 

 

 

9

 

Total

 

$3,644

 

 

 

-

 

 

 

3,644

 

 

 

3,728

 

 

Interest income is not recognized on non-accrual loans.

 

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

 

Because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Bank modifies loans by providing principal forgiveness on certain loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

 

In some cases, the Bank may modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

 

The following table shows the amortized cost basis at March 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

Term Extension

 

 

 

Amortized Cost Basis at March 31, 2023

 

 

% of Loan Class

 

Loan class:

 

 

 

 

 

 

Commercial real estate

 

 

686

 

 

 

0.17%

Total

 

$686

 

 

 

 

 

 

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty.

 

 Term Extension

Loan Class

Financial Effect

Commercial real estate

Extended existing amortization from 148 months to 173 months to keep existing payment the same with the current market rate.

 

Upon the Bank’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

 

No loans modified in the three months ended March 31, 2023 that were made to borrowers experiencing financial difficulty had been written off at March 31, 2023.

 

 
17

Table of Contents

 

The Bank closely monitors the performance of those loans that are modified because borrowers are experiencing financial difficulty so as to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the last 12 months.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Payment Status (Amortized Cost Basis)

 

 

 

Current

 

 

30 - 89 Days Past Due

 

 

90 + Days Past Due

 

Loan type:

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

686

 

 

 

-

 

 

 

-

 

Total

 

$686

 

 

 

-

 

 

 

-

 

  

The following table presents impaired loans as of and for the year ended December 31, 2022:

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid Contractual Principal Balance

 

 

Recorded Investment With No Allowance

 

 

Recorded Investment With Allowance

 

 

Recorded Investment in Impaired Loans

 

 

Related Allowance

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$110

 

 

 

-

 

 

 

110

 

 

 

110

 

 

 

2

 

Single-family residential

 

 

3,912

 

 

 

236

 

 

 

3,300

 

 

 

3,536

 

 

 

60

 

Single-family residential -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco de la Gente non-traditional

 

 

10,441

 

 

 

-

 

 

 

9,748

 

 

 

9,748

 

 

 

611

 

Commercial

 

 

1,785

 

 

 

421

 

 

 

1,346

 

 

 

1,767

 

 

 

9

 

Multifamily and farmland

 

 

104

 

 

 

-

 

 

 

91

 

 

 

91

 

 

 

-

 

Total impaired real estate loans

 

 

16,352

 

 

 

657

 

 

 

14,595

 

 

 

15,252

 

 

 

682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

116

 

 

 

-

 

 

 

116

 

 

 

116

 

 

 

1

 

Consumer loans

 

 

11

 

 

 

-

 

 

 

9

 

 

 

9

 

 

 

-

 

Total impaired loans

 

$16,479

 

 

 

657

 

 

 

14,720

 

 

 

15,377

 

 

 

683

 

 

 
18

Table of Contents

 

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three months ended March 31, 2022 and the twelve months ended December 31, 2022.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Twelve months ended

 

 

 

March 31, 2022

 

 

December 31, 2022

 

 

 

Average Balance

 

 

Interest Income Recognized

 

 

Average Balance

 

 

Interest Income Recognized

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$71

 

 

 

2

 

 

 

75

 

 

 

8

 

Single-family residential

 

 

5,723

 

 

 

47

 

 

 

5,194

 

 

 

194

 

Single-family residential -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banco de la Gente stated income

 

 

9,566

 

 

 

139

 

 

 

8,757

 

 

 

552

 

Commercial

 

 

2,032

 

 

 

25

 

 

 

1,916

 

 

 

93

 

Multifamily and farmland

 

 

103

 

 

 

1

 

 

 

96

 

 

 

5

 

Total impaired real estate loans

 

 

17,495

 

 

 

214

 

 

 

16,038

 

 

 

852

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans not secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans

 

 

188

 

 

 

2

 

 

 

137

 

 

 

8

 

Consumer loans

 

 

7

 

 

 

-

 

 

 

15

 

 

 

2

 

Total impaired loans

 

$17,690

 

 

 

216

 

 

 

16,190

 

 

 

862

 

 

Impaired loans collectively evaluated for impairment totaled $5.3 million $4.9 million at March 31, 2022 and December 31, 2022, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $47,000 and $44,000 at March 31, 2022 and December 31, 2022, respectively.

 

The following tables present changes in the allowance for credit losses for the three months ended March 31, 2023 and 2022. The March 31, 2023 table reflects the CECL methodology and the March 31, 2022 table reflects the Incurred Loss methodology. Paycheck Protection Program (“PPP”) loans are excluded from the allowance for credit losses because PPP loans are guaranteed by the Small Business Administration (“SBA”). No loans were individually evaluated as of March 31, 2023. 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Land Development

 

 

Single-Family Residential

 

 

Single-Family Residential - Banco de la Gente non-traditional

 

 

Commercial

 

 

Multifamily and Farmland

 

 

Commercial

 

 

Farm

 

 

Consumer and All Other

 

 

Unallocated

 

 

Total

 

Three months ended March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$1,415

 

 

 

2,322

 

 

 

763

 

 

 

3,207

 

 

 

164

 

 

 

657

 

 

 

-

 

 

 

214

 

 

 

1,752

 

 

 

10,494

 

Adjustment for CECL implementation

 

 

3,781

 

 

 

715

 

 

 

(576)

 

 

(986)

 

 

115

 

 

 

(295)

 

 

2

 

 

 

54

 

 

 

(1,752)

 

 

1,058

 

Charge-offs

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(166)

 

 

-

 

 

 

(166)

Recoveries

 

 

-

 

 

 

11

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

9

 

 

 

-

 

 

 

60

 

 

 

-

 

 

 

82

 

Provision (recovery) for unfunded commitments

 

 

(193)

 

 

(8)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2)

 

 

-

 

 

 

(203)

Provision (recovery) for loan losses

 

 

250

 

 

 

37

 

 

 

(6)

 

 

21

 

 

 

19

 

 

 

(23)

 

 

(1)

 

 

130

 

 

 

-

 

 

 

427

 

Ending balance

 

$5,253

 

 

 

3,077

 

 

 

181

 

 

 

2,244

 

 

 

298

 

 

 

348

 

 

 

1

 

 

 

290

 

 

 

-

 

 

 

11,692

 

Allowance for credit loss-loans

 

$3,249

 

 

 

3,010

 

 

 

181

 

 

 

2,244

 

 

 

298

 

 

 

348

 

 

 

1

 

 

 

286

 

 

 

-

 

 

 

9,617

 

Allowance for credit losses loan commitments

 

 

2,004

 

 

 

67

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

2,075

 

Total allowance for credit losses

 

$5,253

 

 

 

3,077

 

 

 

181

 

 

 

2,244

 

 

 

298

 

 

 

348

 

 

 

1

 

 

 

290

 

 

 

-

 

 

 

11,692

 

 

 
19

Table of Contents

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Land Development

 

 

Single-Family Residential

 

 

Single-Family Residential - Banco de la Gente non-traditional

 

 

Commercial

 

 

Multifamily and Farmland

 

 

Commercial

 

 

Farm

 

 

Consumer and All Other

 

 

Unallocated

 

 

Total

 

Three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$1,193

 

 

 

2,013

 

 

 

864

 

 

 

2,234

 

 

 

150

 

 

 

711

 

 

 

-

 

 

 

110

 

 

 

2,080

 

 

 

9,355

 

Charge-offs

 

 

-

 

 

 

(31)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4)

 

 

-

 

 

 

(125)

 

 

-

 

 

 

(160)

Recoveries

 

 

-

 

 

 

117

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

19

 

 

 

-

 

 

 

22

 

 

 

-

 

 

 

160

 

Provision (recovery)

 

 

(30)

 

 

(4)

 

 

(23)

 

 

775

 

 

 

(3)

 

 

(80)

 

 

-

 

 

 

121

 

 

 

(685)

 

 

71

 

Ending balance

 

$1,163

 

 

 

2,095

 

 

 

841

 

 

 

3,011

 

 

 

147

 

 

 

646

 

 

 

-

 

 

 

128

 

 

 

1,395

 

 

 

9,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$1

 

 

 

38

 

 

 

657

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

702

 

Ending balance: collectively evaluated for impairment

 

 

1,162

 

 

 

2,057

 

 

 

184

 

 

 

3,005

 

 

 

147

 

 

 

646

 

 

 

-

 

 

 

128

 

 

 

1,395

 

 

 

8,724

 

Ending balance

 

$1,163

 

 

 

2,095

 

 

 

841

 

 

 

3,011

 

 

 

147

 

 

 

646

 

 

 

-

 

 

 

128

 

 

 

1,395

 

 

 

9,426

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans at March 31, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$95,025

 

 

 

272,991

 

 

 

22,137

 

 

 

354,169

 

 

 

58,927

 

 

 

73,409

 

 

 

863

 

 

 

12,237

 

 

 

-

 

 

 

889,758

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: individually evaluated for impairment

 

$4

 

 

 

859

 

 

 

9,494

 

 

 

1,426

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,783

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance: collectively evaluated for impairment

 

$95,021

 

 

 

272,132

 

 

 

12,643

 

 

 

352,743

 

 

 

58,927

 

 

 

73,409

 

 

 

863

 

 

 

12,237

 

 

 

-

 

 

 

877,975

 

 

The Bank utilizes several credit quality indicators to manage credit risk in an ongoing manner. The Bank uses an internal risk grade system that categorizes loans into pass, watch or substandard categories.

 

The Bank uses the following credit quality indicators:

 

 

·

Pass – Includes loans ranging from excellent quality with a minimal amount of credit risk to loans with higher risk and servicing needs but still are considered to be acceptable. The higher risk loans in this category are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

 

·

Watch – These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.

 

·

Substandard – A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

 
20

Table of Contents

 

The following table presents by credit quality indicator, loan class and year of origination, the amortized cost of the Bank’s loans as of March 31, 2023.

 

 

 

Term Loans by Origination Year

 

 

 

 

Revolving

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving

 

 

Converted to

 

 

Total

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Loans

 

 

Term Loans

 

 

Loans

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$3,279

 

 

 

72,777

 

 

 

24,090

 

 

 

11,141

 

 

 

2,135

 

 

 

4,912

 

 

 

2,349

 

 

 

-

 

 

 

120,683

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

49

 

 

 

-

 

 

 

-

 

 

 

49

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

104

 

 

 

-

 

 

 

-

 

 

 

104

 

Total Construction and land development

 

$3,279

 

 

 

72,777

 

 

 

24,090

 

 

 

11,141

 

 

 

2,135

 

 

 

5,065

 

 

 

2,349

 

 

 

-

 

 

 

120,836

 

Single family

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$9,654

 

 

 

67,967

 

 

 

46,587

 

 

 

26,348

 

 

 

14,079

 

 

 

56,773

 

 

 

101,968

 

 

 

-

 

 

 

323,376

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

91

 

 

 

382

 

 

 

-

 

 

 

-

 

 

 

473

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,016

 

 

 

395

 

 

 

-

 

 

 

3,411

 

Total single family

 

$9,654

 

 

 

67,967

 

 

 

46,587

 

 

 

26,348

 

 

 

14,170

 

 

 

60,171

 

 

 

102,363

 

 

 

-

 

 

 

327,260

 

Single family-Banco de la

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gente non-traditional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,104

 

 

 

-

 

 

 

-

 

 

 

17,104

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

412

 

 

 

-

 

 

 

-

 

 

 

412

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,899

 

 

 

-

 

 

 

-

 

 

 

1,899

 

Total Banco de la Gente

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

non-traditional

 

$-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

19,415

 

 

 

-

 

 

 

-

 

 

 

19,415

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$14,091

 

 

 

106,570

 

 

 

74,741

 

 

 

68,156

 

 

 

33,437

 

 

 

108,031

 

 

 

1,426

 

 

 

-

 

 

 

406,452

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120

 

 

 

-

 

 

 

3,659

 

 

 

-

 

 

 

-

 

 

 

3,779

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

419

 

 

 

-

 

 

 

125

 

 

 

-

 

 

 

-

 

 

 

544

 

Total commercial

 

$14,091

 

 

 

106,570

 

 

 

74,741

 

 

 

68,695

 

 

 

33,437

 

 

 

111,815

 

 

 

1,426

 

 

 

-

 

 

 

410,775

 

Multifamily and farmland

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$3,616

 

 

 

16,971

 

 

 

23,211

 

 

 

6,688

 

 

 

3,852

 

 

 

14,019

 

 

 

575

 

 

 

-

 

 

 

68,932

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

120

 

 

 

-

 

 

 

-

 

 

 

120

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

-

 

 

 

-

 

 

 

87

 

Total multifamily and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

farmland

 

$3,616

 

 

 

16,971

 

 

 

23,211

 

 

 

6,688

 

 

 

3,852

 

 

 

14,226

 

 

 

575

 

 

 

-

 

 

 

69,139

 

Total real estate loans

 

$30,640

 

 

 

264,285

 

 

 

168,629

 

 

 

112,872

 

 

 

53,594

 

 

 

210,692

 

 

 

106,713

 

 

 

-

 

 

 

947,425

 

Loans not secured by real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$3,518

 

 

 

18,150

 

 

 

5,351

 

 

 

5,001

 

 

 

3,398

 

 

 

14,006

 

 

 

29,544

 

 

 

-

 

 

 

78,968

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

128

 

 

 

155

 

 

 

1

 

 

 

-

 

 

 

284

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total Commercial

 

$3,518

 

 

 

18,150

 

 

 

5,351

 

 

 

5,001

 

 

 

3,526

 

 

 

14,161

 

 

 

29,545

 

 

 

-

 

 

 

79,252

 

Farm

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$38

 

 

 

18

 

 

 

-

 

 

 

334

 

 

 

23

 

 

 

70

 

 

 

149

 

 

 

-

 

 

 

632

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total farm

 

$38

 

 

 

18

 

 

 

-

 

 

 

334

 

 

 

23

 

 

 

70

 

 

 

149

 

 

 

-

 

 

 

632

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$1,065

 

 

 

2,164

 

 

 

778

 

 

 

377

 

 

 

129

 

 

 

110

 

 

 

2,607

 

 

 

-

 

 

 

7,230

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Substandard

 

 

-

 

 

 

-

 

 

 

4

 

 

 

1

 

 

 

-

 

 

 

1

 

 

 

4

 

 

 

-

 

 

 

10

 

Total consumer

 

$1,065

 

 

 

2,164

 

 

 

782

 

 

 

378

 

 

 

129

 

 

 

111

 

 

 

2,611

 

 

 

-

 

 

 

7,240

 

All other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$7,054

 

 

 

546

 

 

 

477

 

 

 

477

 

 

 

818

 

 

 

4,172

 

 

 

2,636

 

 

 

-

 

 

 

16,180

 

Watch

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

76

 

 

 

66

 

 

 

-

 

 

 

142

 

Substandard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total all other

 

$7,054

 

 

 

546

 

 

 

477

 

 

 

477

 

 

 

818

 

 

 

4,248

 

 

 

2,702

 

 

 

-

 

 

 

16,322

 

Total loans not secured by real estate

 

$11,675

 

 

 

20,878

 

 

 

6,610

 

 

 

6,190

 

 

 

4,496

 

 

 

18,590

 

 

 

35,007

 

 

 

-

 

 

 

103,446

 

Total loans

 

$42,315

 

 

 

285,163

 

 

 

175,239

 

 

 

119,062

 

 

 

58,090

 

 

 

229,282

 

 

 

141,720

 

 

 

-

 

 

 

1,050,871

 

Current period gross charge-offs

 

 -

 

 

 

 16

 

 

 

 29

 

 

 

 3

 

 

 

-

 

 

 

 118

 

 

 

 -

 

 

 

 -

 

 

 

 166

 

 

 
21

Table of Contents

 

  

The following table presents the credit risk profile of each loan type based on credit quality indicators as of December 31, 2022:

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and Land Development

 

 

Single-Family Residential

 

 

Single-Family Residential - Banco de la Gente non-traditional

 

 

Commercial

 

 

Multifamily and Farmland

 

 

Commercial

 

 

Farm

 

 

Consumer

 

 

All Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$114,282

 

 

 

317,850

 

 

 

16,410

 

 

 

402,236

 

 

 

65,348

 

 

 

80,596

 

 

 

938

 

 

 

6,818

 

 

 

14,345

 

 

 

1,018,823

 

Watch

 

 

54

 

 

 

922

 

 

 

1,136

 

 

 

3,963

 

 

 

123

 

 

 

711

 

 

 

-

 

 

 

1

 

 

 

145

 

 

 

7,055

 

Substandard

 

 

110

 

 

 

3,490

 

 

 

2,473

 

 

 

551

 

 

 

91

 

 

 

-

 

 

 

-

 

 

 

15

 

 

 

-

 

 

 

6,730

 

Total

 

$114,446

 

 

 

322,262

 

 

 

20,019

 

 

 

406,750

 

 

 

65,562

 

 

 

81,307

 

 

 

938

 

 

 

6,834

 

 

 

14,490

 

 

 

1,032,608

 

 

(4) Net Earnings Per Share

 

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares.

 

 
22

Table of Contents

 

The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three months ended March 31, 2023 and 2022 is as follows:

 

For the three months ended March 31, 2023

 

 

 

 

 

 

 

 

Net Earnings (Dollars in thousands)

 

 

Weighted Average Number of Shares

 

 

Per Share Amount

 

Basic earnings per share

 

$3,172

 

 

 

5,475,603

 

 

$0.58

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units - unvested

 

 

 

 

 

 

16,967

 

 

 

 

 

Shares held in deferred comp plan by deferred compensation trust

 

 

 

 

 

 

163,680

 

 

 

 

 

Diluted earnings per share

 

$3,172

 

 

 

5,656,250

 

 

$0.56

 

 

For the three months ended March 31, 2022

 

 

 

 

 

 

 

 

Net Earnings (Dollars in thousands)

 

 

Weighted Average Number of Shares

 

 

Per Share Amount

 

Basic earnings per share

 

$3,452

 

 

 

5,497,107

 

 

$0.63

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units - unvested

 

 

 

 

 

 

13,159

 

 

 

 

 

Shares held in deferred comp plan by deferred compensation trust

 

 

 

 

 

 

163,038

 

 

 

 

 

Diluted earnings per share

 

$3,452

 

 

 

5,673,304

 

 

$0.61

 

 

(5) Fair Value

 

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

 

·

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

 

·

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

·

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

 

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

 

 
23

Table of Contents

 

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

 

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

 

Loans

The fair value of loans, excluding previously presented individually evaluated loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

 

Mutual Funds

For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on the balance sheet and reported in the Level 2 fair value category.

 

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category.

 

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.

 

FHLB Borrowings

The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category.

 

Junior Subordinated Debentures

Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category.

 

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally short-term in duration and made at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

 

 
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Table of Contents

 

The tables below present all financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy, as of March 31, 2023 and December 31, 2022.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

 

Fair Value

 

 

Level 1 Valuation

 

 

Level 2 Valuation

 

 

Level 3 Valuation

 

U.S. Treasuries

 

$10,008

 

 

 

-

 

 

 

10,008

 

 

 

-

 

U.S. Government sponsored enterprises

 

 

11,304

 

 

 

-

 

 

 

11,304

 

 

 

-

 

Mortgage-backed securities

 

 

273,820

 

 

 

-

 

 

 

273,820

 

 

 

-

 

State and political subdivisions

 

 

104,016

 

 

 

-

 

 

 

104,016

 

 

 

-

 

Mutual funds held in deferred compensation trust

 

 

1,787

 

 

 

-

 

 

 

1,787

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

Fair Value

 

 

Level 1 Valuation

 

 

Level 2 Valuation

 

 

Level 3 Valuation

 

U.S. Treasuries

 

$9,814

 

 

 

-

 

 

 

9,814

 

 

 

-

 

U.S. Government sponsored enterprises

 

 

11,539

 

 

 

-

 

 

 

11,539

 

 

 

-

 

Mortgage-backed securities

 

 

273,838

 

 

 

-

 

 

 

273,838

 

 

 

-

 

State and political subdivisions

 

 

150,203

 

 

 

-

 

 

 

150,203

 

 

 

-

 

Mutual funds held in deferred compensation trust

 

 

1,327

 

 

 

-

 

 

 

1,327

 

 

 

 

 

 

The fair value measurements for mortgage loans held for sale and individually evaluated loans on a non-recurring basis at March 31, 2023 and December 31, 2022 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements March 31, 2023

 

 

Level 1 Valuation

 

 

Level 2 Valuation

 

 

Level 3 Valuation

 

Mortgage loans held for sale

 

$417

 

 

 

-

 

 

 

-

 

 

 

417

 

Individually evaluated loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements December 31, 2022

 

 

Level 1 Valuation

 

 

Level 2 Valuation

 

 

Level 3 Valuation

 

Mortgage loans held for sale

 

$211

 

 

 

-

 

 

 

-

 

 

 

211

 

Impaired loans

 

 

14,694

 

 

 

-

 

 

 

-

 

 

 

14,694

 

 

 
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(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value March 31, 2023

 

 

Fair Value December 31, 2022

 

 

Valuation Technique

 

Significant Unobservable Inputs

 

 

General Range of Significant Unobservable Input Values

 

Mortgage loans held for sale

 

$417

 

 

 

211

 

 

Rate lock commitment

 

 

N/A

 

 

 

N/A

 

Individually evaluated loans

 

 

-

 

 

 

14,694

 

 

Appraised value and discounted cash flows

 

Discounts to reflect current market conditions and ultimate collectability

 

 

0 - 25%

 

 

The carrying amount and estimated fair value of financial instruments at March 31, 2023 and December 31, 2022 are as follows:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2023

 

 

 

 Carrying Amount

 

 

 Level 1

 

 

 Level 2

 

 

 Level 3

 

 

 Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$83,021

 

 

 

83,021

 

 

 

-

 

 

 

-

 

 

 

83,021

 

Investment securities available for sale

 

 

399,148

 

 

 

-

 

 

 

399,148

 

 

 

-

 

 

 

399,148

 

Other investments

 

 

2,628

 

 

 

-

 

 

 

-

 

 

 

2,628

 

 

 

2,628

 

Mortgage loans held for sale

 

 

417

 

 

 

-

 

 

 

-

 

 

 

417

 

 

 

417

 

Loans, net

 

 

1,041,254

 

 

 

-

 

 

 

-

 

 

 

1,021,007

 

 

 

1,021,007

 

Mutual funds held in deferred compensation trust

 

 

1,787

 

 

 

-

 

 

 

1,787

 

 

 

-

 

 

 

1,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$1,413,441

 

 

 

-

 

 

 

-

 

 

 

1,415,287

 

 

 

1,415,287

 

Securities sold under agreements to repurchase

 

 

39,535

 

 

 

-

 

 

 

39,535

 

 

 

-

 

 

 

39,535

 

Junior subordinated debentures

 

 

15,464

 

 

 

-

 

 

 

15,464

 

 

 

-

 

 

 

15,464

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2022

 

 

 

Carrying Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$71,596

 

 

 

71,596

 

 

 

-

 

 

 

-

 

 

 

71,596

 

Investment securities available for sale

 

 

445,394

 

 

 

-

 

 

 

445,394

 

 

 

-

 

 

 

445,394

 

Other investments

 

 

2,656

 

 

 

-

 

 

 

-

 

 

 

2,656

 

 

 

2,656

 

Mortgage loans held for sale

 

 

211

 

 

 

-

 

 

 

-

 

 

 

211

 

 

 

211

 

Loans, net

 

 

1,022,114

 

 

 

-

 

 

 

-

 

 

 

998,587

 

 

 

998,587

 

Mutual funds held in deferred compensation trust

 

 

1,327

 

 

 

-

 

 

 

1,327

 

 

 

-

 

 

 

1,327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$1,435,215

 

 

 

-

 

 

 

-

 

 

 

1,434,871

 

 

 

1,434,871

 

Securities sold under agreements to repurchase

 

 

47,688

 

 

 

-

 

 

 

47,688

 

 

 

-

 

 

 

47,688

 

Junior subordinated debentures

 

 

15,464

 

 

 

-

 

 

 

15,464

 

 

 

-

 

 

 

15,464

 

 

 
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(6) Leases

 

As of March 31, 2023, the Bank had operating right of use assets of $4.9 million and operating lease liabilities of $5.0 million. The Bank maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Bank if the option is not exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

 

The following table presents lease cost and other lease information as of March 31, 2023 and 2022.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

 

 

 

 

 

 

Operating lease cost

 

$206

 

 

$189

 

 

 

 

 

 

 

 

 

 

Other information:

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

204

 

 

 

575

 

Operating cash flows from operating leases

 

 

-

 

 

 

-

 

Right-of-use assets obtained in exchange for new lease liabilities - operating leases

 

 

-

 

 

 

1,759

 

Weighted-average remaining lease term - operating leases

 

 

9.12

 

 

 

8.92

 

Weighted-average discount rate - operating leases

 

 

2.60%

 

 

2.04%

 

The following table presents lease maturities as of March 31, 2023.

 

(Dollars in thousands)

 

 

 

 

 

 

 

Maturity Analysis of Operating Lease Liabilities:

 

March 31, 2023

 

 

 

 

 

2023

 

$605

 

2024

 

 

750

 

2025

 

 

694

 

2026

 

 

577

 

2027

 

 

536

 

Thereafter

 

 

2,580

 

Total

 

 

5,742

 

Less: Imputed Interest

 

 

(709)

Operating Lease Liability

 

$5,033

 

 

(7) Reportable Segments

 

The Company has two reportable segments, as described below.

 

Banking Operations – This segment reflects the consolidated Bank, excluding CBRES. The primary source of revenue for this segment is net interest income.

 

CBRES – A Bank subsidiary that provides appraisal management services to community banks. The primary source of revenue for this segment is appraisal management fee income.

 

 
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The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents financial information for the Company, which is not considered to be a reportable segment, and is included to reconcile the results of the reportable segments to the Consolidated Financial Statements prepared in conformity with GAAP.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking

 

 

 

 

 

 

 

 

 

 

 

 

Operations

 

 

CBRES

 

 

Other

 

 

Consolidated

 

As of and for the three months ended March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$16,793

 

 

$-

 

 

$8

 

 

$16,801

 

Interest expense

 

 

2,215

 

 

 

-

 

 

 

248

 

 

 

2,463

 

Net interest income

 

 

14,578

 

 

 

-

 

 

 

(240)

 

 

14,338

 

Provision for credit losses

 

 

224

 

 

 

-

 

 

 

-

 

 

 

224

 

Noninterest income

 

 

1,517

 

 

 

-

 

 

 

-

 

 

 

1,517

 

Appraisal management fee income

 

 

-

 

 

 

2,094

 

 

 

-

 

 

 

2,094

 

Noninterest expense

 

 

11,564

 

 

 

334

 

 

 

154

 

 

 

12,052

 

Appraisal management fee expense

 

 

-

 

 

 

1,650

 

 

 

-

 

 

 

1,650

 

Income tax expense (benefit)

 

 

909

 

 

 

25

 

 

 

(83)

 

 

851

 

Net income (loss)

 

$3,398

 

 

$85

 

 

$(311)

 

$3,172

 

Total assets

 

$1,597,326

 

 

$3,329

 

 

$2,037

 

 

$1,602,692

 

As of and for the three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$11,327

 

 

$-

 

 

$2

 

 

$11,329

 

Interest expense

 

 

588

 

 

 

-

 

 

 

75

 

 

 

663

 

Net interest income

 

 

10,739

 

 

 

-

 

 

 

(73)

 

 

10,666

 

Provision for loan losses

 

 

71

 

 

 

-

 

 

 

-

 

 

 

71

 

Noninterest income

 

 

3,536

 

 

 

4

 

 

 

-

 

 

 

3,540

 

Appraisal management fee income

 

 

-

 

 

 

3,506

 

 

 

-

 

 

 

3,506

 

Noninterest expense

 

 

10,016

 

 

 

400

 

 

 

153

 

 

 

10,569

 

Appraisal management fee expense

 

 

-

 

 

 

2,772

 

 

 

-

 

 

 

2,772

 

Income tax expense (benefit)

 

 

818

 

 

 

78

 

 

 

(48)

 

 

848

 

Net income (loss)

 

$3,370

 

 

$260

 

 

$(178)

 

$3,452

 

Total assets

 

$1,657,491

 

 

$3,030

 

 

$2,138

 

 

$1,662,659

 

 

(8) Subsequent Events

 

The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. Management has concluded that there were no material subsequent events.

 

 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report of Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages A-19 through A-59 of the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders.

 

Introduction

 

Management’s discussion and analysis of earnings and related data are presented to assist in understanding the consolidated financial condition and results of operations of the Company. The Company is the parent company of the Bank and a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell, Wake, Rowan and Forsyth counties, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation.

 

Overview

 

Our business consists principally of attracting deposits from the general public and investing these funds in commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. Our profitability depends primarily on our net interest income, which is the difference between the income we receive on our loan and investment securities portfolios and our cost of funds, which consists of interest paid on deposits and borrowed funds. Net interest income also is affected by the relative amounts of our interest-earning assets and interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, a positive interest rate spread will generate net interest income. Our profitability is also affected by the level of other income and operating expenses. Other income consists primarily of miscellaneous fees related to our loans and deposits, mortgage banking income and commissions from sales of annuities and mutual funds. Operating expenses consist of compensation and benefits, occupancy related expenses, federal deposit and other insurance premiums, data processing, advertising and other expenses.

 

Our operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The earnings on our assets are influenced by the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rates, market and monetary fluctuations. Lending activities are affected by the demand for commercial and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Our cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. These factors can cause fluctuations in our net interest income and other income. In addition, local economic conditions can impact the credit risk of our loan portfolio, in that (1) local employers may be required to eliminate employment positions of individual borrowers, and (2) small businesses and commercial borrowers may experience a downturn in their operating performance and become unable to make timely payments on their loans. Management evaluates these factors in estimating the allowance for credit losses (“ACL”, “allowance for credit losses”, or “allowance”) and changes in these economic factors could result in increases or decreases to the provision for loan losses.

 

Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as the economic conditions during the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. Subsequently, continuing supply-chain disruption and rising inflation has caused the Federal Reserve Federal Open Market Committee (“FOMC”) to increase the target federal funds rate 475 basis points since March 1, 2022 to a range of 4.75% to 5.00% at December 31, 2022.

 

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends. Because the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same. The effect of inflation on banks is normally not as significant as its influence on those businesses that have large investments in plants and inventories. During periods of high inflation there are normally corresponding increases in the money supply, and banks will normally experience above average growth in assets, loans, and deposits. Also, general increases in the price of goods and services can be expected to result in increased operating expenses.

 

 
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Table of Contents

 

Our business emphasis has been and continues to be to operate as a well-capitalized, profitable and independent community-oriented financial institution dedicated to providing quality customer service. We are committed to meeting the financial needs of the communities in which we operate. We expect growth to be achieved in our local markets and through expansion opportunities in contiguous or nearby markets. While we would be willing to consider growth by acquisition in certain circumstances, we do not consider the acquisition of another company to be necessary for our continued ability to provide a reasonable return to our shareholders. We believe that we can be more effective in serving our customers than many of our non-local competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries. Our ability to provide these services is enhanced by the stability and experience of our Bank officers and managers.

 

Summary of Significant Accounting Policies

 

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. The following is a summary of some of the more subjective and complex accounting policies of the Company. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2023 Annual Meeting of Shareholders. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the adoption of ASC 326 noted in Note 1 above.

 

The allowance for credit losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance credit losses that management believes will be adequate in light of anticipated risks and loan losses.

 

Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The collectability of loans is reflected through the Company’s estimate of the allowance for credit losses. The Company performs periodic and systematic detailed reviews of its lending portfolio to assess overall collectability. In addition, certain assets and liabilities are reflected at their estimated fair value in the Consolidated Financial Statements. Such amounts are based on either quoted market prices or estimated values derived from dealer quotes used by the Company, market comparisons or internally generated modeling techniques. The Company’s internal models generally involve present value of cash flow techniques. The various techniques are discussed in greater detail elsewhere in this management’s discussion and analysis and the Notes to the Consolidated Financial Statements. Fair value of the Company’s financial instruments is discussed in Note 5 of the Notes to Consolidated Financial Statements (Unaudited) included in this Quarterly Report.

 

There are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain of the principles prescribed by those standards. These judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).

 

Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the accompanying Consolidated Financial Statements in conformity with GAAP. Actual results could differ from those estimates.

 

Results of Operations

 

Summary. Net earnings were $3.2 million or $0.58 per share and $0.56 per diluted share for the three months ended March 31, 2023, as compared to $3.5 million or $0.63 per share and $0.61 per diluted share for the prior year period. The decrease in first quarter net earnings is primarily the result of a decrease in non-interest income, an increase in non-interest expense and an increase in the provision for credit losses, which were partially offset by an increase in net interest income, compared to the prior year period, as discussed below.

 

The annualized return on average assets was 0.81% for the three months ended March 31, 2023, compared to 0.85% for the same period one year ago, and annualized return on average shareholders’ equity was 11.78% for the three months ended March 31, 2023, compared to 10.10% for the same period one year ago.

 

Net Interest Income. Net interest income, the major component of the Company’s net income, is the amount by which interest and fees generated by interest-earning assets exceed the total cost of funds used to carry them. Net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned and rates paid. Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.

 

 
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Net interest income was $14.3 million for the three months ended March 31, 2023, compared to $10.7 million for the three months ended March 31, 2022. The increase in net interest income is due to a $5.5 million increase in interest income, partially offset by a $1.8 million increase in interest expense. The increase in interest income is due to a $3.1 million increase in interest income and fees on loans, a $272,000 increase in interest income on balances due from banks and a $2.1 million increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve, partially offset by a $600,000 decrease in fee income on SBA PPP loans. The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve The increase in interest income on investment securities is primarily due to higher yields on securities purchased after March 31, 2022. The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities.

 

Interest income was $16.8 million for the three months ended March 31, 2023, compared to $11.3 million for the three months ended March 31, 2022. The increase in interest income is due to a $3.1 million increase in interest income and fees on loans, a $272,000 increase in interest income on balances due from banks and a $2.1 million increase in interest income on investment securities. The increase in interest income and fees on loans is primarily due to an increase in total loans and rate increases by the Federal Reserve, partially offset by a $600,000 decrease in fee income on SBA PPP loans. The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve The increase in interest income on investment securities is primarily due to higher yields on securities purchased after March 31, 2022. The Bank recognized zero and $600,000 of PPP loan fee income for the three months ended March 31, 2023 and the three months ended March 31, 2022, respectively. During the three months ended March 31, 2023, average loans were $1.0 billion, an increase of $152.0 million from average loans of $885.2 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, average PPP loans were zero, compared to average PPP loans of $12.3 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, average investment securities available for sale were $476.3 million, an increase of $63.0 million from average investment securities available for sale of $413.3 million for the three months ended March 31, 2022. The average yield on loans for the three months ended March 31, 2023 and 2022 was 5.04% and 4.46%, respectively. The average yield on investment securities available for sale was 2.98% and 1.49% for the three months ended March 31, 2023 and 2022, respectively. The average yield on earning assets was 4.41% and 2.96% for the three months ended March 31, 2023 and 2022, respectively.

 

Interest expense was $2.5 million for the three months ended March 31, 2023, compared to $663,000 for the three months ended March 31, 2022. The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities and an increase in certificates of deposit. During the three months ended March 31, 2023, average interest-bearing non-maturity deposits were $775.1 million, a decrease of $24.2 million from average interest-bearing non-maturity deposits of $799.3 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, average certificates of deposit were $118.8 million, an increase of $18.4 million from average certificates of deposit of $100.4 million for the three months ended March 31, 2022. The average rate paid on interest-bearing checking and savings accounts was 0.78% and 0.20% for the three months ended March 31, 2023 and 2022, respectively. The average rate paid on certificates of deposit was 1.76% for the three months ended March 31, 2023, compared to 0.59% for the same period one year ago. The average rate paid on interest-bearing liabilities was 1.05% for the three months ended March 31, 2023, compared to 0.28% for the same period one year ago.

 

 
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The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended March 31, 2023 and 2022. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the three months ended March 31, 2023 and 2022 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

 

 

 

Three months ended

 

 

Three months ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

(Dollars in thousands)

 

Average Balance

 

 

Interest

 

 

Yield / Rate

 

 

Average Balance

 

 

Interest

 

 

Yield / Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable

 

$1,037,124

 

 

$12,883

 

 

 

5.04%

 

$885,159

 

 

$9,742

 

 

 

4.46%

Investments - taxable

 

 

340,536

 

 

 

2,829

 

 

 

3.37%

 

 

288,532

 

 

 

1,005

 

 

 

1.41%

Investments - nontaxable*

 

 

138,819

 

 

 

754

 

 

 

2.20%

 

 

128,873

 

 

 

561

 

 

 

1.77%

Due from banks

 

 

32,453

 

 

 

383

 

 

 

4.79%

 

 

259,613

 

 

 

111

 

 

 

0.17%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

 

1,548,932

 

 

 

16,849

 

 

 

4.41%

 

 

1,562,177

 

 

 

11,419

 

 

 

2.96%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

37,515

 

 

 

 

 

 

 

 

 

 

 

34,030

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

 

(10,443)

 

 

 

 

 

 

 

 

 

 

(9,390)

 

 

 

 

 

 

 

 

Other assets

 

 

20,784

 

 

 

 

 

 

 

 

 

 

 

55,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$1,596,788

 

 

 

 

 

 

 

 

 

 

$1,642,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand, MMDA & savings deposits

 

$775,101

 

 

$1,488

 

 

 

0.78%

 

$799,327

 

 

$403

 

 

 

0.20%

Time deposits

 

 

118,763

 

 

 

516

 

 

 

1.76%

 

 

100,364

 

 

 

147

 

 

 

0.59%

Junior subordinated debentures

 

 

15,464

 

 

 

248

 

 

 

6.50%

 

 

15,464

 

 

 

75

 

 

 

1.97%

Other

 

 

42,233

 

 

 

211

 

 

 

2.03%

 

 

38,471

 

 

 

38

 

 

 

0.40%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

951,561

 

 

 

2,463

 

 

 

1.05%

 

 

953,626

 

 

 

663

 

 

 

0.28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities and shareholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

 

523,544

 

 

 

 

 

 

 

 

 

 

 

538,961

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

12,433

 

 

 

 

 

 

 

 

 

 

 

10,950

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

109,250

 

 

 

 

 

 

 

 

 

 

 

138,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$1,596,788

 

 

 

 

 

 

 

 

 

 

$1,642,141

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

$14,386

 

 

 

3.36%

 

 

 

 

 

$10,756

 

 

 

2.69%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net yield on interest-earning assets

 

 

 

 

 

 

 

 

 

 

3.77%

 

 

 

 

 

 

 

 

 

 

2.79%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable equivalent adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

 

 

 

$48

 

 

 

 

 

 

 

 

 

 

$90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$14,338

 

 

 

 

 

 

 

 

 

 

$10,666

 

 

 

 

 

 

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $12.2 million in 2023 and $14.1 million in 2022.  A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2023 and 2022.

 

 
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Changes in interest income and interest expense can result from variances in both volume and rates. The following table describes the impact on the Company’s tax equivalent net interest income resulting from changes in average balances and average rates for the periods indicated. The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

 

 

 

Three months ended March 31, 2023 compared to three months ended March 31, 2022

 

 

Three months ended March 31, 2022 compared to three months ended March 31, 2021

 

(Dollars in thousands)

 

Changes in average volume

 

 

Changes in average rates

 

 

Total Increase (Decrease)

 

 

Changes in average volume

 

 

Changes in average rates

 

 

Total Increase (Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans: Net of unearned income

 

$1,780

 

 

 

1,361

 

 

 

3,141

 

 

 

(691)

 

 

(231)

 

 

(922)

Investments - taxable

 

 

307

 

 

 

1,517

 

 

 

1,824

 

 

 

435

 

 

 

31

 

 

 

466

 

Investments - nontaxable

 

 

49

 

 

 

144

 

 

 

193

 

 

 

120

 

 

 

(363)

 

 

(243)

Due from banks

 

 

(1,389)

 

 

1,661

 

 

 

272

 

 

 

32

 

 

 

44

 

 

 

76

 

Total interest income

 

 

747

 

 

 

4,683

 

 

 

5,430

 

 

 

(104)

 

 

(519)

 

 

(623)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MMDA & savings deposits

 

 

(29)

 

 

1,114

 

 

 

1,085

 

 

 

79

 

 

 

(173)

 

 

(94)

Time deposits

 

 

53

 

 

 

316

 

 

 

369

 

 

 

(13)

 

 

(52)

 

 

(65)

Trust preferred securities

 

 

-

 

 

 

173

 

 

 

173

 

 

 

-

 

 

 

4

 

 

 

4

 

Other

 

 

11

 

 

 

162

 

 

 

173

 

 

 

13

 

 

 

(10)

 

 

3

 

Total interest expense

 

 

35

 

 

 

1,765

 

 

 

1,800

 

 

 

79

 

 

 

(231)

 

 

(152)

Net interest income

 

$712

 

 

 

2,918

 

 

 

3,630

 

 

 

(183)

 

 

(288)

 

 

(471)

 

Provision for Credit Losses. The provision for credit losses for the three months ended March 31, 2023 was $224,000, compared to $71,000 for the three months ended March 31, 2022. The increase in the provision for credit losses is primarily attributable to an increase in loan balances and qualitative adjustments for economic conditions and other factors. The provision for credit losses for the three months ended March 31, 2023 includes a $203,000 credit to the provision on unfunded commitments primarily due to a reduction in unfunded commitments from December 31, 2022 to March 31, 2023.

 

 

Non-Interest Income. Total non-interest income was $3.6 million for the three months ended March 31, 2023, compared to $7.0 million for the three months ended March 31, 2022. The decrease in non-interest income is primarily attributable to a $2.5 million net loss on the sale of securities and a $1.4 million decrease in appraisal management fee income due to a decrease in appraisal volume. The securities sale transaction was executed in January and February 2023 to reduce risk in the investment portfolio provided by favorable conditions that had developed for municipal securities in the first quarter of 2023, and to provide the Bank with more flexibility to support loan growth and reduce the need for other borrowings.

 

Non-Interest Expense. Total non-interest expense was $13.7 million for the three months ended March 31, 2023, compared to $13.3 million for the three months ended March 31, 2022. The increase in non-interest expense is primarily attributable to a $651,000 increase in salaries and employee benefits expense primarily due to a reduction in loan origination costs due to lower loan demand and an increase in supplemental retirement plan expense and a $687,000 increase in other non-interest expenses primarily due to an increase in deferred compensation expense, which were partially offset by a $1.1 million decrease in appraisal management fee expense due to a decrease in appraisal volume.

 

Income Taxes. Income tax expense was $851,000 for the three months ended March 31, 2023, compared to $848,000 for the three months ended March 31, 2022. The effective tax rate was 21.15% for the three months ended March 31, 2023, compared to 19.72% for the three months ended March 31, 2022. The increase in the effective tax rate is primarily due to a reduction in non-taxable investments.

 

Analysis of Financial Condition

 

Investment Securities. Available for sale securities were $399.1 million as of March 31, 2023, compared to $445.4 million as of December 31, 2022. Average investment securities available for sale for the three months ended March 31, 2023 were $476.3 million, compared to $467.5 million for the year ended December 31, 2022.

 

Loans. Total loans were $1.1 billion as of March 31, 2023, compared to $1.0 billion as of December 31, 2022. Average loans represented 67% and 59% of average earning assets for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively.

 

The Bank had $417,000 and $211,000 in mortgage loans held for sale as of March 31, 2023 and December 31, 2022, respectively.

 

 
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Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At March 31, 2023, the Bank had $104.0 million in residential mortgage loans, $102.1 million in home equity loans and $614.7 million in commercial mortgage loans, which include $476.0 million secured by commercial property and $138.7 million secured by residential property. Residential mortgage loans at March 31, 2023 include $19.4 million in non-traditional mortgage loans from the former Banco division of the Bank. At December 31, 2022, the Bank had $101.5 million in residential mortgage loans, $101.1 million in home equity loans and $610.0 million in commercial mortgage loans, which include $472.3 million secured by commercial property and $137.7 million secured by residential property. Residential mortgage loans include $20.0 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization

 

Allowance for Credit Losses (ACL).The allowance for credit losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance that management believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed.

 

The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of March 31, 2023. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company calculates the allowance for credit losses using a Weighted Average Remaining Maturity methodology.

 

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for: local, state and national economic outlook; levels and trends of delinquencies; trends in volume, mix and size of loans; seasoning of the loan portfolio; experience of staff; concentrations of credit; and interest rate risk.

 

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated unadjusted for selling costs as appropriate. The Company did not have any loans evaluated on an individual basis at March 31, 2023.

 

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

 

The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable. 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 using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

 

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by the third-party credit review firm (as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The Bank Board reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

 

 
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As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below $1.5 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the board of directors of the Bank (“Bank Board”).

 

Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.

 

Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance. The provision for credit losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance.

 

Since the adoption of CECL on January 1, 2023, the allowance for credit losses represents management’s estimate of credit losses for the remaining estimated life of the Bank’s financial assets, including loan receivables and some off-balance sheet credit exposures. Estimating the amount of the allowance for credit losses requires significant judgment and the use of estimates related to historical experience, current conditions, reasonable and supportable forecasts, and the value of collateral on collateral-dependent loans. The loan portfolio also represents the largest asset type on our consolidated balance sheet. Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for credit losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.

 

There are many factors affecting the allowance for credit losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all the potential factors that could potentially result in credit losses, the process includes subjective elements and is susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect our earnings or financial position in future periods.

 

Beginning December 31, 2012, certain mortgage loans from the former Banco division of the Bank were analyzed separately from other single-family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers.

 

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations. Management believes it has established the allowance for credit losses pursuant to CECL, and has taken into account the views of its regulators and the current economic environment. Management considers the allowance adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements. Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.

 

Non-performing Assets. Non-performing assets were $3.6 million or 0.23% of total assets at March 31, 2023, compared to $3.7 million or 0.23% of total assets at December 31, 2022. Non-accrual loans were $3.6 million at March 31, 2023 and $3.7 million at December 31, 2022. As a percentage of total loans outstanding, non-accrual loans were 0.35% and 0.36% at March 31, 2023 and December 31, 2022, respectively. Non-performing assets include $3.6 million in commercial and residential mortgage loans and $3,000 in other loans at March 31, 2023, compared to $3.7 million in commercial and residential mortgage loans and $8,000 in other loans at December 31, 2022. The Bank had no loans 90 days past due and still accruing at March 31, 2023 and December 31, 2022. The Bank had no other real estate owned at March 31, 2023 and December 31, 2022.

 

 
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Deposits. Total deposits were $1.4 billion at March 31, 2023 and December 31, 2022. Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations of $250,000 or less, were $1.3 billion and $1.4 billion at March 31, 2023 and December 31, 2022, respectively. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s funding base. Certificates of deposit in amounts of more than $250,000 totaled $67.6 million at March 31, 2023, compared to $31.0 million at December 31, 2022. Other time deposits totaled $100.7 million at March 31, 2023, compared to $67.0 million at December 31, 2022. The increases in certificates of deposit in amounts of $250,000 or more and other time deposits are primarily due to promotional rates offered on select certificates of deposit products during the first quarter of 2023.

 

Estimated uninsured deposits totaled $407.8 million, or 28.85% of total deposits, at March 31, 2023, compared to $439.8 million, or 30.64% of total deposits, at December 31, 2022. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits. The Bank did not have any significant deposit concentrations at March 31, 2023.

 

Borrowed Funds. There were no FHLB borrowings outstanding at March 31, 2023 and December 31, 2022. Securities sold under agreements to repurchase were $39.5 million at March 31, 2023, compared to $47.7 million at December 31, 2022.

 

Junior Subordinated Debentures (related to Trust Preferred Securities).Junior subordinated debentures were $15.5 million at March 31, 2023 and December 31, 2022.

 

In June 2006, the Company formed a second wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. All of the common securities of PEBK Trust II are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company. The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole assets of PEBK Trust II. PEBK Trust II is not included in the consolidated financial statements. The Company redeemed $5.0 million of outstanding trust preferred securities in 2019.

 

The trust preferred securities issued by PEBK Trust II accrue and pay interest quarterly at a floating rate of three-month LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the trust preferred securities. The net combined effect of all the documents entered into in connection with the trust preferred securities is that the Company is liable to make the distributions and other payments required on the trust preferred securities.

 

These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.

 

The Company has no financial instruments tied to LIBOR other than the trust preferred securities issued by PEBK Trust II, which are tied to three-month LIBOR. The one-week and two-month U.S. dollar-denominated (USD) LIBOR rates ceased to be published on December 31, 2021. The overnight, one-month, three-month, nine-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023. Management has reviewed the implications of the Adjustable Interest Rate Act (LIBOR Act) enacted in March 2022 and the related Federal Reserve regulations with legal counsel, and is currently working with the trustee to complete required updates prior to June 30, 2023.

 

Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income.

 

The Company manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Committee (“ALCO”) of the Bank. The ALCO meets quarterly and has the responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company. ALCO seeks to minimize interest rate risk between interest-earning assets and interest-bearing liabilities by attempting to minimize wide fluctuations in net interest income due to interest rate movements. The ability to control these fluctuations has a direct impact on the profitability of the Company. Management monitors this activity on a regular basis through analysis of its portfolios to determine the difference between rate sensitive assets and rate sensitive liabilities.

 

 
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The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the three months ended March 31, 2023 totaled $1.5 billion, exceeding average rate sensitive liabilities of $951.6 million by $597.4 million.

 

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of March 31, 2023.

 

Included in the rate sensitive assets are $183.4 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Company utilizes interest rate floors on certain variable rate loans to protect against downward movements in the prime rate. At March 31, 2023, the Company had $112.3 million in loans with interest rate floors. The floors were in effect on $8,000 of these loans.

 

Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of March 31, 2023, such unfunded commitments to extend credit were $376.9 million, while commitments in the form of standby letters of credit totaled $4.4 million. As of December 31, 2022, such unfunded commitments to extend credit were $382.7 million, while commitments in the form of standby letters of credit totaled $4.4 million.

 

The Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of March 31, 2023, the Bank’s core deposits, a non-GAAP measure, totaled $1.4 billion, or 96.33% of total deposits. As of December 31, 2022, the Bank’s core deposits totaled $1.4 billion, or 97.84% of total deposits.

 

The other sources of funding for the Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Bank’s policies include the ability to access wholesale funding of up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Bank’s ratio of wholesale funding to total assets was 1.29% and 0.92% as of March 31, 2023 and December 31, 2022, respectively.

 

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at March 31, 2023 and December 31, 2022. At March 31, 2023, the carrying value of loans pledged as collateral to the FHLB totaled $195.1 million compared to $149.4 million at December 31, 2022. The remaining availability under the line of credit with the FHLB was $124.4 million at March 31, 2023 compared to $86.5 million at December 31, 2022. The Bank had no borrowings from the FRB at March 31, 2023 or December 31, 2022. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At March 31, 2023, the carrying value of loans pledged as collateral to the FRB totaled $594.1 million compared to $585.0 million at December 31, 2022. Availability under the line of credit with the FRB was $449.2 million and $445.1 million at March 31, 2023 and December 31, 2022, respectively. The Bank has completed the necessary steps in order to access the FRB’s Bank Term Funding Program (“BTFP”), should it wish to do so at any time in the future. The Bank has not pledged any collateral to the BTFP as of March 31, 2023.

 

The Bank also had the ability to borrow up to $90.5 million for the purchase of overnight federal funds from four correspondent financial institutions as of March 31, 2023.

 

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.23% at March 31, 2023 and 30.32% at December 31, 2022. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2023 and December 31, 2022.

 

 
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Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit.

  

Capital Resources. Shareholders’ equity was $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. The increase in shareholders’ equity is primarily due to a decrease in the unrealized loss on investment securities available for sale due to rate changes between December 31, 2022 and March 31, 2023.

 

Annualized return on average equity for the three months ended March 31, 2023 was 11.78%, compared to 10.10% for the three months ended March 31, 2022. Total cash dividends paid on common stock were $1.9 million for the three months ended March 31, 2023 and 2022.

 

In March of 2023, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million may be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company had not repurchased any shares of its common stock, under this stock repurchase program as of March 31, 2023.

 

In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019). This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions.

 

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at March 31, 2023 and December 31, 2022. The Company’s Tier 1 capital ratio was 13.34% and 13.21% at March 31, 2023 and December 31, 2022, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for credit losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 14.27% and 14.04% at March 31, 2023 and December 31, 2022, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 12.15% and 12.03% at March 31, 2023 and December 31, 2022, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.27% and 9.82% at March 31, 2023 and December 31, 2022, respectively.

 

The Bank’s Tier 1 risk-based capital ratio was 13.24% and 13.10% at March 31, 2023 and December 31, 2022, respectively. The total risk-based capital ratio for the Bank was 14.17% and 13.93% at March 31, 2023 and December 31, 2022, respectively. The Bank’s common equity Tier 1 capital ratio was 13.24% and 13.10% at March 31, 2023 and December 31, 2022, respectively. The Bank’s Tier 1 leverage capital ratio was 10.12% and 9.68% at March 31, 2023 and December 31, 2022, respectively.

 

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at March 31, 2023.

 

 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable

 

Item 4. Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based on the evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in allowing timely decisions regarding disclosure to be made about material information required to be included in our periodic reports with the SEC. In addition, no change in our internal control over financial reporting has occurred during, or subsequent to, the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On October 19, 2018, the Bank received a draft audit report from the North Carolina Department of Revenue (“NCDOR”) setting forth certain proposed adjustments to the North Carolina income tax returns for the Bank for the tax years January 1, 2014 through December 31, 2016. The NCDOR sought to disallow certain tax credits taken by the Bank in tax years January 1, 2014 through December 31, 2016 from an investment made by the Bank. The total proposed adjustments sought by the NCDOR as of the date of the draft audit report (including additional tax, penalties and interest up to the date of the draft audit report) was approximately $1.4 million. The Bank disagreed with the NCDOR’s proposed adjustments and the disallowance of certain tax credits, and challenged the proposed adjustments and the disallowance of such tax credits. During the second quarter of 2019, the Bank paid the NCDOR $1.2 million in taxes and interest associated with the proposed adjustments noted above. This payment stopped the accrual of interest during the period while the proposed adjustments and disallowance are being contested, and the NCDOR waived associated penalties. The Bank purchased a Guaranty Agreement along with this tax credit investment that unconditionally guarantees the amount of its investment plus associated penalties and interest which management believes would limit the Bank’s exposure to approximately $125,000. The Tax Credit Guaranty Agreement by State Tax Credit Exchange, LLC dated September 10, 2014 was attached to the Company’s September 30, 2018 Quarterly Report on Form 10-Q as Exhibit 99. On April 3, 2023, the NC Business Court issued decisions in two related cases involving North Carolina tax credits concluding that the position taken by the NCDOR in those cases was legally incorrect and the tax credits should not have been disallowed. The rationale advanced in those cases was the same as that used to disallow the Bank’s tax credits. The Bank understands an appeal of those decisions by the NCDOR is likely. If upheld, the Company believes the NCDOR will apply the ruling to the Bank’s tax credits.

 

Item 1A. Risk Factors

 

For information regarding the risk factors that could affect the Company’s business, results of operations, financial condition and liquidity, see the information under Part I, Item 1A. “Risk Factors” in the Form 10-K filed with the SEC on March 17, 2023, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased (1)

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)

 

 

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1 - 31, 2023

 

 

-

 

 

$-

 

 

 

-

 

 

$2,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 1 - 28, 2023

 

 

-

 

 

$-

 

 

 

-

 

 

$2,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 1 - 31, 2023

 

 

1,997

 

 

$33.53

 

 

 

-

 

 

$2,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,997

 

 

$-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The Company's rabbi trust purchased 1,997 shares on the open market in the three months ended March 31, 2023 for its deferred compensation plan.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Reflects shares purchased under the Company's publicly announced stock repurchase program.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Reflects dollar value of balance available for repurchase at end of period under the Company's stock repurchase program, which was authorized in March 2023 and expires in March 2024.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

Not applicable

 

 
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Item 6. Exhibits

 

Exhibit (3)(i)(a)

 

Articles of Incorporation of the Registrant, incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999

 

 

 

Exhibit (3)(i)(b)

 

Articles of Amendment dated December 19, 2008, regarding the Series A Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

 

 

 

Exhibit (3)(i)(c)

 

Articles of Amendment dated February 26, 2010, incorporated by reference to Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010

 

 

 

Exhibit (3)(i)(d)

 

Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form 10-K filed with the Securities and Exchange Commission on March 18, 2022

 

 

 

Exhibit (3)(ii)

 

Second Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and Exchange Commission on June 24, 2015

 

 

 

Exhibit (4)(i)

 

Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999

 

 

 

Exhibit (31)(a)

 

Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit (31)(b)

 

Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit (32)

 

Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

Exhibit (101)

 

The following materials from the Company’s 10-Q Report for the quarterly period ended March 31, 2023, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Peoples Bancorp of North Carolina, Inc.

 

May 9, 2023

 

/s/ Lance A. Sellers

 

Date

 

Lance A. Sellers

President and Chief Executive Officer

 (Principal Executive Officer)

 

 

May 9, 2023

 

/s/ Jeffrey N. Hooper

 

Date

 

Jeffrey N. Hooper

Executive Vice President and Chief Financial Officer

 (Principal Financial and Principal Accounting Officer)

 

 

 
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