What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 147 added, 207 removed, 329 unchanged (52% of the section changed)

26 unchanged sentences

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.

See “COVID-19 Impact” below for additional information regarding the impact of the COVID-19 pandemic on the Company’s business.

Subsequently, concern over the ongoing economic effects of COVID19, continuing supply-chain disruption and rising inflation has caused the FOMC to increase the target federal funds rate by 225 basis points in 2022 to a range of 2.25% to 2.50% at July 31, 2022.

Subsequently, continuing supply-chain disruption and rising inflation has caused the FOMC to increase the target federal funds rate by 300 basis points in 2022 to a range of 3.00% to 3.25% at October 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.

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Our ability to provide these services is enhanced by the stability and experience of our Bank officers and managers.

COVID 19 Impact

The COVID-19 pandemic has caused unprecedented disruption that has affected daily living and negatively impacted the global economy, the banking industry and the Company.

While we are unable to estimate the magnitude, the COVID-19 pandemic and the related global economic crisis may adversely affect our future operating results.

As such, the impact of the COVID-19 pandemic on future fiscal periods is subject to a high degree of uncertainty.

The emergence of COVID-19 and new variants of the virus around the world, and particularly in the United States and Canada, continues to present significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time.

The pandemic has affected the Company’s financial results and business operations, and economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic.

Management cannot predict the full impact of the pandemic on the Company’s management and employees, its customers nor to economic conditions generally, and such effects could exist for an extended period of time.

Effects on Our Market Areas.

Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020.

In North Carolina, schools closed for the remainder of the 2019-2020 academic year, businesses were ordered to temporarily close or reduce their business operations to accommodate social distancing and shelter in place requirements, non-critical healthcare services were significantly curtailed and unemployment levels rose.

Since the initial shut down in March 2020, phased reopening plans began in mid-May of 2020 and continued throughout 2021.

While COVID-19 cases and restrictions are currently decreasing, we are unable to predict if COVID-19 cases will continue to decrease, if additional policies, procedures, restrictions, limitations and mandates will be implemented requiring employees to be vaccinated and/or be subject to regular COVID-19 testing and the impact that the foregoing will have on businesses, including the business of the Company and its customers.

Policy and Regulatory Developments .

Federal, state and local governments and regulatory authorities enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:

The FOMC decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP.

Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the PPP loan program, subject to certain limitations and eligibility criteria.

After the initial $349 billion in funds for the PPP was exhausted, an additional $320 billion in funding for PPP loans was authorized.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law.

The Economic Aid Act reopened and expanded the PPP loan program.

The changes to the PPP loan program allowed new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers.

The Economic Aid Act also revised certain PPP requirements, including aspects of loan forgiveness on existing PPP loans.

Under the Economic Aid Act, the PPP loan program was set to expire on March 31, 2021;

however, the PPP Extension Act which was signed into law on March 30, 2021 extended the PPP loan program until May 31, 2021.

The Bank participated as a lender in the PPP loan program.

In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDR loans”) for a limited period of time to account for the effects of COVID-19.

See Note 3 of the financial statements for additional disclosure of loan modifications as of June 30, 2022.

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

See Note 3 of the financial statements for additional disclosure of loan modifications as of June 30, 2022.

In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, issued a stream of guidance in response to the COVID-19 pandemic and taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact.

These included, without limitation:

requiring banks to focus on business continuity and pandemic planning;

adding pandemic scenarios to stress testing;

encouraging bank use of capital buffers and reserves in lending programs;

permitting certain regulatory reporting extensions;

reducing margin requirements on swaps;

permitting certain otherwise prohibited investments in investment funds;

issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts;

and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service.

Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews.

The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities.

The FDIC also acted to mitigate the deposit insurance assessment effects of participating in the PPP loan program and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Effects on Our Business.

The COVID-19 pandemic and the specific developments referred to above have had and will likely continue to have an impact on our business.

In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant and retail industries will continue to endure economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral.

These developments, together with economic conditions generally, including labor shortages, may also impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans.

As a result, our financial condition, capital levels and results of operations may be adversely affected, as described in further detail below.

Our Response .

We have taken numerous steps in response to the COVID-19 pandemic, including the following:

On March 13, 2020 we enacted our Pandemic Plan.

We used available physical resources to achieve appropriate social distancing protocols in all facilities;

in addition, we established mandatory remote work through June 30, 2021 to isolate certain personnel essential to critical business continuity operations.

We also expanded and tested remote access for the core banking system, funds transfer and loan operations.

We continue to actively work with loan customers to evaluate prudent loan modification terms.

We continue to promote our digital banking options through our website.

Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.

We were a participating lender in the PPP loan program.

We believed it was our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities.

On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services.

Branch lobbies were reopened on May 20, 2020.

One small branch located in an assisted living facility was permanently closed effective December 31, 2020 due to limited lobby space and COVID-19 restrictions.

All business functions continue to be operational.

We continue to pay all employees according to their normal work schedule, even if their work has been reduced.

No employees have been furloughed.

While the majority of employees are now working on-site, some employees whose job responsibilities can be effectively carried out remotely continue to work from home.

Employees working on-site are observing current public health guidelines.

Summary of Significant Accounting Policies

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Results of Operations

Net earnings were $3.2 million or $0.59 per share and $0.57 per diluted share for the three months ended June 30, 2022, as compared to $4.6 million or $0.82 per share and $0.80 per diluted share for the prior year period.

The decrease in second quarter net earnings is primarily the result of a decrease in net interest income, an increase in the provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income compared to the three months ended June 30, 2022, as discussed below.

The annualized return on average assets was 0.77% for the three months ended June 30, 2022, compared to 1.18% for the same period one year ago, and annualized return on average shareholders’ equity was 11.02% for the three months ended June 30, 2022, compared to 13.11% for the same period one year ago.

Year-to-date net earnings as of June 30, 2022 were $6.7 million or $1.21 per share and $1.18 per diluted share for the six months ended June 30, 2022, as compared to $8.7 million or $1.55 per share and $1.51 per diluted share for the prior year period.

The decrease in year-to-date net earnings is primarily attributable to a decrease in net interest income, an increase in the provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income compared to the prior year period, as discussed below.

The annualized return on average assets was 0.81% for the six months ended June 30, 2022, compared to 0.89% for the same period one year ago, and annualized return on average shareholders’ equity was 10.39% for the six months ended June 30, 2022, compared to 9.43% for the same period one year ago.

Net earnings were $5.3 million or $0.96 per share and $0.93 per diluted share for the three months ended September 30, 2022, as compared to $3.4 million or $0.61 per share and $0.59 per diluted share for the prior year period.

The increase in third quarter net earnings is primarily the result of an increase in net interest income and an increase in non-interest income, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense, compared to the prior year period, as discussed below.

The annualized return on average assets was 1.25% for the three months ended September 30, 2022, compared to 0.83% for the same period one year ago, and annualized return on average shareholders’ equity was 18.42% for the three months ended September 30, 2022, compared to 9.30% for the same period one year ago.

Year-to-date net earnings as of September 30, 2022 were $12.0 million or $2.18 per share and $2.11 per diluted share for the nine months ended September 30, 2022, as compared to $12.1 million or $2.16 per share and $2.10 per diluted share for the prior year period.

The decrease in year-to-date net earnings is primarily attributable to an increase in non-interest expense and an increase in the provision for loan losses, which were partially offset by an increase in net interest income and an increase in non-interest income compared to the prior year period, as discussed below.

The annualized return on average assets was 0.96% for the nine months ended September 30, 2022, compared to 1.05 % for the same period one year ago, and annualized return on average shareholders’ equity was 12.53% for the nine months ended September 30, 2022, compared to 11.04% for the same period one year ago.

Net Interest Income.

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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.

Net interest income was $11.3 million for the three months ended June 30, 2022, compared to $11.7 million for the three months ended June 30, 2021.

The decrease in net interest income is due to a $525,000 decrease in interest income, which was partially offset by a $198,000 decrease in interest expense.

The decrease in interest income is primarily due to a $1.1 million decrease in interest income and fees on loans, which was partially offset by an increase in interest income on balances due from banks and an increase in interest income on investment securities.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans.

The increase in interest income on investment securities is primarily due to additional securities purchased with additional cash resulting from an increase in deposits.

Net interest income was $13.8 million for the three months ended September 30, 2022, compared to $10.6 million for the three months ended September 30, 2021.

The increase in net interest income is due to a $3.2 million increase in interest income and a $43,000 decrease in interest expense.

The increase in interest income is due to a $1.2 million increase in interest income and fees on loans, a $811,000 increase in interest income on balances due from banks and a $1.1 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 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 additional securities purchased with additional cash resulting from an increase in deposits combined with higher yields on securities purchased during the second and third quarters of 2022.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities

Interest income was $12.0 million for the three months ended June 30, 2022, compared to $12.5 million for the three months ended June 30, 2021.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans.

The Bank recognized $293,000 and $1.5 million of PPP loan fee income for the three months ended June 30, 2022 and the three months ended June 30, 2021, respectively.

During the three months ended June 30, 2022, average loans were $917.8 million, an increase of $1.4 million from average loans of $916.4 million for the three months ended June 30, 2021.

During the three months ended June 30, 2022, average PPP loans were $4.0 million, a reduction of $53.0 million from average PPP loans of $57.0 million for the three months ended June 30, 2021.

During the three months ended June 30, 2022, average investment securities available for sale were $455.3 million, an increase of $108.4 million from average investment securities available for sale of $346.9 million for the three months ended June 30, 2021.

The average yield on loans for the three months ended June 30, 2022 and 2021 was 4.34% and 4.82%, respectively.

The average yield on investment securities available for sale was 1.48% and 1.80% for the three months ended June 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.03% and 3.43% for the three months ended June 30, 2022 and 2021, respectively.

Interest expense was $644,000 for the three months ended June 30, 2022, compared to $842,000 for the three months ended June 30, 2021.

Interest income was $14.6 million for the three months ended September 30, 2022, compared to $11.4 million for the three months ended September 30, 2021.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The Bank recognized $54,000 and $489,000 of PPP loan fee income for the three months ended September 30, 2022 and the three months ended September 30, 2021, respectively.

During the three months ended September 30, 2022, average loans were $971.6 million, an increase of $82.1 million from average loans of $889.5 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average PPP loans were $739,000, a reduction of $29.9 million from average PPP loans of $30.7 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average investment securities available for sale were $490.6 million, an increase of $111.8 million from average investment securities available for sale of $378.8 million for the three months ended September 30, 2021.

The average yield on loans for the three months ended September 30, 2022 and 2021 was 4.51% and 4.37%, respectively.

The average yield on investment securities available for sale was 2.23% and 1.70% for the three months ended September 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.59% and 2.98% for the three months ended September 30, 2022 and 2021, respectively.

Interest expense was $818,000 for the three months ended September 30, 2022, compared to $861,000 for the three months ended September 30, 2021.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

During the three months ended June 30, 2022, average interest-bearing non-maturity deposits were $823.3 million, an increase of $88.3 million from average interest-bearing non-maturity deposits of $735.0 million for the three months ended June 30, 2021.

During the three months ended June 30, 2022, average certificates of deposit were $101.6 million, a reduction of $5.0 million from average certificates of deposit of $106.6 million for the three months ended June 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.18% and 0.30% for the three months ended June 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.56% for the three months ended June 30, 2022, compared to 0.72% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.26% for the three months ended June 30, 2022, compared to 0.38% for the same period one year ago.

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 June 30, 2022 and 2021.

During the three months ended September 30, 2022, average interest-bearing non-maturity deposits were $843.8 million, an increase of $55.8 million from average interest-bearing non-maturity deposits of $788.0 million for the three months ended September 30, 2021.

During the three months ended September 30, 2022, average certificates of deposit were $99.9 million, a reduction of $3.9 million from average certificates of deposit of $103.8 million for the three months ended September 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.23% and 0.29% for the three months ended September 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.53% for the three months ended September 30, 2022, compared to 0.69% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.33% for the three months ended September 30, 2022, compared to 0.36% for the same period one year ago.

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 June 30, 2022 and 2021 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.

Yields and interest income on tax-exempt investments for the three months ended September 30, 2022 and 2021 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.

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Three months ended

June 30, 2022

June 30, 2021

September 30, 2022

September 30, 2021

(Dollars in thousands)

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A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2022 and 2021.

Year-to-date net interest income as of June 30, 2022 was $22.0 million, compared to $22.8 million for the six months ended June 30, 2021.

The decrease in net interest income is due to a $1.1 million decrease in interest income, which was partially offset by a $350,000 decrease in interest expense.

The decrease in interest income is primarily due to a $2.0 million decrease in interest income and fees on loans, which was partially offset by an increase in interest income on balances due from banks and an increase in interest income on investment securities.

Year-to-date net interest income as of September 30, 2022 was $35.8 million for the nine months ended September 30, 2022, compared to $33.3 million for the nine months ended September 30, 2021.

The increase in net interest income is due to a $2.1 million increase in interest income and a $393,000 decrease in interest expense.

The increase in interest income is primarily due to a $1.5 million increase in interest income on investment securities and a $1.3 million increase in interest income on balances due from banks, which were partially offset by a $747,000 decrease in interest income and fees on loans.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans.

The increase in interest income on investment securities is primarily due to additional securities purchased with additional cash resulting from an increase in deposits.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

Interest income was $23.3 million for the six months ended June 30, 2022, compared to $24.4 million for the six months ended June 30, 2021.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans.

The Bank recognized $893,000 and $2.5 million of PPP loan fee income for the six months ended June 30, 2022 and the six months ended June 30, 2021, respectively.

During the six months ended June 30, 2022, average loans were $901.6 million, a decrease of $30.1 million from average loans of $931.7 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, average PPP loans were $9.7 million, a decrease of $46.0 million from average PPP loans of $55.7 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, average investment securities available for sale were $434.4 million, an increase of $129.3 million from average investment securities available for sale of $305.1 million for the six months ended June 30, 2021.

The average yield on loans for the six months ended June 30, 2022 and 2021 was 4.40% and 4.69%, respectively.

The average yield on investment securities available for sale was 1.49% and 1.87% for the six months ended June 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.00% and 3.49% for the six months ended June 30, 2022 and 2021, respectively.

Interest expense was $1.3 million for the six months ended June 30, 2022, compared to $1.7 million for the six months ended June 30, 2021.

Interest income was $37.9 million for the nine months ended September 30, 2022, compared to $35.9 million for the nine months ended September 30, 2021.

The increase in net interest income is due to a $2.1 million increase in interest income and a $393,000 decrease in interest expense.

The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.

The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans, which offset the increase in interest income resulting from rate increases by the Federal Reserve.

The Bank recognized $948,000 and $3.0 million of PPP loan fee income for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, respectively.

During the nine months ended September 30, 2022, average loans were $925.2 million, an increase of $7.7 million from average loans of $917.5 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average PPP loans were $9.1 million, a decrease of $41.6 million from average PPP loans of $50.7 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average investment securities available for sale were $453.4 million, an increase of $123.4 million from average investment securities available for sale of $330.0 million for the nine months ended September 30, 2021.

The average yield on loans for the nine months ended September 30, 2022 and 2021 was 4.44% and 4.59%, respectively.

The average yield on investment securities available for sale was 1.75% and 1.81% for the nine months ended September 30, 2022 and 2021, respectively.

The average yield on earning assets was 3.20% and 3.31% for the nine months ended September 30, 2022 and 2021, respectively.

Interest expense was $2.1 million for the nine months ended September 30, 2022, compared to $2.5 million for the nine months ended September 30, 2021.

The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

During the six months ended June 30, 2022, average interest-bearing non-maturity deposits were $811.4 million, an increase of $107.8 million from average interest-bearing non-maturity deposits of $703.6 million for the six months ended June 30, 2021.

During the six months ended June 30, 2022, average certificates of deposit were $101.0 million, a decrease of $6.3 million from average certificates of deposit of $107.3 million for the six months ended June 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.19% and 0.30% for the six months ended June 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.57% for the six months ended June 30, 2022, compared to 0.76% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.27% for the six months ended June 30, 2022, compared to 0.39% for the same period one year ago.

During the nine months ended September 30, 2022, average interest-bearing non-maturity deposits were $822.3 million, an increase of $90.3 million from average interest-bearing non-maturity deposits of $732.0 million for the nine months ended September 30, 2021.

During the nine months ended September 30, 2022, average certificates of deposit were $100.6 million, a decrease of $5.5 million from average certificates of deposit of $106.1 million for the nine months ended September 30, 2021.

The average rate paid on interest-bearing checking and savings accounts was 0.21% and 0.30% for the nine months ended September 30, 2022 and 2021, respectively.

The average rate paid on certificates of deposit was 0.56% for the nine months ended September 30, 2022, compared to 0.74% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 0.29% for the nine months ended September 30, 2022, compared to 0.38% for the same period one year ago.

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 six months ended June 30, 2022 and 2021 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.

Yields and interest income on tax-exempt investments for the nine months ended September 30, 2022 and 2021 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.

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The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Six months ended

June 30, 2022

June 30, 2021

Nine months ended

September 30, 2022

September 30, 2021

(Dollars in thousands)

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Interest-bearing liabilities:

NOW, MMDA & savings deposits

Interest-bearing demand, MMDA & savings deposits

Time deposits

17 unchanged sentences

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 June 30, 2022

compared to three months ended June 30, 2021

Six months ended June 30, 2022

compared to six months ended June 30, 2021

Three months ended September 30, 2022 compared to three months ended September 30, 2021

Nine months ended September 30, 2022 compared to nine months ended September 30, 2021

(Dollars in thousands)

17 unchanged sentences

Provision for Loan Losses.

The provision for loan losses for the three months ended June 30, 2022 was $410,000, compared to a recovery of $226,000 for the three months ended June 30, 2021.

The provision for loan losses for the three months ended September 30, 2022 was $408,000, compared to a recovery of $182,000 for the three months ended September 30, 2021.

The increase in the provision for loan losses is primarily attributable to an increase in reserves due to a net increase in the volume of loans in the general reserve pool.

There were no loans with modifications as a result of the COVID-19 pandemic at June 30, 2022 and December 31, 2021.

The provision for loan losses for the six months ended June 30, 2022 was $481,000, compared to a recovery of $681,000 for the six months ended June 30, 2021.

The recovery of provision for loan losses for the three months ended September 30, 2021 was primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool.

There were no loans with modifications as a result of the COVID-19 pandemic at September 30, 2022 and December 31, 2021.

The provision for loan losses for the nine months ended September 30, 2022 was $889,000, compared to a recovery of $863,000 for the nine months ended September 30, 2021.

The increase in the provision for loan losses is primarily attributable to an increase in reserves due to a net increase in the volume of loans in the general reserve pool.

The recovery of provision for loan losses for the nine months ended September 30, 2021 was primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool.

Non-Interest Income.

Total non-interest income was $7.3 million for the three months ended June 30, 2022, compared to $6.0 million for the three months ended June 30, 2021.

The increase in non-interest income is primarily attributable to a $1.4 million increase in appraisal management fee income due to an increase in the volume of appraisals and an increase in service charge income primarily due to service charge changes implemented in March 2022, which were partially offset by a $624,000 decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained for the Bank’s portfolio.

Non-interest income was $14.4 million for the six months ended June 30, 2022, compared to $11.9 million for the six months ended June 30, 2021.

The increase in non-interest income is primarily attributable to a $3.1 million increase in appraisal management fee income due to an increase in the volume of appraisals and an increase in service charge income primarily due to service charge changes implemented in March 2022, which were partially offset by a $1.3 million decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained for the Bank’s portfolio.

Total non-interest income was $6.8 million for the three months ended September 30, 2022, compared to $6.0 million for the three months ended September 30, 2021.

The increase in non-interest income is primarily attributable to a $757,000 increase in appraisal management fee income due to an increase in appraisal volume and a $435,000 increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $457,000 decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained in the Bank’s portfolio.

Non-interest income was $21.2 million for the nine months ended September 30, 2022, compared to $18.0 million for the nine months ended September 30, 2021.

The increase in non-interest income is primarily attributable to a $3.9 million increase in appraisal management fee income due to an increase in appraisal volume and a $1.1 million increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $1.8 million decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained in the Bank’s portfolio.

Non-Interest Expense.

Total non-interest expense was $14.2 million for the three months ended June 30, 2022, compared to $12.1 million for the three months ended June 30, 2021.

The increase in non-interest expense is primarily attributable to a $1.1 million increase in appraisal management fee expense due to an increase in the volume of appraisals and a $777,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs.

Non-interest expense was $27.6 million for the six months ended June 30, 2022, compared to $24.4 million for the six months ended June 30, 2021.

The increase in non-interest expense is primarily attributable to a $2.4 million increase in appraisal management fee expense due to an increase in the volume of appraisals and a $443,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs.

Total non-interest expense was $13.5 million for the three months ended September 30, 2022, compared to $12.6 million for the three months ended September 30, 2021.

The increase in non-interest expense is primarily attributable to a $595,000 increase in appraisal management fee expense due to an increase in appraisal volume, a $123,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs and a $218,000 increase in other non-interest expenses.

Non-interest expense was $41.0 million for the nine months ended September 30, 2022, compared to $37.0 million for the nine months ended September 30, 2021.

The increase in non-interest expense is primarily attributable to a $3.0 million increase in appraisal management fee expense due to an increase in appraisal volume and a $566,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs and a $340,000 increase in other non-interest expenses.

Income Taxes.

Income tax expense was $806,000 for the three months ended June 30, 2022, compared to $1.2 million for the three months ended June 30, 2021.

The effective tax rate was 20.03% for the three months ended June 30, 2022, compared to 20.55% for the three months ended June 30, 2021.

Income tax expense was $1.7 million for the six months ended June 30, 2022, compared to $2.2 million for the six months ended June 30, 2021.

The effective tax rate was 19.87% for the six months ended June 30, 2022, compared to 20.41% for the six months ended June 30, 2021.

Income tax expense was $1.4 million for the three months ended September 30, 2022, compared to $824,000 for the three months ended September 30, 2021.

The effective tax rate was 21.06% for the three months ended September 30, 2022, compared to 19.55% for the three months ended September 30, 2021.

Income tax expense was $3.1 million for the nine months ended September 30, 2022 and 2021.

The effective tax rate was 20.40% for the nine months ended September 30, 2022, compared to 20.17% for the nine months ended September 30, 2021.

Analysis of Financial Condition

Investment Securities.

Available for sale securities were $426.8 million at June 30, 2022, compared to $406.5 million at December 31, 2021.

Average investment securities available for sale for the six months ended June 30, 2022 were $434.4 million, compared to $349.6 million for the year ended December 31, 2021.

At June 30, 2022, loans were $959.5 million, compared to $884.9 million at December 31, 2021.

The Bank had $1.4 million and $18.0 million in PPP loans at June 30, 2022 and December 31, 2021, respectively.

Average loans represented 57% and 61% of average earning assets for the six months ended June 30, 2022 and the year ended December 31, 2021, respectively.

The Bank had $1.3 million and $3.6 million in mortgage loans held for sale as of June 30, 2022 and December 31, 2021, respectively.

Available for sale securities were $444.4 million as of September 30, 2022, compared to $406.5 million as of December 31, 2021.

Average investment securities available for sale for the nine months ended September 30, 2022 were $490.6 million, compared to $349.6 million for the year ended December 31, 2021.

Total loans were $1.0 billion as of September 30, 2022, compared to $884.9 million as of December 31, 2021.

The increase in loans was achieved despite a $17.9 million reduction in PPP loans during the nine months ended September 30, 2022.

The Bank had $103,000 and $18.0 million in PPP loans at September 30, 2022 and December 31, 2021, respectively.

Average loans represented 58% and 61% of average earning assets for the nine months ended September 30, 2022 and the year ended December 31, 2021, respectively.

The Bank had $975,000 and $3.6 million in mortgage loans held for sale as of September 30, 2022 and December 31, 2021, respectively.

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 June 30, 2022, the Bank had $93.1 million in residential mortgage loans, $92.3 million in home equity loans and $574.0 million in commercial mortgage loans, which include $443.5 million secured by commercial property and $130.5 million secured by residential property.

Residential mortgage loans at June 30, 2022 include $21.4 million in non-traditional mortgage loans from the former Banco division of the Bank.

At September 30, 2022, the Bank had $97.7 million in residential mortgage loans, $97.4 million in home equity loans and $596.4 million in commercial mortgage loans, which include $460.1 million secured by commercial property and $136.3 million secured by residential property.

Residential mortgage loans at September 30, 2022 include $20.5 million in non-traditional mortgage loans from the former Banco division of the Bank.

At December 31, 2021, the Bank had $101.5 million in residential mortgage loans, $85.6 million in home equity loans and $494.4 million in commercial mortgage loans, which include $381.0 million secured by commercial property and $113.4 million secured by residential property.

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All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

Past due TDR loans and non-accrual TDR loans totaled $2.4 million and $2.2 million at June 30, 2022 and December 31, 2021, respectively.

Past due TDR loans and non-accrual TDR loans totaled $2.4 million and $2.2 million at September 30, 2022 and December 31, 2021, respectively.

The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower.

There were no performing loans classified as TDR loans at June 30, 2022 and December 31, 2021.

There were no new TDR modifications during the three and six months ended June 30, 2022 and 2021.

There were no performing loans classified as TDR loans at September 30, 2022 and December 31, 2021.

There were no new TDR modifications during the three and nine months ended September 30, 2022 and 2021.

Allowance for Loan Losses (ALLL).

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Qualitative factors applied in the Bank’s ALLL model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications as a result of the COVID-19 pandemic.

At June 30, 2022 and December 31, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic.

At June 30, 2022, the Bank continues to maintain a pool of loans that were previously modified as a result of the COVID-19 pandemic.

At September 30, 2022 and December 31, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic.

At September 30, 2022, the Bank continues to maintain a pool of loans that were previously modified as a result of the COVID-19 pandemic.

The loan balances associated with those loans that were previously modified as a result of the COVID-19 pandemic related modifications have been grouped into their own pool within the Bank’s ALLL model as management considers that they have a higher risk profile, and a higher reserve rate has been applied to this pool.

Loans included in this pool totaled $77.9 million and $88.7 million at June 30, 2022 and December 31, 2021, respectively.

Loans included in this pool totaled $74.0 million and $88.7 million at September 30, 2022 and December 31, 2021, respectively.

The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements.

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Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for the three and six months ended June 30, 2022 as compared to the three and six months ended June 30, 2021.

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for the three and nine months ended September 30, 2022 as compared to the three and nine months ended September 30, 2021.

Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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Risk Grade 8 (Loss)

At June 30, 2022, including non-accrual loans, there were no relationships exceeding $1.0 million in the Watch and Substandard risk grades.

At September 30, 2022, including non-accrual loans, there were no relationships exceeding $1.0 million in the Watch and Substandard risk grades.

Non-performing Assets.

Non-performing assets totaled $3.6 million at June 30, 2022 or 0.21% of total assets, compared to $3.2 million or 0.20% of total assets at December 31, 2021.

Non-accrual loans were $3.6 million at June 30, 2022 and $3.2 million at December 31, 2021.

As a percentage of total loans outstanding, non-accrual loans were 0.37% at June 30, 2022 and December 31, 2021, respectively.

Non-performing assets include $3.6 million in commercial and residential mortgage loans and $21,000 in other loans at June 30, 2022, compared to $3.2 million in commercial and residential mortgage loans, $51,000 in other loans at December 31, 2021.

The Bank had no loans 90 days past due and still accruing at June 30, 2022 and December 31, 2021.

The Bank had no other real estate owned at June 30, 2022 and December 31, 2021.

Total deposits at June 30, 2022 were $1.5 billion compared to $1.4 billion at December 31, 2021.

Core deposits, a non-GAAP measure, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.5 billion and $1.4 billion at June 30, 2022 and December 31, 2021, respectively.

Non-performing assets totaled $3.7 million at September 30, 2022 or 0.22% of total assets, compared to $3.2 million or 0.20% of total assets at December 31, 2021.

Non-accrual loans were $3.7 million at September 30, 2022 and $3.2 million at December 31, 2021.

As a percentage of total loans outstanding, non-accrual loans were 0.37% at September 30, 2022 and December 31, 2021, respectively.

Non-performing assets include $3.7 million in commercial and residential mortgage loans and $19,000 in other loans at September 30, 2022, compared to $3.2 million in commercial and residential mortgage loans, $51,000 in other loans at December 31, 2021.

The Bank had no loans 90 days past due and still accruing at September 30, 2022 and December 31, 2021.

The Bank had no other real estate owned at September 30, 2022 and December 31, 2021.

Total deposits at September 30, 2022 were $1.5 billion compared to $1.4 billion at December 31, 2021.

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.

Borrowed Funds.

There were no FHLB borrowings outstanding at June 30, 2022 and December 31, 2021.

Securities sold under agreements to repurchase were $37.1 million at June 30, 2022 and December 31, 2021.

There were no FHLB borrowings outstanding at September 30, 2022 and December 31, 2021.

Securities sold under agreements to repurchase were $38.0 million at September 30, 2022 and December 31, 2021.

Junior Subordinated Debentures (related to Trust Preferred Securities).

Junior subordinated debentures were $15.5 million at June 30, 2022 and December 31, 2021.

Junior subordinated debentures were $15.5 million at September 30, 2022 and December 31, 2021.

In June 2006, the Company formed a 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.

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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 six months ended June 30, 2022 totaled $1.6 billion, exceeding average rate sensitive liabilities of $977.9 million by $621.6 million.

Average rate sensitive assets for the nine months ended September 30, 2022 totaled $1.6 billion, exceeding average rate sensitive liabilities of $976.4 million by $619.1 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.

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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 June 30, 2022.

The Company did not have any interest rate derivatives outstanding as of September 30, 2022.

Included in the rate sensitive assets are $183.3 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 further downward movements in the prime rate.

At June 30, 2022, the Company had $113.2 million in loans with interest rate floors.

The floors were in effect on $8.5 million of these loans pursuant to the terms of the promissory notes on these loans.

The weighted average rate on these loans is 0.61% higher than the indexed rate on the promissory notes without interest rate floors.

The Company utilizes interest rate floors on certain variable rate loans to protect against downward movements in the prime rate.

At September 30, 2022, the Company had $110.8 million in loans with interest rate floors.

The floors were in effect on $9,000 of these loans.

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.

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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 June 30, 2022, such unfunded commitments to extend credit were $359.0 million, while commitments in the form of standby letters of credit totaled $4.9 million.

As of September 30, 2022, such unfunded commitments to extend credit were $373.9 million, while commitments in the form of standby letters of credit totaled $5.5 million.

As of December 31, 2021, such unfunded commitments to extend credit were $304.3 million, while commitments in the form of standby letters of credit totaled $4.9 million.

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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 June 30, 2022, the Bank’s core deposits, a non-GAAP measure, totaled $1.5 billion, or 97.93% of total deposits.

As of September 30, 2022, the Bank’s core deposits, a non-GAAP measure, totaled $1.5 billion, or 97.99% of total deposits.

As of December 31, 2021, the Bank’s core deposits totaled $1.4 billion, or 98.14% of total deposits.

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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 0.91% and 0.68% as of June 30, 2022 and December 31, 2021, respectively.

The Bank’s ratio of wholesale funding to total assets was 0.91% and 0.68% as of September 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021.

At June 30, 2022, the carrying value of loans pledged as collateral to the FHLB totaled $140.2 million compared to $137.4 million at December 31, 2021.

The remaining availability under the line of credit with the FHLB was $85.9 million at June 30, 2022 compared to $90.9 million at December 31, 2021.

The Bank had no borrowings from the FRB at June 30, 2022 or December 31, 2021.

There were no FHLB borrowings outstanding at September 30, 2022 and December 31, 2021.

At September 30, 2022, the carrying value of loans pledged as collateral to the FHLB totaled $143.4 million compared to $137.4 million at December 31, 2021.

The remaining availability under the line of credit with the FHLB was $88.2 million at September 30, 2022 compared to $90.9 million at December 31, 2021.

The Bank had no borrowings from the FRB at September 30, 2022 or December 31, 2021.

FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.

At June 30, 2022, the carrying value of loans pledged as collateral to the FRB totaled $527.4 million compared to $475.2 million at December 31, 2021.

Availability under the line of credit with the FRB was $410.4 million and $346.20 million at June 30, 2022 and December 31, 2021, respectively.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of June 30, 2022.

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 38.50% at June 30, 2022 and 43.28% at December 31, 2021.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2022 and December 31, 2021.

At September 30, 2022, the carrying value of loans pledged as collateral to the FRB totaled $565.1 million compared to $475.2 million at December 31, 2021.

Availability under the line of credit with the FRB was $427.2 million and $346.20 million at September 30, 2022 and December 31, 2021, respectively.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of September 30, 2022.

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 34.62% at September 30, 2022 and 43.28% at December 31, 2021.

The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2022 and December 31, 2021.

Contractual Obligations and Off-Balance Sheet Arrangements.

The Company’s contractual obligations and other commitments as of June 30, 2022 and December 31, 2021 are summarized in the table below.

The Company’s contractual obligations and other commitments as of September 30, 2022 and December 31, 2021 are summarized in the table below.

The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements.

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(Dollars in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

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Capital Resources.

Shareholders’ equity was $112.4 million, or 6.70% of total assets, at June 30, 2022, compared to $142.4 million, or 8.77% of total assets, at December 31, 2021.

The decrease in shareholders’ equity is primarily due to an increase in the unrealized loss on investment securities available for sale due to rate changes from December 31, 2021 to June 30, 2022.

Annualized return on average equity for the six months ended June 30, 2022 was 10.39%, compared to 12.36% for the six months ended June 30, 2021.

Total cash dividends paid on common stock were $2.9 million and $1.9 million for the six months ended June 30, 2022 and 2021, respectively.

Shareholders’ equity was $103.9 million, or 6.78% of total assets, at September 30, 2022, compared to $142.4 million, or 8.77% of total assets, at December 31, 2021.

The decrease in shareholders’ equity is primarily due to an increase in the unrealized loss on investment securities available for sale due to rate changes from December 31, 2021 to September 30, 2022.

Annualized return on average equity for the nine months ended September 30, 2022 was 12.53%, compared to 11.04% for the nine months ended September 30, 2021.

Total cash dividends paid on common stock were $3.9 million and $2.8 million for the nine months ended September 30, 2022 and 2021, respectively.

In February of 2022, 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.

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The stock repurchase program may be suspended at any time or from time-to-time without prior notice.

The Company has repurchased approximately $594,000, or 22,000 shares of its common stock, under this stock repurchase program as of June 30, 2022.

The Company has repurchased approximately $594,000, or 22,000 shares of its common stock, under this stock repurchase program as of September 30, 2022.

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.

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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 June 30, 2022 and December 31, 2021.

The Company’s Tier 1 capital ratio was 13.79% and 15.43% at June 30, 2022 and December 31, 2021, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at September 30, 2022 and December 31, 2021.

The Company’s Tier 1 capital ratio was 13.39% and 15.43% at September 30, 2022 and December 31, 2021, respectively.

Total risk-based capital is defined as Tier 1 capital plus supplementary capital.

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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 14.63% and 16.35% at June 30, 2022 and December 31, 2021, respectively.

The Company’s total risk-based capital ratio was 14.20% and 16.35% at September 30, 2022 and December 31, 2021, 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 12.50% and 13.96% at June 30, 2022 and December 31, 2021, respectively.

The Company’s common equity Tier 1 capital ratio was 12.17% and 13.96% at September 30, 2022 and December 31, 2021, 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 9.47% and 9.64% at June 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.66% and 15.27% at June 30, 2022 and December 31, 2021, respectively.

The total risk-based capital ratio for the Bank was 14.50% and 16.19% at June 30, 2022 and December 31, 2021, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.66% and 15.27% at June 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 leverage capital ratio was 9.32% and 9.50% at June 30, 2022 and December 31, 2021, respectively.

The Company’s Tier 1 leverage capital ratio was 9.58% and 9.64% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.27% and 15.27% at September 30, 2022 and December 31, 2021, respectively.

The total risk-based capital ratio for the Bank was 14.08% and 16.19% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.27% and 15.27% at September 30, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 leverage capital ratio was 9.43% and 9.50% at September 30, 2022 and December 31, 2021, 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 June 30, 2022.

Based upon these guidelines, the Bank was considered to be “well capitalized” at September 30, 2022.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis