What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 145 added, 147 removed, 316 unchanged (48% of the section changed)

20 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.

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 5.00% to 5.25% at June 30, 2023.

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 500 basis points since March 1, 2022 to a range of 5.25% to 5.50% at September 30, 2023.

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.

32 unchanged sentences

Results of Operations

Net earnings were $4.8 million or $0.88 per share and $0.85 per diluted share for the three months ended June 30, 2023, as compared to $3.2 million or $0.59 per share and $0.57 per diluted share for the prior year period.

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

Net earnings were $8.0 million or $1.46 per share and $1.41 per diluted share for the six months ended June 30, 2023, as compared to $6.7 million or $1.21 per share and $1.18 per diluted share for the prior year period.

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

The annualized return on average assets was 1.01% for the six months ended June 30, 2023, compared to 0.81% for the same period one year ago, and annualized return on average shareholders’ equity was 14.12% for the six months ended June 30, 2023, compared to 10.39% for the same period one year ago.

Net earnings were $4.1 million or $0.76 per share and $0.74 per diluted share for the three months ended September 30, 2023, as compared to $5.3 million or $0.96 per share and $0.93 per diluted share for the prior year period.

The decrease in third quarter net earnings is primarily the result of a decrease in net interest income, an increase in the provision for credit losses and an increase in non-interest expense, compared to the prior year period, as discussed below.

Net earnings were $12.1 million or $2.22 per share and $2.15 per diluted share for the nine months ended September 30, 2023, as compared to $12.0 million or $2.18 per share and $2.11 per diluted share for the prior year period.

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

The annualized return on average assets was 1.01% for the nine months ended September 30, 2023, compared to 0.96% for the same period one year ago, and annualized return on average shareholders’ equity was 13.97% for the nine months ended September 30, 2023, compared to 12.53% for the same period one year ago.

Net Interest Income.

2 unchanged sentences

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 $13.8 million for the three months ended June 30, 2023, compared to $11.3 million for the three months ended June 30, 2022.

The increase in net interest income is due to a $5.6 million increase in interest income, partially offset by a $3.2 million increase in interest expense.

The increase in interest income is due to a $3.7 million increase in interest income and fees on loans, a $75,000 increase in interest income on balances due from banks and a $1.8 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 $293,000 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 June 30, 2022.

Net interest income was $13.3 million for the three months ended September 30, 2023, compared to $13.8 million for the three months ended September 30, 2022.

The decrease in net interest income is due to a $4.1 million increase in interest expense, partially offset by a $3.7 million increase in interest income.

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

Interest income was $17.6 million for the three months ended June 30, 2023, compared to $12.0 million for the three months ended June 30, 2022.

The increase in interest income is due to a $3.1 million increase in interest income and fees on loans and a $895,000 increase in interest income on investment securities, which were partially offset by a $294,000 decrease in interest income on balances due from banks.

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 $54,000 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 June 30, 2022.

The Bank recognized zero and $293,000 of PPP loan fee income for the three months ended June 30, 2023 and the three months ended June 30, 2022, respectively.

During the three months ended June 30, 2023, average loans were $1.1 billion, an increase of $138.2 million from average loans of $917.8 million for the three months ended June 30, 2022.

During the three months ended June 30, 2023, average PPP loans were zero, compared to average PPP loans of $4.0 million for the three months ended June 30, 2022.

During the three months ended June 30, 2023, average investment securities available for sale were $450.7 million, a decrease of $4.7 million from average investment securities available for sale of $455.3 million for the three months ended June 30, 2022.

The average yield on loans for the three months ended June 30, 2023 and 2022 was 5.19% and 4.34%, respectively.

The average yield on investment securities available for sale was 3.01% and 1.48% for the three months ended June 30, 2023 and 2022, respectively.

The average yield on earning assets was 4.55% and 3.03% for the three months ended June 30, 2023 and 2022, respectively.

Interest expense was $3.8 million for the three months ended June 30, 2023, compared to $644,000 for the three months ended June 30, 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 June 30, 2023, average interest-bearing non-maturity deposits were $703.5 million, a decrease of $119.8 million from average interest-bearing non-maturity deposits of $823.3 million for the three months ended June 30, 2022.

During the three months ended June 30, 2023, average certificates of deposit were $205.7 million, an increase of $104.0 million from average certificates of deposit of $101.6 million for the three months ended June 30, 2022.

The average rate paid on interest-bearing checking and savings accounts was 0.94% and 0.18% for the three months ended June 30, 2023 and 2022, respectively.

The average rate paid on certificates of deposit was 3.19% for the three months ended June 30, 2023, compared to 0.56% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.56% for the three months ended June 30, 2023, compared to 0.26% 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, 2023 and 2022.

The increase in interest income on investment securities is primarily due to higher yields on securities purchased during the third and fourth quarter of 2022.

The decrease in interest income on balances due from banks is primarily due to a reduction in balances outstanding.

Interest income was $18.3 million for the three months ended September 30, 2023, compared to $14.6 million for the three months ended September 30, 2022.

The increase in interest income on investment securities is primarily due to higher yields on securities purchased during the third and fourth quarter of 2022.

The decrease in interest income on balances due from banks is primarily due to a reduction in balances outstanding.

The Bank recognized zero and $54,000 of PPP loan fee income for the three months ended September 30, 2023 and the three months ended September 30, 2022, respectively.

During the three months ended September 30, 2023, average loans were $1.1 billion, an increase of $92.5 million from average loans of $971.6 million for the three months ended September 30, 2022.

During the three months ended September 30, 2023, average PPP loans were zero, compared to average PPP loans of $739,000 for the three months ended September 30, 2022.

During the three months ended September 30, 2023, average investment securities available for sale were $448.0 million, a decrease of $42.6 million from average investment securities available for sale of $490.6 million for the three months ended September 30, 2022.

The average yield on loans for the three months ended September 30, 2023 and 2022 was 5.27% and 4.51%, respectively.

The average yield on investment securities available for sale was 3.15% and 2.23% for the three months ended September 30, 2023 and 2022, respectively.

The average yield on earning assets was 4.65% and 3.59% for the three months ended September 30, 2023 and 2022, respectively.

Interest expense was $5.0 million for the three months ended September 30, 2023, compared to $818,000 for the three months ended September 30, 2022.

The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities and an increase in time deposits.

During the three months ended September 30, 2023, average interest-bearing non-maturity deposits were $652.7 million, a decrease of $191.1 million from average interest-bearing non-maturity deposits of $843.8 million for the three months ended September 30, 2022.

During the three months ended September 30, 2023, average certificates of deposit were $268.7 million, an increase of $168.8 million from average certificates of deposit of $99.9 million for the three months ended September 30, 2022.

The average rate paid on interest-bearing checking and savings accounts was 1.06% and 0.23% for the three months ended September 30, 2023 and 2022, respectively.

The average rate paid on certificates of deposit was 3.71% for the three months ended September 30, 2023, compared to 0.53% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.92% for the three months ended September 30, 2023, compared to 0.33% 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, 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.

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

3 unchanged sentences

Three months ended

June 30, 2023

Three months ended

June 30, 2022

September 30, 2023

September 30, 2022

(Dollars in thousands)

22 unchanged sentences

Net yield on interest-earning assets

Taxable equivalent adjustment

Investment securities

Taxable equivalent adjustment Investment securities

Net interest income

2 unchanged sentences

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

Year-to-date net interest income as of June 30, 2023 was $28.1 million for the six months ended June 30, 2023, compared to $22.0 million for the six months ended June 30, 2022.

Year-to-date net interest income was $41.4 million for the nine months ended September 30, 2023, compared to $35.8 million for the nine months ended September 30, 2022.

The increase in net interest income is due to a $14.8 million increase in interest income, partially offset by a $9.1 million increase in interest expense.

4 unchanged sentences

The increase in interest expense is primarily due to an increase in time deposits and an increase in rates paid on interest-bearing liabilities.

Interest income was $34.4 million for the six months ended June 30, 2023, compared to $23.3 million for the six months ended June 30, 2022.

The increase in net interest income is due to a $11.1 million increase in interest income, partially offset by a $5.0 million increase in interest expense.

Interest income was $52.7 million for the nine months ended September 30, 2023, compared to $37.9 million for the nine months ended September 30, 2022.

The increase in interest income is due to a $10.0 million increase in interest income and fees on loans, a $53,000 increase in interest income on balances due from banks and a $4.8 million increase in interest income on investment securities.

2 unchanged sentences

The increase in interest income on investment securities is primarily due to higher yields on securities purchased after June 30, 2022.

The Bank recognized zero and $893,000 of PPP loan fee income for the six months ended June 30, 2023 and the six months ended June 30, 2022, respectively.

During the six months ended June 30, 2023, average loans were $1.0 billion, an increase of $145.1 million from average loans of $901.6 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, average PPP loans were zero, compared to average PPP loans of $9.7 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, average investment securities available for sale were $463.4 million, an increase of $29.0 million from average investment securities available for sale of $434.4 million for the six months ended June 30, 2022.

The average yield on loans for the six months ended June 30, 2023 and 2022 was 5.12% and 4.40%, respectively.

The average yield on investment securities available for sale was 3.00% and 1.49% for the six months ended June 30, 2023 and 2022, respectively.

The average yield on earning assets was 4.48% and 3.00% for the six months ended June 30, 2023 and 2022, respectively.

Interest expense was $6.3 million for the six months ended June 30, 2023, compared to $1.3 million for the six months ended June 30, 2022.

The Bank recognized zero and $893,000 of PPP loan fee income for the nine months ended September 30, 2023 and the nine months ended September 30, 2022, respectively.

During the nine months ended September 30, 2023, average loans were $1.1 billion, an increase of $127.4 million from average loans of $925.2 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, average PPP loans were zero, compared to average PPP loans of $9.1 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, average investment securities available for sale were $458.2 million, an increase of $4.8 million from average investment securities available for sale of $453.4 million for the nine months ended September 30, 2022.

The average yield on loans for the nine months ended September 30, 2023 and 2022 was 5.17% and 4.44%, respectively.

The average yield on investment securities available for sale was 3.05% and 1.75% for the nine months ended September 30, 2023 and 2022, respectively.

The average yield on earning assets was 4.54% and 3.20% for the nine months ended September 30, 2023 and 2022, respectively.

Interest expense was $11.3 million for the nine months ended September 30, 2023, compared to $2.1 million for the nine months ended September 30, 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 six months ended June 30, 2023, average interest-bearing non-maturity deposits were $739.1 million, a decrease of $72.3 million from average interest-bearing non-maturity deposits of $811.4 million for the six months ended June 30, 2022.

During the six months ended June 30, 2023, average certificates of deposit were $162.5 million, an increase of $61.5 million from average certificates of deposit of $101.0 million for the six months ended June 30, 2022.

The average rate paid on interest-bearing checking and savings accounts was 0.86% and 0.19% for the six months ended June 30, 2023 and 2022, respectively.

The average rate paid on certificates of deposit was 2.67% for the six months ended June 30, 2023, compared to 0.57% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.31% for the six months ended June 30, 2023, compared to 0.27% for the same period one year ago.

During the nine months ended September 30, 2023, average interest-bearing non-maturity deposits were $710.0 million, a decrease of $112.3 million from average interest-bearing non-maturity deposits of $822.3 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, average certificates of deposit were $198.3 million, an increase of $97.7 million from average certificates of deposit of $100.6 million for the nine months ended September 30, 2022.

The average rate paid on interest-bearing checking and savings accounts was 0.92% and 0.21% for the nine months ended September 30, 2023 and 2022, respectively.

The average rate paid on certificates of deposit was 3.15% for the nine months ended September 30, 2023, compared to 0.56% for the same period one year ago.

The average rate paid on interest-bearing liabilities was 1.53% for the nine months ended September 30, 2023, compared to 0.29% 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, 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.

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

2 unchanged sentences

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

Six months ended

June 30, 2023

Six months ended

June 30, 2022

Three months ended

September 30, 2023

September 30, 2022

(Dollars in thousands)

13 unchanged sentences

Time deposits

Trust preferred securities

Junior subordinated debentures

Total interest-bearing liabilities

6 unchanged sentences

Net yield on interest-earning assets

Taxable equivalent adjustment

Investment securities

Taxable equivalent adjustment Investment securities

Net interest income

5 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, 2023 compared to three months ended June 30, 2022

Six months ended June 30, 2023 compared to six months ended June 30, 2022

Three months ended September 30, 2023 compared to three months

ended September 30, 2022

Nine months ended September 30, 2023 compared to nine months

ended September 30, 2022

(Dollars in thousands)

12 unchanged sentences

Interest expense:

Interest-bearing demand,

MMDA & savings deposits

Interest-bearing demand, MMDA & savings deposits

Time deposits

Trust preferred securities

Junior subordinated debentures

Total interest expense

1 unchanged sentence

Provision for Credit Losses.

The provision for credit losses for the three months ended June 30, 2023 was $375,000, compared to $410,000 for the three months ended June 30, 2022.

The decrease in the provision for credit losses is primarily attributable to lower loan growth in the second quarter of 2023 compared to the second quarter of 2022, which was partially offset by an increase in qualitative adjustments for economic conditions and other factors.

Total loans outstanding increased $6.9 million in the second quarter of 2023, compared to a $69.7 million increase in the second quarter of 2022.

The provision for credit losses for the three months ended June 30, 2023 includes a $184,000 provision on unfunded commitments primarily due to an increase in unfunded commitments from March 31, 2023 to June 30, 2023.

The provision for credit losses for the six months ended June 30, 2023 was $599,000, compared to $481,000 for the six months ended June 30, 2022.

The increase in the provision for credit losses is primarily attributable to an increase in qualitative adjustments for economic conditions and other factors.

The provision for credit losses for the six months ended June 30, 2023 includes a $19,000 credit to the provision on unfunded commitments.

The provision for credit losses for the three months ended September 30, 2023 was $562,000, compared to $408,000 for the three months ended September 30, 2022.

The increase in the provision for credit losses is primarily attributable to an increase in loan balances and in qualitative adjustments for economic conditions and other factors at September 30, 2023, compared to September 30, 2022.

The provision for credit losses for the three months ended September 30, 2023 includes a $127,000 credit to the provision on unfunded commitments.

The provision for credit losses for the nine months ended September 30, 2023 was $1.2 million, compared to $889,000 for the nine months ended September 30, 2022.

The provision for credit losses for the nine months ended September 30, 2023 includes a $146,000 credit to the provision on unfunded commitments.

Non-Interest Income.

Total non-interest income was $6.4 million for the three months ended June 30, 2023, compared to $7.3 million for the three months ended June 30, 2022.

The decrease in non-interest income is primarily attributable a $849,000 decrease in appraisal management fee income due to a decrease in appraisal volume related to national trends in real estate purchases.

Non-interest income was $10.0 million for the six months ended June 30, 2023, compared to $14.4 million for the six months ended June 30, 2022.

Total non-interest income was $6.8 million for the three months ended September 30, 2023 and September 30, 2022.

Non-interest income was $16.8 million for the nine months ended September 30, 2023, compared to $21.2 million for the nine months ended September 30, 2022.

The decrease in non-interest income is primarily attributable to a $2.5 million net loss on the sale of securities and a $2.2 million decrease in appraisal management fee income due to a decrease in appraisal volume related to national trends in real estate purchases, which were partially offset by a $382,000 increase in miscellaneous non-interest income primarily due to an increase in deferred compensation income due to an increase in valuations for the assets in the deferred compensation plan.

The securities sale transaction was executed in January and February 2023 to reduce risk in the investment portfolio, at a time when favorable sale conditions had developed for municipal securities.

This sale also provides the Bank with more flexibility to support loan growth and reduce the need for other borrowings.

The securities sales referenced above were executed in January and February 2023 to reduce risk in the investment portfolio, at a time when favorable sale conditions had developed for municipal securities.

These sales also provided the Bank with more flexibility to support loan growth and reduce the need for other borrowings.

Non-Interest Expense.

Total non-interest expense was $13.6 million for the three months ended June 30, 2023, compared to $14.2 million for the three months ended June 30, 2022.

The decrease in non-interest expense is primarily attributable to a $708,000 decrease in appraisal management fee expense due to a decrease in appraisal volume related to national trends in real estate purchases.

Non-interest expense was $27.3 million for the six months ended June 30, 2023, compared to $27.6 million for the six months ended June 30, 2022.

The decrease in non-interest expense is primarily attributable to a $1.8 million decrease in appraisal management fee expense due to a decrease in appraisal volume related to national trends in real estate purchases, which was partially offset by a $494,000 increase in salaries and employee benefits expense primarily due to a reduction in loan origination costs due to lower loan demand and a $792,000 increase in other non-interest expenses primarily due to an increase in deferred compensation expense due to an increase in valuations for the assets in the deferred compensation plan.

Total non-interest expense was $14.3 million for the three months ended September 30, 2023, compared to $13.5 million for the three months ended September 30, 2022.

The increase in non-interest expense is primarily attributable to a $545,000 increase in salaries and employee benefits expense primarily due to a reduction in the amortization of loan origination costs, which was partially offset by a $164,000 increase in debit card expense and a $65,000 increase in FDIC insurance expense.

Non-interest expense was $41.6 million for the nine months ended September 30, 2023, compared to $41.0 million for the nine months ended September 30, 2022.

The increase in non-interest expense is primarily attributable to a $1.0 million increase in salaries and employee benefits expense primarily due to a reduction in the amortization of loan origination costs and an increase in supplemental retirement plan expense, and a $802,000 increase in other non-interest expenses primarily due to an increase in deferred compensation expense due to an increase in valuations for the assets in the deferred compensation plan, which were partially offset by a $1.8 million decrease in appraisal management fee expense due to a decrease in appraisal volume related to national trends in real estate purchases.

Income Taxes.

Income tax expense was $1.4 million for the three months ended June 30, 2023, compared to $806,000 for the three months ended June 30, 2022.

The effective tax rate was 22.20% for the three months ended June 30, 2023, compared to 20.03% for the three months ended June 30, 2022.

Income tax expense was $2.2 million for the six months ended June 30, 2023, compared to $1.7 million for the six months ended June 30, 2022.

The effective tax rate was 21.79% for the six months ended June 30, 2023, compared to 19.87% for the six months ended June 30, 2022.

Income tax expense was $1.2 million for the three months ended September 30, 2023, compared to $1.4 million for the three months ended September 30, 2022.

The effective tax rate was 22.09% for the three months ended September 30, 2023, compared to 21.06% for the three months ended September 30, 2022.

Income tax expense was $3.4 million for the nine months ended September 30, 2023, compared to $3.1 million for the nine months ended September 30, 2022.

The effective tax rate was 21.89% for the nine months ended September 30, 2023, compared to 20.40% for the nine months ended September 30, 2022.

The increase in the effective tax rate is primarily due to a reduction in non-taxable investments.

1 unchanged sentence

Investment Securities.

Available for sale securities were $394.1 million as of June 30, 2023, compared to $445.4 million as of December 31, 2022.

Average investment securities available for sale for the three months ended June 30, 2023 were $450.1 million, compared to $467.5 million for the year ended December 31, 2022.

Total loans were $1.1 billion as of June 30, 2023, compared to $1.0 billion as of December 31, 2022.

Average loans represented 68% and 59% of average earning assets for the three months ended June 30, 2023 and the year ended December 31, 2022, respectively.

The Bank had $1.6 million and $211,000 in mortgage loans held for sale as of June 30, 2023 and December 31, 2022, respectively.

Available for sale securities were $378.8 million as of September 30, 2023, compared to $445.4 million as of December 31, 2022.

Average investment securities available for sale for the nine months ended September 30, 2023 were $458.2 million, compared to $467.5 million for the year ended December 31, 2022.

Total loans were $1.1 billion as of September 30, 2023, compared to $1.0 billion as of December 31, 2022.

Average loans represented 68% and 59% of average earning assets for the nine months ended September 30, 2023 and the year ended December 31, 2022, respectively.

The Bank had $1.8 million and $211,000 in mortgage loans held for sale as of September 30, 2023 and December 31, 2022, 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, 2023, the Bank had $105.0 million in residential mortgage loans, $99.6 million in home equity loans and $637.9 million in commercial mortgage loans, which include $495.5 million secured by commercial property and $142.4 million secured by residential property.

Residential mortgage loans at June 30, 2023 include $18.9 million in non-traditional mortgage loans from the former Banco division of the Bank.

At September 30, 2023, the Bank had $107.1 million in residential mortgage loans, $103.1 million in home equity loans and $644.6 million in commercial mortgage loans, which include $493.6 million secured by commercial property and $151.0 million secured by residential property.

Residential mortgage loans at September 30, 2023 include $18.4 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.

9 unchanged sentences

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 June 30, 2023.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of September 30, 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.

12 unchanged sentences

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 June 30, 2023.

The Company did not have any loans evaluated on an individual basis at September 30, 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.

30 unchanged sentences

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.

Beginning December 31, 2012, certain mortgage loans from the former Banco division of the Bank were, prior to the adoption of CECL, 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.

These loans are included in the single-family residential loan pool in the Company's CECL model.

The Company did not have any loans evaluated on an individual basis at 38 September 30, 2023.

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance.

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Non-performing Assets.

Non-performing assets were $3.6 million or 0.22% of total assets at June 30, 2023, compared to $3.7 million or 0.23% of total assets at December 31, 2022.

Non-accrual loans were $3.6 million at June 30, 2023 and $3.7 million at December 31, 2022.

As a percentage of total loans outstanding, non-accrual loans were 0.34% and 0.36% at June 30, 2023 and December 31, 2022, respectively.

Non-performing assets include $3.5 million in commercial and residential mortgage loans and $58,000 in other loans at June 30, 2023, compared to $3.7 million in commercial and residential mortgage loans and $9,000 in other loans at December 31, 2022.

The Bank had no loans 90 days past due and still accruing at June 30, 2023 and December 31, 2022.

The Bank had no other real estate owned at June 30, 2023 and December 31, 2022.

Total deposits were $1.4 billion at June 30, 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 at June 30, 2023, compared to $1.4 billion at and December 31, 2022.

Non-performing assets were $3.7 million or 0.23% of total assets at September 30, 2023 and December 31, 2022.

Non-accrual loans were $3.6 million at September 30, 2023 and $3.7 million at December 31, 2022.

As a percentage of total loans outstanding, non-accrual loans were 0.34% and 0.36% at September 30, 2023 and December 31, 2022, respectively.

Non-performing assets include $3.6 million in commercial and residential mortgage loans and $134,000 in other loans at September 30, 2023, compared to $3.7 million in commercial and residential mortgage loans and $9,000 in other loans at December 31, 2022.

The Bank had $99,000 in loans 90 days past due and still accruing at September 30, 2023, compared to zero at December 31, 2022.

The Bank had no other real estate owned at September 30, 2023 and December 31, 2022.

Total deposits were $1.4 billion at September 30, 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 $1.2 billion at September 30, 2023, compared to $1.4 billion at December 31, 2022.

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 overall cost of funds and profitability.

Certificates of deposit in amounts of more than $250,000 totaled $105.3 million at June 30, 2023, compared to $31.0 million at December 31, 2022.

Other time deposits totaled $129.7 million at June 30, 2023, compared to $67.0 million at December 31, 2022.

The increases in certificates of deposit in amounts of more than $250,000 and other time deposits are primarily due to promotional rates offered on select certificate of deposit products during the six months ended June 30, 2023.

Estimated uninsured deposits totaled $361.8 million, or 26.42% of total deposits, at June 30, 2023, compared to $439.8 million, or 30.64% of total deposits, at December 31, 2022.

Certificates of deposit in amounts of more than $250,000 totaled $137.7 million at September 30, 2023, compared to $31.0 million at December 31, 2022.

Other time deposits totaled $165.4 million at September 30, 2023, compared to $67.0 million at December 31, 2022.

Estimated uninsured deposits totaled $376.6 million, or 27.27% of total deposits, at September 30, 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 June 30, 2023.

The Bank did not have any significant deposit concentrations at September 30, 2023.

Borrowed Funds.

There were no FHLB borrowings outstanding at June 30, 2023 and December 31, 2022.

Securities sold under agreements to repurchase were $93.2 million at June 30, 2023, compared to $47.7 million at December 31, 2022.

The increase in securities sold under agreements to repurchase is primarily due to customers that transferred funds from deposits to securities sold under agreements to repurchase during the three months ended June 30, 2023.

There were no FHLB borrowings outstanding at September 30, 2023 and December 31, 2022.

Securities sold under agreements to repurchase were $83.0 million at September 30, 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 June 30, 2023 and December 31, 2022.

Junior subordinated debentures were $15.5 million at September 30, 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.

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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 trust preferred securities issued by PEBK Trust II accrue and pay interest quarterly at a floating rate of three-month United States Secured Overnight Financing Rate (SOFR) plus 189 basis points.

The Company has guaranteed distributions and other payments due on the trust preferred securities.

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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.

Prior to September 15, 2023, the trust preferred securities accrued and paid interest quarterly at a floating rate of three-month LIBOR plus 163 basis points.

The one-week and two-month U.S.

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The overnight, one-month, three-month, nine-month, and 12-month USD LIBOR rates ceased to be published after June 30, 2023.

Effective September 15, 2023, the trust preferred securities will pay interest quarterly at a floating rate of three-month United States Secured Overnight Financing Rate (SOFR) plus 189 basis points, including a 26 basis point credit spread adjustment.

Effective September 15, 2023, the trust preferred securities accrue and pay interest quarterly at a floating rate of three-month SOFR plus 189 basis points, including a 26 basis point credit spread adjustment.

Asset Liability and Interest Rate Risk Management.

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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, 2023 totaled $1.5 billion, exceeding average rate sensitive liabilities of $966.5 million by $583.3 million.

Average rate sensitive assets for the nine months ended September 30, 2023 totaled $1.6 billion, exceeding average rate sensitive liabilities of $985.9 million by $567.8 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, 2023.

The Company did not have any interest rate derivatives outstanding as of September 30, 2023.

Included in the rate sensitive assets are $178.2 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 June 30, 2023, the Company had $109.9 million in loans with interest rate floors.

No floors were in effect on these loans at June 30, 2023.

At September 30, 2023, the Company had $114.8 million in loans with interest rate floors.

No floors were in effect on these loans at September 30, 2023.

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, 2023, such unfunded commitments to extend credit were $390.5 million, while commitments in the form of standby letters of credit totaled $4.3 million.

As of September 30, 2023, such unfunded commitments to extend credit were $397.3 million, while commitments in the form of standby letters of credit totaled $4.3 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.

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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, 2023, the Bank’s core deposits, a non-GAAP measure, totaled $1.3 billion, or 92.26% of total deposits.

As of September 30, 2023, the Bank’s core deposits, a non-GAAP measure, totaled $1.2 billion, or 90.03% of total deposits.

As of December 31, 2022, the Bank’s core deposits totaled $1.4 billion, or 97.84% 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 1.59% and 0.92% as of June 30, 2023 and December 31, 2022, respectively.

The Bank’s ratio of wholesale funding to total assets was 1.86% and 0.92% as of September 30, 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 June 30, 2023 and December 31, 2022.

At June 30, 2023, the carrying value of loans pledged as collateral to the FHLB totaled $192.9 million compared to $149.4 million at December 31, 2022.

The remaining availability under the line of credit with the FHLB was $119.7 million at June 30, 2023 compared to $86.5 million at December 31, 2022.

The Bank had no borrowings from the FRB at June 30, 2023 or December 31, 2022.

There were no FHLB borrowings outstanding at September 30, 2023 and December 31, 2022.

At September 30, 2023, the carrying value of loans pledged as collateral to the FHLB totaled $196.4 million compared to $149.4 million at December 31, 2022.

The remaining availability under the line of credit with the FHLB was $121.0 million at September 30, 2023 compared to $86.5 million at December 31, 2022.

The Bank had no borrowings from the FRB at September 30, 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 June 30, 2023, the carrying value of loans pledged as collateral to the FRB totaled $597.1 million compared to $585.0 million at December 31, 2022.

Availability under the line of credit with the FRB was $445.7 million and $445.1 million at June 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the carrying value of loans pledged as collateral to the FRB totaled $598.9 million compared to $585.0 million at December 31, 2022.

Availability under the line of credit with the FRB was $437.9 million and $445.1 million at September 30, 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 June 30, 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 June 30, 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 26.98% at June 30, 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 June 30, 2023 and December 31, 2022.

The Bank has not pledged any collateral to the BTFP as of September 30, 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 September 30, 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 24.38% at September 30, 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 September 30, 2023 and December 31, 2022.

Contractual Obligations and Off-Balance Sheet Arrangements.

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Capital Resources.

Shareholders’ equity was $112.4 million, or 6.97% of total assets, at June 30, 2023, compared to $105.2 million, or 6.49% of total assets, at December 31, 2022.

Annualized return on average equity for the six months ended June 30, 2023 was 14.12%, compared to 10.39% for the six months ended June 30, 2022.

Total cash dividends paid on common stock were $3.0 million and $2.9 million for the six months ended June 30, 2023 and 2022, respectively.

Shareholders’ equity was $107.4 million, or 6.68% of total assets, at September 30, 2023, compared to $105.2 million, or 6.49% of total assets, at December 31, 2022.

Annualized return on average equity for the nine months ended September 30, 2023 was 13.97%, compared to 12.53% for the nine months ended September 30, 2022.

Total cash dividends paid on common stock were $4.1 million and $3.9 million for the nine months ended September 30, 2023 and 2022, respectively.

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.

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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 $833,000, or 46,222 shares of its common stock, under this stock repurchase program as of June 30, 2023.

The Company has repurchased approximately $1.7 million, or 87,222 shares of its common stock, under this stock repurchase program as of September 30, 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.

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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, 2023 and December 31, 2022.

The Company’s Tier 1 capital ratio was 13.80% and 13.21% at June 30, 2023 and December 31, 2022, respectively.

Tier 1 capital includes $15.0 million in trust preferred securities at September 30, 2023 and December 31, 2022.

The Company’s Tier 1 capital ratio was 13.66% and 13.21% at September 30, 2023 and December 31, 2022, 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 14.77% and 14.04% at June 30, 2023 and December 31, 2022, respectively.

The Company’s total risk-based capital ratio was 14.64% and 14.04% at September 30, 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 12.59% and 12.03% at June 30, 2023 and December 31, 2022, respectively.

The Company’s common equity Tier 1 capital ratio was 12.48% and 12.03% at September 30, 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 10.41% and 9.82% at June 30, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.69% and 13.10% at June 30, 2023 and December 31, 2022, respectively.

The total risk-based capital ratio for the Bank was 14.66% and 13.93% at June 30, 2023 and December 31, 2022, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.69% and 13.10% at June 30, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.26% and 9.68% at June 30, 2023 and December 31, 2022, respectively.

The Company’s Tier 1 leverage capital ratio was 10.52% and 9.82% at September 30, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.55% and 13.10% at September 30, 2023 and December 31, 2022, respectively.

The total risk-based capital ratio for the Bank was 14.53% and 13.93% at September 30, 2023 and December 31, 2022, respectively.

The Bank’s common equity Tier 1 capital ratio was 13.55% and 13.10% at September 30, 2023 and December 31, 2022, respectively.

The Bank’s Tier 1 leverage capital ratio was 10.36% and 9.68% at September 30, 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 June 30, 2023.

Based upon these guidelines, the Bank was considered to be “well capitalized” at September 30, 2023.

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