10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2022

000-27205

(Commission File No.)

Peoples Bancorp of North Carolina, Inc.

(Exact Name of Registrant as Specified in Its Charter)

North Carolina	56-2132396
(State or Other Jurisdiction of Incorporation)	(IRS Employer Identification No.)
518 West C Street, Newton, North Carolina	28658
(Address of Principal Executive Offices)	(Zip Code)

(828) 464-5620

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, no par value

(title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated Filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $125,528,065 based on the closing price of such common stock on June 30, 2022, which was $27.16 per share.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 5,637,021 shares of common stock, outstanding at February 28, 2023.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. (the “Company”) for the year ended December 31, 2022 (the “Annual Report”), which will be included as Appendix A to the Company’s Proxy Statement for the 2023 Annual Meeting of Shareholders to be held on May 4, 2023 (the “Proxy Statement”), are incorporated by reference into Part II and filed as Exhibit 13 to this Form 10-K.

Portions of the Company’s Proxy Statement to be filed pursuant to Regulation 14A, are incorporated by reference into Part III. The Proxy Statement will be filed on or before April 30, 2023.

This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the markets served by the Company’s subsidiary, Peoples Bank, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.
FORM 10-K CROSS REFERENCE INDEX
	10-K	Proxy Statement and Annual Report
	Page	Page
PART I
Item 1 - Business	4 - 15	N/A
Item 1A - Risk Factors	15 - 25	N/A
Item 1B - Unresolved Staff Comments	25	N/A
Item 2 - Properties	26	N/A
Item 3 - Legal Proceedings	26 - 27	N/A
Item 4 - Mine Safety Disclosures	27	N/A
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder  Matters and Issuer Purchases of Equity Securities	28 - 30	N/A
Item 6 - Selected Financial Data	30	A-3
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	30	A-4 - A-18
Item 7A - Quantitative and Qualitative Disclosures About Market Risk	30	N/A
Item 8 - Financial Statements and Supplementary Data	30	A-19 - A-59
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	31	N/A
Item 9A - Controls and Procedures	31	N/A
Item 9B - Other Information	31	N/A
Item 9C - Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	31	N/A
PART III
Item 10 - Directors and Executive Officers and Corporate Governance	32	15 and A-60
Item 11 - Executive Compensation	32	19 - 26
Item 12 - Security Ownership of Certain Beneficial Owners and Management  and Related Stockholder Matters	32 - 33	5 - 7
Item 13 - Certain Relationships and Related Transactions and Director Independence	33	6, 7 and 26
Item 14 - Principal Accountant Fees and Services	33	27
PART IV
Item 15 - Exhibits and Financial Statement Schedules	34 - 36	N/A
Signatures	37	N/A

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PART I

ITEM 1. BUSINESS

General Business

Peoples Bancorp of North Carolina, Inc. (the “Company”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”). The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Company’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. The Company has no operations and conducts no business of its own other than owning the Bank and PEBK Capital Trust II. Accordingly, the discussion of the business which follows primarily concerns the business conducted by the Bank. Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 17 banking offices, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Huntersville, Mooresville, Raleigh, and Cary, North Carolina. The Bank also operates loan production offices in Charlotte, Denver, Salisbury and Winston-Salem North Carolina. The Company’s fiscal year ends December 31. At December 31, 2022, the Company had total assets of $1.6 billion, net loans of $1.0 billion, deposits of $1.4 billion, total securities of $448.1 million, and shareholders’ equity of $105.2 million.

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

The Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s deposit and loan customers are individuals and small-to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated through the Bank’s former Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-26 of the Annual Report, which is included in this Form 10-K as Exhibit (13).

The operations of the Bank are significantly influenced by general economic conditions and by related monetary and fiscal policies of the Company and the Bank’s regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”).

At December 31, 2022, the Company employed 279 full-time employees and 21 part-time employees, which equated to 291 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2022, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies. As a separate legal entity, CBRES’s services and the appraisal process are conducted independent from the financing process of the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and assets obtained in the ordinary course of collecting debts previously contracted. In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022. All of the Bank’s subsidiaries are incorporated in the state of North Carolina.

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In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), to facilitate the issuance of $20.6 million of trust preferred securities. PEBK Trust II is not included in the consolidated financial statements. The Company redeemed $5.0 million of outstanding trust preferred securities in 2019. The trust preferred securities issued by PEBK Trust II accrue and pay quarterly dividends at a floating rate of three-month LIBOR plus 163 basis points. The Company has guaranteed payment of these dividends and other payments due on the trust preferred securities.

Market Area and Competition

The Bank’s primary market consists of the communities in an approximate 50-mile radius around its headquarters office in Newton, North Carolina. This area includes Catawba County, Alexander County, Lincoln County, Iredell County and portions of northeast Gaston County, North Carolina. The Bank also conducts a portion of its business outside of this area. The Bank is located only 40 miles north of Charlotte, North Carolina, and the Bank’s primary market area is and will continue to be significantly affected by its close proximity to this major metropolitan area.

Employment in the Bank’s primary market area is diversified among manufacturing, retail and wholesale trade, technology, services and utilities. Catawba County’s largest employers include Catawba County Schools, Catawba Valley Medical Center, Duke LifePoint/Frye Regional Medical Center, CommScope, Inc. (manufacturer of fiber optic cable and accessories), Corning Optical Communications (manufacturer of fiber optic cable and accessories), Target Stores Distribution Center (transportation and warehousing), Catawba County, GKN ePowertrain (manufacturing), Wal-Mart Associates, Inc. and Pierre Foods, Inc. Lincoln County’s largest employers include Lincoln County Schools, County of Lincoln, Atrium Health Lincoln, RSI Home Products (manufacturing), Wal-Mart Associates, Inc., The Timken Company (manufacturing), Blum, Inc. (manufacturing), Lowes Home Centers, Inc. and Cataler North America (manufacturing).

The Bank has operated in the Catawba Valley region of North Carolina for over 100 years and is the only financial institution headquartered in Newton, North Carolina. Nevertheless, the Bank faces strong competition both in attracting deposits and making loans. Direct competition for deposits has historically come from other commercial banks, credit unions and brokerage firms located in its primary market area, including large financial institutions. One national money center commercial bank is headquartered in Charlotte, North Carolina. Based upon June 30, 2022 comparative data, the Bank had 20.73% of the deposits in Catawba County, placing it second in deposit size among a total of 11 banks with branch offices in Catawba County; 18.98% of the deposits in Lincoln County, placing it second in deposit size among a total of nine banks with branch offices in Lincoln County; and 17.57% of the deposits in Alexander County, placing it fourth in deposit size among a total of five banks with branch offices in Alexander County.

The Bank also faces additional significant competition for investors’ funds from short-term money market securities and other corporate and government securities. The Bank’s core deposit base has grown principally due to economic growth in the Bank’s market area coupled with the implementation of new and competitive deposit products. The ability of the Bank to attract and retain deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities.

The Bank experiences strong competition for loans from commercial banks and mortgage banking companies. The Bank competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides to borrowers. Competition is increasing as a result of the continuing reduction of restrictions on the interstate operations of financial institutions.

Lending Policies and Procedures

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors of the Bank (the “Bank Board”). The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment, credit history, and other information on the historical and projected income and expenses of the borrower.

5

The objectives of our lending program are to: (i) establish a sound asset structure; (ii) provide a sound and profitable loan portfolio to (a) protect the depositor’s funds and (b) maximize our shareholders’ return on investment; (iii) promote the stable economic growth and development of the market area served by the Bank; and (iv) comply with all regulatory agency requirements and applicable law.

The Bank’s legal lending limit is set by law and is monitored by the FDIC and the Commissioner. As of December 31, 2022, the Bank’s legal lending limit was $26.5 million (absent fully marketable collateral), and the largest credit relationship was $19.7 million. The underwriting standards and loan origination procedures include officer lending limits, which are approved by the Bank Board. The President/Chief Executive Officer of the Bank has loan authority of up to the legal lending limit of the Bank. As of December 21, 2022, the individual lending authority of the Chief Credit Officer/Executive Vice President was set at $6.5 million.

It is the policy of the Bank to ensure that the Bank Board is fully apprised of the status and critical factors affecting the quality and performance of the loan portfolio. These factors include, but are not limited to: (i) credit underwriting policies and procedures; (ii) results of loan reviews and loan audits; and, (iii) credit concentrations (single borrowers and specific industries).

Management provides the Bank Board with the loan portfolio information as described below:

Monthly:

The following reports are submitted to the Bank Board for review and approval on a monthly basis:

· Loan Quality/Yield/Growth/Trend Report

· Risk Grade Report with Details of Loans Risk Graded 5-8

· Commercial Loan Delinquency

· New Loans - $250,000 and Greater

· Comparison on New Loans in Prior Month with Same Month in Prior Year

· Outstanding Commitments - $250,000 and greater

· Commitment Pipeline Report – Outstanding commitments of $2,000,000 and greater (pending final approval and/or acceptance by the applicant)

· Underwriting Exception Report (Commercial, Consumer and Mortgage)

· Documentation Exception Report (Commercial and Consumer – quarterly comparison with current month)

· All New Loans for Prior Month – Details

Quarterly:

The following reports are submitted to the Bank Board for review and approval on a quarterly basis:

· Real Estate Secured Loans with Non-Conforming Loan-To-Value Ratio

· Status of Other Real Estate Owned

· Nonaccrual

· Impaired Loan Report

· Letters of Credit Outstanding

· Portfolio Status Report - Detailed analytical report summarizing the composition of the bank’s loan portfolio

· Portfolio Stress Tests

· Mortgage Report (see Mortgage Policy for complete list of reports)

· Matured Home Equity Loan Report

Semi-annually:

The following report is submitted to the Bank Boards for review and approval on a semi-annual basis:

· Participation Status Report

Annually:

On an annual basis, the Bank Board:

· Reviews and approves the Bank’s credit underwriting policies and procedures

· Reviews findings of the annual independent loan review of borrowing relationships of $1.5 million and greater as well as a periodic sample of commercial relationships with exposures below $1.5 million prepared by an independent loan review company engaged by the Bank

· Receives information from management detailing all new committed borrowing relationships exceeding $3.0 million and is informed during the year if a borrowing relationship exceeds $2.5 million

6

Investment Policies and Procedures

The Bank’s investment policy is designed to provide flexibility as necessary to maintain satisfactory liquidity while maximizing earnings on funds available for investment. The Bank maintains an investment portfolio of high-quality investment securities that is managed in a manner consistent with safe and sound banking practices. The characteristics and financial goals of the investment portfolio are complementary to the Bank’s broader business strategies and congruent with the Bank’s capital policies, technical expertise, and risk tolerances.

The Bank’s specific investment objectives are as follows:

A. Provide Earnings – Maximize the total return on invested funds in a manner that is consistent with the Bank’s overall financial goals and risk considerations. This objective is fulfilled by investing in, holding, and divesting from individual securities that, when considered in combination, contribute to a superior risk/reward for the total portfolio.

B. Provide Liquidity – Remain sufficiently liquid to meet anticipated funding demands either through declines in deposits and/or increases in loan demand. The Bank makes investments that are marketable and capable of being converted to cash at their market values in a relatively short period of time.

C. Mitigate Interest Rate Risk – Utilize portfolio strategies to assist the Bank in managing its overall interest rate sensitivity position in accordance with the goals and objectives approved by the Asset/Liability Management Committee (“ALCO”) of the Bank.

D. Ensure the Safety of Principal –At all times, the safety of principal is a primary consideration. Upon purchase, the Bank’s investments are limited to investment-grade instruments that fully comply with all applicable regulatory guidelines and limitations.

E. Manage Tax Liabilities – Conduct portfolio management in light of the Bank’s current and projected tax position in order to improve overall profitability by reducing the Bank’s tax exposure to its minimum permissible level.

F. Meet Pledging Requirements – Provide collateral for various deposit and funding products such as public funds, trust deposits, repurchase agreements and FHLB borrowings.

The Bank Board reviews and approves the Bank’s Investment Policy annually or more frequently, if appropriate. All investment portfolio activities are reported to the ALCO and the Bank Board. The Bank Board oversees the establishment of appropriate systems and internal controls designed to keep portfolio strategies and holdings consistent with the overall strategies of the Bank.

The Bank Board designates a Primary Investment Officer who is directed to implement the Investment Policy of the Bank in a safe and sound manner. The Primary Investment Officer of the Bank is charged with the responsibility to actively manage the Bank’s investment portfolio, in conformity with the preceding objectives and the following approval requirements. Such responsibility includes the purchase and/or disposition of any holding within the investment portfolio up to $8 million and the ability to establish accounts with other depository institutions or investment firms as needed to process investment activity approved under this policy. Any activity over $8 million and less than 20% of the Bank’s capital as defined by accounting principles generally accepted in the United States of America (“GAAP”) must be approved by the ALCO. Transactions exceeding 20% of GAAP capital must be approved by the Bank Board. Also, any sale of securities that will result in a gain of more than $500,000 or a loss before income taxes exceeding the lesser of $250,000 or 2.5% of the current year’s projected net income must be approved by the Bank Board. The Investment Officer may designate certain investment functions to other officers of the Bank and may also seek outside sources for investment advice or periodic appraisals of the portfolio. The Executive Vice President/Chief Financial Officer serves as the Primary Investment Officer.

7

Human Capital Management

At December 31, 2022, the Company employed 279 full-time employees and 21 part-time employees, which equated to 291 full-time equivalent employees. We are not a party to any collective bargaining agreements, and we consider our employee relations to be good.

Oversight of our corporate culture is an important element of our Board of Directors oversight of risk because our people are critical to the success of our corporate strategy. Our Board of Directors sets the “tone at the top,” and holds senior management accountable for embodying, maintaining, and communicating our culture to employees. Our culture is guided by our guiding principles below:

Our Core Values

- Employees – We are informed, encouraged, and committed

- Integrity – We are fair and truthful

- Exceptional Customer Service – We surpass our customers’ expectation

- Accountability – We are accountable for our own actions and bank goals.

- Progressive and Positive – We see change as an opportunity

- Our brand story

Our Bank Promise, Vision, and Mission

We are committed to fostering, cultivating, and preserving a culture of diversity and inclusion. We are working to cultivate our leaders and shape future talent pools to help us meet the needs of our customers now and in the future. Our human capital is the most valuable asset we have. The collective sum of the individual differences, life experiences, knowledge, inventiveness, innovation, self-expression, unique capabilities, and talent that our employees invest in their work represents a significant part of not only our culture but our reputation and our achievement as well. We embrace our employee’s differences in age, color, disability, ethnicity, family or marital status, gender identity or expression, language, national origin, physical and mental ability, political affiliation, race, religion, sexual orientation, socio-economic status, veteran status, and other characteristics that make our employees unique.

By emphasizing a consistent set of principles that all employees follow, we believe that our employees work experience is more satisfying, and they are better able to serve their customers consistently and at a high level.

Our employees are key to our success as an organization. We are committed to attracting, retaining and promoting top quality talent regardless of sex, sexual orientation, gender identity, race, color, national origin, age, religion and physical ability. We strive to identify and select the best candidates for all open positions based on qualifying factors for each job. We are dedicated to providing a workplace for our employees that is inclusive, supportive, and free of any form of discrimination or harassment; rewarding and recognizing our employees based on their individual results and performance; and recognizing and respecting all of the characteristics and differences that make each of our employees unique.

Employees have annual assignments related to “valuing differences” and diversity training is an integrated part of our leadership training as well. We expanded our Diversity, Equity & Inclusion (“DEI”) course library to support our ongoing culture sustainability program development. We launched our “Courageous Conversations” initiative in 2020, a program we will continue to build on annually. We are an active member of the North Carolina Bankers Association DEI Council doing work to expand DEI programming and other resources for community banks.

We also seek to design careers within our organization that are fulfilling ones, with competitive compensation and benefits alongside a positive work-life balance. We dedicate resources to fostering professional and personal growth with continuing education, on-the-job training and development programs.

8

Supervision and Regulation

Bank holding companies and commercial banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company, the Bank and their subsidiaries. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company, the Bank and their subsidiaries. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. Statutes, rules and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. The Company cannot predict whether or in what form any proposed statute, rule or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation.

General. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to depositors and the FDIC deposit insurance fund in the event a depository institution becomes in danger of default or in default. For example, to mitigate the risk of failure, bank holding companies are required to guarantee the compliance of any insured depository institution subsidiary that may become “undercapitalized” with the terms of the capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the bank’s total assets at the time the bank became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all capital standards as of the time the bank fails to comply with such capital restoration plan. The Company, as a registered bank holding company, is subject to the regulation of the Federal Reserve. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

As a result of the Company’s ownership of the Bank, the Company is also registered under the bank holding company laws of North Carolina. Accordingly, the Company is also subject to regulation and supervision by the Commissioner.

Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”). On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act has had and will continue to have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things,

· enhanced authority over troubled and failing banks and their holding companies;

· increased capital and liquidity requirements;

· increased regulatory examination fees; and

· specific provisions designed to improve supervision and safety and soundness by imposing restrictions and limitations on the scope and type of banking and financial activities.

In May 2018, the Economic Growth Act, was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets less than $10 billion and for large banks with assets of more than $50 billion.

The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and provides for an alternative capital rule which financial institutions and their holding companies with total consolidated assets of less than $10 billion may elect to utilize. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%. In addition, the Economic Growth Act includes regulatory relief for community banks of certain sizes regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans. We have not opted to utilize the Community Bank Leverage Ratio and have instead continued to use the Basel III standards (see discussion on Basel III standards under the heading “Capital Adequacy” below).

It is difficult at this time to predict when or how any new standards under the Economic Growth Act will ultimately be applied to, or what specific impact the Economic Growth Act and the yet-to-be-written implementing rules and regulations will have on us.

9

Capital Adequacy. At December 31, 2022, the Bank exceeded each of its minimum capital requirements with a Tier 1 leverage capital ratio of 9.68%, common equity Tier 1 risk-based capital ratio of 13.10%, Tier 1 risk-based capital ratio of 13.10% and total risk-based capital ratio of 13.93%. At December 31, 2022, the Company also exceeded each of its minimum capital requirements with a Tier 1 leverage capital ratio of 9.82%, common equity Tier 1 risk-based capital ratio of 12.03%, Tier 1 risk-based capital ratio of 13.21% and total risk-based capital ratio of 14.04%.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework that addresses shortcomings in certain capital requirements. The rule, which became effective on January 1, 2015, implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. The final rule:

· established a new minimum common equity Tier 1 risk-based capital ratio (common equity Tier 1 capital to total risk-weighted assets) of 4.5% and increased the minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while maintaining the minimum total risk-based capital ratio of 8.0% and the minimum Tier 1 leverage capital ratio of 4.0%;

· revised the rules for calculating risk-weighted assets to enhance their risk sensitivity;

· phased out trust preferred securities and cumulative perpetual preferred stock as Tier 1 capital;

· added a requirement to maintain a minimum conservation buffer, composed of common equity Tier 1 capital, of 2.5% of risk-weighted assets, to be applied to the new common equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio, which means that banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum common equity Tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%; and

· changed the definitions of capital categories for insured depository institutions for purposes of the Federal Deposit Insurance Corporation Improvement Act of 1991 prompt corrective action provisions. Under these revised definitions, to be considered well-capitalized, an insured depository institution must have a Tier 1 leverage capital ratio of at least 5.0%, a common equity Tier 1 risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a total risk-based capital ratio of at least 10.0%.

The new minimum regulatory capital ratios and changes to the calculation of risk-weighted assets became effective for the Bank and the Company on January 1, 2015. The required minimum conservation buffer was phased in incrementally, starting at 0.625% on January 1, 2016 and increased to 1.25% on January 1, 2017, 1.875% on January 1, 2018, and 2.5% on January 1, 2019.

The final rule established common equity Tier 1 capital as a new capital component. Common equity Tier 1 capital consists of common stock instruments that meet the eligibility criteria in the final rule, retained earnings, accumulated other comprehensive income/loss and common equity Tier 1 minority interest. As a result, Tier 1 capital has two components: common equity Tier 1 capital and additional Tier 1 capital. The final rule also revised the eligibility criteria for inclusion in additional Tier 1 and Tier 2 capital. As a result of these changes, certain non-qualifying capital instruments, including cumulative preferred stock and trust preferred securities, are excluded as a component of Tier 1 capital for institutions of the size of the Company.

The final rule further requires that certain items be deducted from common equity Tier 1 capital, including (1) goodwill and other intangible assets, other than mortgage servicing rights, net of deferred tax liabilities (“DTLs”); (2) deferred tax assets that arise from operating losses and tax credit carryforwards, net of valuation allowances and DTLs; (3) after-tax gain-on-sale associated with a securitization exposure; and (4) defined benefit pension fund assets held by a depository institution holding company, net of DTLs. In addition, banking organizations must deduct from common equity Tier 1 capital the amount of certain assets, including mortgage servicing assets, that exceed certain thresholds. The final rule also allows all but the largest banking organizations to make a one-time election not to recognize unrealized gains and losses on available for sale debt securities in regulatory capital, as under prior capital rules.

The final rule provides that the failure to maintain the minimum conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. If a banking organization’s conservation buffer is less than 0.625%, the banking organization may not make any capital distributions or discretionary cash bonus payments to executive officers. If the conservation buffer is greater than 0.625% but not greater than 1.25%, capital distributions and discretionary cash bonus payments are limited to 20% of net income for the four calendar quarters preceding the applicable calendar quarter (net of any such capital distributions), or eligible retained income. If the conservation buffer is greater than 1.25% but not greater than 1.875%, the limit is 40% of eligible retained income, and if the conservation buffer is greater than 1.875% but not greater than 2.5%, the limit is 60% of eligible retained income. The preceding thresholds for the conservation buffer and related restrictions represent the fully phased in rules effective January 1, 2019.

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Dividend and Repurchase Limitations. Federal regulations provide that the Company must obtain Federal Reserve approval prior to repurchasing its common stock for consideration in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for a “well capitalized” bank holding company; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues.

The ability of the Company to pay dividends or repurchase shares is largely dependent upon the Company’s receipt of dividends from the Bank. North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

Deposit Insurance. As a member of the FDIC, our deposits are insured up to applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. The basic deposit insurance level is generally $250,000, as specified in FDIC regulations. For this protection, each insured bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.

We recognized approximately $461,000, $415,000 and $263,000 in FDIC insurance expense in 2022, 2021, and 2020, respectively. In November 2018, the FDIC announced that the Deposit Insurance Fund (“DIF”) reserve ratio exceeded the statutory minimum of 1.35% as of September 30, 2018. Among other things, this resulted in the FDIC awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior years. We were notified in January 2019 that we had received approximately $272,000 in credits that would be available to offset deposit insurance assessments once the DIF reached 1.38%. The DIF reached 1.38% as of June 30, 2019 and therefore, the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the second quarter of 2019. The Bank’s credits were fully utilized in the first quarter of 2020.

The FDIC may conduct examinations of and require reporting by FDIC-insured institutions. It may also prohibit an institution from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit insurance fund and may terminate the Bank’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.25% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity-based stock ownership requirement. On December 31, 2022, the Bank was in compliance with this requirement.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination, which was conducted in January 2020.

Changes in Control. The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank or financial holding company or savings bank holding company without prior approval of the Federal Reserve. Similarly, Federal Reserve approval (or, in certain cases, non‑objection) must be obtained prior to any person acquiring control of the Company. Control is deemed to exist if, among other things, a person acquires 25% or more of any class of voting stock of the Company or controls in any manner the election of a majority of the directors of the Company.

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Federal Securities Law. The Company has registered its common stock with the Securities and Exchange Commission (“SEC”) pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended from time to time (the “Exchange Act”). As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company. In addition, the SEC and Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd Frank Act that apply to the Company as a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.

Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions and limitations contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. In addition to limitations on the dollar value of loans to directors, executive officers and principal shareholders, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.

Loans to One Borrower. The Bank is subject to the loans-to-one-borrower limits established by North Carolina law, which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral may exceed 15% of the Bank’s total equity capital. At December 31, 2022, this limit was $26.5 million. This limit is increased by an additional 10% of the Bank’s total equity capital, or $44.2 million as of December 31, 2022, for loans and extensions of credit that are fully secured by readily marketable collateral.

Anti-Money Laundering and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “USA Patriot Act”“), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations on financial institutions, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious financial, legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.

Interstate Banking and Branching. The BHCA was amended by the Interstate Banking Act. The Interstate Banking Act provides that adequately capitalized and managed financial and bank holding companies are permitted to acquire banks in any state. State law prohibiting interstate banking or discriminating against out-of-state banks is preempted. States are not permitted to enact laws opting out of this provision; however, states are allowed to adopt a minimum age restriction requiring that target banks located within the state be in existence for a period of years, up to a maximum of five years, before a bank may be subject to the Interstate Banking Act. The Interstate Banking Act, as amended by the Dodd-Frank Act, establishes deposit caps which prohibit acquisitions that result in the acquiring company controlling 30% or more of the deposits of insured banks and thrift institutions held in the state in which the target maintains a branch or 10% or more of the deposits nationwide. States have the authority to waive the 30% deposit cap. State-level deposit caps are not preempted as long as they do not discriminate against out-of-state companies, and the federal deposit caps apply only to initial entry acquisitions.

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Limits on Rates Paid on Deposits and Brokered Deposits. FDIC regulations limit the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in such depository institution’s normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction, “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates) and “undercapitalized” depository institutions may not accept, renew, or roll-over such deposits. Definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” are the same as the definitions adopted by federal banking agencies to implement the prompt corrective action provisions discussed above.

Current Expected Credit Loss Accounting Standard. The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard related to reserving for credit losses. This standard, referred to as Current Expected Credit Loss (or “CECL”), requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts. The Company adopted CECL as of January 1, 2023. See Item 1A. Risk Factors for a further discussion of risks related to CECL.

Financial Privacy and Cybersecurity. The federal banking regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date we have not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.

The Bank Secrecy Act (BSA). The BSA requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence/know-your-customer documentation requirements. The Bank has established an anti-money laundering program to comply with the BSA requirements.

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The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002 (“SOX”) implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America and better protect investors from the types of corporate wrongdoings that occurred at Enron and WorldCom, among other companies. SOX’s principal provisions, many of which have been implemented through regulations released and policies and rules adopted by the securities exchanges in 2003 and 2004, provide for and include, among other things:

· The creation of an independent accounting oversight board;

· Auditor independence provisions which restrict non-audit services that accountants may provide to clients;

· Additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements;

· The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement;

· An increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the public company’s independent auditors;

· Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer;

· Requirements that companies disclose whether at least one member of the audit committee is a ‘financial expert’ (as such term is defined by the SEC), and if not, why not;

· Expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during certain blackout periods;

· A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as the Bank, on non-preferential terms and in compliance with bank regulatory requirements;

· Disclosure of a code of ethics and filing a Form 8-K in the event of a change or waiver of such code; and

· A range of enhanced penalties for fraud and other violations.

The Company complies with the provisions of SOX and its underlying regulations. Management believes that such compliance efforts have strengthened the Company’s overall corporate governance structure, and does not believe that such compliance has to date had, or will in the future have, a material impact on the Company’s results of operations or financial condition.

Standards for Safety and Soundness. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) the federal bank regulatory agencies have prescribed, by regulation, standards and guidelines for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The compensation standards prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide “excessive” compensation, fees or benefits, or that could lead to material financial loss. In addition, the federal bank regulatory agencies are required by FDICIA to prescribe standards specifying: (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of depository institutions and depository institution holding companies.

Other. Additional regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards.

The Bank is subject to examination by the FDIC and the Commissioner. In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit, equal credit and fair credit reporting laws and laws relating to branch banking. The Bank, as an insured North Carolina commercial bank, is prohibited from engaging as a principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the appropriate deposit insurance fund and (ii) the Bank is, and continues to be, in compliance with all applicable capital standards.

Future Requirements. Statutes and regulations, which contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions, are introduced regularly. Neither the Company nor the Bank can predict whether or what form any proposed statute or regulation will be adopted or the extent to which the business of the Company or the Bank may be affected by such statute or regulation.

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Available Information

The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports available free of charge on its internet website www.peoplesbanknc.com as soon as reasonably practicable after the reports are electronically filed with the SEC. The Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q are also available on its internet website in interactive data format using the eXtensible Business Reporting Language (XBRL), which allows financial statement information to be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software and used within investment models in other software formats. The SEC maintains an Internet site that contains reports, proxy information, statements and other information filed by the Company with the SEC electronically. These filings are also accessible on the SEC’s website at https://www.sec.gov.

The Company maintains an internet website at www.peoplesbanknc.com. The Company’s corporate governance policies, including the charters of the Audit and Enterprise Risk, Compensation, and Governance Committees, and the Code of Business Conduct and Ethics may be found on the Company’s website. A written copy of the foregoing corporate governance policies is available upon written request to the Company. Information included on the Company’s website is not incorporated by reference into this Annual Report.

ITEM 1A. RISK FACTORS

The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of these risks were to materialize, our business, financial condition or results of operations could be materially and adversely affected.

RISK FACTORS RELATED TO OUR BUSINESS

The lingering economic impact of the COVID-19 pandemic combined with the current inflationary pressures could adversely affect our financial condition and results of operations.

The COVID-19 pandemic caused significant economic disruption throughout the United States. Although the economic activity has improved and there is growth in demand for goods and services, the lingering impact the COVID-19 pandemic has created certain adverse and persistent macroeconomic consequences, including labor shortages and disruptions of global supply chain, which may continue for some time and which have contributed to rising inflationary pressures and the risk of recession.

As a result of the lingering impact of the COVID-19 pandemic and the related adverse economic consequences, we could be subject to the following risks, among others, any of which individually or in combination with others could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

· Demand for our products and services may decline, making it difficult to grow assets and income;

· If we have high levels of unemployment for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

· Collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

· Limitations may be placed on our ability to foreclose on properties we hold as collateral;

· Our allowance for credit losses may have to be increased if borrowers experience financial difficulties which will adversely affect our net income;

· The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

· Our cybersecurity risks are increased if employees work remotely;

· We rely on third-party vendors for certain services and the unavailability of a critical service could have an adverse effect on us; and

· FDIC premiums may increase if the FDIC experiences additional resolution costs.

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Unfavorable economic conditions could adversely affect our business.

Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations and financial condition. Our banking operations are primarily locally oriented and community-based. Our retail and commercial banking activities are primarily concentrated within the same geographic footprint. Our market is primarily based in the Catawba Valley region of North Carolina and surrounding communities. Worsening economic conditions within our markets could have a material adverse effect on our financial condition, results of operations and cash flows. Accordingly, we expect to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets we serve. Unfavorable changes in unemployment, real estate values, interest rates, inflation and other factors could weaken the economies of the communities we serve. While economic growth and business activity has been generally favorable in our market area in recent years, there can be no assurance that economic conditions will recover to pre-pandemic levels, and these conditions could worsen. In addition, unfavorable global economic conditions, including the effects of the COVID-19 pandemic discussed above, have had a negative impact on financial markets and could adversely impact our customers, which in turn could lead to lower business activity and higher loan delinquencies. Weakness in any of our market areas could have an adverse impact on our earnings, and consequently our financial condition and capital adequacy.

Inflation can have an adverse impact on our customers and their ability to repay.

Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there has been a pronounced rise in inflation and the Federal Reserve has raised certain benchmark interest rates in an effort to combat this trend. Our customers may also be affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans with us.

Recessionary conditions could result in increases in our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and increased unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

We are subject to credit risk and may incur losses if loans are not repaid.

There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States and abroad. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans and the value of the collateral securing these loans. We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

Our loan portfolio includes loans with a higher risk of loss.

We originate commercial real estate loans, commercial loans, construction and land development loans, and residential mortgage loans primarily within our market area. Commercial real estate, commercial, and construction and land development loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had greater credit risk than other loans for the following reasons:

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

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

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

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

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A significant amount of the Bank’s business is concentrated in lending which is secured by property located in the Catawba Valley and surrounding areas.

In addition to the financial strength and cash flow characteristics of the borrower in each case, the Bank often secures its loans with real estate collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If the Bank is required to liquidate the collateral securing a loan during a period of reduced real estate values to satisfy the debt, the Bank’s earnings and capital could be adversely affected.

Additionally, with most of the Bank’s loans concentrated in the Catawba Valley and surrounding areas, a decline in local economic conditions could adversely affect the values of the Bank’s real estate collateral. Consequently, a decline in local economic conditions may have a greater effect on the Bank’s earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse.

Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property collateral.

In considering whether to make a loan secured by real property, we typically require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.

Our allowance for loan losses may be insufficient and could therefore reduce earnings.

The risk of credit losses on loans varies with, among other things, general economic conditions, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan. Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Management believes it has established the allowance in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and in consideration of the current economic environment. Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb future losses, or if the bank regulatory authorities require the Bank to increase the allowance for loan losses as a part of their examination process, the Bank’s earnings and capital could be significantly and adversely affected. For further discussion related to our process for determining the appropriate level of the allowance for loan losses, see “Allowance for Loan Losses” within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results and Operation” of the Annual Report, which is included in this Form 10-K as Exhibit (13).

In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards. The FASB issued an Accounting Standards Update related to CECL, the new credit impairment model, which was implemented by the Company for reporting periods beginning on January 1, 2023. This new model requires financial institutions to estimate and develop a provision for credit losses at origination for the lifetime of the loan, as opposed to reserving for probable incurred losses up to the balance sheet date. Under the CECL model, credit deterioration will be reflected in the income statement in the period of origination or acquisition of the loan, with changes in expected credit losses due to further credit deterioration or improvement reflected in the periods in which the expectation changes.

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The CECL framework is expected to result in earlier recognition of credit losses and is expected to be significantly influenced by the composition, characteristics and quality of the Company’s loan portfolio, as well as the prevailing economic conditions and forecasts. The Company will initially apply the impact of the new guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of implementation.

The CECL standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. Providing for losses over the life of the Bank’s loan portfolio is a change to the previous method of providing allowances for loan losses that are probable and incurred. This change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

If our non-performing assets increase, our earnings will suffer.

Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for probable losses, which is established through a current period charge to the provision for loan losses as well as from time to time, as appropriate, the write down of the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract them from more profitable activity. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.

Changes in interest rates affect profitability and assets.

Changes in prevailing interest rates may hurt the Bank’s business. The Bank derives its income primarily from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. In general, the larger the spread, the more the Bank earns. When market rates of interest change, and in particular during periods of rapid rate movements as experienced in 2022, the interest the Bank receives on its assets and the interest the Bank pays on its liabilities will fluctuate. This can cause decreases in the “spread” and can adversely affect the Bank’s income. Changes in market interest rates could reduce the value of the Bank’s financial assets. Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decrease in value as interest rates rise. In addition, interest rates affect how much money the Bank lends. For example, when interest rates rise, the cost of borrowing increases and the loan originations tend to decrease. If the Bank is unsuccessful in managing the effects of changes in interest rates, the financial condition and results of operations could suffer.

A small number of large deposit relationships provide a significant level of funding for the Bank.

The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $117.0 million at December 31, 2022.  These balances represent 7.89% of total deposits and securities sold under agreements to repurchase combined at December 31, 2022.  Total deposits for the five largest relationships referenced above amounted to $85.7 million, or 5.97% of total deposits at December 31, 2022.  Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $31.4 million, or 65.76% of total securities sold under agreements to repurchase at December 31, 2022. Withdrawals of deposits by any one of our largest depositors could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations.  We may also be forced, as a result of any withdrawal of deposits, to rely more heavily on other, potentially more expensive and less stable funding sources.  Consequently, the occurrence of any of these events could have a material adverse effect on our business, results of operations, financial condition and future prospects.

We may not be able to retain or grow our deposit base, which could adversely impact our funding costs.

Like many financial institutions, the Bank relies on customer deposits as its primary source of funding for its lending activities, and the Bank continues to seek customer deposits to maintain this funding base. The Bank’s future growth will largely depend on its ability to retain and grow its deposit base. As of December 31, 2022, the Bank had $1.4 billion in deposits. The Bank’s deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of its control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of its financial health and general reputation, and a loss of confidence by customers in the Bank or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. The availability of deposits can also be impacted by regulatory changes (e.g., changes in FDIC insurance, the liquidity coverage ratio, etc.), changes in the financial condition of the Bank, or the banking industry in general, and other events which can impact the perceived safety and soundness or economic benefits of bank deposits. Any loss by the Bank of its deposit base could limit its lending ability resulting in lower loan originations, which could have a material adverse effect on the Bank’s business, financial condition and results of operations.

Increases in FDIC insurance premiums may adversely affect our net income and profitability.

The Company is generally unable to control the amount of premiums that the Bank is required to pay for FDIC insurance. If there are bank or financial institution failures that exceed the FDIC’s expectations, the Bank may be required to pay higher FDIC premiums than those currently in force. Any future increases or required prepayments of FDIC insurance premiums may adversely impact the Company’s earnings and financial condition.

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Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology (IT) systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company and/or its third-party service providers. While we have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Although we employ comprehensive measures to prevent, detect, address and mitigate these threats (including access controls, employee training, data encryption, vulnerability assessments, continuous monitoring of our IT networks and systems and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties and increased cybersecurity protection and remediation costs, which in turn could materially adversely affect our results of operations.

Our business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, our business and a negative impact on our results of operations.

We rely heavily on communications and information systems to conduct our business. Our daily operations depend on the operational effectiveness of our technology. We rely on our systems to accurately track and record our assets and liabilities. Any failure, interruption or breach in security of our computer systems or outside technology, whether due to severe weather, natural disasters, acts of war or terrorism, criminal activity, cyberattacks or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management, and other systems leading to inaccurate financial records. This could materially affect our business operations and financial condition.

While we have disaster recovery and other policies and procedures designed to prevent or limit the effect of any failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our results of operations.

In addition, the Bank provides its customers the ability to bank online and through mobile banking. The secure transmission of confidential information over the Internet is a critical element of online and mobile banking. While we use qualified third-party vendors to test and audit our network, our network could become vulnerable to unauthorized access, computer viruses, phishing schemes and other security issues. The Bank may be required to spend significant capital and other resources to alleviate problems caused by security breaches or computer viruses.

To the extent that the Bank’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose the Bank to claims, litigation, and other potential liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in the Bank’s systems and could adversely affect its reputation and its ability to generate deposits.

Additionally, we outsource the processing of our core data system, as well as other systems such as online banking, to third party vendors. Prior to establishing an outsourcing relationship, and on an ongoing basis thereafter, management monitors key vendor controls and procedures related to information technology, which includes reviewing reports of service auditor’s examinations. If our third-party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations.

In the normal course of business, we process large volumes of transactions involving millions of dollars. If our internal controls fail to work as expected, if our systems are used in an unauthorized manner, or if our employees subvert our internal controls, we could experience significant losses.

We process large volumes of transactions on a daily basis involving millions of dollars and are exposed to numerous types of operational risk. Operational risk includes the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems and breaches of the internal control system and compliance requirements. This risk also includes potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards.

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We establish and maintain systems of internal operational controls that provide us with timely and accurate information about our level of operational risk. Although not foolproof, these systems have been designed to manage operational risk at appropriate, cost-effective levels. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. From time to time, losses from operational risk may occur, including the effects of operational errors. We continually monitor and improve our internal controls, data processing systems, and corporate-wide processes and procedures, but there can be no assurance that future losses will not occur.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. We may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, financial advisors and consultants, credit reports, or other financial information could cause us to enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.

We are subject to extensive regulation, which could have an adverse effect on our operations.

The Company and the Bank are subject to extensive regulation and supervision from the Commissioner, the FDIC and the Federal Reserve. This regulation and supervision is intended primarily to enhance the safe and sound operation of the Bank and for the protection of the FDIC insurance fund and our depositors and borrowers, rather than for holders of our equity securities. In the past, our business has been materially affected by these regulations. This trend is likely to continue in the future.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of our assets and the determination of the level of allowance for loan losses. Changes in the regulations that apply to us, or changes in our compliance with regulations, could have a material impact on our operations.

We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and related enforcement actions.

The federal BSA, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network (“FINCEN”), established by the Treasury to administer the BSA, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the OFAC. Federal and state bank regulators also have begun to focus on compliance with BSA and AML regulations. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, the Consumer Finance Protection Bureau and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our CRA rating and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on or delays in approving merger and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.

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Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and investment banks. Defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. We can make no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, cash flows from loan payments and our securities portfolio. Borrowings also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity.

Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or deterioration in credit markets.

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Risks related to decline in value of investment securities portfolio.

At December 31, 2022, unrealized losses in our available for sale investment securities portfolio totaled $62.3 million. These unrealized losses arose due to changing interest rates and are considered to be temporary; however, in the event that we sell these securities while they are in an unrealized loss position, we will recognize a corresponding loss. In January and February 2023, we sold securities available for sale totaling $53.5 million, which resulted in gross losses of $2.7 million and gross gains of $177,000. In the event that we decide to sell additional securities while they are in an unrealized loss position, we will experience additional losses, which could have a material adverse effect on our earnings and financial condition. 

We could experience losses due to competition with other financial institutions.

We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our principal markets, many of which are larger and may have more financial resources. Such competitors primarily include national, regional and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, thrifts, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries, such as online lenders and banks. The financial services industry could become even more competitive as a result of legislative and regulatory changes and continued consolidation. In addition, as customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

Our ability to compete successfully depends on a number of factors, including, among other things:

· the ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets;

· the ability to expand our market position;

· the scope, relevance, and pricing of products and services offered to meet customer needs and demands;

· the rate at which we introduce new products and services relative to our competitors;

· customer satisfaction with our level of service; and

· industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.

Failure to keep pace with technological change could adversely affect our business.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business and could negatively impact our reputation. Replacing these third-party vendors could also entail significant delay and expense.

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Negative publicity could damage our reputation.

Reputation risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business. Negative public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct. Our reputation could also be adversely impacted by negative public opinion regarding the financial services industry in general.

Loss of key personnel could adversely impact results.

The success of the Bank has been and will continue to be greatly influenced by the ability to retain the services of existing senior management. The Bank has benefited from consistency within its senior management team, with two of its top three executives averaging 26 years of service with the Bank. The unexpected loss of the services of any of the key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on the business and financial results of the Bank.

We may be subject to examinations by taxing authorities which could adversely affect our results of operations.

 In the normal course of business, we may be subject to examinations from federal and state taxing authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we are engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations.

As discussed in Item 3. Legal Proceedings, the North Carolina Department of Revenue is seeking to disallow certain tax credits taken by the Bank in prior tax years from an investment made by the Bank. While the Bank purchased a Guaranty Agreement along with the investment, which we believe limits our potential exposure, in the event the tax credits are ultimately disallowed, there can be no assurance that the guarantor will perform under the Guaranty Agreement or that we will recover all of any of these potential losses under the Guaranty Agreement. This could have a material adverse effect on our results of operations and financial condition.

Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.

Our accounting policies are fundamental to understanding our financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

From time to time the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our external financial statements. These changes are beyond our control, can be hard to predict and could materially impact how we report our results of operations and financial condition. We could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements in material amounts.

Our internal controls may be ineffective.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations, and financial condition.

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Impairment of investment securities or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

In assessing the impairment of investment securities, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issues, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of fair value in the near term. In assessing the future ability of the Company to realize the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The impact of each of these impairment matters could have a material adverse effect on our business, results of operations, and financial condition.

Because we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:

· general or local economic conditions;

· environmental cleanup liability;

· neighborhood values;

· interest rates;

· real estate tax rates;

· operating expenses of the mortgaged properties;

· supply of and demand for rental units or properties;

· ability to obtain and maintain adequate occupancy of the properties;

· zoning laws;

· governmental rules, regulations and fiscal policies; and

· acts of God.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss.

We are subject to losses due to errors, omissions or fraudulent behavior by our employees, clients, counterparties or other third parties.

We are exposed to many types of operational risk, including the risk of fraud by employees and third parties, clerical recordkeeping errors and transactional errors. Our business is dependent on our employees as well as third-party service providers to process a large number of increasingly complex transactions. We could be materially and adversely affected if employees, clients, counterparties or other third parties caused an operational breakdown or failure, either as a result of human error, fraudulent manipulation or purposeful damage to any of our operations or systems.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information, which we do not independently verify. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a client, we may assume that the client’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the client. Our financial condition and results of operations could be negatively affected to the extent we rely on financial statements that do not comply with GAAP or are materially misleading, any of which could be caused by errors, omissions, or fraudulent behavior by our employees, clients, counterparties, or other third parties.

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Our articles of incorporation and bylaws, and certain banking laws may have an anti-takeover effect.

Provisions of our articles of incorporation and bylaws, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. The combination of these provisions may prohibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of our common stock.

RISKS RELATED TO THE COMPANY’S STOCK

Our stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including the risk factors discussed elsewhere in this report that are outside of our control and which may occur regardless of our operating results.

Future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline.

Although our common stock is listed for trading in The NASDAQ Global Select Market under the symbol “PEBK”, the trading volume in our common stock is lower than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the relatively low trading volume of our common stock, significant sales of our common stock in the public market, or the perception that those sales may occur, could cause the trading price of our common stock to decline or to be lower than it otherwise might be in the absence of those sales or perceptions.

Our common stock is not FDIC insured.

The Company’s common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.

We may reduce or eliminate dividends on our common stock.

Although we have historically paid a quarterly cash dividend to the holders of our common stock, holders of our common stock are not entitled to receive dividends. Downturns in the domestic and global economies could cause our Board of Directors to consider, among other things, reducing or eliminating dividends paid on our common stock. This could adversely affect the market price of our common stock. Furthermore, as a bank holding company, our ability to pay dividends is subject to the guidelines of the Federal Reserve regarding capital adequacy and dividends before declaring or paying any dividends. Dividends also may be limited as a result of safety and soundness considerations.

We may need additional access to capital, which we may be unable to obtain on attractive terms or at all.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth or to fund losses or additional provision for loan losses in the future. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to it, or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our stock price negatively affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2. PROPERTIES

At December 31, 2022, the Company and the Bank conducted their business from their headquarters office in Newton, North Carolina and the Bank’s 17 branch offices in Lincolnton, Hickory, Newton, Catawba, Conover, Claremont, Maiden, Denver, Triangle, Hiddenite, Charlotte, Huntersville, Mooresville, Raleigh and Cary, North Carolina. The Bank also operates loan production offices in Charlotte, Denver, Salisbury and Winston-Salem, North Carolina. The following table sets forth certain information regarding the Bank’s properties at December 31, 2022.

Owned Corporate Office 518 West C Street Newton, North Carolina 28658   420 West A Street Newton, North Carolina 28658   213 1st Street, West Conover, North Carolina 28613   3261 East Main Street Claremont, North Carolina 28610   6125 Highway 16 South Denver, North Carolina 28037   5153 N.C. Highway 90E Hiddenite, North Carolina 28636   200 Island Ford Road Maiden, North Carolina 28650   3310 Springs Road NE Hickory, North Carolina 28601   142 South Highway 16 Denver, North Carolina 28037   106 North Main Street Catawba, North Carolina 28609   2050 Catawba Valley Boulevard Hickory, North Carolina 28601   1074 River Highway Mooresville, North Carolina 28117   163 Plantation Ridge Drive Mooresville, North Carolina 28117   1910 East Main Street Lincolnton, North Carolina 28092 Leased 1333 2nd Street NE Hickory, North Carolina 28601   6350 South Boulevard Charlotte, North Carolina 28217   3752/3754 Highway 16 North Denver, North Carolina 28037   9617 Holly Point Drive Huntersville, NC 28078   4000 Westchase Boulevard Suite 100 Raleigh, North Carolina 27607   1117 Parkside Main Street Cary, North Carolina 27519   13840 Ballantyne Corporate Place Suite 150 Charlotte, North Carolina 28277   118 East Council Street Suite 1 Salisbury, NC 28144   380 Knollwood Street Suite D Winston-Salem, NC 27103  

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ITEM 3. LEGAL PROCEEDINGS

On October 19, 2018, the Bank received a draft audit report from the North Carolina Department of Revenue (“NCDOR”) setting forth certain proposed adjustments to the North Carolina income tax returns for the Bank for the tax years January 1, 2014 through December 31, 2016. The NCDOR sought to disallow certain tax credits taken by the Bank in tax years January 1, 2014 through December 31, 2016 from an investment made by the Bank. The total proposed adjustments sought by the NCDOR as of the date of the draft audit report (including additional tax, penalties and interest up to the date of the draft audit report) was approximately $1.4 million. The Bank disagreed with the NCDOR’s proposed adjustments and the disallowance of certain tax credits, and challenged the proposed adjustments and the disallowance of such tax credits. During the second quarter of 2019, the Bank paid the NCDOR $1.2 million in taxes and interest associated with the proposed adjustments noted above. This payment stopped the accrual of interest during the period while the proposed adjustments and disallowance are being contested, and the NCDOR waived associated penalties. The Bank purchased a Guaranty Agreement along with this tax credit investment that unconditionally guarantees the amount of its investment plus associated penalties and interest which management believes would limit the Bank’s exposure to approximately $125,000. The Tax Credit Guaranty Agreement by State Tax Credit Exchange, LLC dated September 10, 2014 was attached to the Company’s September 30, 2018 Quarterly Report on Form 10-Q as Exhibit 99.

In the opinion of management, the Company is not involved in any other material pending legal proceedings other than routine proceedings occurring in the ordinary course of business.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is listed on the NASDAQ Global Market, under the symbol “PEBK.” Market makers for the Company’s shares include Raymond James Financial, Inc. and Hovde Group, LLC.

The ability of the Company to pay dividends and repurchase shares is largely dependent upon the Company’s receipt of dividends from the Bank. The Bank’s ability to pay dividends is limited. North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amount of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations). For further discussion, see Supervision and Regulation under Item 1 Business.

As of March 8, 2023, the Company had 668 shareholders of record, not including the number of persons or entities whose stock is held in nominee or street name through various brokerage firms or banks.

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STOCK PERFORMANCE GRAPH

                The following graph compares the Company’s cumulative shareholder return on its common stock with a NASDAQ index and with a southeastern bank index. The graph was prepared by S&P Global Market Intelligence, using data as of December 31, 2022.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS

Performance Report for

Peoples Bancorp of North Carolina, Inc.

The information required by Item 201(d) concerning securities authorized for issuance under equity compensation plans is set forth in Item 12 hereof.

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ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number  of Shares Purchased (1)		Average  Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)
October 1 - 31, 2022		3,200	$	27.50		3,200	$	1,317,790
November 1 - 30, 2022		2,446	$	28.43		1,000	$	1,289,460
December 1 - 31, 2022		269	$	30.71		-	$	1,289,460
Total		5,915	$	28.03		4,200

(1) The Company purchased 1,715 shares on the open market in the three months ended December 31, 2022 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

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

(3) Reflects dollar value of balance available for repurchase at end of period under the Company's stock repurchase program, which was authorized in February 2022 and expires in February 2023.

ITEM 6. SELECTED FINANCIAL DATA

The information required by this Item is set forth in the section captioned “Selected Financial Data” on page A-3 of the Annual Report, which Annual Report is filed with this Form 10-K as Exhibit (13). The section captioned “Selected Financial Data” on page A-3 of the Annual Report is incorporated herein by reference.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this Item is set forth in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-18 of the Annual Report, which section is filed with this Form 10-K as Exhibit (13). The section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and supplementary data are set forth on pages A-19 through A-60 of the Annual Report, which Annual Report is filed with this Form 10-K as Exhibit (13). The consolidated financial statements of the Company and supplementary data set forth on pages A-19 through A-59 of the Annual Report are incorporated herein by reference.

30

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company, has concluded, based on their evaluation as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures (as defined in Rule 13A-15(e) promulgated under the Exchange Act) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management including the Chief Executive Officer and the Chief Financial Officer of the Company as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Controls over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2022.

 This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, management’s report was not subject to attestation by the Company’s independent registered public accounting firm.

ITEM 9B. OTHER INFORMATION

Not applicable

ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable

31

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is set forth under the sections captioned “Director Nominees”, “Executive Officers of the Company “, “Security Ownership Of Certain Beneficial Owners and Management, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Code of Business Conduct and Ethics”, “Board Committees – Governance Committee” and “Board Committees – Audit and Enterprise Risk Committee” contained in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is set forth under the section captioned “Compensation Discussion and Analysis”, “Summary Compensation Table”, “Grants of Plan-Based Awards”, “Outstanding Equity Awards at Fiscal Year End”, “Option Exercises and Stock Vested”, “Pension Benefits”, “Nonqualified Deferred Compensation”, “Employment Agreements”, “Potential Payments upon Termination or Change in Control”, “Omnibus Stock Option and Long Term Incentive Plan”, “Director Compensation”, “Compensation Committee – Compensation Committee Interlocks and Insider Participation”, “Compensation Committee – Compensation Committee Report”, and “Pay versus Performance”, contained in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

For the information required by the Item see the section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the Proxy Statement, which section is incorporated herein by reference.

The following table presents the number of shares of Company common stock to be issued upon the exercise of outstanding options, warrants and rights; the weighted-average price of the outstanding options, warrants and rights and the number of options, warrants and rights remaining that may be issued under the Company’s Omnibus Stock Ownership and Long Term Incentive Plans.

32

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)		Weighted-average  exercise price of outstanding options, warrants and rights (2)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders		28,440	$	0.00		279,920
Equity compensation plans not approved by security holders		-		-		-
Total		28,440	$	0.00		279,920

(1) Includes: 3,245 restricted stock units granted on January 24, 2018 under the 2009 Omnibus Stock Ownership and Long Term Incentive Plan, all of which vested on January 24, 2022; 5,115 restricted stock units granted on February 21, 2019 under the 2009 Omnibus Stock Ownership and Long Term Incentive Plan, all of which vested on February 21, 2023; 7,635 restricted stock units granted on May 7, 2020 under the 2020 Omnibus Stock Ownership and Long Term Incentive Plan, all of which vest on May 7, 2024; 7,060 restricted stock units granted on February 3, 2021 under the 2020 Omnibus Stock Ownership and Long Term Incentive Plan, all of which vest on February 3, 2025; and 5,385 restricted stock units granted on January 20, 2022 under the 2020 Omnibus Stock Ownership and Long Term Incentive Plan, all of which vest on January 20, 2026.

(2) The restricted stock units granted by the Company under the Omnibus Plans do not have an exercise price.

The above table excludes shares awarded from time to time pursuant to the Service Recognition Program. The Service Recognition Program is described under the section captioned “Discretionary Bonus and Service Awards” contained in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

See the sections captioned “Indebtedness of and Transactions with Management and Directors” and “Board Leadership Structure and Risk Oversight” contained in the Proxy Statement, which sections are incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

See the section captioned “Proposal 2 - Ratification of Selection of Independent Registered Public Accounting Firm” contained in the Proxy Statement, which section is incorporated herein by reference.

33

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)1.	Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit (13) and incorporated herein by reference)
	(a)	Reports of Independent Registered Public Accounting Firm
	(b)	Consolidated Balance Sheets as of December 31, 2022 and 2021
	(c)	Consolidated Statements of Earnings for the Years Ended December 31, 2022, 2021 and 2020
	(d)	Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2022, 2021 and 2020
	(e)	Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020
	(f)	Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020
	(g)	Notes to Consolidated Financial Statements
15(a)2.	Consolidated Financial Statement Schedules
	All schedules have been omitted, as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.
15(a)3.	Exhibits

Exhibit (3)(i)(a)	Articles of Incorporation of the Registrant, incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (3)(i)(b)	Articles of Amendment dated December 19, 2008, regarding the Series A Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (3)(i)(c)	Articles of Amendment dated February 26, 2010, incorporated by reference to Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010
Exhibit (3)(i)(d)	Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form 10-K filed with the Securities and Exchange Commission on March 18, 2022
Exhibit (3)(ii)	Second Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and Exchange Commission on June 24, 2015
Exhibit (4)(i)	Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (4)(ii)	Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, incorporated by reference to Exhibit 4(ii) to the Form 10-K/A filed with the Securities and Exchange Commission on March 16, 2020

34

Exhibit (10)(i)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated December 18, 2008, incorporated by reference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(ii)	Employment Agreement dated January 22, 2015 between the Registrant and William D. Cable, Sr., incorporated by reference to Exhibit (10)(c) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(iii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated December 18, 2008, incorporated by reference to Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(iv)	Employment Agreement dated January 22, 2015 between the Registrant and Lance A. Sellers, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(v)	Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(h) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(vi)	Rabbi Trust for the Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(vii)	Description of Service Recognition Program maintained by Peoples Bank, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 27, 2003
Exhibit (10)(viii)	Capital Securities Purchase Agreement dated as of June 26, 2006, by and among the Registrant, PEBK Capital Trust II and Bear, Sterns Securities Corp., incorporated by reference to Exhibit 10(j) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(ix)	Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of June 28, 2006, incorporated by reference to Exhibit 10(k) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(x)	Guarantee Agreement of the Registrant dated as of June 28, 2006, incorporated by reference to Exhibit 10(l) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xi)	Indenture, dated as of June 28, 2006, by and between the Registrant and LaSalle Bank National Association, as Trustee, relating to Junior Subordinated Debt Securities Due September 15, 2036, incorporated by reference to Exhibit 10(m) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xii)	Form of Amended and Restated Director Supplemental Retirement Agreement between Peoples Bank and Directors Robert C. Abernethy, James S. Abernethy, Douglas S. Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L. Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman, Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit (10)(n) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

35

Exhibit (10)(xiii)	2009 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(o) to the Form 10-K filed with the Securities and Exchange Commission on March 20, 2009
Exhibit (10)(xiv)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated February 16, 2018, incorporated by reference to Exhibit (10)(xx) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xv)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxii) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xvi)	2020 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(xxi) to the Form 10-K filed with the Securities and Exchange Commission on March 19, 2021
Exhibit (10)(xvii)	Employment Agreement dated August 19, 2021 by and among the Registrant, Peoples Bank and Jeffrey N. Hooper, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on August 20, 2021
Exhibit (13)	2022 Annual Report of Peoples Bancorp of North Carolina, Inc.
Exhibit (21)	Subsidiaries of the Registrant
Exhibit (23)	Consent of Elliott Davis, PLLC
Exhibit (31)(a)	Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31)()	Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit (101)	The following materials from the Company’s 10-K Report for the annual period ended December 31, 2022, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements.

36

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEOPLES BANCORP OF NORTH CAROLINA, INC.
	(Registrant)
By:	/s/ Lance A. Sellers
	Lance A. Sellers
	President and Chief Executive Officer
	Date: March 17, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title	Date
/s/ Lance A. Sellers	President and Chief Executive Officer	March 17, 2023
Lance A. Sellers	(Principal Executive Officer)
/s/ James S. Abernethy	Director	March 17, 2023
James S. Abernethy
/s/ Robert C. Abernethy	Chairman of the Board and Director	March 17, 2023
Robert C. Abernethy
/s/ Douglas S. Howard	Director	March 17, 2023
Douglas S. Howard
/s/ Jeffrey N. Hooper	Executive Vice President and Chief	March 17, 2023
Jeffrey N. Hooper	Financial Officer (Principal Financial
	and Principal Accounting Officer)
/s/ John W. Lineberger, Jr.	Director	March 17, 2023
John W. Lineberger, Jr.
/s/ Gary E. Matthews	Director	March 17, 2023
Gary E. Matthews
/s/ Billy L. Price, Jr., M.D.	Director	March 17, 2023
Billy L. Price, Jr., M.D.
/s/ Larry E. Robinson	Director	March 17, 2023
Larry E. Robinson
/s/ William Gregory Terry	Director	March 17, 2023
William Gregory Terry
/s/ Dan Ray Timmerman, Sr.	Director	March 17, 2023
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary	Director	March 17, 2023
Benjamin I. Zachary
/s/ Kimberly Boyd-Leaks	Director	March 17, 2023
Kimberly Boyd-Leaks

EX-13

EXHIBIT (13)

The Annual Report to Security Holders is Appendix A to the Proxy Statement for the 2022 Annual Meeting of Shareholders and is incorporated herein by reference.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

General Description of Business

Peoples Bancorp of North Carolina, Inc. (the “Company”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”).  The Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”).  The Company’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any.  The Company has no operations and conducts no business of its own other than owning the Bank and PEBK Capital Trust II.  Accordingly, the discussion of the business which follows primarily concerns the business conducted by the Bank.  Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620. 

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 17 banking offices, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Huntersville, Mooresville, Raleigh, and Cary, North Carolina.  The Bank also operates loan production offices in Charlotte, Denver, Salisbury and Winston-Salem North Carolina.  The Company’s fiscal year ends December 31.  At December 31, 2022, the Company had total assets of $1.6 billion, net loans of $1.0 billion, deposits of $1.4 billion, total securities of $448.1 million, and shareholders’ equity of $105.2 million.

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

The Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans.  Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers.  Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio.  The majority of the Bank’s deposit and loan customers are individuals and small-to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated through the Bank’s former Banco offices.  Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-26 of the Annual Report, which is included in this Form 10-K as Exhibit (13).

The operations of the Bank are significantly influenced by general economic conditions and by related monetary and fiscal policies of the Company and the Bank’s regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”).

At December 31, 2022, the Company employed 279 full-time employees and 21 part-time employees, which equated to 291 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company.  At December 31, 2022, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC.  Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services.  CBRES serves as a “clearing-house” for appraisal services for community banks.  Other banks are able to contract with CBRES to find and engage appropriate appraisal companies.   As a separate legal entity, CBRES’s services and the appraisal process are conducted independent from the financing process of the Bank.  PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and assets obtained in the ordinary course of collecting debts previously contracted.  In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022.  All of the Bank’s subsidiaries are incorporated in the state of North Carolina.

In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), to facilitate the issuance of $20.6 million of trust preferred securities.  PEBK Trust II is not included in the consolidated financial statements.  The Company redeemed $5.0 million of outstanding trust preferred securities in 2019.  The trust preferred securities issued by PEBK Trust II accrue and pay quarterly dividends at a floating rate of three-month LIBOR plus 163 basis points.  The Company has guaranteed payment of these dividends and other payments due on the trust preferred securities.

A-1

This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate” and “believe,” variations of these words and other similar expressions.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the markets served by the Company’s subsidiary, Peoples Bank, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Company’s other filings with the Securities and Exchange Commission.  The Company undertakes no obligation to update any forward-looking statements.

A-2

SELECTED FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
	2022			2021			2020
Summary of Operations
Interest income	$	54,431			47,179			47,958
Interest expense		3,323			3,205			3,836
Net interest income		51,108			43,974			44,122
Provision for (recovery of) loan losses		1,472			(1,163	)		4,259
Net interest income after provision for loan losses		49,636			45,137			39,863
Non-interest income		26,689			24,919			22,914
Non-interest expense		56,030			51,127			48,931
Earnings before income taxes		20,295			18,929			13,846
Income tax expense		4,172			3,796			2,489
Net earnings	$	16,123			15,133			11,357
Selected Year-End Balances
Assets	$	1,620,927			1,624,193			1,416,175
Investment securities available for sale		445,394			406,549			245,249
Net loans		1,022,114			875,514			938,731
Mortgage loans held for sale		211			3,637			9,139
Interest-earning assets		1,502,868			1,531,975			1,326,489
Deposits		1,435,215			1,412,748			1,221,086
Interest-bearing liabilities		975,279			950,987			805,771
Shareholders' equity	$	105,195			142,369			139,899
Shares outstanding		5,636,830			5,661,569			5,632,035
Selected Average Balances
Assets	$	1,663,665			1,568,417			1,366,962
Investment securities available for sale		467,484			349,647			200,821
Loans		949,175			908,682			935,970
Interest-earning assets		1,601,168			1,483,519			1,271,764
Deposits		1,480,113			1,372,855			1,115,019
Interest-bearing liabilities		979,315			896,903			793,188
Shareholders' equity	$	123,887			147,740			141,287
Shares outstanding		5,480,123			5,576,099			5,657,025
Profitability Ratios
Return on average total assets		0.97	%		0.96	%		0.83	%
Return on average shareholders' equity		13.01	%		10.24	%		8.04	%
Dividend payout ratio		30.61	%		24.83	%		38.67	%
Liquidity and Capital Ratios (averages)
Loan to deposit		64.13	%		66.19	%		83.94	%
Shareholders' equity to total assets		7.45	%		9.42	%		10.35	%
Per share of Common Stock
Basic net earnings	$	2.94			2.71			2.01
Diluted net earnings	$	2.85			2.63			1.95
Cash dividends	$	0.87			0.66			0.75
Book value	$	19.24			25.89			24.84

A-3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following is a discussion of our financial position and results of operations and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report on Form 10-K and the Company’s consolidated financial statements and notes thereto on pages A-19 through A-59.

Introduction

Management’s discussion and analysis of earnings and related data are presented to assist in understanding the consolidated financial condition and results of operations of the Company, for the years ended December 31, 2022, 2021 and 2020.  The Company is a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the parent company of the “Bank. The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell, Wake, Rowan and Forsyth counties, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”).

Overview

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

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

COVID-19 has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Following the COVID-19 outbreak in December 2019 and January 2020, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events generally had an adverse effect on business and consumer confidence and the Company and its customers.  On March 3, 2020, the Federal Reserve Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. Subsequently on March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic had an adverse effect on the Company’s financial condition and results of operations.  Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as the economic conditions during the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again.  The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets.  Subsequently, continuing supply-chain disruption and rising inflation has caused the FOMC to increase the target federal funds rate by 425 basis points in 2022 to a range of 4.25% to 4.50% at December 31, 2022.

A-4

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

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

The Company does not have specific plans for additional offices in 2023 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.

Summary of Significant and Critical Accounting Policies

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

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance.  The following is a summary of some of the more subjective and complex accounting policies of the Company.  A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2022 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2023 Annual Meeting of Shareholders. 

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

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

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

The Company has an overall interest rate risk management strategy that has, in prior years, incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility.  When using derivative instruments, the Company is exposed to credit and market risk.  If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative.  The Company minimized the credit risk in derivative instruments by entering into transactions with high-quality counterparties that were reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of December 31, 2022 or 2021.

A-5

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

Results of Operations

Summary.  The Company reported earnings of $16.1 million or $2.94 per share and $2.85 per diluted share for the year ended December 31, 2022, as compared to $15.1 million or $2.71 per share and $2.63 per diluted share for the prior year.  The increase in year-to-date net earnings is primarily attributable to 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 for the year ended December 31, 2022, compared to the year ended December 31, 2021, as discussed below.

The Company reported earnings of $15.1 million or $2.71 per share and $2.63 per diluted share for the year ended December 31, 2021, as compared to $11.4 million or $2.01 per share and $1.95 per diluted share for the prior year.  The increase in year-to-date net earnings is primarily attributable to a recovery in the provision for loan losses and an increase in non-interest income, which were partially offset by a decrease in net interest income and an increase in non-interest expense.

The return on average assets in 2022 was 0.97%, as compared to 0.96% in 2021 and 0.83% in 2020. The return on average shareholders’ equity was 13.01% in 2022, as compared to 10.24% in 2021 and 8.04% in 2020. 

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

Net interest income in 2022 was $51.1 million, compared to $44.0 million in 2021.  The increase in net interest income is due to a $7.3 million increase in interest income, partially offset by a $118,000 increase in interest expense.  The increase in interest income is primarily due to a $1.9 million increase in interest income and fees on loans, a $2.0 million increase in interest income on balances due from banks and a $3.4 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 $2.4 million 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 in 2022.  The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities.  Net interest income decreased to $44.0 million in 2021 from $44.1 million in 2020. 

Table 1 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 years ended December 31, 2022, 2021 and 2020. 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 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.  Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry.  Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP.  The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

A-6

Table 1 - Average Balance Table
	December 31, 2022								December 31, 2021								December 31, 2020
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:
Loans	$	949,175			43,077		4.54	%		908,682			41,186		4.53	%		935,970			42,314		4.52	%
Investments - taxable		399,036			7,159		1.79	%		283,521			4,381		1.55	%		132,468			2,299		1.74	%
Investments - nontaxable*		71,943			2,355		3.27	%		70,413			1,802		2.56	%		75,609			3,634		4.81	%
Federal funds sold		-			-		-			-			-		-			91,166			204		0.22	%
Due from banks		181,014			2,223		1.23	%		220,903			258		0.12	%		36,551			127		0.35	%
Total interest-earning assets		1,601,168			54,814		3.42	%		1,483,519			47,627		3.21	%		1,271,764			48,578		3.82	%
Cash and due from banks		36,778								32,104								34,569
Other assets		35,373								62,322								69,062
Allowance for loan losses		(9,654	)							(9,528	)							(8,433	)
Total assets	$	1,663,665								1,568,417								1,366,962
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$	824,955			2,019		0.24	%		745,616			2,029		0.27	%		584,177			1,962		0.34	%
Time deposits		99,880			562		0.56	%		105,127			752		0.72	%		103,694			947		0.91	%
FHLB borrowings		-			-		-			-			-		-			60,820			357		0.59	%
Trust preferred securities		15,464			529		3.42	%		15,464			280		1.81	%		15,478			370		2.39	%
Other		39,016			213		0.55	%		30,696			144		0.47	%		29,019			200		0.69	%
Total interest-bearing liabilities		979,315			3,323		0.34	%		896,903			3,205		0.36	%		793,188			3,836		0.48	%
Demand deposits		555,278								522,114								427,148
Other liabilities		5,185								1,659								5,339
Shareholders' equity		123,887								147,741								141,287
Total liabilities and shareholder's equity	$	1,663,665								1,568,417								1,366,962
Net interest spread				$	51,491		3.08	%				$	44,422		2.85	%				$	44,742		3.34	%
Net yield on interest-earning assets							3.22	%							2.99	%							3.52	%
Taxable equivalent adjustment Investment securities				$	383							$	448							$	620
Net interest income				$	51,108							$	43,974							$	44,122

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $13.3 million in 2022, $12.7 million in 2021 and $19.2 million in 2020.  A tax rate of 2.50% was used to calculate the tax equivalent yields on these securities in 2022, 2021 and 2020.

Changes in interest income and interest expense can result from variances in both volume and rates.  Table 2 describes the impact on the Company’s tax equivalent net interest income resulting from changes in average balances and average rates for the periods indicated.  The changes in net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

A-7

Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis
	December 31, 2022									December 31, 2021
(Dollars in thousands)	Changes in average volume			Changes in average rates			Total Increase (Decrease)			Changes in average volume			Changes in average rates			Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$	1,837			54			1,891		$	(1,235	)		107			(1,128	)
Investments - taxable		1,929			849			2,778			3,489			(3,149	)		340
Investments - nontaxable		45			508			553			(84	)		(6	)		(90	)
Federal funds sold		-			-			-			(102	)		(102	)		(204	)
Due from banks		(268	)		2,233			1,965			428			(297	)		131
Total interest income		3,543			3,644			7,187			2,496			(3,447	)		(951	)
Interest expense:
NOW, MMDA & savings deposits		205			(215	)		(10	)		491			(424	)		67
Time deposits		(34	)		(156	)		(190	)		12			(207	)		(195	)
FHLB borrowings		-			-			-			(179	)		(178	)		(357	)
Trust preferred securities		-			249			249			-			(90	)		(90	)
Other		42			27			69			10			(66	)		(56	)
Total interest expense		213			(95	)		118			334			(965	)		(631	)
Net interest income	$	3,330			3,739			7,069		$	2,162			(2,482	)		(320	)

Net interest income on a tax equivalent basis totaled $51.5 million in 2022, as compared to $44.4 million in 2021.  The net interest spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 3.08% in 2022, as compared to a net interest spread of 2.85% in 2021.  The net yield on interest-earning assets was 3.22% in 2022 and 2.99% in 2021.

Tax equivalent interest income increased $7.2 million in 2022 primarily due to a $1.9 million increase in interest income and fees on loans, a $3.3 million increase in tax equivalent interest income on investment securities and a $2.0 million increase 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 $2.4 million 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 combined with higher yields on securities purchased in 2022.  The increase in interest income on balances due from banks is primarily due to rate increases by the Federal Reserve.  The yield on interest-earning assets was 3.42% in 2022, as compared to 3.21% in 2021. 

Interest expense increased $118,000 in 2022, as compared to 2021.  The increase in interest expense is primarily due to an increase in rates paid on interest-bearing liabilities.  Average interest-bearing liabilities increased by $82.4 million to $979.3 million in 2022, as compared to $896.9 million in 2021.  The cost of funds decreased to 0.34% in 2022 from 0.36% in 2021. 

In 2021, net interest income on a tax equivalent basis was $44.4 million, as compared to $44.7 million in 2020.  The net interest spread was 2.85% in 2021, as compared to 3.34% in 2020.  The net yield on interest-earning assets was 2.99% in 2021, as compared to 3.52% in 2020.

Provision for Loan Losses.  Provisions for loan losses are charged to income in order to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on factors such as management’s judgment as to losses within the Bank’s loan portfolio, including the valuation of impaired loans, loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies and management’s assessment of the quality of the loan portfolio and general economic climate.

The provision for loan losses for the year ended December 31, 2022 was $1.5 million, compared to a recovery of $1.2 million for the year ended December 31, 2021.  The increase in the provision for loan losses is primarily attributable to an increase in reserves due to an increase in the balance of loans in the general reserve pool.  The recovery of provision for loan losses for the year ended December 31, 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 December 31, 2022 and 2021. 

A-8

Net charge-offs for 2022 were $333,000.  Net recoveries for 2021 were $610,000.  Net charge-offs for 2020 were $1.0 million.  The ratio of net charge-offs/(recoveries) to average total loans was 0.03% in 2022, -0.07% in 2021 and 0.11% in 2020.  The allowance for loan losses was $10.5 million or 1.02% of total loans outstanding at December 31, 2022.  For December 31, 2021 and 2020, the allowance for loan losses amounted to $9.4 million or 1.06% of total loans outstanding and $9.9 million, or 1.04% of total loans outstanding, respectively. 

Table 3 presents a summary of net charge off activity for the years ended December 31, 2022, 2021 and 2020.

Table 3 - Net Charge-off Analysis
	Net charge-offs/(recoveries)									Net charge-offs/(recoveries) as a percent of average loans outstanding
	Years ended December 31,									Years ended December 31,
(Dollars in thousands)	2022			2021			2020			2022			2021			2020
Real estate loans
Construction and land development	$	-			(121	)		(31	)		0.00	%		-0.13	%		-0.03	%
Single-family residential		(101	)		(182	)		(5	)		-0.03	%		-0.07	%		0.00	%
Single-family residential - Banco de la Gente non-traditional		-			-			-			0.00	%		0.00	%		0.00	%
Commercial		(9	)		(52	)		(63	)		0.00	%		-0.02	%		-0.02	%
Multifamily and farmland		-			(3	)		-			0.00	%		-0.01	%		0.00	%
Total real estate loans		(110	)		(358	)		(99	)		-0.01	%		-0.05	%		-0.01	%
Loans not secured by real estate
Commercial loans		(39	)		(493	)		869			-0.05	%		-0.54	%		0.54	%
Farm loans		-			-			-			0.00	%		0.00	%		0.00	%
Consumer loans (1)		482			241			254			7.06	%		3.75	%		3.57	%
All other loans		-			-			7			0.00	%		0.00	%		0.20	%
Total loans	$	333			(610	)		1,031			0.03	%		-0.07	%		0.11	%
Provision for (recovery of) loan losses for the period	$	1,472		$	(1,163	)		4,259
Allowance for loan losses at end of period	$	10,494		$	9,355			9,908
Total loans at end of period	$	1,032,608		$	884,869			948,639
Non-accrual loans at end of period	$	3,728		$	3,230			3,758
Allowance for loan losses as a percent of total loans outstanding at end of period		1.02	%		1.06	%		1.04	%
Non-accrual loans as a percent of total loans outstanding at end of period		0.36	%		0.37	%		0.40	%
Allowance for loan losses as a percent of nonaccrual loans at end of period		281.49	%		289.63	%		263.58	%

(1) The loss ratio for consumer loans is elevated because overdraft charge-offs related to DDA and NOW accounts are reported in consumer loan charge-offs and recoveries.  The net overdraft charge-offs are not considered material and are therefore not shown separately.

Please see the section below entitled “Allowance for Loan Losses” for a more complete discussion of the Bank’s policy for addressing potential loan losses.

Non-Interest Income.  Non-interest income was $26.7 million for the year ended December 31, 2022, compared to $24.9 million for the year ended December 31, 2021.  The increase in non-interest income is primarily attributable to a $2.8 million increase in appraisal management fee income due to an increase in appraisal volume and a $1.3 million increase in service charge income, primarily due to service charge changes implemented in March 2022, which were partially offset by a $2.1 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 income was $24.9 million for the year ended December 31, 2021, compared to $22.9 million for the year ended December 31, 2020.  The increase in non-interest income is primarily attributable to a $2.1 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $1.7 million increase in miscellaneous non-interest income primarily due to an increase in debit card income resulting from increased debit card activity and an increase in income on Small Business Investment Company (“SBIC”) investments.  These increases in non-interest income were partially offset by a $2.6 million decrease in gains on sale of securities.

A-9

The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2022, 2021 or 2020. 

Table 4 presents a summary of non-interest income for the years ended December 31, 2022, 2021 and 2020.

Table 4 - Non-Interest Income
(Dollars in thousands)	2022		2021		2020
Service charges	$	5,290	$	3,921	$	3,528
Other service charges and fees		734		803		742
Gain on sale of securities		-		-		2,639
Mortgage banking income		393		2,505		2,469
Insurance and brokerage commissions		945		1,035		897
Gain/(loss) on sale and write-down of other real estate		-		21		(47	)
Visa debit card income		4,901		5,045		4,237
Appraisal management fee income		11,663		8,890		6,754
Miscellaneous		2,763		2,699		1,695
Total non-interest income	$	26,689	$	24,919	$	22,914

Non-Interest Expense.  Non-interest expense was $56.0 million for the year ended December 31, 2022, compared to $51.1 million for the year ended December 31, 2021.  The increase in non-interest expense is primarily attributable to a $2.2 million increase in appraisal management fee expense due to an increase in appraisal volume and a $1.6 million increase in salaries and employee benefits expense primarily due to increases in insurance costs and salary expense and a $421,000 increase in other non-interest expenses primarily due to increases in consulting expense, online banking expense and office supplies expense.

Non-interest expense was $51.1 million for the year ended December 31, 2021, compared to $48.9 million for the year ended December 31, 2020.  The increase in non-interest expense was primarily attributable to a $968,000 increase in salaries and employee benefits expense primarily due to an increase in incentive compensation and a $1.8 million increase in appraisal management fee expense due to an increase in the volume of appraisals.

Table 5 presents a summary of non-interest expense for the years ended December 31, 2022, 2021 and 2020.

Table 5 - Non-Interest Expense
(Dollars in thousands)	2022		2021		2020
Salaries and employee benefits	$	26,130	$	24,506	$	23,538
Occupancy expense		8,048		7,858		7,933
Office supplies		532		374		528
FDIC deposit insurance		461		415		263
Visa debit card expense		1,224		1,000		1,012
Professional services		451		489		502
Postage		238		230		190
Telephone		691		730		794
Director fees and expense		454		381		360
Advertising		693		536		787
Consulting fees		1,464		1,337		1,078
Taxes and licenses		277		254		295
Foreclosure/OREO expense		7		5		20
Internet banking expense		949		768		729
FHLB advance prepayment penalty		-		-		1,100
Appraisal management fee expense		9,264		7,112		5,274
Other operating expense		5,147		5,132		4,528
Total non-interest expense	$	56,030	$	51,127	$	48,931

A-10

Income Taxes.  The Company reported income tax expense of $4.2 million, $3.8 million and $2.5 million for the years ended December 31, 2022, 2021 and 2020, respectively.  The Company’s effective tax rates were 20.56%, 20.05% and 17.98% in 2022, 2021 and 2020, respectively. The increase in the effective tax rate in 2021 and 2022 was primarily due to a reduction in non-taxable investments combined with an increase in earnings before income taxes.

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

The Company uses several funding sources to meet its liquidity requirements.  The primary funding source is core deposits, a non-GAAP measure, which includes demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000.  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 The Company considers these to be a stable portion of the Company’s liability mix and the result of on-going consumer and commercial banking relationships.  As of December 31, 2022, the Company’s core deposits totaled $1.4 billion, or 98% of total deposits.

The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $117.0 million and $118.9 million at December 31, 2022 and 2021, respectively.  These balances represent 7.89% of total deposits and securities sold under agreements to repurchase combined at December 31, 2022, as compared to 8.20% of total deposits and securities sold under agreements to repurchase combined at December 31, 2021.  Total deposits for the five largest relationships referenced above amounted to $85.7 million, or 5.97% of total deposits at December 31, 2022, as compared to $100.5 million, or 7.12% of total deposits at December 31, 2021.  Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $31.4 million, or 65.76% of total securities sold under agreements to repurchase at December 31, 2022, as compared to $18.3 million, or 49.44% of total securities sold under agreements to repurchase at December 31, 2021. 

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

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with no balances outstanding at December 31, 2022.  At December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $149.4 million.  The remaining availability under the line of credit with the FHLB was $86.5 million at December 31, 2022.  The Bank had no borrowings from the FRB at 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 December 31, 2022, the carrying value of loans pledged as collateral to the FRB totaled approximately $585.0 million.  Availability under the line of credit with the FRB was $445.1 million at December 31, 2021. 

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 December 31, 2022.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits with banks, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 30.32%, 43.28% and 28.12% at December 31, 2022, 2021 and 2020, respectively.  The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy for on balance sheet liquidity was 10% at December 31, 2022, 2021 and 2020. 

As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $22.7 million during 2022.  Net cash used in investing activities was $256.0 million during 2021 and net cash provided by financing activities was $27.4 million during 2022.

Asset Liability and Interest Rate Risk Management.  The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities.  This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. Table 6 presents an interest rate sensitivity analysis for the interest-earning assets and interest-bearing liabilities for the year ended December 31, 2022.

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Table 6 - Interest Sensitivity Analysis
(Dollars in thousands)	Immediate			1-3 months			4-12 months			Total Within One Year			Over One Year & Non-sensitive			Total
Interest-earning assets:
Loans	$	197,430			5,381			19,499			222,310			810,298			1,032,608
Mortgage loans held for sale		211			-			-			211			-			211
Investment securities available for sale		-			1,162			1,691			2,853			442,541			445,394
Interest-bearing deposit accounts		21,535			-			-			21,535			-			21,535
Other interest-earning assets		-			-			-			-			4,132			4,132
Total interest-earning assets		219,176			6,543			21,190			246,909			1,256,971			1,503,880
Interest-bearing liabilities:
NOW, savings, and money market deposits		814,128			-			-			814,128			-			814,128
Time deposits		15,035			9,189			34,875			59,099			38,900			97,999
Securities sold under agreement to repurchase		47,688			-			-			47,688			-			47,688
Trust preferred securities		-			15,464			-			15,464			-			15,464
Total interest-bearing liabilities		876,851			24,653			34,875			936,379			38,900			975,279
Interest-sensitive gap	$	(657,675	)		(18,110	)		(13,685	)		(689,470	)		1,218,071			528,601
Cumulative interest-sensitive gap	$	(657,675	)		(675,785	)		(689,470	)		(689,470	)		528,601
Interest-earning assets as a percentage of interest-bearing liabilities		25.00	%		26.54	%		60.76	%		26.37	%		3,231.29	%

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year.  Rate sensitive assets therefore include both loans and available for sale (“AFS”) securities.  Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds.  At December 31, 2022, rate sensitive assets and rate sensitive liabilities totaled $1.6 billion and $979.0 million, respectively.

Included in the rate sensitive assets are $185.2 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the Federal Open Market Committee (“FOMC”).  The Bank utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate.  At December 31, 2022, the Bank had $111.6 million in loans with interest rate floors.  The floors were in effect on $8,000 of these loans.  

An analysis of the Company’s financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities.  A discussion of these changes and trends follows.

Analysis of Financial Condition

Investment Securities.  The composition of the investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income.  The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

All of the Company’s investment securities are held in the available for sale (“AFS”) category. At December 31, 2022 the market value of AFS securities totaled $445.4 million, as compared to $406.5 million and $245.2 million at December 31, 2021 and 2020, respectively. 

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The Company’s investment portfolio consists of U.S. Government sponsored enterprise securities, municipal securities, U.S. Treasury securities, U.S. Government sponsored enterprise mortgage-backed securities, trust preferred securities and equity securities.  AFS securities averaged $467.5 million in 2022, $349.6 million in 2021 and $200.8 million in 2020.  Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity.  Yields are calculated on a tax equivalent basis.  Yields and interest income on tax-exempt investments 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. 

Loans.  The loan portfolio is the largest category of the Company’s earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. The Bank makes loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Wake, Rowan and Forsyth counties in North Carolina.

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 December 31, 2022, the Bank had $101.5 million in residential mortgage loans, $101.1 million in home equity loans and $610.0 million in commercial mortgage loans, which include $472.3 million secured by commercial property and $137.7 million secured by residential property.   Residential mortgage loans include $20.0 million in non-traditional mortgage loans from the former Banco division of the Bank.  All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

The mortgage loans originated in the traditional banking offices are generally 15 –30-year fixed rate loans with attributes that prevent the loans from being sellable in the secondary market.  These factors may include higher loan-to-value ratio, limited documentation on income, non-conforming appraisal or non-conforming property type.  These loans are generally made to existing Bank customers and have been originated throughout the Bank’s seven county service area, with no geographic concentration. 

As of December 31, 2022, gross loans outstanding were $1.0 billion, as compared to $884.9 million at December 31, 2021.  Average loans represented 59% and 61% of average total earning assets for the years ended December 31, 2022 and 2021, respectively.  The Bank had $211,000 and $3.6 million in mortgage loans held for sale as of December 31, 2022 and 2021, respectively.

Past due TDR loans and non-accrual TDR loans totaled $3.7 million and $2.2 million at December 31, 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 December 31, 2022 and December 31, 2021.

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 Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP.  The Bank participated as a lender in the PPP.  Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million.  The outstanding balance of PPP loans was $103,000 and $18.0 million at December 31, 2022 and 2021, respectively.  These loans are classified as commercial loans in the tables above.  The Bank recognized $948,000 and $3.4 million of PPP loan fee income for the year ended December 31, 2022 and year ended December, 2021, respectively.  PPP loan fee income is reported in interest and fees on loans in the Consolidated Statements of Earnings on page A-23.

There were no loans with existing modifications as a result of the COVID-19 pandemic at December 31, 2022 and 2021.  At December 31, 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.  As such, a higher reserve rate has been applied to this pool.  Loans included in this pool totaled $70.5 million and $88.7 million at December 31, 2022 and December 31, 2021, respectively.  Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

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Table 7 identifies the maturities of all loans as of December 31, 2022 and addresses the sensitivity of these loans to changes in interest rates.

Table 7 - Maturity and Repricing Data for Loans
(Dollars in thousands)	Within one year or less		After one year through five years		After five years through 15 years		After fifteen years		Total loans
Real estate loans
Construction and land development	$	39,401		32,795		41,664		586		114,446
Single-family residential		116,876		83,201		78,754		43,431		322,262
Single-family residential- Banco de la Gente stated income		9,432		-		5,384		5,203		20,019
Commercial		46,751		183,754		170,049		6,196		406,750
Multifamily and farmland		3,933		23,052		19,598		18,979		65,562
Total real estate loans		216,393		322,802		315,449		74,395		929,039
Loans not secured by real estate
Commercial loans		37,081		22,005		19,461		2,760		81,307
Farm loans		473		465		-		-		938
Consumer loans		2,972		2,795		1,067		-		6,834
All other loans		7,096		1,959		5,435		-		14,490
Total loans	$	264,015		350,026		341,412		77,155		1,032,608
Total fixed rate loans	$	41,705		337,736		331,308		77,155		787,904
Total floating rate loans		222,310		12,290		10,104		-		244,704
Total loans	$	264,015		350,026		341,412		77,155		1,032,608

In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. At December 31, 2022, outstanding loan commitments totaled $382.7 million.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Additional information regarding commitments is provided below in the section entitled “Commitments and Contingencies” and in Note 11 to the Consolidated Financial Statements.

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

· the Bank’s loan loss experience;

· the amount of past due and non-performing loans;

· specific known risks;

· the status and amount of other past due and non-performing assets;

· underlying estimated values of collateral securing loans;

· current and anticipated economic conditions (including those arising out of the COVID-19 pandemic); and

· other factors which management believes affect the allowance for potential credit losses.

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

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

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

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

The allowance is comprised of three components: specific reserves, general reserves and unallocated reserves.  After a loan has been identified as impaired, management measures impairment.  When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects reserves established under GAAP for collective loan impairment.  These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience.  This charge-off experience may be adjusted to reflect the effects of current conditions.  The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.  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.  There were no loans with existing modifications as a result of the COVID-19 pandemic at December 31, 2022 and 2021.  At December 31, 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.  As such, a higher reserve rate has been applied to this pool.  Loans included in this pool totaled $70.5 million and $88.7 million at December 31, 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. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk.  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 year ended December 31, 2022 as compared to the year ended December 31, 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. The Company adopted CECL as of January 1, 2023.

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

PPP loans are excluded from the allowance as PPP loans are 100 percent guaranteed by the SBA. 

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

Non-performing Assets.  Non-performing assets were $3.7 million or 0.23% of total assets at December 31, 2022, compared to $3.2 million or 0.20% of total assets at December 31, 2021.  Non-performing assets include $3.7 million in commercial and residential mortgage loans and $8,000 in other loans at December 31, 2022, compared to $3.2 million in commercial and residential mortgage loans and $51,000 in other loans at December 31, 2021.  The Bank had no other real estate owned as of December 31, 2022 and 2021.  The Bank had no repossessed assets as of December 31, 2022 and 2021.

At December 31, 2022, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $3.7 million or 0.36% of total loans.  Non-performing loans at December 31, 2021 were $3.2 million or 0.38% of total loans.

Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results, liquidity or capital resources have been classified as non-performing.  Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performing loans.  Management expects the future level of non-accrual loans to continue to be in-line with the level of non-accrual loans at December 31, 2022 and 2021.

It is the general policy of the Bank to stop accruing interest income when a loan is placed on non-accrual status and any interest previously accrued but not collected is reversed against current income.  Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected.

Deposits.  The Bank primarily uses deposits to fund its loan and investment portfolios. The Bank offers a variety of deposit accounts to individuals and businesses. Deposit accounts include checking, savings, money market and time deposits.  Total deposits were $1.4 billion as of December 31, 2022 and 2021.  Core deposits, a non-GAAP measure, which include noninterest-bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations less than $250,000, were $1.4 billion at December 31, 2022 and 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. 

Time deposits in amounts of $250,000 or more totaled $31.0 million and $26.3 million at December 31, 2022 and 2021, respectively.  At December 31, 2022 and 2021, the Bank had approximately $15.2 million and $11.1 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers.  CDARS balances totaled $7.1 million and $3.0 million as of December 31, 2022 and 2021, respectively.  The weighted average rate of brokered deposits as of December 31, 2022 and 2021 was 1.27% and 1.49%, respectively.

Table 8 is a summary of the maturity distribution of time deposits in amounts of $250,000 or more as of December 31, 2022.

Table 8 - Maturities of Time Deposits of $250,000 or greater
(Dollars in thousands)	2022
Three months or less	$	7,589
Over three months through six months		4,732
Over six months through twelve months		5,802
Over twelve months		12,878
Total	$	31,001

Borrowed Funds. The Bank has access to various short-term borrowings, including the purchase of federal funds and borrowing arrangements from the FHLB and other financial institutions.  There were no FHLB borrowings outstanding at December 31, 2022 and 2021.  Average FHLB borrowings for 2022 and 2021 were zero.  Additional information regarding FHLB borrowings is provided in Note 7 to the Consolidated Financial Statements.

A-16

The Bank had no borrowings from the FRB at December 31, 2021 and 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 December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $585.0 million.

Securities sold under agreements to repurchase were $47.7 million at December 31, 2022, compared to $37.1 million at December 31, 2021. 

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

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

The Company enters into derivative contracts to manage various financial risks.  A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate.  Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date.  Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk.  Therefore, the derivative amounts recorded on the balance sheet do not represent the amounts that may ultimately be paid under these contracts.  Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management” beginning on page A-11 and in Note 1 to the Consolidated Financial Statements.  There were no derivatives at December 31, 2022 or 2021.

Capital Resources.  Shareholders’ equity was $105.2 million, or 6.49% of total assets, at December 31, 2022, compared to $142.4 million, or 8.77% of total assets, at December 31, 2021. 

Average shareholders’ equity as a percentage of total average assets is one measure used to determine capital strength.   Average shareholders’ equity as a percentage of total average assets was 7.45%, 9.42% and 10.35% for 2022, 2021 and 2020, respectively.   The return on average shareholders’ equity was 13.01% at December 31, 2022, as compared to 10.24% and 8.04% at December 31, 2021 and December 31, 2020, respectively.  Total cash dividends paid on common stock were $4.9 million, $3.8 million and $4.4 million during 2022, 2021 and 2020, respectively. 

The Board of Directors, at its discretion, can issue up to 5,000,000 shares of preferred stock.  The Board is authorized to determine the number of shares, voting powers, designations, preferences, limitations and relative rights.

In 2021, the Board of Directors authorized a stock repurchase program, whereby up to $4.0 million was allocated to repurchase the Company’s common stock.  Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice.  The Company repurchased approximately $3.6 million, or 127,597 shares of its common stock, under this stock repurchase program through December 31, 2021.

In 2022, the Board of Directors authorized a stock repurchase program, whereby up to $2.0 million was allocated to repurchase the Company’s common stock.  Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice.  The Company repurchased approximately $711,000, or 26,200 shares of its common stock, under this stock repurchase program through December 31, 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.  The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules).  An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019).  This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.  These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions.

A-17

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above.  Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill.  Tier 1 capital includes $15.0 million in trust preferred securities at December 31, 2022 and December 31, 2021.  The Company’s Tier 1 capital ratio was 13.21% and 15.43% at December 31, 2022 and December 31, 2021, respectively.  Total risk-based capital is defined as Tier 1 capital plus supplementary capital.  Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for loan losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets.  The Company’s total risk-based capital ratio was 14.04% and 16.35% at December 31, 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 12.03% and 13.96% at December 31, 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 9.82% and 9.64% at December 31, 2022 and December 31, 2021, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.10% and 15.27% at December 31, 2022 and December 31, 2021, respectively.  The total risk-based capital ratio for the Bank was 13.93% and 16.19% at December 31, 2022 and December 31, 2021, respectively.   The Bank’s common equity Tier 1 capital ratio was 13.10% and 15.27% at December 31, 2022 and December 31, 2021, respectively.  The Bank’s Tier 1 leverage capital ratio was 9.68% and 9.50% at December 31, 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 December 31, 2022.

A-18

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2022, 2021 and 2020
INDEX
	PAGE(S)
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements PCAOB #149	A-20 - A-21
Financial Statements
Consolidated Balance Sheets at December 31, 2022 and 2021	A-22
Consolidated Statements of Earnings for the years ended December 31, 2022, 2021 and 2020	A-23
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021 and 2020	A-24
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022, 2021 and 2020	A-25
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020	A-26 - A-27
Notes to Consolidated Financial Statements	A-28 - A-59

A-19

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Peoples Bancorp of North Carolina, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

A-20

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses – Qualitative Factors

As discussed in Note 3 to the Company’s financial statements, the Company had a gross loan portfolio of approximately $1.0 billion and associated allowance for loan losses of approximately $10.5 million as of December 31, 2022. As described by the Company in Note 1, the allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of the Company’s historical loan loss experience, the amount of past due and non-performing loans, specific known risks, underlying estimated values of collateral securing loans, current and anticipated economic conditions, and other factors which management believes represents the best estimate of the allowance for loan losses.

We identified the Company’s estimate of qualitative factors applied to adjust the historical loss experience of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included the following:

· We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.

· We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, as well as other audit evidence gathered.

· Analytical procedures were performed to evaluate the directional consistency of changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.

/s/ Elliott Davis, PLLC

We have served as the Company's auditor since 2015.

Raleigh, North Carolina

March 17, 2023

A-21

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 2022 and December 31, 2021
(Dollars in thousands)
	December 31,			December 31,
Assets	2022			2021
	(Audited)			(Audited)
Cash and due from banks, including reserve requirements of $0 at both 12/31/22 and 12/31/21	$	50,061			44,711
Interest-bearing deposits		21,535			232,788
Cash and cash equivalents		71,596			277,499
Investment securities available for sale		445,394			406,549
Other investments		2,656			3,668
Total securities		448,050			410,217
Mortgage loans held for sale		211			3,637
Loans		1,032,608			884,869
Less allowance for loan losses		(10,494	)		(9,355	)
Net loans		1,022,114			875,514
Premises and equipment, net		18,205			16,104
Cash surrender value of life insurance		17,703			17,365
Right of use lease asset		5,116			4,612
Accrued interest receivable and other assets		37,932			19,245
Total assets	$	1,620,927			1,624,193
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	523,088			514,319
Interest-bearing demand, MMDA & savings		814,128			797,179
Time, $250,000 or more		31,001			26,333
Other time		66,998			74,917
Total deposits		1,435,215			1,412,748
Securities sold under agreements to repurchase		47,688			37,094
Junior subordinated debentures		15,464			15,464
Lease liability		5,185			4,677
Accrued interest payable and other liabilities		12,180			11,841
Total liabilities		1,515,732			1,481,824
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding		-			-
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,636,830 shares at December 31, 2022 and 5,661,569 shares at December 31, 2021		52,636			53,305
Common stock held by deferred compensation trust, at cost; 169,004 shares at December 31, 2022 and 162,193 shares at December 31, 2021		(2,181	)		(1,992	)
Deferred compensation		2,181			1,992
Retained earnings		100,156			88,968
Accumulated other comprehensive income (loss)		(47,597	)		96
Total shareholders' equity		105,195			142,369
Total liabilities and shareholders' equity	$	1,620,927			1,624,193

See accompanying Notes to Consolidated Financial Statements.

A-22

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands, except per share amounts)
	2022			2021			2020
Interest income:
Interest and fees on loans	$	43,077			41,186			42,314
Interest on due from banks		2,223			258			127
Interest on federal funds sold		-			-			204
Interest on investment securities:
U.S. Government sponsored enterprises		4,962			2,478			2,361
States and political subdivisions		4,075			3,146			2,691
Other		94			111			261
Total interest income		54,431			47,179			47,958
Interest expense:
Demand deposits, MMDA & savings deposits		2,019			2,029			1,962
Time deposits		562			752			947
FHLB borrowings		-			-			357
Junior subordinated debentures		529			280			370
Other		213			144			200
Total interest expense		3,323			3,205			3,836
Net interest income		51,108			43,974			44,122
Provision for (recovery of) loan losses		1,472			(1,163	)		4,259
Net interest income after provision for loan losses		49,636			45,137			39,863
Non-interest income:
Service charges		5,290			3,921			3,528
Other service charges and fees		734			803			742
Gain on sale of securities		-			-			2,639
Mortgage banking income		393			2,505			2,469
Insurance and brokerage commissions		945			1,035			897
Appraisal management fee income		11,663			8,890			6,754
Gain (loss) on sale of premises and equipment		(85	)		105			-
Gain (loss) on sales and write-downs of other real estate, net		-			21			(47	)
Miscellaneous		7,749			7,639			5,932
Total non-interest income		26,689			24,919			22,914
Non-interest expense:
Salaries and employee benefits		26,130			24,506			23,538
Occupancy		8,048			7,858			7,933
Professional fees		1,915			1,826			1,580
Advertising		693			536			787
Debit card expense		1,224			1,000			1,012
FDIC insurance		461			415			263
Appraisal management fee expense		9,264			7,112			5,274
Other		8,295			7,874			8,544
Total non-interest expense		56,030			51,127			48,931
Earnings before income taxes		20,295			18,929			13,846
Income tax expense		4,172			3,796			2,489
Net earnings	$	16,123			15,133			11,357
Basic net earnings per share	$	2.94			2.71			2.01
Diluted net earnings per share	$	2.85			2.63			1.95
Cash dividends declared per share	$	0.87			0.66			0.75

See accompanying Notes to Consolidated Financial Statements.

A-23

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Net earnings	$	16,123			15,133			11,357
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		(61,919	)		(6,886	)		4,919
Reclassification adjustment for gains on securities available for sale included in net earnings		-			-			(2,639	)
Total other comprehensive income (loss), before income taxes		(61,919	)		(6,886	)		2,280
Income tax expense (benefit) related to other comprehensive income (loss):
Unrealized holding gain (losses) on securities available for sale		(14,226	)		(1,582	)		1,130
Reclassification adjustment for gains on securities available for sale included in net earnings		-			-			(606	)
Total income tax expense (benefit) related to other comprehensive income (loss)		(14,226	)		(1,582	)		524
Total other comprehensive income (loss), net of tax		(47,693	)		(5,304	)		1,756
Total comprehensive income (loss)	$	(31,570	)		9,829			13,113

See accompanying Notes to Consolidated Financial Statements.

A-24

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
												Common Stock
												Held By			Accumulated
	Common			Common								Deferred			Other
	Stock			Stock			Retained			Deferred		Compensation			Comprehensive
	Shares			Amount			Earnings			Compensation		Trust			Income (Loss)			Total
Balance, December 31, 2019		5,912,300		$	59,813			70,663			1,588		(1,588	)		3,644			134,120
Common stock repurchase		(126,800	)		(2,999	)		-			-		-			-			(2,999	)
Cash dividends declared on common stock		-			-			(4,392	)		-		-			-			(4,392	)
Restricted stock units exercised		2004			57			-			-		-			-			57
Equity incentive plan, net		-			-			-			208		(208	)		-			-
Net earnings		-			-			11,357			-		-			-			11,357
Change in accumulated other comprehensive income, net of tax		-			-			-			-		-			1,756			1,756
Balance, December 31, 2020		5,787,504		$	56,871			77,628			1,796		(1,796	)		5,400			139,899
Common stock repurchase		(127,597	)		(3,605	)		-			-		-			-			(3,605	)
Cash dividends declared on common stock		-			-			(3,793	)							-			(3,793	)
Restricted stock units exercised		1,662			39			-			-		-			-			39
Equity incentive plan, net		-			-			-			196		(196	)		-			-
Net earnings		-			-			15,133			-		-			-			15,133
Change in accumulated other comprehensive loss, net of tax		-			-			-			-		-			(5,304	)		(5,304	)
Balance, December 31, 2021		5,661,569		$	53,305			88,968			1,992		(1,992	)		96			142,369
Common stock repurchase		(26,200	)		(710	)		-			-		-			-			(710	)
Cash dividends declared on common stock		-			-			(4,935	)							-			(4,935	)
Restricted stock units exercised		1,461			41			-			-		-			-			41
Equity incentive plan, net		-			-			-			189		(189	)		-			-
Net earnings		-			-			16,123			-		-			-			16,123
Change in accumulated other comprehensive loss, net of tax		-			-			-			-		-			(47,693	)		(47,693	)
Balance, December 31, 2022		5,636,830		$	52,636			100,156			2,181		(2,181	)		(47,597	)		105,195

See accompanying Notes to Consolidated Financial Statements.

A-25

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Cash flows from operating activities:
Net earnings	$	16,123			15,133			11,357
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion		6,031			5,569			4,183
Provision for (recovery of) loan losses		1,472			(1,163	)		4,259
Deferred income taxes		(541	)		(227	)		(560	)
Gain on sale of investment securities		-			-			(2,639	)
Gain on sale of other real estate		-			(21	)		-
Write-down of other real estate		-			-			47
(Gain) loss on sale and writedowns of premises and equipment		85			(105	)		-
Restricted stock units expense		249			181			27
Proceeds from sales of loans held for sale		22,659			98,365			112,426
Origination of loans held for sale		(19,233	)		(92,863	)		(117,148	)
Change in:
Cash surrender value of life insurance		(403	)		(397	)		(380	)
Right of use lease asset		1,677			738			199
Other assets		(3,920	)		(554	)		(596	)
Lease liability		(1,673	)		(721	)		(176	)
Other liabilities		131			2,965			(1,837	)
Net cash provided by operating activities		22,657			26,900			9,162
Cash flows from investing activities:
Purchases of investment securities available for sale		(149,738	)		(209,306	)		(127,893	)
Proceeds from sales, calls and maturities of investment securities available for sale		7,875			9,540			62,408
Proceeds from paydowns of investment securities available for sale		37,400			28,536			19,169
Purchases of other investments		-			-			(45	)
Proceeds from paydowns of other investment securities		1,162			201			176
Net change in FHLB stock		(105	)		331			(55	)
Net change in loans		(148,072	)		64,380			(99,971	)
Purchases of premises and equipment		(4,563	)		(484	)		(2,492	)
Purchases of bank owned life insurance		-			-			(269	)
Proceeds from sale of premises and equipment		-			515			-
Proceeds from sale of other real estate and repossessions		-			149
Proceeds from bank owned life insurance		65			-			-
Net cash used by investing activities		(255,976	)		(106,138	)		(148,972	)
Cash flows from financing activities:
Net change in deposits		22,467			191,662			254,569
Net change in securities sold under agreement to repurchase		10,594			10,893			1,980
Proceeds from FHLB borrowings		-			-			70,000
Repayments of FHLB borrowings		-			-			(70,000	)
Proceeds from FRB borrowings		1			1			1
Repayments of FRB borrowings		(1	)		(1	)		(1	)
Proceeds from Fed Funds Purchased		162			162			7,011
Repayments of Fed Funds Purchased		(162	)		(162	)		(7,011	)
Repayments of Junior Subordinated Debentures		-			-			(155	)
Common stock repurchased		(710	)		(3,605	)		(2,999	)
Cash dividends paid on common stock		(4,935	)		(3,793	)		(4,392	)
Net cash provided by financing activities		27,416			195,157			249,003
Net change in cash and cash equivalents		(205,903	)		115,919			109,193
Cash and cash equivalents at beginning of period		277,499			161,580			52,387
Cash and cash equivalents at end of period	$	71,596			277,499			161,580

A-26

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	3,284			3,224			3,856
Income taxes	$	4,659			3,669			2,781
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities available for sale, net	$	(47,693	)		(5,304	)		1,756
Transfer of loans to other real estate	$	-			-			175
Issuance of accrued restricted stock units	$	41			39			57
Initial recognition of lease right of use asset and lease liability	$	2,181			1,927			942

See accompanying Notes to Consolidated Financial Statements.

A-27

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Organization

Peoples Bancorp of North Carolina, Inc. (the “Company”) has served as the holding company to Peoples Bank (the “Bank”) since 1999.  The Company is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for the Bank. 

The Bank commenced business in 1912 upon receipt of its banking charter from the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is primarily regulated by the Commissioner and the Federal Deposit Insurance Corporation (the “FDIC”) and undergoes periodic examinations by these regulatory agencies. The Bank, whose main office is in Newton, North Carolina, provides a full range of commercial and consumer banking services primarily in Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties in North Carolina.

Peoples Investment Services, Inc. (“PIS”) is a wholly owned subsidiary of the Bank and began operations in 1996 to provide investment and trust services through agreements with an outside party.

Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks.  Other banks are able to contract with CBRES to find and engage appropriate appraisal companies.  In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022.

PB Real Estate Holdings, LLC (“PBREH”) is a wholly owned subsidiary of the Bank and began operation in 2015.  PBREH acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.

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

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH.  All significant intercompany balances and transactions have been eliminated in consolidation. 

Basis of Presentation

The accounting principles followed by the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segment: Banking Operations and CBRES, as discussed more fully in Note 16. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting.

A-28

Cash and Cash Equivalents

Cash, due from banks, interest-bearing deposits and federal funds sold are considered cash and cash equivalents for cash flow reporting purposes.

Investment Securities

The Company uses three classifications for its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2022 and 2021, the Company classified all of its investment securities as available for sale.

Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis.  A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established.  The decline in value attributed to non-credit related factors is recognized in comprehensive income.

Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

Other investments include equity securities with no readily determinable fair value.  These investments are carried at cost.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.   The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.

A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan will not be collected.  Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Accrual of interest is discontinued on a loan when management believes, after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings.

Allowance for Loan Losses

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

· the Bank’s loan loss experience;

· the amount of past due and non-performing loans;

· specific known risks;

· the status and amount of other past due and non-performing assets;

· underlying estimated values of collateral securing loans;

· current and anticipated economic conditions; and

· other factors which management believes affect the allowance for potential credit losses.

A-29

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

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

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

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

The allowance is comprised of three components: specific reserves, general reserves and unallocated reserves.  After a loan has been identified as impaired, management measures impairment.  When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects reserves established under GAAP for collective loan impairment.  These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience.  This charge-off experience may be adjusted to reflect the effects of current conditions.  The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.  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.  There were no loans with existing modifications as a result of the COVID-19 pandemic at December 31, 2022 and 2021.  At December 31, 2022 and 2021, the Bank maintained 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.  As such, a higher reserve rate has been applied to this pool.  Loans included in this pool totaled $70.5 million and $88.7 million at December 31, 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. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk.  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 year ended December 31, 2022 as compared to the year ended December 31, 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.

A-30

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

SBA PPP loans are excluded from the allowance as PPP loans are 100 percent guaranteed by the SBA. 

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

Mortgage Banking Activities

Mortgage banking income represents income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $285,000, $351,000 and $578,000 at December 31, 2022, 2021 and 2020, respectively.  Mortgage servicing rights related to these loans are immaterial for all periods presented.

The Bank originates certain fixed rate mortgage loans and commits these loans for sale.  The commitments to originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative contracts.  The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in the financial statements.

Mortgage loans held for sale are carried at the lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value. 

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are generally as follows:

Buildings and improvements	10 - 50 years
Furniture and equipment	3 - 10 years

Other Real Estate

Foreclosed assets include all assets received in full or partial satisfaction of a loan.  Foreclosed assets are reported at fair value less estimated selling costs.  Any write-downs at the time of foreclosure are charged to the allowance.  Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value less estimated selling costs declines below carrying value.  Costs relating to the development and improvement of the property are capitalized.  Revenues and expenses from operations are included in other expenses.  Changes in the valuation allowance are included in loss on sale and write-down of other real estate. 

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

A-31

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of a deferred tax asset, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Tax effects from an uncertain tax position can be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  The Company assessed the impact of this guidance and determined that it did not have a material impact on the Company’s financial position, results of operations or disclosures.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder.  No new awards may be made after May 7, 2019.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015.  The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016.  The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017.  The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018.  The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019.  The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants).  The amount of expense recorded each period reflects the changes in the Company’s stock price during such period.  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $3,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted.   As of December 31, 2021, a total of 285,305 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan.  No new awards may be made after May 7, 2030 (ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020.  The Company granted 7,060 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021.  The Company granted 5,385 restricted stock units under the 2020 Plan at a grant date fair value of $27.99 per share during the first quarter of 2022.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for 2020, 2021 and 2022 grants).  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $334,000.

A-32

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $249,000, $181,000 and $27,000 for the years ended December 31, 2022, 2021 and 2020, respectively. 

Net Earnings Per Share

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

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2022, 2021 and 2020 are as follows:

For the year ended December 31, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	16,123		5,480,123	$	2.94
Effect of dilutive securities:
Restricted stock units - unvested		-		15,467
Shares held in deferred comp plan by deferred compensation trust				165,599
Diluted earnings per share	$	16,123		5,661,189	$	2.85

For the year ended December 31, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	15,133		5,576,099	$	2.71
Effect of dilutive securities:
Restricted stock units - unvested		-		13,935
Shares held in deferred comp plan by deferred compensation trust				158,831
Diluted earnings per share	$	15,133		5,748,865	$	2.63

For the year ended December 31, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,657,025	$	2.01
Effect of dilutive securities:
Restricted stock units		-		14,203
Shares held in deferred comp plan by deferred compensation trust		-		150,394
Diluted earnings per share	$	11,357		5,821,622	$	1.95

A-33

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2022, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted 

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company has developed CECL model assumptions and is comparing results to current allowance for loan loss calculations.  Parallel processing of the existing allowance for loan losses model with the CECL was completed during the fourth quarter of 2022.  At this time, the Company expects its allowance for credit losses related to all financial assets will increase by approximately $1.1 million upon adoption compared to its allowance for loan losses at December 31, 2022 of approximately $10.5 million. The impact of the initial adoption will be reflected in the Company's SEC Form 10-Q for the period ended March 31, 2023.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.

A-34

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-10: Financial Instruments Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures	Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations or financial position but will impact future disclosure requirements and reduce individually evaluated loan totals.

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

Reclassification

Certain amounts in the 2021 and 2020 consolidated financial statements have been reclassified to conform to the 2022 presentation.

(2) Investment Securities

Investment securities available for sale at December 31, 2022 and 2021 are as follows:

(Dollars in thousands)
	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	10,951		-		1,137		9,814
U.S. Government sponsored enterprises		12,245		-		706		11,539
Mortgage-backed securities		299,222		445		25,829		273,838
State and political subdivisions		184,768		91		34,656		150,203
Total	$	507,186		536		62,328		445,394

(Dollars in thousands)
	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	7,964		-		75		7,889
U.S. Government sponsored enterprises		14,252		200		185		14,267
Mortgage-backed securities		218,402		1,769		3,019		217,152
State and political subdivisions		165,804		3,694		2,257		167,241
Total	$	406,422		5,663		5,536		406,549

A-35

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2022 and 2021 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. 

(Dollars in thousands)
	December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	2,878		104		6,936		1,033		9,814		1,137
U.S. Government sponsored enterprises		2,904		87		8,635		619		11,539		706
Mortgage-backed securities		128,241		8,740		120,464		17,089		248,705		25,829
State and political subdivisions		65,880		7,766		76,291		26,890		142,171		34,656
Total	$	199,903		16,697		212,326		45,631		412,229		62,328

(Dollars in thousands)
	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	7,889		75		-		-		7,889		75
U.S. Government sponsored enterprises		5,232		15		3,263		170		8,495		185
Mortgage-backed securities		131,483		2,477		19,632		542		151,115		3,019
State and political subdivisions		80,076		1,981		5,922		276		85,998		2,257
Total	$	224,680		4,548		28,817		988		253,497		5,536

At December 31, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $62.3 million.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the December 31, 2022 tables above, all three of the U.S. Treasury securities, 149 of the 158 securities issued by state and political subdivisions contained unrealized losses, all seven of the securities issued by U.S. Government sponsored enterprises, and 123 of the 133 mortgage-backed securities, contained unrealized losses.  These unrealized losses are considered temporary because of acceptable financial condition and results of operations on each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2022, 2021 or 2020. 

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2022, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2022
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	240		240
Due from one to five years		8,434		8,128
Due from five to ten years		58,540		49,599
Due after ten years		140,750		113,589
Mortgage-backed securities		299,222		273,838
Total	$	507,186		445,394

No securities available for sale were sold during 2022 and 2021.  During 2020, proceeds from sales of securities available for sale were $56.3 million and resulted in gross gains of $2.7 million and gross losses of $56,000. 

A-36

Securities with a fair value of approximately $96.0 million and $98.6 million at December 31, 2022 and 2021, respectively, were pledged to secure public deposits, FHLB borrowings and for other purposes as required by law.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.  The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2022 and 2021.

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	9,814		-		9,814		-
U.S. Government sponsored enterprises	$	11,539		-		11,539		-
Mortgage-backed securities	$	273,838		-		273,838		-
State and political subdivisions	$	150,203		-		150,203		-

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,889		-		7,889		-88.7
U.S. Government sponsored enterprises	$	14,267		-		14,267		-
Mortgage-backed securities	$	217,152		-		217,152		-
State and political subdivisions	$	167,241		-		167,241		-

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available.  If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. 

(3) Loans

Major classifications of loans at December 31, 2022 and 2021 are summarized as follows:

A-37

(Dollars in thousands)
	December 31, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	114,446			95,760
Single-family residential		322,262			266,111
Single-family residential - Banco de la Gente non-traditional		20,019			23,147
Commercial		406,750			337,841
Multifamily and farmland		65,562			58,366
Total real estate loans		929,039			781,225
Loans not secured by real estate:
Commercial loans		81,307			91,172
Farm loans		938			796
Consumer loans		6,834			6,436
All other loans		14,490			5,240
Total loans		1,032,608			884,869
Less allowance for loan losses		(10,494	)		(9,355	)
Total net loans	$	1,022,114			875,514

The above table includes deferred costs, net of deferred fees, totaling $909,000 at December 31, 2022.  The above table includes deferred costs, net of deferred fees, totaling $198,000 at December 31, 2021 including $945,000 in deferred PPP loan fees. 

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

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

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

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

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

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

A-38

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

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 PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP.  The Bank participated as a lender in the PPP.  Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million.  The outstanding balance of PPP loans was $103,000 and $18.0 million at December 31, 2022 and 2021, respectively.  These loans are classified as commercial loans in the tables above.  The Bank recognized $948,000 and $3.4 million of PPP loan fee income for the year ended December 31, 2022 and year ended December, 2021, respectively. 

The following tables present an age analysis of past due loans, by loan type, as of December 31, 2022 and 2021:

December 31, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	363		-		363		114,083		114,446		-
Single-family residential		4,318		256		4,574		317,688		322,262		-
Single-family residential - Banco de la Gente non-traditional		2,977		264		3,241		16,778		20,019		-
Commercial		306		-		306		406,444		406,750		-
Multifamily and farmland		-		-		-		65,562		65,562		-
Total real estate loans		7,964		520		8,484		920,555		929,039		-
Loans not secured by real estate:
Commercial loans		3		-		3		81,304		81,307		-
Farm loans		-		-		-		938		938		-
Consumer loans		71		-		71		6,763		6,834		-
All other loans		-		-		-		14,490		14,490		-
Total loans	$	8,038		520		8,558		1,024,050		1,032,608		-

December 31, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential - Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-
Loans not secured by real estate:
Commercial loans		43		-		43		91,129		91,172		-
Farm loans		-		-		-		796		796		-
Consumer loans		38		-		38		6,398		6,436		-
All other loans		-		-		-		5,240		5,240		-
Total loans	$	5,485		746		6,231		878,638		884,869		-

A-39

The following table presents the Bank’s non-accrual loans as of December 31, 2022 and 2021:

(Dollars in thousands)
	December 31, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	53		-
Single-family residential		1,914		1,642
Single-family residential - Banco de la Gente non-traditional		1,532		1,232
Commercial		129		200
Multifamily and farmland		91		105
Total real estate loans		3,719		3,179
Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		9		2
Total	$	3,728		3,230

At the end of each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers who also perform appraisals for third parties.  Factors, including the assumptions and techniques utilized by the appraiser, are considered by management in determining the fair value of collateral.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows.  If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s Troubled Debt Restructurings (“TDR loans”) in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Impaired loans collectively evaluated for impairment totaled $4.9 million and $5.3 million at December 31, 2022 and 2021, respectively.  Accruing impaired loans were $15.4 and $18.3 million at December 31, 2022 and December 31, 2021, respectively.  Interest income recognized on accruing impaired loans was $862,000 and $1.0 million for the years ended December 31, 2022 and 2021, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Bank’s impaired loans as of December 31, 2022, 2021 and 2020:

December 31, 2022
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	110		-		110		110		2		75		8
Single-family residential		3,912		236		3,300		3,536		60		5,194		194
Single-family residential - Banco de la Gente non-traditional		10,441		-		9,748		9,748		611		8,757		552
Commercial		1,785		421		1,346		1,767		9		1,916		93
Multifamily and farmland		104		-		91		91		-		96		5
Total impaired real estate loans		16,352		657		14,595		15,252		682		16,038		852
Loans not secured by real estate:
Commercial loans		116		-		116		116		1		137		8
Consumer loans		11		-		9		9		-		15		2
Total impaired loans	$	16,479		657		14,720		15,377		683		16,190		862

A-40

December 31, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	73		-		73		73		3		82		6
Single-family residential		5,138		524		4,374		4,898		86		6,017		253
Single-family residential - Banco de la Gente non-traditional		11,753		-		10,922		10,922		687		10,325		609
Commercial		2,138		435		1,608		2,043		11		2,385		109
Multifamily and farmland		113		-		105		105		-		110		6
Total impaired real estate loans		19,215		959		17,082		18,041		787		18,919		983
Loans not secured by real estate:
Commercial loans		282		49		170		219		2		271		19
Consumer loans		8		-		4		4		-		11		1
Total impaired loans	$	19,505		1,008		17,256		18,264		789		19,201		1,003

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		108		108		4		134		8
Single-family residential		5,302		379		4,466		4,845		33		4,741		262
Single-family residential - Banco de la Gente non-traditional		13,417		-		12,753		12,753		862		13,380		798
Commercial		2,999		1,082		1,891		2,973		14		2,940		139
Multifamily and farmland		119		-		117		117		-		29		6
Total impaired real estate loans		21,945		1,461		19,335		20,796		913		21,224		1,213
Loans not secured by real estate:
Commercial loans		515		211		244		455		5		564		32
Consumer loans		41		-		37		37		1		60		5
Total impaired loans	$	22,501		1,672		19,616		21,288		919		21,848		1,250

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2022 and 2021 are presented below.  The Bank’s valuation methodology is discussed in Note 16.

(Dollars in thousands)
	Fair Value Measurements December 31, 2022		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	211		-		-		211
Impaired loans	$	14,694		-		-		14,694

(Dollars in thousands)
	Fair Value Measurements December 31, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	3,637		-		-		3,637
Impaired loans	$	17,475		-		-		17,475

A-41

	Fair Value December 31, 2022		Fair Value December 31, 2021		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	211	$	3,637	Rate lock commitment	N/A	N/A
Impaired loans	$	14,694	$	17,475	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2022.  PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA. 

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated			Total
Twelve months ended December 31, 2022
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			-		110			2,080			9,355
Charge-offs		-		(128	)		-			-		-		(33	)		-		(591	)		-			(752	)
Recoveries		-		229			-			9		-		72			-		109			-			419
Provision		222		208			(101	)		964		14		(93	)		-		586			(328	)		1,472
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Allowance for loan losses December 31, 2022
Ending balance: individually evaluated for impairment	$	-		36			597			6		-		-			-		-			-			639
Ending balance: collectively evaluated for impairment		1,415		2,286			166			3,201		164		657			-		214			1,752			9,855
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Loans at December 31, 2022
Ending balance	$	114,446		322,262			20,019			406,750		65,562		81,307			938		21,324			-			1,032,608
Ending balance: individually evaluated for impairment	$	-		537			8,555			1,388		-		-			-		-			-			10,480
Ending balance: collectively evaluated for impairment	$	114,446		321,725			11,464			405,362		65,562		81,307			938		21,324			-			1,022,128

Changes in the allowance for loan losses for the year ended December 31, 2021 were as follows:

A-42

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2021
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Charge-offs		-			(89	)		-			-			-		(293	)		-		(380	)		-		(762	)
Recoveries		121			271			-			52			3		786			-		139			-		1,372
Provision		(124	)		(12	)		(188	)		(30	)		25		(1,127	)		-		223			70		(1,163	)
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Allowance for loan losses December 31, 2021
Ending balance: individually evaluated for impairment	$	1			57			672			7			-		-			-		-			-		737
Ending balance: collectively evaluated for impairment		1,192			1,956			192			2,227			150		711			-		110			2,080		8,618
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Loans at December 31, 2021
Ending balance	$	95,760			266,111			23,147			337,841			58,366		91,172			796		11,676			-		884,869
Ending balance: individually evaluated for impairment	$	6			1,633			9,795			1,437			-		49			-		-			-		12,920
Ending balance: collectively evaluated for impairment	$	95,754			264,478			13,352			336,404			58,366		91,123			796		11,676			-		871,949

Changes in the allowance for loan losses for the year ended December 31, 2020 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2020
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120		688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-		(903	)		-		(434	)		-		(1,414	)
Recoveries		36			70			-			70			-		34			-		173			-		383
Provision		471			564			(21	)		844			2		1,526			-		251			622		4,259
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Allowance for loan losses December 31, 2020
Ending balance: individually evaluated for impairment	$	1			4			844			8			-		-			-		-			-		857
Ending balance: collectively evaluated for impairment		1,195			1,839			208			2,204			122		1,345			-		128			2,010		9,051
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Loans at December 31, 2020
Ending balance	$	94,124			272,325			26,883			332,971			48,880		161,740			855		10,861			-		948,639
Ending balance: individually evaluated for impairment	$	7			1,558			11,353			2,118			-		212			-		-			-		15,248
Ending balance: collectively evaluated for impairment	$	94,117			270,767			15,530			330,853			48,880		161,528			855		10,861			-		933,391

Impaired loans collectively evaluated for impairment totaled $4.9 million, $5.3 million and $5.8 million at December 31, 2022, 2021 and 2020, respectively and are included in the tables above.  Allowance on impaired loans collectively evaluated for impairment totaled $44,000, $42,000 and 61,000 at December 31, 2022, 2021 and 2020, respectively.

A-43

The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 8.  These risk grades are evaluated on an ongoing basis.  A description of the general characteristics of the eight risk grades is as follows:

· Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.

· Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Bank’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.

· Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Bank’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).

· Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

· Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.

· Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

· Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

· Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2022 and 2021.

December 31, 2022
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		2,782		-		-		-		1,365		-		527		-		4,674
2- High Quality		14,912		138,124		-		33,353		17		13,302		-		2,384		1,366		203,458
3- Good Quality		94,113		166,329		7,442		340,926		63,270		64,422		938		3,663		12,851		753,954
4- Management Attention		5,257		10,615		8,968		27,957		2,061		1,507		-		244		128		56,737
5- Watch		54		922		1,136		3,963		123		711		-		1		145		7,055
6- Substandard		110		3,490		2,473		551		91		-		-		15		-		6,730
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	114,446		322,262		20,019		406,750		65,562		81,307		938		6,834		14,490		1,032,608

A-44

December 31, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		5,923		-		-		-		371		-		581		-		6,875
2- High Quality		11,752		109,337		-		28,546		19		16,177		-		2,039		1,309		169,179
3- Good Quality		80,325		129,856		8,712		272,786		54,945		68,183		792		3,510		3,931		623,040
4- Management Attention		3,534		14,964		10,478		30,937		2,754		5,214		4		284		-		68,169
5- Watch		76		2,464		1,703		4,938		543		1,177		-		1		-		10,902
6- Substandard		73		3,567		2,254		634		105		50		-		21		-		6,704
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	95,760		266,111		23,147		337,841		58,366		91,172		796		6,436		5,240		884,869

Past due TDR loans and non-accrual TDR loans totaled $3.7 million and $2.2 million at December 31, 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 December 31, 2022 and December 31, 2021.

There were no new TDR modifications during the years ended December 31, 2022 and 2021.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2022 and 2021.  TDR loans are deemed to be in default if they become past due by 90 days or more. 

(4) Premises and Equipment

Major classifications of premises and equipment at December 31, 2022 and 2021 are summarized as follows:

(Dollars in thousands)
	2022			2021
Land	$	3,851			3,857
Buildings and improvements		18,371			18,359
Furniture and equipment		26,156			25,420
Construction in process		3,028			-
Total premises and equipment		51,406			47,636
Less accumulated depreciation		(33,201	)		(31,532	)
Total net premises and equipment	$	18,205			16,104

The Bank recognized depreciation expense totaling $2.4 million, $2.6 million and $2.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. 

The Bank had $85,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2022.  The Bank had $105,000 net gains on the sale of and write-downs on premises and equipment for the year ended December 31, 2021.  The Bank had no gains or losses on the sale of or write-downs on premises and equipment for the year ended December 31, 2020. 

(5) Leases

The Bank leases various office spaces for banking and operational facilities and equipment under operating lease arrangements.

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Total rent expense was approximately $976,000, $703,000 and $880,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, the Bank had operating right of use assets of $5.1 million and operating lease liabilities of $5.2 million. The Bank maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices.  Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised.  Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Bank if the option is not exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

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

(Dollars in thousands)
	December 31, 2022
Operating lease cost	$	888
Other information:
Cash paid for amounts included in the measurement of lease liabilities		873
Operating cash flows from operating leases		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		1,726
Weighted-average remaining lease term - operating leases		9.26
Weighted-average discount rate - operating leases		2.23	%

The following table presents lease maturities as of December 31, 2022.

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2022
2023	$	805
2024		750
2025		694
2026		577
2027		528
Thereafter		2,418
Total		5,727
Less: Imputed Interest		(542	)
Operating Lease Liability	$	5,185

(6) Time Deposits

At December 31, 2022, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)
2023	$	59,099
2024		26,526
2025		7,380
2026		3,420
2027 and thereafter		1,574
Total	$	97,999

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At December 31, 2022 and 2021, the Bank had approximately $15.0 million and $11.1 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers.  CDARS balances totaled $7.1 million and $3.0 million as of December 31, 2022 and 2021, respectively.  The weighted average rate of brokered deposits as of December 31, 2022 and 2021 was 1.27% and 1.49%, respectively.

(7) Federal Home Loan Bank (FHLB) and Federal Reserve Bank Borrowings

The Bank had no borrowings from the FHLB at December 31, 2022 and 2021.  FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns.  At December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $149.4 million.  The remaining availability under the line of credit with the FHLB was $86.5 million at December 31, 2022.  The Bank incurred a $1.1 million prepayment penalty on the prepayment of a $70.0 million FHLB advance in 2020.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $812,000 and $707,000 of FHLB stock, included in other investments, at December 31, 2022 and 2021, respectively.

As of December 31, 2022 and 2021, the Bank had no borrowings from the Federal Reserve Bank (“FRB”).  FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.  At December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $585.0 million.  Availability under the line of credit with the FRB was $445.1 million at December 31, 2022. 

(8) Junior Subordinated Debentures

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

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

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

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

(9) Income Taxes

The provision for income taxes is summarized as follows:

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(Dollars in thousands)
	2022			2021			2020
Current expense	$	4,713			4,023			3,049
Deferred income tax benefit		(541	)		(227	)		(560	)
Total income tax	$	4,172			3,796			2,489

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:

(Dollars in thousands)
	2022			2021			2020
Tax expense at statutory rate	$	4,262			3,975			2,908
State income tax, net of federal income tax effect		395			339			261
Tax-exempt interest income		(445	)		(497	)		(649	)
Increase in cash surrender value of life insurance		(71	)		(83	)		(80	)
Tax credits		(230	)		(234	)		(234	)
Nondeductible interest and other expense		24			30			46
Other		237			266			237
Total	$	4,172			3,796			2,489

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities.  The net deferred tax asset is included as a component of other assets at December 31, 2022 and 2021.

(Dollars in thousands)
	2022			2021
Deferred tax assets:
Allowance for loan losses	$	2,411			2,149
Accrued retirement expense		1,174			1,148
Restricted stock		245			209
Interest income on nonaccrual loans		1			2
Lease liability		1,191			1,075
Unrealized loss on available for sale securities		14,197			-
Total gross deferred tax assets		19,219			4,583
Deferred tax liabilities:
Deferred loan fees		209			263
Accumulated depreciation		438			563
Prepaid expenses		3			4
ROU Asset		1,175			1,060
Other		(93	)		(55	)
Unrealized gain on available for sale securities		-			29
Total gross deferred tax liabilities		1,732			1,864
Net deferred tax asset	$	17,487			2,719

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded that it has no liability related to uncertain tax positions.

As of December 31, 2022, the Company’s Federal income tax filings for years 2019 through 2021 are open to audit by the Internal Revenue Service.  The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2019, 2020, 2021 and 2022 remain open to audit by the North Carolina Department of Revenue.

(10) Related Party Transactions 

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. In accordance with Regulation O of the Federal Reserve, it is the policy of the Bank that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2022 and 2021:

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(Dollars in thousands)
	2022			2021
Beginning balance	$	2,687			1,852
Disbursements		4,090			3,636
Repayments		(3,396	)		(2,801	)
Ending balance	$	3,381			2,687

At December 31, 2022 and 2021, the Company had deposit relationships with related parties of approximately $44.5 million and $43.4 million, respectively.

(11) Commitments and Contingencies

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. 

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.

(Dollars in thousands)
	Contractual Amount
	2022		2021
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	382,699		304,258
Standby letters of credit	$	4,352		4,892

Commitments to extend credit are conditional agreements to lend to a customer.  Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $387.1 million does not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Bank to pay a third party on behalf of a customer. Those letters of credit are primarily issued to businesses in the Bank’s delineated market area. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds real estate, equipment, automobiles and customer deposits as collateral supporting those commitments for which collateral is deemed necessary.

In the normal course of business, the Company is a party (both as plaintiff and defendant) to lawsuits. In the opinion of management and counsel, none of these cases should have a material adverse effect on the financial position of the Company.

The Company and the Bank have entered into employment agreements with certain key employees. The agreements, among other things, include salary, bonus, incentive compensation, and change in control provisions.

The Company has $110.5 million available for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2022.

At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property.  As of December 31, 2022, the Bank has funded $2.9 million of this commitment.  At December 31, 2022, the Bank had $1.5 million in unfunded commitments for SBA Small Business Investment Company (“SBIC”) investments.

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(12) Employee and Director Benefit Programs

The Bank has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Bank matched employee contributions to a maximum of 4.00% of annual compensation in 2020, 2021 and 2022.  The Company’s contribution pursuant to this formula was approximately $719,000, $709,000 and $692,000 for the years ended December 31, 2022, 2021 and 2020, respectively.  Investments made available under the 401(k) plan are determined by a committee comprised of senior management.  No investments in Company stock are available under the 401(k) plan. Contributions to the 401(k) plan are vested immediately.

In December 2001, the Company initiated a retirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries.  Under the postretirement benefit plan, the Company purchased life insurance policies on the lives of the key officers and each director.  The increase in cash surrender value of the policies constitutes the Company’s contribution to the postretirement benefit plan each year.  Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $369,000, $447,000 and $368,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company paid medical benefits for certain retired employees through the first quarter of 2022. The Company did not incur any postretirement medical benefits expense in 2022, 2021 and 2020 due to an excess accrual balance.

The following table sets forth the change in the accumulated benefit obligation for the Company’s two postretirement benefit plans described above:

(Dollars in thousands)
	2022			2021
Benefit obligation at beginning of period	$	5,011			4,870
Service cost		325			359
Interest cost		63			70
Benefits paid		(289	)		(288	)
Benefit obligation at end of period	$	5,110			5,011

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2022 and 2021 are shown in the following two tables:

(Dollars in thousands)
	2022		2021
Benefit obligation	$	5,110		5,011
Fair value of plan assets		-		-

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(Dollars in thousands)
	2022			2021
Funded status	$	(5,110	)		(5,011	)
Unrecognized prior service cost/benefit		-			-
Unrecognized net actuarial loss		-			-
Net amount recognized	$	(5,110	)		(5,011	)
Unfunded accrued liability	$	(5,110	)		(5,011	)
Intangible assets		-			-
Net amount recognized	$	(5,110	)		(5,011	)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2022, 2021 and 2020 consisted of the following:

(Dollars in thousands)
	2022			2021			2020
Service cost	$	325			359			359
Interest cost		63			70			70
Net periodic cost	$	388			429			429
Weighted average discount rate assumption used to determine benefit obligation		5.50	%		5.50	%		5.49	%

The Company paid postretirement plan benefits totaling $289,000, $288,000 and $216,000 during the years ended December 31, 2022, 2021 and 2020, respectively.  Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:

(Dollars in thousands)
Year ending December 31,
2023	$	329
2024	$	353
2025	$	370
2026	$	368
2027	$	494
Thereafter	$	8,358

(13) Regulatory Matters

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum capital ratios in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for loan losses, up to 1.25% of risk-weighted assets and other adjustments.  Management believes, as of December 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

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As of December 31, 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

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

The Company’s and the Bank’s actual capital amounts and ratios are presented below:

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2022:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	178,286		14.04	%		101,608		8.00	%		N/A		N/A
Bank	$	176,923		13.93	%		101,606		8.00	%		133,357		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	167,792		13.21	%		76,206		6.00	%		N/A		N/A
Bank	$	166,429		13.10	%		76,204		6.00	%		107,956		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	167,792		9.82	%		68,347		4.00	%		N/A		N/A
Bank	$	166,429		9.68	%		68,780		4.00	%		68,780		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	152,792		12.03	%		57,154		4.50	%		N/A		N/A
Bank	$	166,429		13.10	%		57,153		4.50	%		88,905		7.00	%

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2021:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	166,628		16.35	%		81,547		8.00	%		N/A		N/A
Bank	$	164,975		16.19	%		81,539		8.00	%		107,020		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	157,273		15.43	%		61,160		6.00	%		N/A		N/A
Bank	$	155,620		15.27	%		61,154		6.00	%		86,635		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	157,273		9.64	%		65,258		4.00	%		N/A		N/A
Bank	$	155,620		9.50	%		65,557		4.00	%		65,557		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	142,273		13.96	%		45,870		4.50	%		N/A		N/A
Bank	$	155,620		15.27	%		45,866		4.50	%		71,347		7.00	%

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(14) Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2022, 2021 and 2020 included the following items:

(Dollars in thousands)
	2022		2021		2020
Visa debit card income	$	4,901		5,045		4,237
Bank owned life insurance income		458		397		380
Other		2,390		2,197		1,315
	$	7,749		7,639		5,932

Other non-interest expense for the years ended December 31, 2022, 2021 and 2020 included the following items:

(Dollars in thousands)
	2022		2021		2020
ATM expense	$	629		619		567
Data processing		777		643		635
Deposit program expense		348		415		426
Dues and subscriptions		628		588		538
FHLB advance prepayment penalty		-		-		1,100
Internet banking expense		949		768		729
Office supplies		532		374		538
Telephone		691		730		794
Other		3,741		3,737		3,217
	$	8,295		7,874		8,544

(15) Fair Value of Financial Instruments

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

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

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

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

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

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Other Investments

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

Mortgage Loans Held for Sale

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

Loans

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

Mutual Funds

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

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The fair value presentation for recurring assets is presented in Note 2.  There were no recurring liabilities at December 31, 2022 and 2021.  The fair value presentation for non-recurring assets is presented in Note 3.  There were no non-recurring liabilities at December 31, 2022 and 2021.  The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2022 and 2021 are as follows:

(Dollars in thousands)
			Fair Value Measurements at December 31, 2022
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	71,596		71,596		-		-		71,596
Investment securities available for sale		445,394		-		445,394		-		445,394
Other investments		2,656		-		-		2,656		2,656
Mortgage loans held for sale		211		-		-		211		211
Loans, net		1,022,114		-		-		998,587		998,587
Mutual funds held in deferred compensation trust		1,327		-		1,327		-		1,327
Liabilities:
Deposits	$	1,435,215		-		-		1,434,871		1,434,871
Securities sold under agreements to repurchase		47,688		-		47,688		-		47,688
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	277,499		277,499		-		-		277,499
Investment securities available for sale		406,549		-		406,549		-		406,549
Other investments		3,668		-		-		3,668		3,668
Mortgage loans held for sale		3,637		-		-		3,637		3,637
Loans, net		875,514		-		-		855,814		855,814
Mutual funds held in deferred compensation trust		1,510		-		1,510		-		1,510
Liabilities:
Deposits	$	1,412,748		-		-		1,401,833		1,401,833
Securities sold under agreements to repurchase		37,094		-		37,094		-		37,094
Junior subordinated debentures		15,464		-		15,464		-		15,464

The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of December 31, 2022 and 2021.

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,327		-		1,327		-

A-55

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,510		-		1,510		-

(16) Reportable Segments

The Company has two reportable segments as described below.

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

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

The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents the parent company, which is  not considered to be a reportable segment, is included to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP.

(Dollars in thousands)
	Banking
	Operations			CBRES		Other			Consolidated
As of and for the year ended December 31, 2022
Interest income	$	54,416		$	-	$	15		$	54,431
Interest expense		2,796			-		527			3,323
Net interest income		51,620			-		(512	)		51,108
Provision for loan losses		1,472			-		-			1,472
Noninterest income		15,012			14		-			15,026
Appraisal management fee income		-			11,663		-			11,663
Noninterest expense		44,433			1,695		638			46,766
Appraisal management fee expense		-			9,264		-			9,264
Income tax expense (benefit)		4,248			166		(242	)		4,172
Net income (loss)	$	16,479		$	552	$	(908	)	$	16,123
Total assets	$	1,617,212		$	3,227	$	488		$	1,620,927
As of and for the year ended December 31, 2021
Interest income	$	47,171		$	-	$	8		$	47,179
Interest expense		2,930			-		275			3,205
Net interest income		44,241			-		(267	)		43,974
Recovery of loan losses		(1,163	)		-		-			(1,163	)
Noninterest income		16,014			15		-			16,029
Appraisal management fee income		-			8,890		-			8,890
Noninterest expense		42,239			1,163		613			44,015
Appraisal management fee expense		-			7,112		-			7,112
Income tax expense (benefit)		3,836			145		(185	)		3,796
Net income (loss)	$	15,343		$	485	$	(695	)	$	15,133
Total assets	$	1,620,933		$	2,692	$	568		$	1,624,193
As of and for the year ended December 31, 2020
Interest income	$	47,926		$	-	$	32		$	47,958
Interest expense		3,473			-		363			3,836
Net interest income		44,453			-		(331	)		44,122
Provision for loan losses		4,259			-		-			4,259
Noninterest income		16,148			12		-			16,160
Appraisal management fee income		-			6,754		-			6,754
Noninterest expense		42,041			991		625			43,657
Appraisal management fee expense		-			5,274		-			5,274
Income tax expense (benefit)		2,574			116		(201	)		2,489
Net income (loss)	$	11,727		$	385	$	(755	)	$	11,357

A-56

(17) Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements

Balance Sheets
December 31, 2022 and 2021
(Dollars in thousands)
Assets	2022		2021
Cash	$	384		561
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		118,832		155,716
Investment in PEBK Capital Trust II		464		464
Other assets		24		105
Total assets	$	120,704		157,846
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,464		15,464
Liabilities		45		13
Shareholders' equity		105,195		142,369
Total liabilities and shareholders' equity	$	120,704		157,846

Statements of Earnings
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
Revenues:	2022		2021		2020
Interest and dividend from subsidiary	$	6,240		7,419		7,539
Total revenues		6,240		7,419		7,539
Expenses:
Interest		529		280		370
Other operating expenses		639		613		625
Total expenses		1,168		893		995
Income before income tax benefit and equity in undistributed earnings of subsidiaries		5,072		6,526		6,544
Income tax benefit		242		185		201
Income before equity in undistributed earnings of subsidiaries		5,314		6,711		6,745
Equity in undistributed earnings of subsidiaries		10,809		8,422		4,612
Net earnings	$	16,123		15,133		11,357

A-57

Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Cash flows from operating activities:
Net earnings	$	16,123			15,133			11,357
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(10,809	)		(8,422	)		(4,612	)
Change in:
Other assets		81			545			(19	)
Other liabilities		32			-			(10	)
Net cash provided by operating activities		5,427			7,256			6,716
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		-			-			250
Net cash provided by investing activities		-			-			250
Cash flows from financing activities:
Repayment of junior subordinated debentures		-			-			(155	)
Cash dividends paid on common stock		(4,935	)		(3,793	)		(4,392	)
Stock repurchase		(710	)		(3,605	)		(2,999	)
Proceeds from exercise of restricted stock units		41			39			57
Net cash used by financing activities		(5,604	)		(7,359	)		(7,489	)
Net change in cash		(177	)		(103	)		(523	)
Cash at beginning of year		561			664			1,187
Cash at end of year	$	384			561			664

(18) Quarterly Data

	2022								2021
(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First			Second			Third			Fourth
Total interest income	$	11,329		11,992		14,611		16,499	$	11,922			12,517			11,421			11,319
Total interest expense		663		644		818		1,198		815			842			861			687
Net interest income		10,666		11,348		13,793		15,301		11,107			11,675			10,560			10,632
Provision for loan losses		71		410		408		583		(455	)		(226	)		(182	)		(300	)
Other income		7,046		7,328		6,793		5,522		5,873			6,040			6,040			6,966
Other expense		13,341		14,243		13,455		14,991		12,268			12,132			12,568			14,159
Income before income taxes		4,300		4,023		6,723		5,249		5,167			5,809			4,214			3,739
Income tax expense		848		806		1,416		1,102		1,046			1,194			824			732
Net earnings		3,452		3,217		5,307		4,147		4,121			4,615			3,390			3,007
Basic net earnings per share	$	0.63		0.59		0.96		0.76	$	0.73			0.82			0.61			0.55
Diluted net earnings per share	$	0.61		0.57		0.93		0.74	$	0.71			0.80			0.59			0.53

A-58

(19) Subsequent Events

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

In January and February 2023, the Bank sold securities available for sale totaling $53.5 million, which resulted in gross losses of $2.7 million and gross gains of $177,000.  The transaction was intended to reduce risk in the investment portfolio provided by favorable conditions that had developed for this class of security in the first part of 2023, and to provide the Bank with more flexibility to take advantage of a higher interest rate environment in 2023.

Between March 10, 2023 and March 12, 2023, two financial institutions unrelated to the Company experienced a significant run on deposits, leading to insolvency. These institutions failed and were placed into receivership by the FDIC. These institutions also had deposit concentrations related to higher-risk customer types, such as venture capital and cryptocurrency.  The Federal Reserve determined that these institutions were a systemic risk and therefore, in concert with the FDIC, have determined that all deposits held by these two institutions will be insured.  These events have created market volatility for the financial sector; however, the ongoing ramifications of these events have yet to be seen.  These events have not caused any significant changes in deposit balances at Peoples Bank.

A-59

DIRECTORS AND OFFICERS OF THE COMPANY

DIRECTORS

Robert C. Abernethy – Chairman

Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank;

President, Secretary and Treasurer, Carolina Glove Company, Inc. (glove manufacturer)

Secretary and Assistant Treasurer, Midstate Contractors, Inc. (paving company)

James S. Abernethy

Vice President, Carolina Glove Company, Inc. (glove manufacturer)

President and Assistant Secretary, Midstate Contractors, Inc. (paving company)

Vice President, Secretary and Chairman of the Board of Directors, Alexander Railroad Company

Kimberly Boyd-Leaks

Executive Vice President – Chief Retail Banking Support Officer, Peoples Bank

Douglas S. Howard

Vice President and Treasurer, Denver Equipment Company of Charlotte, Inc.

John W. Lineberger, Jr.

Vice President, Lineberger Brothers, Inc. (real estate development)

Gary E. Matthews

President and Director, Matthews Construction Company, Inc. (general contractor)

Director, Conover Metal Products

Billy L. Price, Jr. MD

Practitioner of Internal Medicine, BL Price Jr. Medical Consultants, PLLC

Larry E. Robinson

Chairman of the Board and Chief Executive Officer, The Blue Ridge Distributing Co., Inc. (beer and wine distributor)

Director, United Beverages of North Carolina, LLC (beer distributor)

William Gregory (Greg) Terry

President, Clemson Legacy Designs

Director/Consultant, Drum & Willis-Reynolds Funeral Homes & Crematory                        

Dan Ray Timmerman, Sr.

Chairman of the Board and Chief Executive Officer, Timmerman Manufacturing, Inc. (wrought iron furniture, railings and gates manufacturer)

Benjamin I. Zachary

President, Treasurer, General Manager and Director, Alexander Railroad Company

OFFICERS

Lance A. Sellers

President and Chief Executive Officer

Jeffrey N. Hooper

Executive Vice President, Chief Financial Officer, Corporate Treasurer and Assistant Corporate Secretary

William D. Cable, Sr.

Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer

A-60

EX-21

EXHIBIT (21)

SUBSIDIARIES OF THE REGISTRANT

A list of subsidiaries is contained in Part I, Item 1 Business under the section titled “Subsidiaries” and is incorporated herein by reference.

EX-23

EXHIBIT (23)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (No. 333-43426 on Form S-3D, effective August 10, 2000 and No. 333-254489 on Form S-8, effective March 19, 2021) of Peoples Bancorp of North Carolina, Inc. of our reports dated March 17, 2023, relating to the consolidated financial statements, appearing in this Annual Report on Form 10-K of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2022.

/s/ Elliott Davis, PLLC

Raleigh, North Carolina

March 17, 2023

EX-31.I

EXHIBIT (31)(i)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.	I have reviewed this annual report on Form 10-K of Peoples Bancorp of North Carolina, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 17, 2023	/s/ Lance A. Sellers
Date	Lance A. Sellers
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.II

EXHIBIT (31)(ii)

CERTIFICATIONS

I, Jeffrey N. Hooper, certify that:

1.	I have reviewed this annual report on Form 10-K of Peoples Bancorp of North Carolina, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 17, 2023	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Principal Accounting Officer)

EX-32

EXHIBIT (32)

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

              In connection with the Annual Report of Peoples Bancorp of North Carolina, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best knowledge of the undersigned:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 17, 2023	/s/ Lance A. Sellers
Date	Lance A. Sellers
	Chief Executive Officer

March 17, 2023	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper
	Chief Financial Officer

XML

Cover - USD ($)	12 Months Ended
	Dec. 31, 2022	Feb. 28, 2023	Jun. 30, 2022
Cover [Abstract]
Entity Registrant Name	Peoples Bancorp of North Carolina, Inc.
Entity Central Index Key	0001093672
Document Type	10-K
Amendment Flag	false
Entity Voluntary Filers	No
Current Fiscal Year End Date	--12-31
Entity Well Known Seasoned Issuer	No
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Dec. 31, 2022
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2022
Entity Common Stock Shares Outstanding		5,637,021
Entity Public Float			$ 125,528,065
Document Annual Report	true
Document Transition Report	false
Entity File Number	000-27205
Entity Incorporation State Country Code	NC
Entity Tax Identification Number	56-2132396
Entity Address Address Line 1	518 West C Street
Entity Address City Or Town	Newton
Entity Address State Or Province	NC
Entity Address Postal Zip Code	28658
City Area Code	828
Icfr Auditor Attestation Flag	false
Auditor Name	Elliott Davis, PLLC
Auditor Location	Raleigh, North Carolina
Auditor Firm Id	149
Local Phone Number	464-5620
Entity Interactive Data Current	Yes

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Consolidated Balance Sheets
Cash and due from banks, including reserve requirements of $0 at both 12/31/22 and 12/31/21	$ 50,061	$ 44,711
Interest-bearing deposits	21,535	232,788
Cash and cash equivalents	71,596	277,499
Investment securities available for sale	445,394	406,549
Other investments	2,656	3,668
Total securities	448,050	410,217
Mortgage loans held for sale	211	3,637
Loans	1,032,608	884,869
Less allowance for loan losses	(10,494)	(9,355)
Net loans	1,022,114	875,514
Premises and equipment, net	18,205	16,104
Cash surrender value of life insurance	17,703	17,365
Right of use lease asset	5,116	4,612
Accrued interest receivable and other assets	37,932	19,245
Total assets	1,620,927	1,624,193
Deposits:
Noninterest-bearing demand	523,088	514,319
Interest-bearing demand, MMDA & savings	814,128	797,179
Time, $250,000 or more	31,001	26,333
Other time	66,998	74,917
Total deposits	1,435,215	1,412,748
Securities sold under agreements to repurchase	47,688	37,094
Junior subordinated debentures	15,464	15,464
Lease liability	5,185	4,677
Accrued interest payable and other liabilities	12,180	11,841
Total liabilities	1,515,732	1,481,824
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding	0	0
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,636,830 shares at December 31, 2022 and 5,661,569 shares at December 31, 2021	52,636	53,305
Common stock held by deferred compensation trust, at cost; 169,004 shares at December 31, 2022 and 162,193 shares at December 31, 2021	(2,181)	(1,992)
Deferred compensation	2,181	1,992
Retained earnings	100,156	88,968
Accumulated other comprehensive income (loss)	(47,597)	96
Total shareholders' equity	105,195	142,369
Total liabilities and shareholders' equity	$ 1,620,927	$ 1,624,193

XML

Consolidated Balance Sheets (Parenthetical) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Assets
Cash and due from banks, reserve requirements	$ 0	$ 0
Liabilities and Shareholders' Equity
Time	$ 250,000,000	$ 0
Shareholders' equity:
Preferred stock, stated value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized (in shares)	5,000,000,000	5,000,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	20,000,000,000	20,000,000,000
Common stock, shares issued (in shares)	5,636,830,000	5,661,569,000
Common stock, shares outstanding (in shares)	5,636,830,000	5,661,569,000
Common Stock Held By Deferred Compensation Trust	169,004,000	162,193,000

XML

Consolidated Statements of Earnings - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Interest income:
Interest and fees on loans	$ 43,077,000	$ 41,186,000	$ 42,314,000
Interest on due from banks	2,223,000	258,000	127,000
Interest on federal funds sold			204,000
Interest on investment securities:
U.S. Government sponsored enterprises	4,962,000	2,478,000	2,361,000
States and political subdivisions	4,075,000	3,146,000	2,691,000
Other	94,000	111,000	261,000
Total interest income	54,431,000	47,179,000	47,958,000
Interest expense:
Demand deposits, MMDA & savings deposits	2,019,000	2,029,000	1,962,000
Time deposits	562,000	752,000	947,000
FHLB borrowings			357,000
Junior subordinated debentures	529,000	280,000	370,000
Other	213,000	144,000	200,000
Total interest expense	3,323,000	3,205,000	3,836,000
Net interest income	51,108,000	43,974,000	44,122,000
Provision for (recovery of) loan losses	1,472,000	(1,163,000)	4,259,000
Net interest income after provision for loan losses	49,636,000	45,137,000	39,863,000
Non-interest income:
Service charges	5,290,000	3,921,000	3,528,000
Other service charges and fees	734,000	803,000	742,000
Gain on sale of securities			2,639,000
Mortgage banking income	393,000	2,505,000	2,469,000
Insurance and brokerage commissions	945,000	1,035,000	897,000
Appraisal management fee income	11,663,000	8,890,000	6,754,000
Gain (loss) on sale of premises and equipment	(85,000)	105,000	0
Gain (loss) on sales and write-downs of other real estate, net		21,000	(47,000)
Miscellaneous	7,749,000	7,639,000	5,932,000
Total non-interest income	26,689,000	24,919,000	22,914,000
Non-interest expense:
Salaries and employee benefits	26,130,000	24,506,000	23,538,000
Occupancy	8,048,000	7,858,000	7,933,000
Professional fees	1,915,000	1,826,000	1,580,000
Advertising	693,000	536,000	787,000
Debit card expense	1,224,000	1,000,000	1,012,000
FDIC insurance	461,000	415,000	263,000
Appraisal management fee expense	9,264,000	7,112,000	5,274,000
Other	8,295,000	7,874,000	8,544,000
Total non-interest expense	56,030,000	51,127,000	48,931,000
Earnings before income taxes	20,295,000	18,929,000	13,846,000
Income tax expense	4,172,000	3,796,000	2,489,000
Net earnings	$ 16,123,000	$ 15,133,000	$ 11,357,000
Basic net earnings per share	$ 2.94	$ 2.71	$ 2.01
Diluted net earnings per share	2.85	2.63	1.95
Cash dividends declared per share	$ 0.87	$ 0.66	$ 0.75

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Consolidated Statements of Comprehensive Income
Net earnings	$ 16,123	$ 15,133	$ 11,357
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	61,919	6,886	4,919
Reclassification adjustment for gains on securities available for sale included in net earnings			(2,639)
Total other comprehensive income (loss), before income taxes	(61,919)	(6,886)	2,280
Income tax expense (benefit) related to other comprehensive income (loss):
Unrealized holding gain (losses) on securities available for sale	(14,226)	(1,582)	1,130
Reclassification adjustment for gains on securities available for sale included in net earnings			(606)
Total income tax expense (benefit) related to other comprehensive income (loss)	(14,226)	(1,582)	524
Total other comprehensive income (loss), net of tax	(47,693)	(5,304)	1,756
Total comprehensive income (loss)	$ (31,570)	$ 9,829	$ 13,113

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Consolidated Statements of Changes in Shareholders' Equity - USD ($) shares in Thousands, $ in Thousands	Total	Common Stock	Retained Earnings (Accumulated Deficit)	Deferred Compensation	Common Stock Held By Deferred Compensation Trust	Accumulated other comprehensive loss
Balance, shares at Dec. 31, 2019		5,912,300
Balance, amount at Dec. 31, 2019	$ 134,120	$ 59,813	$ 70,663	$ 1,588	$ (1,588)	$ 3,644
Common stock repurchase, shares		(126,800)
Common stock repurchase, amount	(2,999)	$ (2,999)	0	0	0	0
Cash dividends declared on common stock	(4,392)	$ 0	(4,392)	0	0	0
Restricted stock units exercised, shares		2,004
Restricted stock units exercised, amount	57	$ 57	0	0	0	0
Equity incentive plan, net	0	0	0	208	(208)	0
Net earnings	11,357	0	11,357	0	0	0
Change in accumulated other comprehensive income, net of tax	1,756	$ 0	0	0	0	1,756
Balance, shares at Dec. 31, 2020		5,787,504
Balance, amount at Dec. 31, 2020	139,899	$ 56,871	77,628	1,796	(1,796)	5,400
Common stock repurchase, shares		(127,597)
Common stock repurchase, amount	(3,605)	$ (3,605)	0	0	0	0
Cash dividends declared on common stock	(3,793)	$ 0	(3,793)			0
Restricted stock units exercised, shares		1,662
Restricted stock units exercised, amount	39	$ 39	0	0	0	0
Equity incentive plan, net	0	0	0	196	(196)	0
Net earnings	15,133	0	15,133	0	0	0
Change in accumulated other comprehensive income, net of tax	(5,304)	$ 0	0	0	0	(5,304)
Balance, shares at Dec. 31, 2021		5,661,569
Balance, amount at Dec. 31, 2021	142,369	$ 53,305	88,968	1,992	(1,992)	96
Common stock repurchase, shares		(26,200)
Common stock repurchase, amount	(710)	$ (710)	0	0	0	0
Cash dividends declared on common stock	(4,935)	$ 0	(4,935)			0
Restricted stock units exercised, shares		1,461
Restricted stock units exercised, amount	41	$ 41	0	0	0	0
Equity incentive plan, net	0	0	0	189	(189)	0
Net earnings	16,123	0	16,123	0	0	0
Change in accumulated other comprehensive income, net of tax	(47,693)	$ 0	0	0	0	(47,693)
Balance, shares at Dec. 31, 2022		5,636,830
Balance, amount at Dec. 31, 2022	$ 105,195	$ 52,636	$ 100,156	$ 2,181	$ (2,181)	$ (47,597)

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Cash flows from operating activities:
Net earnings	$ 16,123	$ 15,133	$ 11,357
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	6,031	5,569	4,183
Provision for (recovery of) loan losses	1,472	(1,163)	4,259
Deferred income taxes	(541)	(227)	(560)
Gain on sale of investment securities	0	0	(2,639)
Gain on sale of other real estate	0	(21)	0
Write-down of other real estate	0	0	47
(Gain) loss on sale and writedowns of premises and equipment	85	(105)	0
Restricted stock units expense	249	181	27
Proceeds from sales of loans held for sale	22,659	98,365	112,426
Origination of loans held for sale	(19,233)	(92,863)	(117,148)
Change in:
Cash surrender value of life insurance	(403)	(397)	(380)
Right of use lease asset	1,677	738	199
Other assets	(3,920)	(554)	(596)
Lease liability	(1,673)	(721)	(176)
Other liabilities	131	2,965	(1,837)
Net cash provided by operating activities	22,657	26,900	9,162
Cash flows from investing activities:
Purchases of investment securities available for sale	(149,738)	(209,306)	(127,893)
Proceeds from sales, calls and maturities of investment securities available for sale	7,875	9,540	62,408
Proceeds from paydowns of investment securities available for sale	37,400	28,536	19,169
Purchases of other investments	0	0	(45)
Proceeds from paydowns of other investment securities	1,162	201	176
Net change in FHLB stock	(105)	331	(55)
Net change in loans	(148,072)	64,380	(99,971)
Purchases of premises and equipment	(4,563)	(484)	(2,492)
Purchases of bank owned life insurance	0	0	(269)
Proceeds from sale of premises and equipment	0	515	0
Proceeds from sale of other real estate and repossessions	0	149
Proceeds from bank owned life insurance	65	0	0
Net cash used by investing activities	(255,976)	(106,138)	(148,972)
Cash flows from financing activities:
Net change in deposits	22,467	191,662	254,569
Net change in securities sold under agreement to repurchase	10,594	10,893	1,980
Proceeds from FHLB borrowings	0	0	70,000
Repayments of FHLB borrowings	0	0	(70,000)
Proceeds from FRB borrowings	1	1	1
Repayments of FRB borrowings	(1)	(1)	(1)
Proceeds from Fed Funds Purchased	162	162	7,011
Repayments of Fed Funds Purchased	(162)	(162)	(7,011)
Repayments of Junior Subordinated Debentures			(155)
Common stock repurchased	(710)	(3,605)	(2,999)
Cash dividends paid on common stock	(4,935)	(3,793)	(4,392)
Net cash provided by financing activities	27,416	195,157	249,003
Net change in cash and cash equivalents	(205,903)	115,919	109,193
Cash and cash equivalents at beginning of period	277,499	161,580	52,387
Cash and cash equivalents at end of period	71,596	277,499	161,580
Cash paid during the year for:
Interest	3,284	3,224	3,856
Income taxes	4,659	3,669	2,781
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities available for sale, net	(47,693)	(5,304)	1,756
Transfer of loans to other real estate	0	0	175
Issuance of accrued restricted stock units	41	39	57
Initial recognition of lease right of use asset and lease liability	$ 2,181	$ 1,927	$ 942

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2022

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

Organization

Peoples Bancorp of North Carolina, Inc. (the “Company”) has served as the holding company to Peoples Bank (the “Bank”) since 1999.  The Company is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for the Bank. 

The Bank commenced business in 1912 upon receipt of its banking charter from the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is primarily regulated by the Commissioner and the Federal Deposit Insurance Corporation (the “FDIC”) and undergoes periodic examinations by these regulatory agencies. The Bank, whose main office is in Newton, North Carolina, provides a full range of commercial and consumer banking services primarily in Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties in North Carolina.

Peoples Investment Services, Inc. (“PIS”) is a wholly owned subsidiary of the Bank and began operations in 1996 to provide investment and trust services through agreements with an outside party.

Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks.  Other banks are able to contract with CBRES to find and engage appropriate appraisal companies.  In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022.

PB Real Estate Holdings, LLC (“PBREH”) is a wholly owned subsidiary of the Bank and began operation in 2015.  PBREH acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.

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

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH.  All significant intercompany balances and transactions have been eliminated in consolidation. 

Basis of Presentation

The accounting principles followed by the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segment: Banking Operations and CBRES, as discussed more fully in Note 16. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting.

Cash and Cash Equivalents

Cash, due from banks, interest-bearing deposits and federal funds sold are considered cash and cash equivalents for cash flow reporting purposes.

Investment Securities

The Company uses three classifications for its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2022 and 2021, the Company classified all of its investment securities as available for sale.

Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis.  A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established.  The decline in value attributed to non-credit related factors is recognized in comprehensive income.

Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

Other investments include equity securities with no readily determinable fair value.  These investments are carried at cost.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.   The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.

A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan will not be collected.  Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Accrual of interest is discontinued on a loan when management believes, after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings.

Allowance for Loan Losses

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

· the Bank’s loan loss experience;

· the amount of past due and non-performing loans;

· specific known risks;

· the status and amount of other past due and non-performing assets;

· underlying estimated values of collateral securing loans;

· current and anticipated economic conditions; and

· other factors which management believes affect the allowance for potential credit losses.

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

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

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

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

The allowance is comprised of three components: specific reserves, general reserves and unallocated reserves.  After a loan has been identified as impaired, management measures impairment.  When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects reserves established under GAAP for collective loan impairment.  These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience.  This charge-off experience may be adjusted to reflect the effects of current conditions.  The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.  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.  There were no loans with existing modifications as a result of the COVID-19 pandemic at December 31, 2022 and 2021.  At December 31, 2022 and 2021, the Bank maintained 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.  As such, a higher reserve rate has been applied to this pool.  Loans included in this pool totaled $70.5 million and $88.7 million at December 31, 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. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk.  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 year ended December 31, 2022 as compared to the year ended December 31, 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.

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

SBA PPP loans are excluded from the allowance as PPP loans are 100 percent guaranteed by the SBA. 

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

Mortgage Banking Activities

Mortgage banking income represents income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $285,000, $351,000 and $578,000 at December 31, 2022, 2021 and 2020, respectively.  Mortgage servicing rights related to these loans are immaterial for all periods presented.

The Bank originates certain fixed rate mortgage loans and commits these loans for sale.  The commitments to originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative contracts.  The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in the financial statements.

Mortgage loans held for sale are carried at the lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value. 

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are generally as follows:

Buildings and improvements	10 - 50 years
Furniture and equipment	3 - 10 years

Other Real Estate

Foreclosed assets include all assets received in full or partial satisfaction of a loan.  Foreclosed assets are reported at fair value less estimated selling costs.  Any write-downs at the time of foreclosure are charged to the allowance.  Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value less estimated selling costs declines below carrying value.  Costs relating to the development and improvement of the property are capitalized.  Revenues and expenses from operations are included in other expenses.  Changes in the valuation allowance are included in loss on sale and write-down of other real estate. 

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of a deferred tax asset, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Tax effects from an uncertain tax position can be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  The Company assessed the impact of this guidance and determined that it did not have a material impact on the Company’s financial position, results of operations or disclosures.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder.  No new awards may be made after May 7, 2019.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015.  The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016.  The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017.  The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018.  The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019.  The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants).  The amount of expense recorded each period reflects the changes in the Company’s stock price during such period.  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $3,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted.   As of December 31, 2021, a total of 285,305 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan.  No new awards may be made after May 7, 2030 (ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020.  The Company granted 7,060 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021.  The Company granted 5,385 restricted stock units under the 2020 Plan at a grant date fair value of $27.99 per share during the first quarter of 2022.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for 2020, 2021 and 2022 grants).  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $334,000.

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $249,000, $181,000 and $27,000 for the years ended December 31, 2022, 2021 and 2020, respectively. 

Net Earnings Per Share

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

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2022, 2021 and 2020 are as follows:

For the year ended December 31, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	16,123		5,480,123	$	2.94
Effect of dilutive securities:
Restricted stock units - unvested		-		15,467
Shares held in deferred comp plan by deferred compensation trust				165,599
Diluted earnings per share	$	16,123		5,661,189	$	2.85

For the year ended December 31, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	15,133		5,576,099	$	2.71
Effect of dilutive securities:
Restricted stock units - unvested		-		13,935
Shares held in deferred comp plan by deferred compensation trust				158,831
Diluted earnings per share	$	15,133		5,748,865	$	2.63

For the year ended December 31, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,657,025	$	2.01
Effect of dilutive securities:
Restricted stock units		-		14,203
Shares held in deferred comp plan by deferred compensation trust		-		150,394
Diluted earnings per share	$	11,357		5,821,622	$	1.95

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2022, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted 

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company has developed CECL model assumptions and is comparing results to current allowance for loan loss calculations.  Parallel processing of the existing allowance for loan losses model with the CECL was completed during the fourth quarter of 2022.  At this time, the Company expects its allowance for credit losses related to all financial assets will increase by approximately $1.1 million upon adoption compared to its allowance for loan losses at December 31, 2022 of approximately $10.5 million. The impact of the initial adoption will be reflected in the Company's SEC Form 10-Q for the period ended March 31, 2023.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-10: Financial Instruments Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures	Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations or financial position but will impact future disclosure requirements and reduce individually evaluated loan totals.

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

Reclassification

Certain amounts in the 2021 and 2020 consolidated financial statements have been reclassified to conform to the 2022 presentation.

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Investment Securities

12 Months Ended

Dec. 31, 2022

Investment Securities

Investment Securities

(2) Investment Securities

Investment securities available for sale at December 31, 2022 and 2021 are as follows:

(Dollars in thousands)
	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	10,951		-		1,137		9,814
U.S. Government sponsored enterprises		12,245		-		706		11,539
Mortgage-backed securities		299,222		445		25,829		273,838
State and political subdivisions		184,768		91		34,656		150,203
Total	$	507,186		536		62,328		445,394

(Dollars in thousands)
	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	7,964		-		75		7,889
U.S. Government sponsored enterprises		14,252		200		185		14,267
Mortgage-backed securities		218,402		1,769		3,019		217,152
State and political subdivisions		165,804		3,694		2,257		167,241
Total	$	406,422		5,663		5,536		406,549

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2022 and 2021 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. 

(Dollars in thousands)
	December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	2,878		104		6,936		1,033		9,814		1,137
U.S. Government sponsored enterprises		2,904		87		8,635		619		11,539		706
Mortgage-backed securities		128,241		8,740		120,464		17,089		248,705		25,829
State and political subdivisions		65,880		7,766		76,291		26,890		142,171		34,656
Total	$	199,903		16,697		212,326		45,631		412,229		62,328

(Dollars in thousands)
	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	7,889		75		-		-		7,889		75
U.S. Government sponsored enterprises		5,232		15		3,263		170		8,495		185
Mortgage-backed securities		131,483		2,477		19,632		542		151,115		3,019
State and political subdivisions		80,076		1,981		5,922		276		85,998		2,257
Total	$	224,680		4,548		28,817		988		253,497		5,536

At December 31, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $62.3 million.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the December 31, 2022 tables above, all three of the U.S. Treasury securities, 149 of the 158 securities issued by state and political subdivisions contained unrealized losses, all seven of the securities issued by U.S. Government sponsored enterprises, and 123 of the 133 mortgage-backed securities, contained unrealized losses.  These unrealized losses are considered temporary because of acceptable financial condition and results of operations on each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2022, 2021 or 2020. 

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2022, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2022
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	240		240
Due from one to five years		8,434		8,128
Due from five to ten years		58,540		49,599
Due after ten years		140,750		113,589
Mortgage-backed securities		299,222		273,838
Total	$	507,186		445,394

No securities available for sale were sold during 2022 and 2021.  During 2020, proceeds from sales of securities available for sale were $56.3 million and resulted in gross gains of $2.7 million and gross losses of $56,000. 

Securities with a fair value of approximately $96.0 million and $98.6 million at December 31, 2022 and 2021, respectively, were pledged to secure public deposits, FHLB borrowings and for other purposes as required by law.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.  The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2022 and 2021.

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	9,814		-		9,814		-
U.S. Government sponsored enterprises	$	11,539		-		11,539		-
Mortgage-backed securities	$	273,838		-		273,838		-
State and political subdivisions	$	150,203		-		150,203		-

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,889		-		7,889		-88.7
U.S. Government sponsored enterprises	$	14,267		-		14,267		-
Mortgage-backed securities	$	217,152		-		217,152		-
State and political subdivisions	$	167,241		-		167,241		-

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available.  If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. 

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Loans

12 Months Ended

Dec. 31, 2022

Loans

Loans

(3) Loans

Major classifications of loans at December 31, 2022 and 2021 are summarized as follows:

(Dollars in thousands)
	December 31, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	114,446			95,760
Single-family residential		322,262			266,111
Single-family residential - Banco de la Gente non-traditional		20,019			23,147
Commercial		406,750			337,841
Multifamily and farmland		65,562			58,366
Total real estate loans		929,039			781,225
Loans not secured by real estate:
Commercial loans		81,307			91,172
Farm loans		938			796
Consumer loans		6,834			6,436
All other loans		14,490			5,240
Total loans		1,032,608			884,869
Less allowance for loan losses		(10,494	)		(9,355	)
Total net loans	$	1,022,114			875,514

The above table includes deferred costs, net of deferred fees, totaling $909,000 at December 31, 2022.  The above table includes deferred costs, net of deferred fees, totaling $198,000 at December 31, 2021 including $945,000 in deferred PPP loan fees. 

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

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

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

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

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

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

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

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 PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP.  The Bank participated as a lender in the PPP.  Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million.  The outstanding balance of PPP loans was $103,000 and $18.0 million at December 31, 2022 and 2021, respectively.  These loans are classified as commercial loans in the tables above.  The Bank recognized $948,000 and $3.4 million of PPP loan fee income for the year ended December 31, 2022 and year ended December, 2021, respectively. 

The following tables present an age analysis of past due loans, by loan type, as of December 31, 2022 and 2021:

December 31, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	363		-		363		114,083		114,446		-
Single-family residential		4,318		256		4,574		317,688		322,262		-
Single-family residential - Banco de la Gente non-traditional		2,977		264		3,241		16,778		20,019		-
Commercial		306		-		306		406,444		406,750		-
Multifamily and farmland		-		-		-		65,562		65,562		-
Total real estate loans		7,964		520		8,484		920,555		929,039		-
Loans not secured by real estate:
Commercial loans		3		-		3		81,304		81,307		-
Farm loans		-		-		-		938		938		-
Consumer loans		71		-		71		6,763		6,834		-
All other loans		-		-		-		14,490		14,490		-
Total loans	$	8,038		520		8,558		1,024,050		1,032,608		-

December 31, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential - Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-
Loans not secured by real estate:
Commercial loans		43		-		43		91,129		91,172		-
Farm loans		-		-		-		796		796		-
Consumer loans		38		-		38		6,398		6,436		-
All other loans		-		-		-		5,240		5,240		-
Total loans	$	5,485		746		6,231		878,638		884,869		-

The following table presents the Bank’s non-accrual loans as of December 31, 2022 and 2021:

(Dollars in thousands)
	December 31, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	53		-
Single-family residential		1,914		1,642
Single-family residential - Banco de la Gente non-traditional		1,532		1,232
Commercial		129		200
Multifamily and farmland		91		105
Total real estate loans		3,719		3,179
Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		9		2
Total	$	3,728		3,230

At the end of each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers who also perform appraisals for third parties.  Factors, including the assumptions and techniques utilized by the appraiser, are considered by management in determining the fair value of collateral.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows.  If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s Troubled Debt Restructurings (“TDR loans”) in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Impaired loans collectively evaluated for impairment totaled $4.9 million and $5.3 million at December 31, 2022 and 2021, respectively.  Accruing impaired loans were $15.4 and $18.3 million at December 31, 2022 and December 31, 2021, respectively.  Interest income recognized on accruing impaired loans was $862,000 and $1.0 million for the years ended December 31, 2022 and 2021, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Bank’s impaired loans as of December 31, 2022, 2021 and 2020:

December 31, 2022
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	110		-		110		110		2		75		8
Single-family residential		3,912		236		3,300		3,536		60		5,194		194
Single-family residential - Banco de la Gente non-traditional		10,441		-		9,748		9,748		611		8,757		552
Commercial		1,785		421		1,346		1,767		9		1,916		93
Multifamily and farmland		104		-		91		91		-		96		5
Total impaired real estate loans		16,352		657		14,595		15,252		682		16,038		852
Loans not secured by real estate:
Commercial loans		116		-		116		116		1		137		8
Consumer loans		11		-		9		9		-		15		2
Total impaired loans	$	16,479		657		14,720		15,377		683		16,190		862

December 31, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	73		-		73		73		3		82		6
Single-family residential		5,138		524		4,374		4,898		86		6,017		253
Single-family residential - Banco de la Gente non-traditional		11,753		-		10,922		10,922		687		10,325		609
Commercial		2,138		435		1,608		2,043		11		2,385		109
Multifamily and farmland		113		-		105		105		-		110		6
Total impaired real estate loans		19,215		959		17,082		18,041		787		18,919		983
Loans not secured by real estate:
Commercial loans		282		49		170		219		2		271		19
Consumer loans		8		-		4		4		-		11		1
Total impaired loans	$	19,505		1,008		17,256		18,264		789		19,201		1,003

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		108		108		4		134		8
Single-family residential		5,302		379		4,466		4,845		33		4,741		262
Single-family residential - Banco de la Gente non-traditional		13,417		-		12,753		12,753		862		13,380		798
Commercial		2,999		1,082		1,891		2,973		14		2,940		139
Multifamily and farmland		119		-		117		117		-		29		6
Total impaired real estate loans		21,945		1,461		19,335		20,796		913		21,224		1,213
Loans not secured by real estate:
Commercial loans		515		211		244		455		5		564		32
Consumer loans		41		-		37		37		1		60		5
Total impaired loans	$	22,501		1,672		19,616		21,288		919		21,848		1,250

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2022 and 2021 are presented below.  The Bank’s valuation methodology is discussed in Note 16.

(Dollars in thousands)
	Fair Value Measurements December 31, 2022		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	211		-		-		211
Impaired loans	$	14,694		-		-		14,694

(Dollars in thousands)
	Fair Value Measurements December 31, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	3,637		-		-		3,637
Impaired loans	$	17,475		-		-		17,475

	Fair Value December 31, 2022		Fair Value December 31, 2021		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	211	$	3,637	Rate lock commitment	N/A	N/A
Impaired loans	$	14,694	$	17,475	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2022.  PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA. 

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated			Total
Twelve months ended December 31, 2022
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			-		110			2,080			9,355
Charge-offs		-		(128	)		-			-		-		(33	)		-		(591	)		-			(752	)
Recoveries		-		229			-			9		-		72			-		109			-			419
Provision		222		208			(101	)		964		14		(93	)		-		586			(328	)		1,472
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Allowance for loan losses December 31, 2022
Ending balance: individually evaluated for impairment	$	-		36			597			6		-		-			-		-			-			639
Ending balance: collectively evaluated for impairment		1,415		2,286			166			3,201		164		657			-		214			1,752			9,855
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Loans at December 31, 2022
Ending balance	$	114,446		322,262			20,019			406,750		65,562		81,307			938		21,324			-			1,032,608
Ending balance: individually evaluated for impairment	$	-		537			8,555			1,388		-		-			-		-			-			10,480
Ending balance: collectively evaluated for impairment	$	114,446		321,725			11,464			405,362		65,562		81,307			938		21,324			-			1,022,128

Changes in the allowance for loan losses for the year ended December 31, 2021 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2021
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Charge-offs		-			(89	)		-			-			-		(293	)		-		(380	)		-		(762	)
Recoveries		121			271			-			52			3		786			-		139			-		1,372
Provision		(124	)		(12	)		(188	)		(30	)		25		(1,127	)		-		223			70		(1,163	)
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Allowance for loan losses December 31, 2021
Ending balance: individually evaluated for impairment	$	1			57			672			7			-		-			-		-			-		737
Ending balance: collectively evaluated for impairment		1,192			1,956			192			2,227			150		711			-		110			2,080		8,618
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Loans at December 31, 2021
Ending balance	$	95,760			266,111			23,147			337,841			58,366		91,172			796		11,676			-		884,869
Ending balance: individually evaluated for impairment	$	6			1,633			9,795			1,437			-		49			-		-			-		12,920
Ending balance: collectively evaluated for impairment	$	95,754			264,478			13,352			336,404			58,366		91,123			796		11,676			-		871,949

Changes in the allowance for loan losses for the year ended December 31, 2020 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2020
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120		688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-		(903	)		-		(434	)		-		(1,414	)
Recoveries		36			70			-			70			-		34			-		173			-		383
Provision		471			564			(21	)		844			2		1,526			-		251			622		4,259
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Allowance for loan losses December 31, 2020
Ending balance: individually evaluated for impairment	$	1			4			844			8			-		-			-		-			-		857
Ending balance: collectively evaluated for impairment		1,195			1,839			208			2,204			122		1,345			-		128			2,010		9,051
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Loans at December 31, 2020
Ending balance	$	94,124			272,325			26,883			332,971			48,880		161,740			855		10,861			-		948,639
Ending balance: individually evaluated for impairment	$	7			1,558			11,353			2,118			-		212			-		-			-		15,248
Ending balance: collectively evaluated for impairment	$	94,117			270,767			15,530			330,853			48,880		161,528			855		10,861			-		933,391

Impaired loans collectively evaluated for impairment totaled $4.9 million, $5.3 million and $5.8 million at December 31, 2022, 2021 and 2020, respectively and are included in the tables above.  Allowance on impaired loans collectively evaluated for impairment totaled $44,000, $42,000 and 61,000 at December 31, 2022, 2021 and 2020, respectively.

The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 8.  These risk grades are evaluated on an ongoing basis.  A description of the general characteristics of the eight risk grades is as follows:

· Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.

· Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Bank’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.

· Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Bank’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).

· Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

· Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date.

· Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

· Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

· Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2022 and 2021.

December 31, 2022
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		2,782		-		-		-		1,365		-		527		-		4,674
2- High Quality		14,912		138,124		-		33,353		17		13,302		-		2,384		1,366		203,458
3- Good Quality		94,113		166,329		7,442		340,926		63,270		64,422		938		3,663		12,851		753,954
4- Management Attention		5,257		10,615		8,968		27,957		2,061		1,507		-		244		128		56,737
5- Watch		54		922		1,136		3,963		123		711		-		1		145		7,055
6- Substandard		110		3,490		2,473		551		91		-		-		15		-		6,730
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	114,446		322,262		20,019		406,750		65,562		81,307		938		6,834		14,490		1,032,608

December 31, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		5,923		-		-		-		371		-		581		-		6,875
2- High Quality		11,752		109,337		-		28,546		19		16,177		-		2,039		1,309		169,179
3- Good Quality		80,325		129,856		8,712		272,786		54,945		68,183		792		3,510		3,931		623,040
4- Management Attention		3,534		14,964		10,478		30,937		2,754		5,214		4		284		-		68,169
5- Watch		76		2,464		1,703		4,938		543		1,177		-		1		-		10,902
6- Substandard		73		3,567		2,254		634		105		50		-		21		-		6,704
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	95,760		266,111		23,147		337,841		58,366		91,172		796		6,436		5,240		884,869

Past due TDR loans and non-accrual TDR loans totaled $3.7 million and $2.2 million at December 31, 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 December 31, 2022 and December 31, 2021.

There were no new TDR modifications during the years ended December 31, 2022 and 2021.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2022 and 2021.  TDR loans are deemed to be in default if they become past due by 90 days or more. 

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Premises and Equipment

12 Months Ended

Dec. 31, 2022

Premises and Equipment

Premises and Equipment

(4) Premises and Equipment

Major classifications of premises and equipment at December 31, 2022 and 2021 are summarized as follows:

(Dollars in thousands)
	2022			2021
Land	$	3,851			3,857
Buildings and improvements		18,371			18,359
Furniture and equipment		26,156			25,420
Construction in process		3,028			-
Total premises and equipment		51,406			47,636
Less accumulated depreciation		(33,201	)		(31,532	)
Total net premises and equipment	$	18,205			16,104

The Bank recognized depreciation expense totaling $2.4 million, $2.6 million and $2.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. 

The Bank had $85,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2022.  The Bank had $105,000 net gains on the sale of and write-downs on premises and equipment for the year ended December 31, 2021.  The Bank had no gains or losses on the sale of or write-downs on premises and equipment for the year ended December 31, 2020. 

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Leases

12 Months Ended

Dec. 31, 2022

Leases

Leases

(5) Leases

The Bank leases various office spaces for banking and operational facilities and equipment under operating lease arrangements.

Total rent expense was approximately $976,000, $703,000 and $880,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

As of December 31, 2022, the Bank had operating right of use assets of $5.1 million and operating lease liabilities of $5.2 million. The Bank maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices.  Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised.  Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Bank if the option is not exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

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

(Dollars in thousands)
	December 31, 2022
Operating lease cost	$	888
Other information:
Cash paid for amounts included in the measurement of lease liabilities		873
Operating cash flows from operating leases		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		1,726
Weighted-average remaining lease term - operating leases		9.26
Weighted-average discount rate - operating leases		2.23	%

The following table presents lease maturities as of December 31, 2022.

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2022
2023	$	805
2024		750
2025		694
2026		577
2027		528
Thereafter		2,418
Total		5,727
Less: Imputed Interest		(542	)
Operating Lease Liability	$	5,185

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Time Deposits

12 Months Ended

Dec. 31, 2022

Time Deposits

Time Deposits

(6) Time Deposits

At December 31, 2022, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)
2023	$	59,099
2024		26,526
2025		7,380
2026		3,420
2027 and thereafter		1,574
Total	$	97,999

At December 31, 2022 and 2021, the Bank had approximately $15.0 million and $11.1 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers.  CDARS balances totaled $7.1 million and $3.0 million as of December 31, 2022 and 2021, respectively.  The weighted average rate of brokered deposits as of December 31, 2022 and 2021 was 1.27% and 1.49%, respectively.

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Federal Home Loan Bank and Federal Reserve Bank Borrowings

12 Months Ended

Dec. 31, 2022

Federal Home Loan Bank and Federal Reserve Bank Borrowings

Federal Home Loan Bank and Federal Reserve Bank Borrowings

(7) Federal Home Loan Bank (FHLB) and Federal Reserve Bank Borrowings

The Bank had no borrowings from the FHLB at December 31, 2022 and 2021.  FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns.  At December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $149.4 million.  The remaining availability under the line of credit with the FHLB was $86.5 million at December 31, 2022.  The Bank incurred a $1.1 million prepayment penalty on the prepayment of a $70.0 million FHLB advance in 2020.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $812,000 and $707,000 of FHLB stock, included in other investments, at December 31, 2022 and 2021, respectively.

As of December 31, 2022 and 2021, the Bank had no borrowings from the Federal Reserve Bank (“FRB”).  FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB.  At December 31, 2022, the carrying value of loans pledged as collateral totaled approximately $585.0 million.  Availability under the line of credit with the FRB was $445.1 million at December 31, 2022. 

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Junior Subordinated Debentures

12 Months Ended

Dec. 31, 2022

Junior Subordinated Debentures

Junior Subordinated Debentures

(8) Junior Subordinated Debentures

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

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

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

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

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Income Taxes

12 Months Ended

Dec. 31, 2022

Income Taxes

Income Taxes

(9) Income Taxes

The provision for income taxes is summarized as follows:

(Dollars in thousands)
	2022			2021			2020
Current expense	$	4,713			4,023			3,049
Deferred income tax benefit		(541	)		(227	)		(560	)
Total income tax	$	4,172			3,796			2,489

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:

(Dollars in thousands)
	2022			2021			2020
Tax expense at statutory rate	$	4,262			3,975			2,908
State income tax, net of federal income tax effect		395			339			261
Tax-exempt interest income		(445	)		(497	)		(649	)
Increase in cash surrender value of life insurance		(71	)		(83	)		(80	)
Tax credits		(230	)		(234	)		(234	)
Nondeductible interest and other expense		24			30			46
Other		237			266			237
Total	$	4,172			3,796			2,489

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities.  The net deferred tax asset is included as a component of other assets at December 31, 2022 and 2021.

(Dollars in thousands)
	2022			2021
Deferred tax assets:
Allowance for loan losses	$	2,411			2,149
Accrued retirement expense		1,174			1,148
Restricted stock		245			209
Interest income on nonaccrual loans		1			2
Lease liability		1,191			1,075
Unrealized loss on available for sale securities		14,197			-
Total gross deferred tax assets		19,219			4,583
Deferred tax liabilities:
Deferred loan fees		209			263
Accumulated depreciation		438			563
Prepaid expenses		3			4
ROU Asset		1,175			1,060
Other		(93	)		(55	)
Unrealized gain on available for sale securities		-			29
Total gross deferred tax liabilities		1,732			1,864
Net deferred tax asset	$	17,487			2,719

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded that it has no liability related to uncertain tax positions.

As of December 31, 2022, the Company’s Federal income tax filings for years 2019 through 2021 are open to audit by the Internal Revenue Service.  The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2019, 2020, 2021 and 2022 remain open to audit by the North Carolina Department of Revenue.

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Related Party Transactions

12 Months Ended

Dec. 31, 2022

Related Party Transactions

Related Party Transactions

(10) Related Party Transactions 

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. In accordance with Regulation O of the Federal Reserve, it is the policy of the Bank that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2022 and 2021:

(Dollars in thousands)
	2022			2021
Beginning balance	$	2,687			1,852
Disbursements		4,090			3,636
Repayments		(3,396	)		(2,801	)
Ending balance	$	3,381			2,687

At December 31, 2022 and 2021, the Company had deposit relationships with related parties of approximately $44.5 million and $43.4 million, respectively.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2022

Commitments and Contingencies

Commitments and Contingencies

(11) Commitments and Contingencies

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees.  Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.  The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. 

The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.

(Dollars in thousands)
	Contractual Amount
	2022		2021
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	382,699		304,258
Standby letters of credit	$	4,352		4,892

Commitments to extend credit are conditional agreements to lend to a customer.  Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $387.1 million does not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Bank to pay a third party on behalf of a customer. Those letters of credit are primarily issued to businesses in the Bank’s delineated market area. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds real estate, equipment, automobiles and customer deposits as collateral supporting those commitments for which collateral is deemed necessary.

In the normal course of business, the Company is a party (both as plaintiff and defendant) to lawsuits. In the opinion of management and counsel, none of these cases should have a material adverse effect on the financial position of the Company.

The Company and the Bank have entered into employment agreements with certain key employees. The agreements, among other things, include salary, bonus, incentive compensation, and change in control provisions.

The Company has $110.5 million available for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2022.

At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property.  As of December 31, 2022, the Bank has funded $2.9 million of this commitment.  At December 31, 2022, the Bank had $1.5 million in unfunded commitments for SBA Small Business Investment Company (“SBIC”) investments.

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Employee and Director Benefit Programs

12 Months Ended

Dec. 31, 2022

Employee and Director Benefit Programs

Employee and Director Benefit Programs

(12) Employee and Director Benefit Programs

The Bank has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Bank matched employee contributions to a maximum of 4.00% of annual compensation in 2020, 2021 and 2022.  The Company’s contribution pursuant to this formula was approximately $719,000, $709,000 and $692,000 for the years ended December 31, 2022, 2021 and 2020, respectively.  Investments made available under the 401(k) plan are determined by a committee comprised of senior management.  No investments in Company stock are available under the 401(k) plan. Contributions to the 401(k) plan are vested immediately.

In December 2001, the Company initiated a retirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries.  Under the postretirement benefit plan, the Company purchased life insurance policies on the lives of the key officers and each director.  The increase in cash surrender value of the policies constitutes the Company’s contribution to the postretirement benefit plan each year.  Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $369,000, $447,000 and $368,000 for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company paid medical benefits for certain retired employees through the first quarter of 2022. The Company did not incur any postretirement medical benefits expense in 2022, 2021 and 2020 due to an excess accrual balance.

The following table sets forth the change in the accumulated benefit obligation for the Company’s two postretirement benefit plans described above:

(Dollars in thousands)
	2022			2021
Benefit obligation at beginning of period	$	5,011			4,870
Service cost		325			359
Interest cost		63			70
Benefits paid		(289	)		(288	)
Benefit obligation at end of period	$	5,110			5,011

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2022 and 2021 are shown in the following two tables:

(Dollars in thousands)
	2022		2021
Benefit obligation	$	5,110		5,011
Fair value of plan assets		-		-

(Dollars in thousands)
	2022			2021
Funded status	$	(5,110	)		(5,011	)
Unrecognized prior service cost/benefit		-			-
Unrecognized net actuarial loss		-			-
Net amount recognized	$	(5,110	)		(5,011	)
Unfunded accrued liability	$	(5,110	)		(5,011	)
Intangible assets		-			-
Net amount recognized	$	(5,110	)		(5,011	)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2022, 2021 and 2020 consisted of the following:

(Dollars in thousands)
	2022			2021			2020
Service cost	$	325			359			359
Interest cost		63			70			70
Net periodic cost	$	388			429			429
Weighted average discount rate assumption used to determine benefit obligation		5.50	%		5.50	%		5.49	%

The Company paid postretirement plan benefits totaling $289,000, $288,000 and $216,000 during the years ended December 31, 2022, 2021 and 2020, respectively.  Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:

(Dollars in thousands)
Year ending December 31,
2023	$	329
2024	$	353
2025	$	370
2026	$	368
2027	$	494
Thereafter	$	8,358

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Regulatory Matters

12 Months Ended

Dec. 31, 2022

Regulatory Matters

Regulatory Matters

(13) Regulatory Matters

The Company and the Bank are subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum capital ratios in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for loan losses, up to 1.25% of risk-weighted assets and other adjustments.  Management believes, as of December 31, 2022, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

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

The Company’s and the Bank’s actual capital amounts and ratios are presented below:

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2022:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	178,286		14.04	%		101,608		8.00	%		N/A		N/A
Bank	$	176,923		13.93	%		101,606		8.00	%		133,357		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	167,792		13.21	%		76,206		6.00	%		N/A		N/A
Bank	$	166,429		13.10	%		76,204		6.00	%		107,956		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	167,792		9.82	%		68,347		4.00	%		N/A		N/A
Bank	$	166,429		9.68	%		68,780		4.00	%		68,780		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	152,792		12.03	%		57,154		4.50	%		N/A		N/A
Bank	$	166,429		13.10	%		57,153		4.50	%		88,905		7.00	%

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2021:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	166,628		16.35	%		81,547		8.00	%		N/A		N/A
Bank	$	164,975		16.19	%		81,539		8.00	%		107,020		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	157,273		15.43	%		61,160		6.00	%		N/A		N/A
Bank	$	155,620		15.27	%		61,154		6.00	%		86,635		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	157,273		9.64	%		65,258		4.00	%		N/A		N/A
Bank	$	155,620		9.50	%		65,557		4.00	%		65,557		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	142,273		13.96	%		45,870		4.50	%		N/A		N/A
Bank	$	155,620		15.27	%		45,866		4.50	%		71,347		7.00	%

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Other Operating Income and Expense

12 Months Ended

Dec. 31, 2022

Other Operating Income and Expense

Other Operating Income and Expense

(14) Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2022, 2021 and 2020 included the following items:

(Dollars in thousands)
	2022		2021		2020
Visa debit card income	$	4,901		5,045		4,237
Bank owned life insurance income		458		397		380
Other		2,390		2,197		1,315
	$	7,749		7,639		5,932

Other non-interest expense for the years ended December 31, 2022, 2021 and 2020 included the following items:

(Dollars in thousands)
	2022		2021		2020
ATM expense	$	629		619		567
Data processing		777		643		635
Deposit program expense		348		415		426
Dues and subscriptions		628		588		538
FHLB advance prepayment penalty		-		-		1,100
Internet banking expense		949		768		729
Office supplies		532		374		538
Telephone		691		730		794
Other		3,741		3,737		3,217
	$	8,295		7,874		8,544

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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2022

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(15) Fair Value of Financial Instruments

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

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

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

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

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

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

Loans

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

Mutual Funds

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The fair value presentation for recurring assets is presented in Note 2.  There were no recurring liabilities at December 31, 2022 and 2021.  The fair value presentation for non-recurring assets is presented in Note 3.  There were no non-recurring liabilities at December 31, 2022 and 2021.  The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2022 and 2021 are as follows:

(Dollars in thousands)
			Fair Value Measurements at December 31, 2022
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	71,596		71,596		-		-		71,596
Investment securities available for sale		445,394		-		445,394		-		445,394
Other investments		2,656		-		-		2,656		2,656
Mortgage loans held for sale		211		-		-		211		211
Loans, net		1,022,114		-		-		998,587		998,587
Mutual funds held in deferred compensation trust		1,327		-		1,327		-		1,327
Liabilities:
Deposits	$	1,435,215		-		-		1,434,871		1,434,871
Securities sold under agreements to repurchase		47,688		-		47,688		-		47,688
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	277,499		277,499		-		-		277,499
Investment securities available for sale		406,549		-		406,549		-		406,549
Other investments		3,668		-		-		3,668		3,668
Mortgage loans held for sale		3,637		-		-		3,637		3,637
Loans, net		875,514		-		-		855,814		855,814
Mutual funds held in deferred compensation trust		1,510		-		1,510		-		1,510
Liabilities:
Deposits	$	1,412,748		-		-		1,401,833		1,401,833
Securities sold under agreements to repurchase		37,094		-		37,094		-		37,094
Junior subordinated debentures		15,464		-		15,464		-		15,464

The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of December 31, 2022 and 2021.

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,327		-		1,327		-

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,510		-		1,510		-

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Reportable Segments

12 Months Ended

Dec. 31, 2022

Reportable Segments

Reportable Segments

(16) Reportable Segments

The Company has two reportable segments as described below.

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

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

The following table presents financial information for the reportable segments. The information provided under the caption “Other” represents the parent company, which is  not considered to be a reportable segment, is included to reconcile the results of the operating segments to the consolidated financial statements prepared in conformity with GAAP.

(Dollars in thousands)
	Banking
	Operations			CBRES		Other			Consolidated
As of and for the year ended December 31, 2022
Interest income	$	54,416		$	-	$	15		$	54,431
Interest expense		2,796			-		527			3,323
Net interest income		51,620			-		(512	)		51,108
Provision for loan losses		1,472			-		-			1,472
Noninterest income		15,012			14		-			15,026
Appraisal management fee income		-			11,663		-			11,663
Noninterest expense		44,433			1,695		638			46,766
Appraisal management fee expense		-			9,264		-			9,264
Income tax expense (benefit)		4,248			166		(242	)		4,172
Net income (loss)	$	16,479		$	552	$	(908	)	$	16,123
Total assets	$	1,617,212		$	3,227	$	488		$	1,620,927
As of and for the year ended December 31, 2021
Interest income	$	47,171		$	-	$	8		$	47,179
Interest expense		2,930			-		275			3,205
Net interest income		44,241			-		(267	)		43,974
Recovery of loan losses		(1,163	)		-		-			(1,163	)
Noninterest income		16,014			15		-			16,029
Appraisal management fee income		-			8,890		-			8,890
Noninterest expense		42,239			1,163		613			44,015
Appraisal management fee expense		-			7,112		-			7,112
Income tax expense (benefit)		3,836			145		(185	)		3,796
Net income (loss)	$	15,343		$	485	$	(695	)	$	15,133
Total assets	$	1,620,933		$	2,692	$	568		$	1,624,193
As of and for the year ended December 31, 2020
Interest income	$	47,926		$	-	$	32		$	47,958
Interest expense		3,473			-		363			3,836
Net interest income		44,453			-		(331	)		44,122
Provision for loan losses		4,259			-		-			4,259
Noninterest income		16,148			12		-			16,160
Appraisal management fee income		-			6,754		-			6,754
Noninterest expense		42,041			991		625			43,657
Appraisal management fee expense		-			5,274		-			5,274
Income tax expense (benefit)		2,574			116		(201	)		2,489
Net income (loss)	$	11,727		$	385	$	(755	)	$	11,357

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Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements

12 Months Ended

Dec. 31, 2022

Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements

Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements

(17) Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements

Balance Sheets
December 31, 2022 and 2021
(Dollars in thousands)
Assets	2022		2021
Cash	$	384		561
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		118,832		155,716
Investment in PEBK Capital Trust II		464		464
Other assets		24		105
Total assets	$	120,704		157,846
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,464		15,464
Liabilities		45		13
Shareholders' equity		105,195		142,369
Total liabilities and shareholders' equity	$	120,704		157,846

Statements of Earnings
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
Revenues:	2022		2021		2020
Interest and dividend from subsidiary	$	6,240		7,419		7,539
Total revenues		6,240		7,419		7,539
Expenses:
Interest		529		280		370
Other operating expenses		639		613		625
Total expenses		1,168		893		995
Income before income tax benefit and equity in undistributed earnings of subsidiaries		5,072		6,526		6,544
Income tax benefit		242		185		201
Income before equity in undistributed earnings of subsidiaries		5,314		6,711		6,745
Equity in undistributed earnings of subsidiaries		10,809		8,422		4,612
Net earnings	$	16,123		15,133		11,357

Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Cash flows from operating activities:
Net earnings	$	16,123			15,133			11,357
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(10,809	)		(8,422	)		(4,612	)
Change in:
Other assets		81			545			(19	)
Other liabilities		32			-			(10	)
Net cash provided by operating activities		5,427			7,256			6,716
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		-			-			250
Net cash provided by investing activities		-			-			250
Cash flows from financing activities:
Repayment of junior subordinated debentures		-			-			(155	)
Cash dividends paid on common stock		(4,935	)		(3,793	)		(4,392	)
Stock repurchase		(710	)		(3,605	)		(2,999	)
Proceeds from exercise of restricted stock units		41			39			57
Net cash used by financing activities		(5,604	)		(7,359	)		(7,489	)
Net change in cash		(177	)		(103	)		(523	)
Cash at beginning of year		561			664			1,187
Cash at end of year	$	384			561			664

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Quarterly Data

12 Months Ended

Dec. 31, 2022

Quarterly Data

Quarterly Data

(18) Quarterly Data

	2022								2021
(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First			Second			Third			Fourth
Total interest income	$	11,329		11,992		14,611		16,499	$	11,922			12,517			11,421			11,319
Total interest expense		663		644		818		1,198		815			842			861			687
Net interest income		10,666		11,348		13,793		15,301		11,107			11,675			10,560			10,632
Provision for loan losses		71		410		408		583		(455	)		(226	)		(182	)		(300	)
Other income		7,046		7,328		6,793		5,522		5,873			6,040			6,040			6,966
Other expense		13,341		14,243		13,455		14,991		12,268			12,132			12,568			14,159
Income before income taxes		4,300		4,023		6,723		5,249		5,167			5,809			4,214			3,739
Income tax expense		848		806		1,416		1,102		1,046			1,194			824			732
Net earnings		3,452		3,217		5,307		4,147		4,121			4,615			3,390			3,007
Basic net earnings per share	$	0.63		0.59		0.96		0.76	$	0.73			0.82			0.61			0.55
Diluted net earnings per share	$	0.61		0.57		0.93		0.74	$	0.71			0.80			0.59			0.53

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Subsequent Events

12 Months Ended

Dec. 31, 2022

Subsequent Events

Subsequent Events

(19) Subsequent Events

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

In January and February 2023, the Bank sold securities available for sale totaling $53.5 million, which resulted in gross losses of $2.7 million and gross gains of $177,000.  The transaction was intended to reduce risk in the investment portfolio provided by favorable conditions that had developed for this class of security in the first part of 2023, and to provide the Bank with more flexibility to take advantage of a higher interest rate environment in 2023.

Between March 10, 2023 and March 12, 2023, two financial institutions unrelated to the Company experienced a significant run on deposits, leading to insolvency. These institutions failed and were placed into receivership by the FDIC. These institutions also had deposit concentrations related to higher-risk customer types, such as venture capital and cryptocurrency.  The Federal Reserve determined that these institutions were a systemic risk and therefore, in concert with the FDIC, have determined that all deposits held by these two institutions will be insured.  These events have created market volatility for the financial sector; however, the ongoing ramifications of these events have yet to be seen.  These events have not caused any significant changes in deposit balances at Peoples Bank.

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

Summary of Significant Accounting Policies

Organization

Peoples Bancorp of North Carolina, Inc. (the “Company”) has served as the holding company to Peoples Bank (the “Bank”) since 1999.  The Company is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for the Bank. 

The Bank commenced business in 1912 upon receipt of its banking charter from the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is primarily regulated by the Commissioner and the Federal Deposit Insurance Corporation (the “FDIC”) and undergoes periodic examinations by these regulatory agencies. The Bank, whose main office is in Newton, North Carolina, provides a full range of commercial and consumer banking services primarily in Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties in North Carolina.

Peoples Investment Services, Inc. (“PIS”) is a wholly owned subsidiary of the Bank and began operations in 1996 to provide investment and trust services through agreements with an outside party.

Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks.  Other banks are able to contract with CBRES to find and engage appropriate appraisal companies.  In 2019, the Company launched PB Insurance Agency, which operated as a division of CBRES, until it was discontinued in 2022.

PB Real Estate Holdings, LLC (“PBREH”) is a wholly owned subsidiary of the Bank and began operation in 2015.  PBREH acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.

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

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH.  All significant intercompany balances and transactions have been eliminated in consolidation. 

Basis of Presentation

The accounting principles followed by the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.

Business Segments

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Management has determined that the Company has two significant operating segment: Banking Operations and CBRES, as discussed more fully in Note 16. In determining the appropriateness of segment definition, the Company considers the criteria of ASC 280, Segment Reporting.

Cash and Cash Equivalents

Cash, due from banks, interest-bearing deposits and federal funds sold are considered cash and cash equivalents for cash flow reporting purposes.

Investment Securities

The Company uses three classifications for its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2022 and 2021, the Company classified all of its investment securities as available for sale.

Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.

Management evaluates investment securities for other-than-temporary impairment on a quarterly basis.  A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established.  The decline in value attributed to non-credit related factors is recognized in comprehensive income.

Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

Other investments include equity securities with no readily determinable fair value.  These investments are carried at cost.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding.   The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.

A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan will not be collected.  Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Accrual of interest is discontinued on a loan when management believes, after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings.

Allowance for Loan Losses

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

· the Bank’s loan loss experience;

· the amount of past due and non-performing loans;

· specific known risks;

· the status and amount of other past due and non-performing assets;

· underlying estimated values of collateral securing loans;

· current and anticipated economic conditions; and

· other factors which management believes affect the allowance for potential credit losses.

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

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

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

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

The allowance is comprised of three components: specific reserves, general reserves and unallocated reserves.  After a loan has been identified as impaired, management measures impairment.  When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects reserves established under GAAP for collective loan impairment.  These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience.  This charge-off experience may be adjusted to reflect the effects of current conditions.  The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.  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.  There were no loans with existing modifications as a result of the COVID-19 pandemic at December 31, 2022 and 2021.  At December 31, 2022 and 2021, the Bank maintained 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.  As such, a higher reserve rate has been applied to this pool.  Loans included in this pool totaled $70.5 million and $88.7 million at December 31, 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. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk.  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 year ended December 31, 2022 as compared to the year ended December 31, 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.

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

SBA PPP loans are excluded from the allowance as PPP loans are 100 percent guaranteed by the SBA. 

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

Mortgage Banking Activities

Mortgage banking income represents income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $285,000, $351,000 and $578,000 at December 31, 2022, 2021 and 2020, respectively.  Mortgage servicing rights related to these loans are immaterial for all periods presented.

The Bank originates certain fixed rate mortgage loans and commits these loans for sale.  The commitments to originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative contracts.  The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in the financial statements.

Mortgage loans held for sale are carried at the lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value. 

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are generally as follows:

Buildings and improvements	10 - 50 years
Furniture and equipment	3 - 10 years

Other Real Estate

Foreclosed assets include all assets received in full or partial satisfaction of a loan.  Foreclosed assets are reported at fair value less estimated selling costs.  Any write-downs at the time of foreclosure are charged to the allowance.  Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value less estimated selling costs declines below carrying value.  Costs relating to the development and improvement of the property are capitalized.  Revenues and expenses from operations are included in other expenses.  Changes in the valuation allowance are included in loss on sale and write-down of other real estate. 

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of a deferred tax asset, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.

Tax effects from an uncertain tax position can be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information.  A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.  The Company assessed the impact of this guidance and determined that it did not have a material impact on the Company’s financial position, results of operations or disclosures.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder.  No new awards may be made after May 7, 2019.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015.  The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016.  The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017.  The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018.  The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019.  The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants).  The amount of expense recorded each period reflects the changes in the Company’s stock price during such period.  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $3,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees.  A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted.   As of December 31, 2021, a total of 285,305 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan.  No new awards may be made after May 7, 2030 (ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020.  The Company granted 7,060 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021.  The Company granted 5,385 restricted stock units under the 2020 Plan at a grant date fair value of $27.99 per share during the first quarter of 2022.  The Company recognizes compensation expense on the restricted stock units over the vesting period (four years from the grant date for 2020, 2021 and 2022 grants).  As of December 31, 2022, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $334,000.

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $249,000, $181,000 and $27,000 for the years ended December 31, 2022, 2021 and 2020, respectively. 

Net Earnings Per Share

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

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2022, 2021 and 2020 are as follows:

For the year ended December 31, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	16,123		5,480,123	$	2.94
Effect of dilutive securities:
Restricted stock units - unvested		-		15,467
Shares held in deferred comp plan by deferred compensation trust				165,599
Diluted earnings per share	$	16,123		5,661,189	$	2.85

For the year ended December 31, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	15,133		5,576,099	$	2.71
Effect of dilutive securities:
Restricted stock units - unvested		-		13,935
Shares held in deferred comp plan by deferred compensation trust				158,831
Diluted earnings per share	$	15,133		5,748,865	$	2.63

For the year ended December 31, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,657,025	$	2.01
Effect of dilutive securities:
Restricted stock units		-		14,203
Shares held in deferred comp plan by deferred compensation trust		-		150,394
Diluted earnings per share	$	11,357		5,821,622	$	1.95

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2022, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted 

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company has developed CECL model assumptions and is comparing results to current allowance for loan loss calculations.  Parallel processing of the existing allowance for loan losses model with the CECL was completed during the fourth quarter of 2022.  At this time, the Company expects its allowance for credit losses related to all financial assets will increase by approximately $1.1 million upon adoption compared to its allowance for loan losses at December 31, 2022 of approximately $10.5 million. The impact of the initial adoption will be reflected in the Company's SEC Form 10-Q for the period ended March 31, 2023.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-10: Financial Instruments Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures	Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company s results of operations or financial position but will impact future disclosure requirements and reduce individually evaluated loan totals.

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

Reclassification

Certain amounts in the 2021 and 2020 consolidated financial statements have been reclassified to conform to the 2022 presentation.

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Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2022

Summary of Significant Accounting Policies

Schedule of premises and equipment

Buildings and improvements	10 - 50 years
Furniture and equipment	3 - 10 years

Reconciliations of the amounts used in the computation of both basic earnings per common share and diluted earnings per common share

For the year ended December 31, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	16,123		5,480,123	$	2.94
Effect of dilutive securities:
Restricted stock units - unvested		-		15,467
Shares held in deferred comp plan by deferred compensation trust				165,599
Diluted earnings per share	$	16,123		5,661,189	$	2.85

For the year ended December 31, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	15,133		5,576,099	$	2.71
Effect of dilutive securities:
Restricted stock units - unvested		-		13,935
Shares held in deferred comp plan by deferred compensation trust				158,831
Diluted earnings per share	$	15,133		5,748,865	$	2.63

For the year ended December 31, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,657,025	$	2.01
Effect of dilutive securities:
Restricted stock units		-		14,203
Shares held in deferred comp plan by deferred compensation trust		-		150,394
Diluted earnings per share	$	11,357		5,821,622	$	1.95

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Investment Securities (Tables)

12 Months Ended

Dec. 31, 2022

Investment Securities

Investment securities available for sale

(Dollars in thousands)
	December 31, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	10,951		-		1,137		9,814
U.S. Government sponsored enterprises		12,245		-		706		11,539
Mortgage-backed securities		299,222		445		25,829		273,838
State and political subdivisions		184,768		91		34,656		150,203
Total	$	507,186		536		62,328		445,394

(Dollars in thousands)
	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	7,964		-		75		7,889
U.S. Government sponsored enterprises		14,252		200		185		14,267
Mortgage-backed securities		218,402		1,769		3,019		217,152
State and political subdivisions		165,804		3,694		2,257		167,241
Total	$	406,422		5,663		5,536		406,549

current fair value and associated unrealized losses on investments in debt securities with unrealized losses

(Dollars in thousands)
	December 31, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	2,878		104		6,936		1,033		9,814		1,137
U.S. Government sponsored enterprises		2,904		87		8,635		619		11,539		706
Mortgage-backed securities		128,241		8,740		120,464		17,089		248,705		25,829
State and political subdivisions		65,880		7,766		76,291		26,890		142,171		34,656
Total	$	199,903		16,697		212,326		45,631		412,229		62,328

(Dollars in thousands)
	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	7,889		75		-		-		7,889		75
U.S. Government sponsored enterprises		5,232		15		3,263		170		8,495		185
Mortgage-backed securities		131,483		2,477		19,632		542		151,115		3,019
State and political subdivisions		80,076		1,981		5,922		276		85,998		2,257
Total	$	224,680		4,548		28,817		988		253,497		5,536

Amortized cost and estimated fair value of investment securities available for sale by contractual maturity

December 31, 2022
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	240		240
Due from one to five years		8,434		8,128
Due from five to ten years		58,540		49,599
Due after ten years		140,750		113,589
Mortgage-backed securities		299,222		273,838
Total	$	507,186		445,394

Fair value measurements of investment securities available for sale using Level 3 significant unobservable inputs

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	9,814		-		9,814		-
U.S. Government sponsored enterprises	$	11,539		-		11,539		-
Mortgage-backed securities	$	273,838		-		273,838		-
State and political subdivisions	$	150,203		-		150,203		-

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,889		-		7,889		-88.7
U.S. Government sponsored enterprises	$	14,267		-		14,267		-
Mortgage-backed securities	$	217,152		-		217,152		-
State and political subdivisions	$	167,241		-		167,241		-

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Loans (Tables)

12 Months Ended

Dec. 31, 2022

Loans

Major classifications of loans

(Dollars in thousands)
	December 31, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	114,446			95,760
Single-family residential		322,262			266,111
Single-family residential - Banco de la Gente non-traditional		20,019			23,147
Commercial		406,750			337,841
Multifamily and farmland		65,562			58,366
Total real estate loans		929,039			781,225
Loans not secured by real estate:
Commercial loans		81,307			91,172
Farm loans		938			796
Consumer loans		6,834			6,436
All other loans		14,490			5,240
Total loans		1,032,608			884,869
Less allowance for loan losses		(10,494	)		(9,355	)
Total net loans	$	1,022,114			875,514

Age analysis of past due loans, by loan type

December 31, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	363		-		363		114,083		114,446		-
Single-family residential		4,318		256		4,574		317,688		322,262		-
Single-family residential - Banco de la Gente non-traditional		2,977		264		3,241		16,778		20,019		-
Commercial		306		-		306		406,444		406,750		-
Multifamily and farmland		-		-		-		65,562		65,562		-
Total real estate loans		7,964		520		8,484		920,555		929,039		-
Loans not secured by real estate:
Commercial loans		3		-		3		81,304		81,307		-
Farm loans		-		-		-		938		938		-
Consumer loans		71		-		71		6,763		6,834		-
All other loans		-		-		-		14,490		14,490		-
Total loans	$	8,038		520		8,558		1,024,050		1,032,608		-

December 31, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential - Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-
Loans not secured by real estate:
Commercial loans		43		-		43		91,129		91,172		-
Farm loans		-		-		-		796		796		-
Consumer loans		38		-		38		6,398		6,436		-
All other loans		-		-		-		5,240		5,240		-
Total loans	$	5,485		746		6,231		878,638		884,869		-

Non-accrual loans

(Dollars in thousands)
	December 31, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	53		-
Single-family residential		1,914		1,642
Single-family residential - Banco de la Gente non-traditional		1,532		1,232
Commercial		129		200
Multifamily and farmland		91		105
Total real estate loans		3,719		3,179
Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		9		2
Total	$	3,728		3,230

Schedule Of Bank's impaired loans

December 31, 2022
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	110		-		110		110		2		75		8
Single-family residential		3,912		236		3,300		3,536		60		5,194		194
Single-family residential - Banco de la Gente non-traditional		10,441		-		9,748		9,748		611		8,757		552
Commercial		1,785		421		1,346		1,767		9		1,916		93
Multifamily and farmland		104		-		91		91		-		96		5
Total impaired real estate loans		16,352		657		14,595		15,252		682		16,038		852
Loans not secured by real estate:
Commercial loans		116		-		116		116		1		137		8
Consumer loans		11		-		9		9		-		15		2
Total impaired loans	$	16,479		657		14,720		15,377		683		16,190		862

December 31, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	73		-		73		73		3		82		6
Single-family residential		5,138		524		4,374		4,898		86		6,017		253
Single-family residential - Banco de la Gente non-traditional		11,753		-		10,922		10,922		687		10,325		609
Commercial		2,138		435		1,608		2,043		11		2,385		109
Multifamily and farmland		113		-		105		105		-		110		6
Total impaired real estate loans		19,215		959		17,082		18,041		787		18,919		983
Loans not secured by real estate:
Commercial loans		282		49		170		219		2		271		19
Consumer loans		8		-		4		4		-		11		1
Total impaired loans	$	19,505		1,008		17,256		18,264		789		19,201		1,003

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		108		108		4		134		8
Single-family residential		5,302		379		4,466		4,845		33		4,741		262
Single-family residential - Banco de la Gente non-traditional		13,417		-		12,753		12,753		862		13,380		798
Commercial		2,999		1,082		1,891		2,973		14		2,940		139
Multifamily and farmland		119		-		117		117		-		29		6
Total impaired real estate loans		21,945		1,461		19,335		20,796		913		21,224		1,213
Loans not secured by real estate:
Commercial loans		515		211		244		455		5		564		32
Consumer loans		41		-		37		37		1		60		5
Total impaired loans	$	22,501		1,672		19,616		21,288		919		21,848		1,250

Fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis

(Dollars in thousands)
	Fair Value Measurements December 31, 2022		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	211		-		-		211
Impaired loans	$	14,694		-		-		14,694

(Dollars in thousands)
	Fair Value Measurements December 31, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	3,637		-		-		3,637
Impaired loans	$	17,475		-		-		17,475

	Fair Value December 31, 2022		Fair Value December 31, 2021		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	211	$	3,637	Rate lock commitment	N/A	N/A
Impaired loans	$	14,694	$	17,475	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

Changes in the allowance for loan losses

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated			Total
Twelve months ended December 31, 2022
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			-		110			2,080			9,355
Charge-offs		-		(128	)		-			-		-		(33	)		-		(591	)		-			(752	)
Recoveries		-		229			-			9		-		72			-		109			-			419
Provision		222		208			(101	)		964		14		(93	)		-		586			(328	)		1,472
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Allowance for loan losses December 31, 2022
Ending balance: individually evaluated for impairment	$	-		36			597			6		-		-			-		-			-			639
Ending balance: collectively evaluated for impairment		1,415		2,286			166			3,201		164		657			-		214			1,752			9,855
Ending balance	$	1,415		2,322			763			3,207		164		657			-		214			1,752			10,494
Loans at December 31, 2022
Ending balance	$	114,446		322,262			20,019			406,750		65,562		81,307			938		21,324			-			1,032,608
Ending balance: individually evaluated for impairment	$	-		537			8,555			1,388		-		-			-		-			-			10,480
Ending balance: collectively evaluated for impairment	$	114,446		321,725			11,464			405,362		65,562		81,307			938		21,324			-			1,022,128

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2021
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Charge-offs		-			(89	)		-			-			-		(293	)		-		(380	)		-		(762	)
Recoveries		121			271			-			52			3		786			-		139			-		1,372
Provision		(124	)		(12	)		(188	)		(30	)		25		(1,127	)		-		223			70		(1,163	)
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Allowance for loan losses December 31, 2021
Ending balance: individually evaluated for impairment	$	1			57			672			7			-		-			-		-			-		737
Ending balance: collectively evaluated for impairment		1,192			1,956			192			2,227			150		711			-		110			2,080		8,618
Ending balance	$	1,193			2,013			864			2,234			150		711			-		110			2,080		9,355
Loans at December 31, 2021
Ending balance	$	95,760			266,111			23,147			337,841			58,366		91,172			796		11,676			-		884,869
Ending balance: individually evaluated for impairment	$	6			1,633			9,795			1,437			-		49			-		-			-		12,920
Ending balance: collectively evaluated for impairment	$	95,754			264,478			13,352			336,404			58,366		91,123			796		11,676			-		871,949

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Twelve months ended December 31, 2020
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120		688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-		(903	)		-		(434	)		-		(1,414	)
Recoveries		36			70			-			70			-		34			-		173			-		383
Provision		471			564			(21	)		844			2		1,526			-		251			622		4,259
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Allowance for loan losses December 31, 2020
Ending balance: individually evaluated for impairment	$	1			4			844			8			-		-			-		-			-		857
Ending balance: collectively evaluated for impairment		1,195			1,839			208			2,204			122		1,345			-		128			2,010		9,051
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Loans at December 31, 2020
Ending balance	$	94,124			272,325			26,883			332,971			48,880		161,740			855		10,861			-		948,639
Ending balance: individually evaluated for impairment	$	7			1,558			11,353			2,118			-		212			-		-			-		15,248
Ending balance: collectively evaluated for impairment	$	94,117			270,767			15,530			330,853			48,880		161,528			855		10,861			-		933,391

Credit risk profile of each loan type based on internally assigned risk grade

December 31, 2022
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		2,782		-		-		-		1,365		-		527		-		4,674
2- High Quality		14,912		138,124		-		33,353		17		13,302		-		2,384		1,366		203,458
3- Good Quality		94,113		166,329		7,442		340,926		63,270		64,422		938		3,663		12,851		753,954
4- Management Attention		5,257		10,615		8,968		27,957		2,061		1,507		-		244		128		56,737
5- Watch		54		922		1,136		3,963		123		711		-		1		145		7,055
6- Substandard		110		3,490		2,473		551		91		-		-		15		-		6,730
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	114,446		322,262		20,019		406,750		65,562		81,307		938		6,834		14,490		1,032,608

December 31, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		5,923		-		-		-		371		-		581		-		6,875
2- High Quality		11,752		109,337		-		28,546		19		16,177		-		2,039		1,309		169,179
3- Good Quality		80,325		129,856		8,712		272,786		54,945		68,183		792		3,510		3,931		623,040
4- Management Attention		3,534		14,964		10,478		30,937		2,754		5,214		4		284		-		68,169
5- Watch		76		2,464		1,703		4,938		543		1,177		-		1		-		10,902
6- Substandard		73		3,567		2,254		634		105		50		-		21		-		6,704
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	95,760		266,111		23,147		337,841		58,366		91,172		796		6,436		5,240		884,869

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Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2022

Premises and Equipment

Summary of premises and equipment

(Dollars in thousands)
	2022			2021
Land	$	3,851			3,857
Buildings and improvements		18,371			18,359
Furniture and equipment		26,156			25,420
Construction in process		3,028			-
Total premises and equipment		51,406			47,636
Less accumulated depreciation		(33,201	)		(31,532	)
Total net premises and equipment	$	18,205			16,104

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Leases (Tables)

12 Months Ended

Dec. 31, 2022

Leases

Lease expense

(Dollars in thousands)
	December 31, 2022
Operating lease cost	$	888
Other information:
Cash paid for amounts included in the measurement of lease liabilities		873
Operating cash flows from operating leases		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		1,726
Weighted-average remaining lease term - operating leases		9.26
Weighted-average discount rate - operating leases		2.23	%

Maturity analysis of operating lease liabilities

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2022
2023	$	805
2024		750
2025		694
2026		577
2027		528
Thereafter		2,418
Total		5,727
Less: Imputed Interest		(542	)
Operating Lease Liability	$	5,185

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Time Deposits (Tables)

12 Months Ended

Dec. 31, 2022

Time Deposits

Scheduled maturities of time deposits

(Dollars in thousands)
2023	$	59,099
2024		26,526
2025		7,380
2026		3,420
2027 and thereafter		1,574
Total	$	97,999

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2022

Income Taxes

Components of income tax expense (benefit)

(Dollars in thousands)
	2022			2021			2020
Current expense	$	4,713			4,023			3,049
Deferred income tax benefit		(541	)		(227	)		(560	)
Total income tax	$	4,172			3,796			2,489

Schedule of effective income Tax rate reconciliation

(Dollars in thousands)
	2022			2021			2020
Tax expense at statutory rate	$	4,262			3,975			2,908
State income tax, net of federal income tax effect		395			339			261
Tax-exempt interest income		(445	)		(497	)		(649	)
Increase in cash surrender value of life insurance		(71	)		(83	)		(80	)
Tax credits		(230	)		(234	)		(234	)
Nondeductible interest and other expense		24			30			46
Other		237			266			237
Total	$	4,172			3,796			2,489

Schedule of deferred tax assets and liabilities

(Dollars in thousands)
	2022			2021
Deferred tax assets:
Allowance for loan losses	$	2,411			2,149
Accrued retirement expense		1,174			1,148
Restricted stock		245			209
Interest income on nonaccrual loans		1			2
Lease liability		1,191			1,075
Unrealized loss on available for sale securities		14,197			-
Total gross deferred tax assets		19,219			4,583
Deferred tax liabilities:
Deferred loan fees		209			263
Accumulated depreciation		438			563
Prepaid expenses		3			4
ROU Asset		1,175			1,060
Other		(93	)		(55	)
Unrealized gain on available for sale securities		-			29
Total gross deferred tax liabilities		1,732			1,864
Net deferred tax asset	$	17,487			2,719

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Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2022

Related Party Transactions

Summary of activity for related party loans

(Dollars in thousands)
	2022			2021
Beginning balance	$	2,687			1,852
Disbursements		4,090			3,636
Repayments		(3,396	)		(2,801	)
Ending balance	$	3,381			2,687

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2022

Commitments and Contingencies

Financial instruments with credit risk

(Dollars in thousands)
	Contractual Amount
	2022		2021
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	382,699		304,258
Standby letters of credit	$	4,352		4,892

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Employee and Director Benefit Programs (Tables)

12 Months Ended

Dec. 31, 2022

Employee and Director Benefit Programs

Change in accumulated benefit obligation

(Dollars in thousands)
	2022			2021
Benefit obligation at beginning of period	$	5,011			4,870
Service cost		325			359
Interest cost		63			70
Benefits paid		(289	)		(288	)
Benefit obligation at end of period	$	5,110			5,011

Amounts recognized in the Consolidated Balance Sheet

(Dollars in thousands)
	2022		2021
Benefit obligation	$	5,110		5,011
Fair value of plan assets		-		-

(Dollars in thousands)
	2022			2021
Funded status	$	(5,110	)		(5,011	)
Unrecognized prior service cost/benefit		-			-
Unrecognized net actuarial loss		-			-
Net amount recognized	$	(5,110	)		(5,011	)
Unfunded accrued liability	$	(5,110	)		(5,011	)
Intangible assets		-			-
Net amount recognized	$	(5,110	)		(5,011	)

Schedule of net benefit costs

(Dollars in thousands)
	2022			2021			2020
Service cost	$	325			359			359
Interest cost		63			70			70
Net periodic cost	$	388			429			429
Weighted average discount rate assumption used to determine benefit obligation		5.50	%		5.50	%		5.49	%

Schedule of expected benefit payments

(Dollars in thousands)
Year ending December 31,
2023	$	329
2024	$	353
2025	$	370
2026	$	368
2027	$	494
Thereafter	$	8,358

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Regulatory Matters (Tables)

12 Months Ended

Dec. 31, 2022

Regulatory Matters

Bank's actual capital amounts and ratios

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2022:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	178,286		14.04	%		101,608		8.00	%		N/A		N/A
Bank	$	176,923		13.93	%		101,606		8.00	%		133,357		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	167,792		13.21	%		76,206		6.00	%		N/A		N/A
Bank	$	166,429		13.10	%		76,204		6.00	%		107,956		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	167,792		9.82	%		68,347		4.00	%		N/A		N/A
Bank	$	166,429		9.68	%		68,780		4.00	%		68,780		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	152,792		12.03	%		57,154		4.50	%		N/A		N/A
Bank	$	166,429		13.10	%		57,153		4.50	%		88,905		7.00	%

(Dollars in thousands)
	Actual					Minimum Regulatory Capital Ratio					Minimum Ratio plus Capital Conservation Buffer
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2021:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	166,628		16.35	%		81,547		8.00	%		N/A		N/A
Bank	$	164,975		16.19	%		81,539		8.00	%		107,020		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	157,273		15.43	%		61,160		6.00	%		N/A		N/A
Bank	$	155,620		15.27	%		61,154		6.00	%		86,635		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	157,273		9.64	%		65,258		4.00	%		N/A		N/A
Bank	$	155,620		9.50	%		65,557		4.00	%		65,557		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	142,273		13.96	%		45,870		4.50	%		N/A		N/A
Bank	$	155,620		15.27	%		45,866		4.50	%		71,347		7.00	%

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Other Operating Income and Expense (Tables)

12 Months Ended

Dec. 31, 2022

Other Operating Income and Expense

Schedule Of Miscellaneous non-interest income

(Dollars in thousands)
	2022		2021		2020
Visa debit card income	$	4,901		5,045		4,237
Bank owned life insurance income		458		397		380
Other		2,390		2,197		1,315
	$	7,749		7,639		5,932

Schedule Of Other non-interest expense

(Dollars in thousands)
	2022		2021		2020
ATM expense	$	629		619		567
Data processing		777		643		635
Deposit program expense		348		415		426
Dues and subscriptions		628		588		538
FHLB advance prepayment penalty		-		-		1,100
Internet banking expense		949		768		729
Office supplies		532		374		538
Telephone		691		730		794
Other		3,741		3,737		3,217
	$	8,295		7,874		8,544

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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2022

Fair Value of Financial Instruments

Carrying amount and estimated fair value of the Company's financial instruments

(Dollars in thousands)
			Fair Value Measurements at December 31, 2022
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	71,596		71,596		-		-		71,596
Investment securities available for sale		445,394		-		445,394		-		445,394
Other investments		2,656		-		-		2,656		2,656
Mortgage loans held for sale		211		-		-		211		211
Loans, net		1,022,114		-		-		998,587		998,587
Mutual funds held in deferred compensation trust		1,327		-		1,327		-		1,327
Liabilities:
Deposits	$	1,435,215		-		-		1,434,871		1,434,871
Securities sold under agreements to repurchase		47,688		-		47,688		-		47,688
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	277,499		277,499		-		-		277,499
Investment securities available for sale		406,549		-		406,549		-		406,549
Other investments		3,668		-		-		3,668		3,668
Mortgage loans held for sale		3,637		-		-		3,637		3,637
Loans, net		875,514		-		-		855,814		855,814
Mutual funds held in deferred compensation trust		1,510		-		1,510		-		1,510
Liabilities:
Deposits	$	1,412,748		-		-		1,401,833		1,401,833
Securities sold under agreements to repurchase		37,094		-		37,094		-		37,094
Junior subordinated debentures		15,464		-		15,464		-		15,464

summary of present the balance of mutual funds

(Dollars in thousands)
	December 31, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,327		-		1,327		-

(Dollars in thousands)
	December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,510		-		1,510		-

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Reportable Segments (Tables)

12 Months Ended

Dec. 31, 2022

Reportable Segments

presents financial information for the reportable segments

(Dollars in thousands)
	Banking
	Operations			CBRES		Other			Consolidated
As of and for the year ended December 31, 2022
Interest income	$	54,416		$	-	$	15		$	54,431
Interest expense		2,796			-		527			3,323
Net interest income		51,620			-		(512	)		51,108
Provision for loan losses		1,472			-		-			1,472
Noninterest income		15,012			14		-			15,026
Appraisal management fee income		-			11,663		-			11,663
Noninterest expense		44,433			1,695		638			46,766
Appraisal management fee expense		-			9,264		-			9,264
Income tax expense (benefit)		4,248			166		(242	)		4,172
Net income (loss)	$	16,479		$	552	$	(908	)	$	16,123
Total assets	$	1,617,212		$	3,227	$	488		$	1,620,927
As of and for the year ended December 31, 2021
Interest income	$	47,171		$	-	$	8		$	47,179
Interest expense		2,930			-		275			3,205
Net interest income		44,241			-		(267	)		43,974
Recovery of loan losses		(1,163	)		-		-			(1,163	)
Noninterest income		16,014			15		-			16,029
Appraisal management fee income		-			8,890		-			8,890
Noninterest expense		42,239			1,163		613			44,015
Appraisal management fee expense		-			7,112		-			7,112
Income tax expense (benefit)		3,836			145		(185	)		3,796
Net income (loss)	$	15,343		$	485	$	(695	)	$	15,133
Total assets	$	1,620,933		$	2,692	$	568		$	1,624,193
As of and for the year ended December 31, 2020
Interest income	$	47,926		$	-	$	32		$	47,958
Interest expense		3,473			-		363			3,836
Net interest income		44,453			-		(331	)		44,122
Provision for loan losses		4,259			-		-			4,259
Noninterest income		16,148			12		-			16,160
Appraisal management fee income		-			6,754		-			6,754
Noninterest expense		42,041			991		625			43,657
Appraisal management fee expense		-			5,274		-			5,274
Income tax expense (benefit)		2,574			116		(201	)		2,489
Net income (loss)	$	11,727		$	385	$	(755	)	$	11,357

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Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements (Tables)

12 Months Ended

Dec. 31, 2022

Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements

Balance Sheets

Balance Sheets
December 31, 2022 and 2021
(Dollars in thousands)
Assets	2022		2021
Cash	$	384		561
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		118,832		155,716
Investment in PEBK Capital Trust II		464		464
Other assets		24		105
Total assets	$	120,704		157,846
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,464		15,464
Liabilities		45		13
Shareholders' equity		105,195		142,369
Total liabilities and shareholders' equity	$	120,704		157,846

Statements of Earnings

Statements of Earnings
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
Revenues:	2022		2021		2020
Interest and dividend from subsidiary	$	6,240		7,419		7,539
Total revenues		6,240		7,419		7,539
Expenses:
Interest		529		280		370
Other operating expenses		639		613		625
Total expenses		1,168		893		995
Income before income tax benefit and equity in undistributed earnings of subsidiaries		5,072		6,526		6,544
Income tax benefit		242		185		201
Income before equity in undistributed earnings of subsidiaries		5,314		6,711		6,745
Equity in undistributed earnings of subsidiaries		10,809		8,422		4,612
Net earnings	$	16,123		15,133		11,357

Statements of Cash Flows

Statements of Cash Flows
For the Years Ended December 31, 2022, 2021 and 2020
(Dollars in thousands)
	2022			2021			2020
Cash flows from operating activities:
Net earnings	$	16,123			15,133			11,357
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(10,809	)		(8,422	)		(4,612	)
Change in:
Other assets		81			545			(19	)
Other liabilities		32			-			(10	)
Net cash provided by operating activities		5,427			7,256			6,716
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale		-			-			250
Net cash provided by investing activities		-			-			250
Cash flows from financing activities:
Repayment of junior subordinated debentures		-			-			(155	)
Cash dividends paid on common stock		(4,935	)		(3,793	)		(4,392	)
Stock repurchase		(710	)		(3,605	)		(2,999	)
Proceeds from exercise of restricted stock units		41			39			57
Net cash used by financing activities		(5,604	)		(7,359	)		(7,489	)
Net change in cash		(177	)		(103	)		(523	)
Cash at beginning of year		561			664			1,187
Cash at end of year	$	384			561			664

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Quarterly Data (Tables)

12 Months Ended

Dec. 31, 2022

Quarterly Data

Schedule of quarterly financial information

	2022								2021
(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First			Second			Third			Fourth
Total interest income	$	11,329		11,992		14,611		16,499	$	11,922			12,517			11,421			11,319
Total interest expense		663		644		818		1,198		815			842			861			687
Net interest income		10,666		11,348		13,793		15,301		11,107			11,675			10,560			10,632
Provision for loan losses		71		410		408		583		(455	)		(226	)		(182	)		(300	)
Other income		7,046		7,328		6,793		5,522		5,873			6,040			6,040			6,966
Other expense		13,341		14,243		13,455		14,991		12,268			12,132			12,568			14,159
Income before income taxes		4,300		4,023		6,723		5,249		5,167			5,809			4,214			3,739
Income tax expense		848		806		1,416		1,102		1,046			1,194			824			732
Net earnings		3,452		3,217		5,307		4,147		4,121			4,615			3,390			3,007
Basic net earnings per share	$	0.63		0.59		0.96		0.76	$	0.73			0.82			0.61			0.55
Diluted net earnings per share	$	0.61		0.57		0.93		0.74	$	0.71			0.80			0.59			0.53

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Summary of Significant Accounting Policies (Details)	12 Months Ended
	Dec. 31, 2022
Building Improvements | Minimum
Estimated useful lives	10
Building Improvements | Maximum
Estimated useful lives	50
Furniture and equipment | Minimum
Estimated useful lives	3
Furniture and equipment | Maximum
Estimated useful lives	10

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Summary of Significant Accounting Policies (Details 1) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Net Earnings Available to Common Shareholders
Net earnings									$ 16,123,000	$ 15,133,000	$ 11,357,000
Effect of dilutive securities: Restricted stock units									0	0	0
Diluted earnings per common share									$ 16,123,000	$ 15,133,000	$ 11,357,000
Common Shares
Basic earnings per common share (in shares)									5,480,123	5,576,099	5,657,025
Effect of dilutive securities: Restricted stock units (in shares)									15,467	13,935	14,203
Shares held in deferred comp plan									165,599	158,831	150,394
Diluted earnings per common share (in shares)									5,661,189	5,748,865	5,821,622
Per Share Amount
Basic earnings per common share (in dollars per share)	$ 0.76	$ 0.96	$ 0.59	$ 0.63	$ 0.55	$ 0.61	$ 0.82	$ 0.73	$ 2.94	$ 2.71	$ 2.01
Diluted earnings per common share (in dollars per share)	$ 0.74	$ 0.93	$ 0.57	$ 0.61	$ 0.53	$ 0.59	$ 0.80	$ 0.71	$ 2.85	$ 2.63	$ 1.95

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Summary of Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended							6 Months Ended	12 Months Ended
	Mar. 31, 2022	Mar. 31, 2021	Mar. 31, 2019	Mar. 31, 2018	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2015	Jun. 30, 2020	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Unpaid principal balances of mortgage loans serviced for others									$ 285,000	$ 351,000	$ 578,000
Loans									70,500,000	88,700,000
Under the 2009 Plan and 2020 Plan [Member]
Compensation expense for restricted stock units									249,000	$ 181,000	$ 27,000
2009 Plan
Unrecognized compensation expense related to the restricted stock unit grants									3,000
Shares of restricted stock units granted			5,290	3,725	4,114	5,544	16,583
Fair value of restricted stock units granted			$ 28.43	$ 31.43	$ 25	$ 16.91	$ 16.34
2020 Plan
Unrecognized compensation expense related to the restricted stock unit grants									$ 334,000
Fair value of restricted stock units granted	$ 5,385	$ 7,060						$ 7,635
Shares of restricted stock units granted	$ 27.99	$ 22.04						$ 17.08

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Investment Securities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Amortized cost	$ 507,186	$ 406,422
Gross unrealized gains	536	5,663
Gross unrealized losses	62,328	5,536
Estimated fair value	445,394	406,549
U.S Treasuries [Member]
Amortized cost	10,951	7,964
Gross unrealized gains	0	0
Gross unrealized losses	1,137	75
Estimated fair value	9,814	7,889
Mortgage-backed securities
Amortized cost	299,222	218,402
Gross unrealized gains	445	1,769
Gross unrealized losses	25,829	3,019
Estimated fair value	273,838	217,152
U.S. Government sponsored enterprises
Amortized cost	12,245	14,252
Gross unrealized gains	0	200
Gross unrealized losses	706	185
Estimated fair value	11,539	14,267
State and political subdivisions
Amortized cost	184,768	165,804
Gross unrealized gains	91	3,694
Gross unrealized losses	34,656	2,257
Estimated fair value	$ 150,203	$ 167,241

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Investment Securities (Details 1) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Less than 12 months, fair value	$ 199,903,000	$ 224,680,000
Less than 12 months, unrealized losses	16,697,000	4,548,000
12 months or more, fair value	212,326,000	28,817,000
12 months or more, unrealized losses	45,631,000	988,000
Total, fair value	412,229,000	253,497,000
Total, unrealized losses	62,328,000	5,536,000
U.S Treasuries [Member]
Less than 12 months, fair value	2,878,000	7,889,000
Less than 12 months, unrealized losses	104,000	75,000
12 months or more, fair value	6,936,000	0
12 months or more, unrealized losses	1,033,000	0
Total, fair value	9,814,000	7,889,000
Total, unrealized losses	1,137,000	75,000
Mortgage-backed securities
Less than 12 months, fair value	128,241,000	131,483,000
Less than 12 months, unrealized losses	8,740,000	2,477,000
12 months or more, fair value	120,464,000	19,632,000
12 months or more, unrealized losses	17,089,000	542,000
Total, fair value	248,705,000	151,115,000
Total, unrealized losses	25,829,000	3,019,000
U.S. Government sponsored enterprises
Less than 12 months, fair value	2,904,000	5,232,000
Less than 12 months, unrealized losses	87,000	15,000
12 months or more, fair value	8,635,000	3,263,000
12 months or more, unrealized losses	619,000	170,000
Total, fair value	11,539,000	8,495,000
Total, unrealized losses	706,000	185,000
State and political subdivisions
Less than 12 months, fair value	65,880,000	80,076,000
Less than 12 months, unrealized losses	7,766,000	1,981,000
12 months or more, fair value	76,291,000	5,922,000
12 months or more, unrealized losses	26,890,000	276,000
Total, fair value	142,171,000	85,998,000
Total, unrealized losses	$ 34,656,000	$ 2,257,000

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Investment Securities (Details 2) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Amortized Cost
Due within one year	$ 240
Due from one to five years	8,434
Due from five to ten years	58,540
Due after ten years	140,750
Mortgage-backed securities	299,222
Total	507,186	$ 406,422
Estimated Fair Value
Due within one year	240
Due from one to five years	8,128
Due from five to ten years	49,599
Due after ten years	113,589
Mortgage-backed securities	273,838
Total	$ 445,394

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Investment Securities (Details 3) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Estimated fair value	$ 445,394,000	$ 406,549,000
U.S Treasuries [Member]
Level 1 valuation	0	0
Level 2 valuation	9,814,000	7,889,000
Level 3 valuation	0	(88,700)
Estimated fair value	9,814,000	7,889,000
Mortgage-backed securities
Level 1 valuation	0	0
Level 2 valuation	273,838,000	217,152,000
Level 3 valuation	0	0
Estimated fair value	273,838,000	217,152,000
U.S. Government sponsored enterprises
Level 1 valuation	0	0
Level 2 valuation	11,539,000	14,267,000
Level 3 valuation	0	0
Estimated fair value	11,539,000	14,267,000
State and political subdivisions
Level 1 valuation	0	0
Level 2 valuation	150,203,000	167,241,000
Level 3 valuation	0	0
Estimated fair value	$ 150,203,000	$ 167,241,000

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Investment Securities (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2022	Dec. 31, 2021
Investment Securities
Unrealized losses in the investment securites portfolio relating to debt securities		$ 62,300,000
Proceeds from sales of investment securities available for sale	$ 56,300,000
Gross losses	56,000
Gains on sales of available for sale securities	$ 2,700,000
Securities pledged to secure public deposits		$ 96,000,000	$ 98,600,000

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Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Major Classifications
Total Loans	$ 1,032,608	$ 884,869
Less allowance for loan losses	(10,494)	(9,355)
Net loans	1,022,114	875,514
Construction and Land Development
Major Classifications
Total Loans	114,446	95,760
Single-Family Residential - Banco de la Gente Non-Tradtional
Major Classifications
Total Loans	20,019	23,147
Farm Loans (Not Secured by Real Estate)
Major Classifications
Total Loans	938	796
All Other Loans (Not Secured by Real Estate)
Major Classifications
Total Loans	14,490	5,240
Total Real Estate Loans
Major Classifications
Total Loans	929,039	781,225
Single-Family Residential
Major Classifications
Total Loans	322,262	266,111
Commercial
Major Classifications
Total Loans	406,750	337,841
Commercial Loans (Not Secured by Real Estate)
Major Classifications
Total Loans	81,307	91,172
Consumer Loans (Not Secured by Real Estate)
Major Classifications
Total Loans	6,834	6,436
Multifamily and Farmland
Major Classifications
Total Loans	$ 65,562	$ 58,366

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Loans (Details 1) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Loans 30-89 Days Past Due	$ 8,038,000	$ 5,485,000
Loans 90 Or More Days Past Due	520,000	746,000
Total Past Due Loans	8,558,000	6,231,000
Total Current Loans	1,024,050,000	878,638,000
Accruing Loans 90 Or More Days Past Due	0	0
Total Loans	1,032,608,000	884,869,000
Construction and Land Development
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	363,000	0
Total Current Loans	114,083,000	95,760,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	363,000	0
Total Loans	114,446,000	95,760,000
Single-Family Residential - Banco de la Gente Non-Tradtional
Loans 90 Or More Days Past Due	264,000	112,000
Total Past Due Loans	3,241,000	2,705,000
Total Current Loans	16,778,000	20,442,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	2,977,000	2,593,000
Total Loans	20,019,000	23,147,000
Farm Loans (Not Secured by Real Estate)
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	0	0
Total Current Loans	938,000	796,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	0	0
Total Loans	938,000	796,000
All Other Loans (Not Secured by Real Estate)
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	0	0
Total Current Loans	14,490,000	5,240,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	0	0
Total Loans	14,490,000	5,240,000
Total Real Estate Loans | Total Real Estate [Member]
Loans 90 Or More Days Past Due	520,000	746,000
Total Past Due Loans	8,484,000	6,150,000
Total Current Loans	920,555,000	775,075,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	7,964,000	5,404,000
Total Loans	929,039,000	781,225,000
Single-Family Residential
Loans 90 Or More Days Past Due	256,000	634,000
Total Past Due Loans	4,574,000	2,957,000
Total Current Loans	317,688,000	263,154,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	4,318,000	2,323,000
Total Loans	322,262,000	266,111,000
Commercial
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	306,000	488,000
Total Current Loans	406,444,000	337,353,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	306,000	488,000
Total Loans	406,750,000	337,841,000
Commercial Loans (Not Secured by Real Estate)
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	3,000	43,000
Total Current Loans	81,304,000	91,129,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	3,000	43,000
Total Loans	81,307,000	91,172,000
Consumer Loans (Not Secured by Real Estate)
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	71,000	38,000
Total Current Loans	6,763,000	6,398,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	71,000	38,000
Total Loans	6,834,000	6,436,000
Multifamily and Farmland
Loans 90 Or More Days Past Due	0	0
Total Past Due Loans	0	0
Total Current Loans	65,562,000	58,366,000
Accruing Loans 90 Or More Days Past Due	0	0
Loans 30-89 Days Past Due	0	0
Total Loans	$ 65,562,000	$ 58,366,000

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Loans (Details 2) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Non-accrual Loans	$ 3,728	$ 3,230
Construction and Land Development
Non-accrual Loans	53	0
Single-Family Residential - Banco de la Gente Non-Tradtional
Non-accrual Loans	1,532	1,232
Total Real Estate Loans
Non-accrual Loans	3,719	3,179
Single-Family Residential
Non-accrual Loans	1,914	1,642
Commercial
Non-accrual Loans	129	200
Commercial Loans (Not Secured by Real Estate)
Non-accrual Loans	0	49
Consumer Loans (Not Secured by Real Estate)
Non-accrual Loans	9	2
Multifamily and Farmland
Non-accrual Loans	$ 91	$ 105

XML

Loans (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Impaired Loans
Unpaid Contractual Principal Balance	$ 16,479	$ 19,505	$ 22,501
Recorded Investment With No Allowance	657	1,008	1,672
Recorded Investment With Allowance	14,720	17,256	19,616
Recorded Investment In Impaired Loans	15,377	18,264	21,288
Related Allowance	683	789	919
Average Outstanding Impaired Loans	16,190	19,201	21,848
Interest Income Recognized	862	1,003	1,250
Construction and Land Development
Impaired Loans
Unpaid Contractual Principal Balance	110	73	108
Recorded Investment With No Allowance	0	0	0
Recorded Investment With Allowance	110	73	108
Recorded Investment In Impaired Loans	110	73	108
Related Allowance	2	3	4
Average Outstanding Impaired Loans	75	82	134
Interest Income Recognized	8	6	8
Single-Family Residential - Banco de la Gente Non-Tradtional
Impaired Loans
Unpaid Contractual Principal Balance	10,441	11,753	13,417
Recorded Investment With No Allowance	0	0	0
Recorded Investment With Allowance	9,748	10,922	12,753
Recorded Investment In Impaired Loans	9,748	10,922	12,753
Related Allowance	611	687	862
Average Outstanding Impaired Loans	8,757	10,325	13,380
Interest Income Recognized	552	609	798
Total Real Estate Loans
Impaired Loans
Unpaid Contractual Principal Balance	16,352	19,215	21,945
Recorded Investment With No Allowance	657	959	1,461
Recorded Investment With Allowance	14,595	17,082	19,335
Recorded Investment In Impaired Loans	15,252	18,041	20,796
Related Allowance	682	787	913
Average Outstanding Impaired Loans	16,038	18,919	21,224
Interest Income Recognized	852	983	1,213
Single-Family Residential
Impaired Loans
Unpaid Contractual Principal Balance	3,912	5,138	5,302
Recorded Investment With No Allowance	236	524	379
Recorded Investment With Allowance	3,300	4,374	4,466
Recorded Investment In Impaired Loans	3,536	4,898	4,845
Related Allowance	60	86	33
Average Outstanding Impaired Loans	5,194	6,017	4,741
Interest Income Recognized	194	253	262
Commercial
Impaired Loans
Unpaid Contractual Principal Balance	1,785	2,138	2,999
Recorded Investment With No Allowance	421	435	1,082
Recorded Investment With Allowance	1,346	1,608	1,891
Recorded Investment In Impaired Loans	1,767	2,043	2,973
Related Allowance	9	11	14
Average Outstanding Impaired Loans	1,916	2,385	2,940
Interest Income Recognized	93	109	139
Commercial Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid Contractual Principal Balance	116	282	515
Recorded Investment With No Allowance	0	49	211
Recorded Investment With Allowance	116	170	244
Recorded Investment In Impaired Loans	116	219	455
Related Allowance	1	2	5
Average Outstanding Impaired Loans	137	271	564
Interest Income Recognized	8	19	32
Consumer Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid Contractual Principal Balance	11	8	41
Recorded Investment With No Allowance	0	0	0
Recorded Investment With Allowance	9	4	37
Recorded Investment In Impaired Loans	9	4	37
Related Allowance	0	0	1
Average Outstanding Impaired Loans	15	11	60
Interest Income Recognized	2	1	5
Multifamily and Farmland
Impaired Loans
Unpaid Contractual Principal Balance	104	113	119
Recorded Investment With No Allowance	0	0	0
Recorded Investment With Allowance	91	105	117
Recorded Investment In Impaired Loans	91	105	117
Related Allowance	0	0	0
Average Outstanding Impaired Loans	96	110	29
Interest Income Recognized	$ 5	$ 6	$ 6

XML

Loans (Details 4) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Mortgage Loans Held For Sale	$ 211	$ 3,637
Impaired Loans	14,694	17,475
Impaired Loans
Impaired Loans	$ 14,694	17,475
Valuation Technique	Appraised value and discounted cash flows
Significant Unobservable Inputs	Discounts to reflect current market conditions and ultimate collectability
General Range Of Significant Unobservable Input Values	0 - 25
Mortgage loans held for sale
Mortgage Loans Held For Sale	$ 211	3,637
Valuation Technique	Rate lock commitment
Significant Unobservable Inputs	N/A
General Range Of Significant Unobservable Input Values	N/A
Level 1
Mortgage Loans Held For Sale	$ 0	0
Impaired Loans	0	0
Level 2
Mortgage Loans Held For Sale	0	0
Impaired Loans	0	0
Level 3
Mortgage Loans Held For Sale	211	3,637
Impaired Loans	$ 14,694	$ 17,475

XML

Loans (Details 5) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Beginning Balance	$ 9,355	$ 9,908	$ 6,680
Charge-offs	(752)	(762)	(1,414)
Recoveries	419	1,372	383
Provision	1,472	(1,163)	4,259
Ending Balance	10,494	9,355	9,908
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	639	737	857
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	9,855	8,618	9,051
Allowance For Loan Losses, Ending Balance	10,494	9,355	9,908
Loans, Ending Balance	1,032,608	884,869	948,639
Loans, Ending Balance: Individually Evaluated For Impairments	10,480	12,920	15,248
Loans, Ending Balance: Collectively Evaluated For Impairments	1,022,128	871,949	933,391
Unallocated
Beginning Balance	2,080	2,010	1,388
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	(328)	70	622
Ending Balance	1,752	2,080	2,010
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	1,752	2,080	2,010
Allowance For Loan Losses, Ending Balance	1,752	2,080	2,010
Loans, Ending Balance	0	0	0
Loans, Ending Balance: Individually Evaluated For Impairments	0	0	0
Loans, Ending Balance: Collectively Evaluated For Impairments	0	0	0
Consumer And All Other [Member]
Beginning Balance	110	128	138
Charge-offs	(591)	(380)	(434)
Recoveries	109	139	173
Provision	586	223	251
Ending Balance	214	110	128
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	214	110	128
Allowance For Loan Losses, Ending Balance	214	110	128
Loans, Ending Balance	21,324	11,676	10,861
Loans, Ending Balance: Individually Evaluated For Impairments	0	0	0
Loans, Ending Balance: Collectively Evaluated For Impairments	21,324	11,676	10,861
Multifamily and Farmland
Beginning Balance	150	122	120
Charge-offs	0	0	0
Recoveries	0	3	0
Provision	14	25	2
Ending Balance	164	150	122
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	164	150	122
Allowance For Loan Losses, Ending Balance	164	150	122
Loans, Ending Balance	65,562	58,366	48,880
Loans, Ending Balance: Individually Evaluated For Impairments	0	0	0
Loans, Ending Balance: Collectively Evaluated For Impairments	65,562	58,366	48,880
Commercial loans (not secured by real estate)
Beginning Balance	711	1,345	688
Charge-offs	(33)	(293)	(903)
Recoveries	72	786	34
Provision	(93)	(1,127)	1,526
Ending Balance	657	711	1,345
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	657	711	1,345
Allowance For Loan Losses, Ending Balance	657	711	1,345
Loans, Ending Balance	81,307	91,172	161,740
Loans, Ending Balance: Individually Evaluated For Impairments	0	49	212
Loans, Ending Balance: Collectively Evaluated For Impairments	81,307	91,123	161,528
Construction and Land Development
Beginning Balance	1,193	1,196	694
Charge-offs	0	0	(5)
Recoveries	0	121	36
Provision	222	(124)	471
Ending Balance	1,415	1,193	1,196
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	1	1
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	1,415	1,192	1,195
Allowance For Loan Losses, Ending Balance	1,415	1,193	1,196
Loans, Ending Balance	114,446	95,760	94,124
Loans, Ending Balance: Individually Evaluated For Impairments	0	6	7
Loans, Ending Balance: Collectively Evaluated For Impairments	114,446	95,754	94,117
Single-Family Residential - Banco de la Gente Non-Tradtional
Beginning Balance	864	1,052	1,073
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	(101)	(188)	(21)
Ending Balance	763	864	1,052
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	597	672	844
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	166	192	208
Allowance For Loan Losses, Ending Balance	763	864	1,052
Loans, Ending Balance	20,019	23,147	26,883
Loans, Ending Balance: Individually Evaluated For Impairments	8,555	9,795	11,353
Loans, Ending Balance: Collectively Evaluated For Impairments	11,464	13,352	15,530
Farm Loans (Not Secured by Real Estate)
Beginning Balance	0	0	0
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	0	0	0
Ending Balance	0	0	0
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	0	0	0
Allowance For Loan Losses, Ending Balance	0	0	0
Loans, Ending Balance	938	796	855
Loans, Ending Balance: Individually Evaluated For Impairments	0	0	0
Loans, Ending Balance: Collectively Evaluated For Impairments	938	796	855
Single-Family Residential
Beginning Balance	2,013	1,843	1,274
Charge-offs	(128)	(89)	(65)
Recoveries	229	271	70
Provision	208	(12)	564
Ending Balance	2,322	2,013	1,843
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	36	57	4
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	2,286	1,956	1,839
Allowance For Loan Losses, Ending Balance	2,322	2,013	1,843
Loans, Ending Balance	322,262	266,111	272,325
Loans, Ending Balance: Individually Evaluated For Impairments	537	1,633	1,558
Loans, Ending Balance: Collectively Evaluated For Impairments	321,725	264,478	270,767
Commercial
Beginning Balance	2,234	2,212	1,305
Charge-offs	0	0	(7)
Recoveries	9	52	70
Provision	964	(30)	844
Ending Balance	3,207	2,234	2,212
Allowance For Loan Losses, Ending Balance: Individually Evaluated For Impairments	6	7	8
Allowance For Loan Losses, Ending Balance: Collectively Evaluated For Impairments	3,201	2,227	2,204
Allowance For Loan Losses, Ending Balance	3,207	2,234	2,212
Loans, Ending Balance	406,750	337,841	332,971
Loans, Ending Balance: Individually Evaluated For Impairments	1,388	1,437	2,118
Loans, Ending Balance: Collectively Evaluated For Impairments	$ 405,362	$ 336,404	$ 330,853

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Loans (Details 6) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Total Loans	$ 1,032,608	$ 884,869
Construction and Land Development
Total Loans	114,446	95,760
Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	20,019	23,147
Farm Loans (Not Secured by Real Estate)
Total Loans	938	796
All Other Loans (Not Secured by Real Estate)
Total Loans	14,490	5,240
Single-Family Residential
Total Loans	322,262	266,111
Commercial
Total Loans	406,750	337,841
Commercial Loans (Not Secured by Real Estate)
Total Loans	81,307	91,172
Consumer Loans (Not Secured by Real Estate)
Total Loans	6,834	6,436
Multifamily and Farmland
Total Loans	65,562	58,366
Good Quality | Construction and Land Development
Total Loans	94,113	80,325
Watch
Total Loans	7,055	10,902
Watch | Construction and Land Development
Total Loans	54	76
Watch | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	1,136	1,703
Watch | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
Watch | All Other Loans (Not Secured by Real Estate)
Total Loans	145	0
Watch | Single-Family Residential
Total Loans	922	2,464
Watch | Commercial Loans (Not Secured by Real Estate)
Total Loans	711	1,177
Watch | Consumer Loans (Not Secured by Real Estate)
Total Loans	1	1
Watch | Multifamily and Farmland
Total Loans	123	543
Watch | Commercial
Total Loans	3,963	4,938
Management Attention
Total Loans	56,737	68,169
Management Attention | Commercial loans (not secured by real estate)
Total Loans	1,507	5,214
Management Attention | Consumer loans (not secured by real estate)
Total Loans	244	284
Management Attention | Construction and Land Development
Total Loans	5,257	3,534
Management Attention | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	8,968	10,478
Management Attention | Multifamily and Farmland
Total Loans	2,061	2,754
Management Attention | Commercial
Total Loans	27,957	30,937
Management Attention | Single-Family Residential [Member]
Total Loans	10,615	14,964
Management Attention | All Other Loans (Not Secured by Real Estate) [Member]
Total Loans	128	0
Excellent Quality
Total Loans	4,674	6,875
Excellent Quality | Construction and Land Development [Member]
Total Loans	0	0
Excellent Quality | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	0	0
Excellent Quality | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
Excellent Quality | All Other Loans (Not Secured by Real Estate)
Total Loans	0	0
Excellent Quality | Commercial
Total Loans	0	0
Excellent Quality | Commercial Loans (Not Secured by Real Estate)
Total Loans	1,365	371
Excellent Quality | Consumer Loans (Not Secured by Real Estate)
Total Loans	527	581
Excellent Quality | Multifamily and Farmland
Total Loans	0	0
Excellent Quality | Single-Family Residential [Member]
Total Loans	2,782	5,923
High Quality
Total Loans	203,458	169,179
High Quality | Commercial loans (not secured by real estate)
Total Loans	13,302	16,177
High Quality | Consumer loans (not secured by real estate)
Total Loans	2,384	2,039
High Quality | Construction and Land Development
Total Loans	14,912	11,752
High Quality | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	0	0
High Quality | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
High Quality | All Other Loans (Not Secured by Real Estate)
Total Loans	1,366	1,309
High Quality | Single-Family Residential
Total Loans	138,124	109,337
High Quality | Commercial
Total Loans	33,353	28,546
High Quality | Multifamily and Farmland
Total Loans	17	19
Good Quality
Total Loans	753,954	623,040
Good Quality | Consumer loans (not secured by real estate)
Total Loans	3,663	3,510
Good Quality | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	7,442	8,712
Good Quality | Farm Loans (Not Secured by Real Estate)
Total Loans	938	792
Good Quality | All Other Loans (Not Secured by Real Estate)
Total Loans	12,851	3,931
Good Quality | Commercial
Total Loans	340,926	272,786
Good Quality | Commercial Loans (Not Secured by Real Estate)
Total Loans	64,422	68,183
Good Quality | Multifamily and Farmland
Total Loans	63,270	54,945
Good Quality | Single-Family Residential [Member]
Total Loans	166,329	129,856
Substandard
Total Loans	6,730	6,704
Substandard | Construction and Land Development
Total Loans	110	73
Substandard | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	2,473	2,254
Substandard | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
Substandard | All Other Loans (Not Secured by Real Estate)
Total Loans	0	0
Substandard | Single-Family Residential
Total Loans	3,490	3,567
Substandard | Commercial
Total Loans	551	634
Substandard | Commercial Loans (Not Secured by Real Estate)
Total Loans	0	50
Substandard | Consumer Loans (Not Secured by Real Estate)
Total Loans	15	21
Substandard | Multifamily and Farmland
Total Loans	91	105
Doubtful
Total Loans	0	0
Doubtful | Construction and Land Development
Total Loans	0	0
Doubtful | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	0	0
Doubtful | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
Doubtful | All Other Loans (Not Secured by Real Estate)
Total Loans	0	0
Doubtful | Single-Family Residential
Total Loans	0	0
Doubtful | Commercial
Total Loans	0	0
Doubtful | Commercial Loans (Not Secured by Real Estate)
Total Loans	0	0
Doubtful | Consumer Loans (Not Secured by Real Estate)
Total Loans	0	0
Doubtful | Multifamily and Farmland
Total Loans	0	0
Loss
Total Loans	0	0
Loss | Construction and Land Development
Total Loans	0	0
Loss | Single-Family Residential - Banco de la Gente Non-Tradtional
Total Loans	0	0
Loss | Farm Loans (Not Secured by Real Estate)
Total Loans	0	0
Loss | All Other Loans (Not Secured by Real Estate)
Total Loans	0	0
Loss | Single-Family Residential
Total Loans	0	0
Loss | Commercial
Total Loans	0	0
Loss | Commercial Loans (Not Secured by Real Estate)
Total Loans	0	0
Loss | Consumer Loans (Not Secured by Real Estate)
Total Loans	0	0
Loss | Multifamily and Farmland
Total Loans	0	0
Management Attention | Farm Loans (Not Secured by Real Estate)
Total Loans	$ 0	$ 4

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Loans (Details Narrative) - USD ($)	1 Months Ended	12 Months Ended
	Mar. 27, 2020	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Total past due TDR loans and non-accrual TDR loans		$ 3,700,000	$ 2,200,000
Allowance For Loan And Leases Losses		44,000	42,000	$ 61,000
Net of deferred fees		909,000	198,000
Deferred PPP loan fees			945,000
Impaired LoanAC		4,900,000	5,300,000	5,800,000
Interest Income Recognized On Accruing Impaired Loans		862,000	1,003,000	1,250,000
TDR loans
Impaired Loan		4,900,000	5,300,000
Paycheck Protection Program [Member]
Ppp Loan Amount			128,100,000	$ 128,100,000.0
Ppp Loan Program Description	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 PPP.
Additional Funding Loan, Description	A second round of PPP funding provided a total of $320 billion additional funding for the PPP.
Ppp Loan Outstanding Amount		103,000	18,000,000.0
Recognized Ppp Loan Fee Income		948,000	3,400,000
Allowance for Loan and Lease Losses [Member]
Accruing Impaired Loans		154,000	18,300,000
Interest Income Recognized On Accruing Impaired Loans		862,000	$ 1,000,000.0
Tdr Residential Mortage Portfolio Loan Amount		$ 250,000

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Premises and Equipment (Details) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Premises and Equipment
Land	$ 3,851,000	$ 3,857,000
Buildings and improvements	18,371,000	18,359,000
Furniture and equipment	26,156,000	25,420,000
Construction in process	3,028,000	0
Total premises and equipment	51,406,000	47,636,000
Less accumulated depreciation	(33,201,000)	(31,532,000)
Total net premises and equipment	$ 18,205,000	$ 16,104,000

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Premises and Equipment (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Premises and Equipment
Depreciation expense	$ 2,400,000	$ 2,600,000	$ 2,500,000
Net losses on the sale of and write-downs on premises and equipment	$ (85,000)	$ (105,000)

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Leases (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2022 USD ($)
Leases
Operating lease cost	$ 888
Cash paid for amounts included in the measurement of lease liabilities	873
Operating cash flows from operating leases	0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$ 1,726
Weighted-average remaining lease term - operating leases	9 years 3 months 3 days
Weighted-average discount rate - operating leases	2.23%

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Leases (Details 1) $ in Thousands	Dec. 31, 2022 USD ($)
Leases
2023	$ 805
2024	750
2025	694
2026	577
2027	528
Thereafter	2,418
Total	5,727
Less: imputed interest	(542)
Operating lease liability	$ 5,185

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Leases (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Leases
Operating ROU assets		$ 5,100,000
Operating lease liabilities		5,200,000
Rent expense	$ 976,000	$ 703,000	$ 880,000
Lease term	15 years

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Time Deposits (Details) $ in Thousands	Dec. 31, 2022 USD ($)
Time Deposits
2023	$ 59,099
2024	26,526
2025	7,380
2026	3,420
2027 and thereafter	1,574
Total	$ 97,999

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Time Deposits (Details Narrative) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Time Deposits
Time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service ("CDARS") on behalf of local customers	$ 15,000,000.0	$ 11,100,000
CDARS balances	$ 7,100	$ 3,000
Weighted average rate of brokered deposits	1.27%	1.49%

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Federal Home Loan Bank and Federal Reserve Bank Borrowings (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2022	Dec. 31, 2021
Federal Home Loan Bank and Federal Reserve Bank Borrowings
Loans pledged as collateral to the FHLB	$ 110,000
FHLB stock owned		$ 812,000	$ 707,000
Carrying value of loans pledged as collateral to the FHLB		14,940,000
Remaining availability credit with the FHLB		8,650,000
Prepayment of penalty	$ 70,000,000.0
Availability under the line of credit with the FRB		445,100,000
Fair value under the line of credit with the FRB3E		$ 585,000,000
Common stock Per shjare		$ 100

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Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Income Taxes
Current expense									$ 4,713	$ 4,023	$ 3,049
Deferred income tax expense									(541)	(227)	(560)
Total income tax	$ 1,102	$ 1,416	$ 806	$ 848	$ 732	$ 824	$ 1,194	$ 1,046	$ 4,172	$ 3,796	$ 2,489

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Income Taxes (Details 1) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Income Taxes
Tax expense at statutory rate									$ 4,262,000	$ 3,975,000	$ 2,908,000
Differences:
State income tax, net of federal income tax effect									395,000	339,000	261,000
Tax exempt interest income									(445,000)	(497,000)	(649,000)
Increase in cash surrender value of life insurance									(71,000)	(83,000)	(80,000)
Tax credits									(230)	(234)	(234)
Nondeductible interest and other expense									24,000	30,000	46,000
Other									237,000	266,000	237,000
Total income tax	$ 1,102,000	$ 1,416,000	$ 806,000	$ 848,000	$ 732,000	$ 824,000	$ 1,194,000	$ 1,046,000	$ 4,172,000	$ 3,796,000	$ 2,489,000

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Income Taxes (Details 2) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Deferred tax assets:
Allowance for loan losses	$ 2,411,000	$ 2,149,000
Accrued retirement expense	1,174,000	1,148,000
Restricted stock	245,000	209,000
Interest income on nonaccrual loans	1,000	2,000
Lease liability	1,191,000	1,075,000
Unrealized loss on available for sale securities	14,197	0
Total gross deferred tax assets	19,219,000	4,583,000
Deferred tax liabilities:
Deferred loan fees	209,000	263,000
Accumulated depreciation	438,000	563,000
Prepaid expenses	3,000	4,000
ROU Asset	1,175,000	1,060,000
Other	93,000	(55,000)
Unrealized gain on available for sale securities	0	29,000
Total gross deferred tax liabilities	1,732,000	1,864,000
Net deferred tax asset	$ 17,487,000	$ 2,719,000

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Related Party Transactions (Details) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021
Related Party Transactions
Beginning balance	$ 2,687,000	$ 1,852,000
Disbursements	4,090,000	3,636,000
Repayments	(3,396,000)	(2,801,000)
Ending balance	$ 3,381,000	$ 2,687,000

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Related Party Transactions (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Related Party Transactions
Related party deposits	$ 44,500	$ 4,340

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Commitments and Contingencies (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Standby letters of credit and financial guarantees written
Commitments and contingencies	$ 4,352	$ 4,892
Commitments to extend credit
Commitments and contingencies	$ 382,699	$ 304,258

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Commitments and Contingencies (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2017
Commitments and Contingencies
Overnight federal funds	$ 11,050
Commitments	2,900
Unfunded commitments	1,500
Investments		$ 300
Alloted to each property		$ 150
Future cash requirements	$ 38,710

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Employee and Director Benefit Programs (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Employee and Director Benefit Programs
Benefit obligation at beginning of period	$ 5,011	$ 4,870
Service cost	325	359	$ 359
Interest cost	63	70	70
Benefits paid	(289)	(288)
Benefit obligation at end of period	$ 5,110	$ 5,011	$ 4,870

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Employee and Director Benefit Programs (Details 1) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Employee and Director Benefit Programs
Funded status	$ (5,110,000)	$ (5,011,000)
Unrecognized prior service cost/benefit	0	0
Unrecognized net actuarial loss	0	0
Net amounts recognized	(5,011,000)	(5,110,000)
Intangible assets	0	0
Unfunded accrued liability	(5,110,000)	(5,011,000)
Net amounts recognized	$ (5,110,000)	$ (5,011,000)	$ (4,870,000)

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Employee and Director Benefit Programs (Details 2) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Employee and Director Benefit Programs
Benefit obligation at beginning of period	$ 5,110	$ 5,011	$ 4,870
Fair value of plan assets	$ 0	$ 0

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Employee and Director Benefit Programs (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Employee and Director Benefit Programs
Service cost	$ 325	$ 359	$ 359
Interest cost	63	70	70
Net periodic cost	$ 388	$ 429	$ 429
Weighted average discount rate assumption used to determine benefit obligation	5.50%	5.50%	5.49%

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Employee and Director Benefit Programs (Details 4) $ in Thousands	Dec. 31, 2022 USD ($)
Employee and Director Benefit Programs
2022	$ 329
2023	353
2024	370
2025	368
2026	494
Thereafter	$ 8,358

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Employee and Director Benefit Programs (Details Narrative) - USD ($)	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Employee and Director Benefit Programs
Matching of employee contributions, percentage	4.00%	4.00%	4.00%
Defined Benefit Plan, Contributions by Employer	$ 19,000	$ 709,000	$ 692,000
Expenses incurred for benefits relating to the postretirement benefit plan	369,000	447,000	368,000
Postretirement Benefits paid	$ 289,000	$ 288,000	$ 216,000

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Regulatory Matters (Details) - USD ($)	Dec. 31, 2022	Dec. 31, 2021
Total capital (to Risk-Weighted Assets) | Consolidated
Actual, amount	$ 178,286,000	$ 166,628,000
Actual, ratio	14.04%	16.35%
For capital adequacy purposes, amount	$ 101,608,000	$ 81,547,000
For capital adequacy purposes, ratio	8.00%	8.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Total capital (to Risk-Weighted Assets) | Bank
Actual, amount	$ 176,923,000	$ 164,975,000
Actual, ratio	13.93%	16.19%
For capital adequacy purposes, amount	$ 101,606,000	$ 81,539,000
For capital adequacy purposes, ratio	8.00%	8.00%
To be well capitalized under prompt corrective action provisions, amount	$ 133,357,000	$ 107,020,000
To be well capitalized under prompt corrective action provisions, ratio	10.50%	10.50%
Tier 1 Capital (to Risk- Weighted Assets) | Consolidated
Actual, amount	$ 167,792,000	$ 157,273,000
Actual, ratio	13.21%	15.43%
For capital adequacy purposes, amount	$ 76,206,000	$ 61,160,000
For capital adequacy purposes, ratio	6.00%	6.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Tier 1 Capital (to Risk- Weighted Assets) | Bank
Actual, amount	$ 166,429,000	$ 155,620,000
Actual, ratio	13.10%	15.27%
For capital adequacy purposes, amount	$ 76,204,000	$ 61,154,000
For capital adequacy purposes, ratio	6.00%	6.00%
To be well capitalized under prompt corrective action provisions, amount	$ 107,956,000	$ 86,635,000
To be well capitalized under prompt corrective action provisions, ratio	8.50%	8.50%
Tier 1 Capital (Average Assets) | Consolidated
Actual, amount	$ 167,792,000	$ 157,273,000
Actual, ratio	9.82%	9.64%
For capital adequacy purposes, amount	$ 68,347,000	$ 65,258,000
For capital adequacy purposes, ratio	4.00%	4.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Tier 1 Capital (Average Assets) | Bank
Actual, amount	$ 166,429,000	$ 155,620,000
Actual, ratio	9.68%	9.50%
For capital adequacy purposes, amount	$ 68,780,000	$ 65,557,000
For capital adequacy purposes, ratio	4.00%	4.00%
To be well capitalized under prompt corrective action provisions, amount	$ 68,780,000	$ 65,557,000
To be well capitalized under prompt corrective action provisions, ratio	4.00%	4.00%
Common Equity Tier 1 (to Risk-Weighted Assets) | Consolidated
Actual, amount	$ 152,792,000	$ 142,273,000
Actual, ratio	12.03%	13.96%
For capital adequacy purposes, amount	$ 57,154,000	$ 45,870,000
For capital adequacy purposes, ratio	4.50%	4.50%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Common Equity Tier 1 (to Risk-Weighted Assets) | Bank
Actual, amount	$ 166,429,000	$ 155,620,000
Actual, ratio	13.10%	15.27%
For capital adequacy purposes, amount	$ 57,153,000	$ 45,866,000
For capital adequacy purposes, ratio	4.50%	4.50%
To be well capitalized under prompt corrective action provisions, amount	$ 88,905,000	$ 71,347,000
To be well capitalized under prompt corrective action provisions, ratio	7.00%	7.00%

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Other Operating Income and Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Other Operating Income and Expense
Visa debit card income	$ 4,901	$ 5,045	$ 4,237
Bank owned life insurance income	458	397	380
Other	2,390	2,197	1,315
Miscellaneous non-interest income	7,749	7,639	5,932
ATM expense	629	619	567
Data processing	777	643	635
Deposit program expense	348	415	426
Dues and subscriptions	628	588	538
FHLB advance prepayment penalty	0	0	1,100
Internet banking expense	949	768	729
Office supplies	532	374	538
Telephone	691	730	794
Other	3,741	3,737	3,217
Other	$ 8,295	$ 7,874	$ 8,544

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Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021
Assets:
Investment securities available for sale	$ 445,394	$ 406,549
Mortgage loans held for sale	211	3,637
Level 1
Assets:
Investment securities available for sale	0	0
Mortgage loans held for sale	0	0
Liabilities:
Cash and cash equivalents	71,596	277,499
Other investments	0	0
Mutual funds held in deferred compensation trust, amount measured at fair value on a recurring basis	0	0
Loans, net	0	0
Mutual funds held in deferred compensation trust	0	0
Deposits	0	0
Securities sold under agreements to repurchase	0	0
Junior subordinated debentures	0	0
Level 2
Assets:
Investment securities available for sale	445,394	406,549
Mortgage loans held for sale	0	0
Liabilities:
Cash and cash equivalents	0	0
Other investments	0	0
Mutual funds held in deferred compensation trust, amount measured at fair value on a recurring basis	1,510	1,327
Loans, net	0	0
Mutual funds held in deferred compensation trust	1,327	1,510
Deposits	0	0
Securities sold under agreements to repurchase	47,688	37,094
Junior subordinated debentures	15,464	15,464
Level 3
Assets:
Investment securities available for sale	0	0
Mortgage loans held for sale	211	3,637
Liabilities:
Cash and cash equivalents	0	0
Other investments	2,656	3,668
Mutual funds held in deferred compensation trust, amount measured at fair value on a recurring basis	0	0
Loans, net	998,587	855,814
Mutual funds held in deferred compensation trust	0	0
Deposits	1,434,871	1,401,833
Securities sold under agreements to repurchase	0	0
Junior subordinated debentures	0	0
Carrying Amount
Assets:
Investment securities available for sale	445,394	406,549
Mortgage loans held for sale	211	3,637
Liabilities:
Cash and cash equivalents	71,596	277,499
Other investments	2,656	3,668
Loans, net	1,022,114	875,514
Mutual funds held in deferred compensation trust	1,327	1,510
Deposits	1,435,215	1,412,748
Securities sold under agreements to repurchase	47,688	37,094
Junior subordinated debentures	15,464	15,464
Fair Value
Liabilities:
Mutual funds held in deferred compensation trust, amount measured at fair value on a recurring basis	1,510	1,327
Estimated Fair Value
Assets:
Investment securities available for sale	445,394	406,549
Mortgage loans held for sale	211	3,637
Liabilities:
Cash and cash equivalents	71,596	277,499
Other investments	2,656	3,668
Loans, net	998,587	855,814
Mutual funds held in deferred compensation trust	1,327	1,510
Deposits	1,434,871	1,401,833
Securities sold under agreements to repurchase	47,688	37,094
Junior subordinated debentures	$ 15,464	$ 15,464

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Reportable Segments (Details) - USD ($)	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Interest expense									$ 3,323,000	$ 3,205,000	$ 3,836,000
Provision for loan losses	$ 583,000	$ 408,000	$ 410,000	$ 71,000	$ 300,000	$ 182,000	$ 226,000	$ 455,000	1,472,000	(1,163,000)	4,259,000
Noninterest income	5,522,000	6,793,000	7,328,000	7,046,000	6,966,000	6,040,000	6,040,000	5,873,000	26,689,000	24,919,000	22,914,000
Noninterest expense	14,991,000	13,455,000	14,243,000	13,341,000	14,159,000	12,568,000	12,132,000	12,268,000	8,295,000	7,874,000	8,544,000
Total income tax	1,102,000	1,416,000	806,000	848,000	732,000	824,000	1,194,000	1,046,000	4,172,000	3,796,000	2,489,000
Net earnings	4,147,000	$ 5,307,000	$ 3,217,000	$ 3,452,000	3,007,000	$ 3,390,000	$ 4,615,000	$ 4,121,000	16,123,000	15,133,000	11,357,000
Total assets	1,620,927,000				1,624,193,000				1,620,927,000	1,624,193,000
Banking Operations [Member]
Interest income									54,416	47,171	47,926
Interest expense									2,796	2,930	3,473
Net interest income									51,620	44,241	44,453
Provision for loan losses									1,472	(1,163)	4,259
Noninterest income									15,012	16,014	16,148
Appraisal management fee income									0	0	0
Noninterest expense									44,433	42,239	42,041
Appraisal management fee expense									0	0	0
Total income tax									4,248	3,836	2,574
Net earnings									16,479	15,343	11,727
Total assets	1,617,212				1,620,933				1,617,212	1,620,933
CBRES [Member]
Interest income									0	0	0
Interest expense									0	0	0
Net interest income									0	0	0
Provision for loan losses									0	0	0
Noninterest income									14	15	12
Appraisal management fee income									11,663	8,890	6,754
Noninterest expense									1,695	1,163	991
Appraisal management fee expense									9,264	7,112	5,274
Total income tax									166	145	116
Net earnings									552	485	385
Total assets	3,227				2,692				3,227	2,692
Other [Member]
Interest income									527	275	363
Interest expense									15	8	32
Net interest income									(512)	(267)	(331)
Provision for loan losses									0	0	0
Noninterest income									0	0	0
Appraisal management fee income									0	0	0
Noninterest expense									638	613	625
Appraisal management fee expense									0	0	0
Total income tax									(242)	(185)	(201)
Net earnings									(908)	(695)	(755)
Total assets	488				568				488	568
Consolidated [Member]
Interest income									54,431	47,179	47,958
Interest expense									3,323	3,205	3,836
Net interest income									51,108	43,974	44,122
Provision for loan losses									1,472	(1,163)	4,259
Noninterest income									15,026	16,029	16,160
Appraisal management fee income									11,663	8,890	6,754
Noninterest expense									46,766	44,015	43,657
Appraisal management fee expense									9,264	7,112	5,274
Total income tax									4,172	3,796	2,489
Net earnings									16,123	15,133	$ 11,357
Total assets	$ 1,620,927				$ 1,624,193				$ 1,620,927	$ 1,624,193

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Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements Balance Sheets (Details) - USD ($) $ in Thousands	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2017
Assets
Interest-bearing time deposit	$ 21,535	$ 232,788
Investment in subsidiaries					$ 300
Total assets	1,620,927	1,624,193
Junior subordinated debentures	15,464	15,464
Total liabilities	1,515,732	1,481,824
Total shareholders' equity	105,195	142,369	$ 139,899	$ 134,120
Total liabilities and shareholders' equity	1,620,927	1,624,193
Parent Company
Assets
Cash	384	561	$ 664	$ 1,187
Interest-bearing time deposit	1,000	1,000
Investment in subsidiaries	118,832	155,716
Investment in PEBK Capital Trust II	464	464
Other assets	24	105
Total assets	120,704	157,846
Junior subordinated debentures	15,464	15,464
Total liabilities	45	13
Total shareholders' equity	105,195	142,369
Total liabilities and shareholders' equity	$ 120,704	$ 157,846

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Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements Statements of Earnings (Details 1) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Expenses:
Interest									$ 3,323	$ 3,205	$ 3,836
Other operating expenses									213	144	200
Total income tax	$ 1,102	$ 1,416	$ 806	$ 848	$ 732	$ 824	$ 1,194	$ 1,046	4,172	3,796	2,489
Net earnings	$ 4,147	$ 5,307	$ 3,217	$ 3,452	$ 3,007	$ 3,390	$ 4,615	$ 4,121	16,123	15,133	11,357
Parent Company
Revenues
Interest and dividend from subsidiary									6,240	7,419	7,539
Total revenues									6,240	7,419	7,539
Expenses:
Interest									529	280	370
Other operating expenses									639	613	625
Total expenses									1,168	893	995
Income before income tax benefit and equity in undistributed earnings of subsidiaries									5,072	6,526	6,544
Total income tax									242	185	201
Income before equity in undistributed earnings of subsidiaries									5,314	6,711	6,745
Equity in undistributed earnings of subsidiaries									10,809	8,422	4,612
Net earnings									$ 16,123	$ 15,133	$ 11,357

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Peoples Bancorp of North Carolina Inc (Parent Company Only) Condensed Financial Statements (Details 2) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Net earnings	$ 4,147	$ 5,307	$ 3,217	$ 3,452	$ 3,007	$ 3,390	$ 4,615	$ 4,121	$ 16,123	$ 15,133	$ 11,357
Other assets									3,920	554	596
Net cash provided by operating activities									22,657	26,900	9,162
Proceeds from calls and maturities of investment securities available for sale									7,875	9,540	62,408
Net cash used by investing activities									(255,976)	(106,138)	(148,972)
Net cash (used) provided by financing activities									27,416	195,157	249,003
Net cash provided by financing activities									27,416	195,157	249,003
Net change in cash and cash equivalents									(205,903)	115,919	109,193
Parent Company
Net earnings									16,123	15,133	11,357
Equity in undistributed earnings of subsidiaries									(10,809)	(8,422)	(4,612)
Other assets									81	545	(19)
Other liabilities									32	0	(10)
Net cash provided by operating activities									5,427	7,256	6,716
Proceeds from calls and maturities of investment securities available for sale									0	0	250
Net cash used by investing activities									0	0	250
Repayments of Junior Subordinated Debentures									0	0	155
Cash dividends paid on common stock									(4,935)	(3,793)	(4,392)
Stock repurchase									710	3,605	(2,999)
Proceeds from exercise of restricted stock units									41	39	57
Net cash (used) provided by financing activities									(5,604)	(7,359)	(7,489)
Net cash provided by financing activities									(5,604)	(7,359)	(7,489)
Net change in cash and cash equivalents									(177)	(103)	(523)
Cash at beginning of year				$ 561				$ 664	561	664	1,187
Cash at end of year	$ 384				$ 561				$ 384	$ 561	$ 664

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Quarterly Data (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2022	Sep. 30, 2022	Jun. 30, 2022	Mar. 31, 2022	Dec. 31, 2021	Sep. 30, 2021	Jun. 30, 2021	Mar. 31, 2021	Dec. 31, 2022	Dec. 31, 2021	Dec. 31, 2020
Quarterly Data
Total interest income	$ 16,499	$ 14,611	$ 11,992	$ 11,329	$ 11,319	$ 11,421	$ 12,517	$ 11,922
Total interest expense	1,198	818	644	663	687	861	842	815
Net interest income	15,301	13,793	11,348	10,666	10,632	10,560	11,675	11,107
Provision for loan losses	583	408	410	71	300	182	226	455	$ 1,472	$ (1,163)	$ 4,259
Other income	5,522	6,793	7,328	7,046	6,966	6,040	6,040	5,873	26,689	24,919	22,914
Noninterest expense	14,991	13,455	14,243	13,341	14,159	12,568	12,132	12,268	8,295	7,874	8,544
Income before income taxes	5,249	6,723	4,023	4,300	3,739	4,214	5,809	5,167	20,295	18,929	13,846
Total income tax	1,102	1,416	806	848	732	824	1,194	1,046	4,172	3,796	2,489
Net earnings	$ 4,147	$ 5,307	$ 3,217	$ 3,452	$ 3,007	$ 3,390	$ 4,615	$ 4,121	$ 16,123	$ 15,133	$ 11,357
Basic net earnings per share	$ 0.76	$ 0.96	$ 0.59	$ 0.63	$ 0.55	$ 0.61	$ 0.82	$ 0.73	$ 2.94	$ 2.71	$ 2.01
Diluted net earnings per share	$ 0.74	$ 0.93	$ 0.57	$ 0.61	$ 0.53	$ 0.59	$ 0.80	$ 0.71	$ 2.85	$ 2.63	$ 1.95

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Subsequent Events (Details Narrative) - USD ($)	2 Months Ended	12 Months Ended
	Feb. 28, 2023	Dec. 31, 2022	Dec. 31, 2021
Gross losses		$ 62,328,000	$ 5,536,000
Gross gains		$ 536,000	$ 5,663,000
Subsequent Event [Member]
Securities available for sale, sold	$ 53,500,000
Gross losses	2,700,000
Gross gains	$ 177,000