UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~[ X ]~~

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September~~June 30, ~~2020~~

2021

~~[ ]~~

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

000-27205

(Commission File No.)

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

~~(Exact name of registrant as specified in its charter)~~

~~North Carolina~~	~~56-2132396~~ PEOPLES BANCORP OF NORTH CAROLINA, INC.
~~(State~~ (Exact name of registrant as specified in its charter)

North Carolina		56-2132396
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

518 West C Street, Newton, North Carolina		28658
(Address of principal executive offices)		(Zip Code)

(828) 464-5620

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name on each exchange on which registered

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the ~~registrant's~~registrant’s classes of common stock, as of the latest practicable date. ~~5,787,504~~5,789,166 shares of common stock, outstanding at ~~October~~July 31, ~~2020.~~

~~INDEX~~

~~PART I.~~

~~FINANCIAL INFORMATION~~

2021.

		~~PAGE(S)~~
~~Item 1.~~	~~Financial Statements~~

INDEX

			PAGE(S)
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		3

	Consolidated Balance Sheets at ~~September~~June 30, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020 (Audited)		3

	Consolidated Statements of Earnings for the three and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)		4

	Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)		5

	Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)		6

	Consolidated Statements of Cash Flows for the ~~nine~~three and six months ended ~~September~~June 30, 2021 and 2020 ~~and 2019~~ (Unaudited)		7-8

	Notes to Consolidated Financial Statements (Unaudited)	~~9-30~~	9-29

Item 2.	Management’s Discussion and Analysis of Financial ~~Conditionand~~Condition and Results of Operations	~~30-44~~	30-45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45	46

Item 4.	Controls and Procedures	45	46

PART II.

OTHER INFORMATION

Item 1.	Legal Proceedings	45	46
Item 1A.	Risk Factors	~~45-47~~	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48	47
Item 3.	Defaults upon Senior Securities	48	47
Item 5.	Other Information	48	47
Item 6.	Exhibits	~~48-50~~	47-50
Signatures			51
Certifications			~~52-54~~

Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by the registrant and its subsidiaries, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

P~~ART~~2020.

Table of Contents

PART I.

FINANCIAL INFORMATION

I~~tem~~

Item 1.

Financial Statements

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

C~~onsolidated Balance Sheets~~

~~September 30, 2020 and December 31, 2019~~

~~(Dollars in thousands)~~

September 30,

December 31,

Assets

2020

2019

(Unaudited)

(Audited)

Cash and due from banks, including reserve requirements

of $0 at 9/30/20 and $13,210 at 12/31/19
$48,355
  48,337
Interest-bearing deposits
  15,778
  720
Federal funds sold
  140,095
  3,330
Cash and cash equivalents
  204,228
  52,387



Investment securities available for sale
  222,991
  195,746
Other investments
  7,163
  4,231
Total securities
  230,154
  199,977



Mortgage loans held for sale
  8,960
  4,417



Loans
  970,232
  849,874
Less allowance for loan losses
  (9,892)
  (6,680)
Net loans
  960,340
  843,194



Premises and equipment, net
  19,057
  18,604
Cash surrender value of life insurance
  16,742
  16,319
Other real estate
  128
  -
Right of use lease asset
  3,097
  3,622
Accrued interest receivable and other assets
  15,903
  16,362
Total assets
$1,458,609
  1,154,882



Liabilities and Shareholders' Equity





Deposits:


Noninterest-bearing demand
$455,199
  338,004
NOW, MMDA & savings
  626,674
  516,757
Time, $250,000 or more
  24,717
  34,269
Other time
  79,806
  77,487
Total deposits
  1,186,396
  966,517



Securities sold under agreements to repurchase
  34,151
  24,221
FHLB borrowings
  70,000
  -
Junior subordinated debentures
  15,464
  15,619
Lease liability
  3,139
  3,647
Accrued interest payable and other liabilities
  10,008
  10,758
Total liabilities
  1,319,158
  1,020,762



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 5,787,504 shares


at September 30, 2020 and 5,912,300 shares at December 31, 2019
  56,871
  59,813
Retained earnings
  76,580
  70,663
Accumulated other comprehensive income
  6,000
  3,644
Total shareholders' equity
  139,451
  134,120
Total liabilities and shareholders' equity
$1,458,609
  1,154,882

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
June 30, 2021 and December 31, 2020
(Dollars in thousands)

	June 30,			December 31,
	2021			2020
	(Unaudited)			(Audited)
Assets

Cash and due from banks, including reserve requirements of $0 at both June 30, 2021 and December 31, 2020	$	47,151			42,737
Interest-bearing deposits		240,158			118,843
Cash and cash equivalents		287,309			161,580

Investment securities available for sale		367,529			245,249
Other investments		3,758			4,155
Total securities		371,287			249,404

Mortgage loans held for sale		5,501			9,139

Loans		888,360			948,639
Less allowance for loan losses		(9,287	)		(9,908	)
Net loans		879,073			938,731

Premises and equipment, net		17,217			18,600
Cash surrender value of life insurance		17,164			16,968
Other real estate		0			128
Right of use lease asset		3,017			3,423
Accrued interest receivable and other assets		19,005			18,202
Total assets	$	1,599,573			1,416,175

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$	512,577			456,980
Interest-bearing demand, MMDA & savings		775,009			657,834
Time, $250,000 or more		26,631			25,771
Other time		77,837			80,501
Total deposits		1,392,054			1,221,086

Securities sold under agreements to repurchase		31,249			26,201
Junior subordinated debentures		15,464			15,464
Lease liability		3,073			3,471
Accrued interest payable and other liabilities		12,359			10,054
Total liabilities		1,454,199			1,276,276

Commitments		0			0

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 5,789,166 shares at June 30, 2021 and 5,787,504 shares at December 31, 2020		56,910			56,871
Common stock held by deferred compensation trust, at cost; 158,985 shares at June 30, 2021 and 155,469 shares at December 31, 2020		(1,901	)		(1,796	)
Deferred compensation		1,901			1,796
Retained earnings		84,504			77,628
Accumulated other comprehensive income		3,960			5,400
Total shareholders' equity		145,374			139,899

Total liabilities and shareholders' equity	$	1,599,573			1,416,175

See accompanying Notes to Consolidated Financial Statements.

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

C~~onsolidated Statements of Earnings~~

~~Three and Nine Months Ended September 30, 2020 and 2019~~

~~(Dollars in thousands, except per share amounts)~~

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Interest income:

Interest and fees on loans
$10,507
  11,004
  31,367
  32,517
Interest on due from banks
  19
  87
  103
  136
Interest on fededal funds sold
  33
  -
  178
  -
Interest on investment securities:




U.S. Government sponsored enterprises
  528
  628
  1,864
  1,942
State and political subdivisions
  717
  671
  2,042
  2,265
Other
  64
  40
  202
  128
Total interest income
  11,868
  12,430
  35,756
  36,988





Interest expense:




NOW, MMDA & savings deposits
  482
  455
  1,455
  1,057
Time deposits
  224
  259
  725
  581
FHLB borrowings
  103
  21
  269
  70
Junior subordinated debentures
  76
  210
  296
  656
Other
  57
  49
  150
  168
Total interest expense
  942
  994
  2,895
  2,532
Net interest income
  10,926
  11,436
  32,861
  34,456





Provision for loan losses
  522
  422
  3,460
  677
Net interest income after provision for loan losses
  10,404
  11,014
  29,401
  33,779





Non-interest income:




Service charges
  809
  1,178
  2,635
  3,409
Other service charges and fees
  188
  202
  543
  548
Gain/(loss) on sale of investment securities
  1,688
  (5)
  2,145
  226
Mortgage banking income
  750
  376
  1,635
  834
Insurance and brokerage commissions
  200
  206
  647
  642
Appraisal management fee income
  1,871
  1,311
  4,955
  3,285
Gain/(loss) on sale and write-down of




other real estate
  (47)
  (1)
  (47)
  (18)
Miscellaneous
  1,673
  1,441
  4,453
  4,287
Total non-interest income
  7,132
  4,708
  16,966
  13,213





Non-interest expense:




Salaries and employee benefits
  5,737
  5,695
  16,996
  17,060
Occupancy
  1,943
  1,861
  5,725
  5,409
Professional fees
  374
  237
  1,121
  955
Advertising
  152
  234
  566
  775
Debit card expense
  278
  201
  766
  667
FDIC Insurance
  81
  (36)
  169
  116
Appraisal management fee expense
  1,478
  1,012
  3,845
  2,538
Other
  1,871
  2,063
  5,627
  5,907
Total non-interest expense
  11,914
  11,267
  34,815
  33,427
Earnings before income taxes
  5,622
  4,455
  11,552
  13,565





Income tax expense
  1,113
  834
  2,115
  2,464





Net earnings
$4,509
  3,621
  9,437
  11,101





Basic net earnings per share
$0.78
  0.62
  1.62
  1.87
Diluted net earnings per share
$0.78
  0.61
  1.62
  1.86
Cash dividends declared per share
$0.15
  0.14
  0.60
  0.52

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
Three and Six Months Ended June 30, 2021 and 2020
(Dollars in thousands, except per share amounts)

	Three months ended					Six months ended
	June 30,					June 30,
	2021			2020		2021			2020
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)

Interest income:
Interest and fees on loans	$	11,003			10,180		21,667			20,860
Interest on due from banks		48			41		83			84
Interest on fededal funds sold		0			22		0			145
Interest on investment securities:
U.S. Government sponsored enterprises		682			651		1,220			1,336
State and political subdivisions		758			684		1,397			1,325
Other		26			60		72			138
Total interest income		12,517			11,638		24,439			23,888

Interest expense:
NOW, MMDA & savings deposits		543			448		1,040			973
Time deposits		191			224		403			501
FHLB borrowings		0			102		0			166
Junior subordinated debentures		71			90		142			220
Other		37			48		72			93
Total interest expense		842			912		1,657			1,953

Net interest income		11,675			10,726		22,782			21,935

Provision for (recovery of) loan losses		(226	)		1,417		(681	)		2,938

Net interest income after provision for loan losses		11,901			9,309		23,463			18,997

Non-interest income:
Service charges		910			718		1,836			1,826
Other service charges and fees		171			162		383			355
Gain on sale of investment securities		0			457		0			457
Mortgage banking income		723			563		1,593			885
Insurance and brokerage commissions		238			205		498			447
Appraisal management fee income		2,005			1,734		3,821			3,084
Gain on sale of other real estate		21			0		21			0
Miscellaneous		1,972			1,400		3,761			2,780
Total non-interest income		6,040			5,239		11,913			9,834

Non-interest expense:
Salaries and employee benefits		5,666			5,535		11,849			11,259
Occupancy		1,939			1,861		3,892			3,782
Professional fees		435			414		772			747
Advertising		154			196		297			414
Debit card expense		264			258		496			488
FDIC Insurance		164			48		196			88
Appraisal management fee expense		1,634			1,333		3,090			2,367
Other		1,876			1,807		3,808			3,756
Total non-interest expense		12,132			11,452		24,400			22,901

Earnings before income taxes		5,809			3,096		10,976			5,930

Income tax expense		1,194			535		2,240			1,002

Net earnings	$	4,615			2,561		8,736			4,928

Basic net earnings per share	$	0.82			0.46		1.55			0.87
Diluted net earnings per share	$	0.80			0.44		1.51			0.84
Cash dividends declared per share	$	0.16			0.15		0.32			0.45

See accompanying Notes to Consolidated Financial Statements.

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

C~~onsolidated Statements of Comprehensive Income~~

~~Three and Nine Months Ended September 30, 2020 and 2019~~

~~(Dollars in thousands)~~

Three months ended

Nine months ended

September 30,

September 30,

2020

2019

2020

2019

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net earnings
$4,509
  3,621
  9,437
  11,101





Other comprehensive income:




Unrealized holding gains on securities




available for sale
  93
  700
  5,204
  4,584
Reclassification adjustment for (gains) losses on




securities available for sale




included in net earnings
  (1,688)
  5
  (2,145)
  (226)





Total other comprehensive income (loss),




before income taxes
  (1,595)
  705
  3,059
  4,358





Income tax expense related to other




comprehensive income:









Unrealized holding gains on securities




available for sale
  21
  161
  1,196
  1,054
Reclassification adjustment for (gains) losses




on securities available for sale




included in net earnings
  (388)
  1
  (493)
  (52)





Total income tax expense related to




other comprehensive income (loss)
  (367)
  162
  703
  1,002





Total other comprehensive income (loss),




net of tax
  (1,228)
  543
  2,356
  3,356





Total comprehensive income
$3,281
  4,164
  11,793
  14,457

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2021 and 2020
(Dollars in thousands)

	Three months ended					Six months ended
	June 30,					June 30,
	2021		2020			2021			2020
	(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)

Net earnings	$	4,615		2,561			8,736			4,928

Other comprehensive income:
Unrealized holding gains (losses) on securities available for sale		2,155		2,396			(1,870	)		5,110
Reclassification adjustment for gains on securities available for sale included in net earnings		0		(457	)		0			(457	)

Total other comprehensive income (loss), before income taxes		2,155		1,939			(1,870	)		4,653

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

Unrealized holding gains (losses) on securities available for sale		495		550			(430	)		1,174
Reclassification adjustment for gains on securities available for sale included in net earnings		0		(105	)		0			(105	)

Total income tax expense (benefit) related to other comprehensive income		495		445			(430	)		1,069

Total other comprehensive income (loss), net of tax		1,660		1,494			(1,440	)		3,584

Total comprehensive income	$	6,275		4,055			7,296			8,512

See accompanying Notes to Consolidated Financial Statements.

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

C~~onsolidated Statements of Changes in Shareholders' Equity~~

~~Three and Nine Months Ended September 30, 2020 and 2019~~

~~(Dollars in thousands)~~

Accumulated

Other

Common Stock

Retained

Comprehensive

Shares

Amount

Earnings

Income

Total

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Balance, December 31, 2019
  5,912,300
$59,813
  70,663
  3,644
  134,120






Common stock repurchase
  (126,800)
  (2,999)
  -
  -
  (2,999)
Cash dividends declared on





common stock
  -
  -
  (1,779)
  -
  (1,779)
Restricted stock units exercised
  2,004
  57
  -
  -
  57
Net earnings
  -
  -
  2,367
  -
  2,367
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  2,090
  2,090
Balance, March 31, 2020
  5,787,504
  56,871
  71,251
  5,734
  133,856






Cash dividends declared on





common stock
  -
  -
  (870)
  -
  (870)
Net earnings
  -
  -
  2,561
  -
  2,561
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  1,494
  1,494
Balance, June 30, 2020
  5,787,504
$56,871
  72,942
  7,228
  137,041






Cash dividends declared on





common stock
  -
  -
  (871)
  -
  (871)
Net earnings
  -
  -
  4,509
  -
  4,509
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  (1,228)
  (1,228)
Balance, September 30, 2020
  5,787,504
$56,871
  76,580
  6,000
  139,451












Balance, December 31, 2018
  5,995,256
$62,096
  60,535
  986
  123,617






Common stock repurchase
  (5,518)
  (152)
  -
  -
  (152)
Cash dividends declared on





common stock
  -
  -
  (1,445)
  -
  (1,445)
Restricted stock units exercised
  7,398
  207
  -
  -
  207
Net earnings
  -
  -
  3,667
  -
  3,667
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  690
  690
Balance, March 31, 2019
  5,997,136
  62,151
  62,757
  1,676
  126,584






Common stock repurchase
  (63,996)
  (1,761)
  -
  -
  (1,761)
Cash dividends declared on





common stock
  -
  -
  (832)
  -
  (832)
Net earnings
  -
  -
  3,813
  -
  3,813
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  2,123
  2,123
Balance, June 30, 2019
  5,933,140
$60,390
  65,738
  3,799
  129,927






Common stock repurchase
  (20,840)
  (577)
  -
  -
  (577)
Cash dividends declared on





common stock
  -
  -
  (831)
  -
  (831)
Restricted stock units exercised
  -
  -
  -
  -
  -
Net earnings
  -
  -
  3,621
  -
  3,621
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  543
  543
Balance, September 30, 2019
  5,912,300
$59,813
  68,528
  4,342
  132,683

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
Three and Six Months Ended June 30, 2021 and 2020
(Dollars in thousands)

	Common Stock						Retained			Deferred		Common Stock Held By Deferred Compensation			Accumulated Other Comprehensive
	Shares			Amount			Earnings			Compensation		Trust			Income			Total
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)

Balance, As At December 31, 2020		5,787,504		$	56,871			77,628			1,796		(1,796	)		5,400			139,899

Cash dividends declared on common stock		-			0			(930	)		0		0			0			(930	)
Restricted stock units exercised		1,662			39			0			0		0			0			39
Equity incentive plan, net		-			0			0			53		(53	)		0			0
Net earnings		-			0			4,121			0		0			0			4,121
Change in accumulated other comprehensive income, net of tax		-			0			0			0		0			(3,100	)		(3,100	)
Balance, As At March 31, 2021		5,789,166			56,910			80,819			1,849		(1,849	)		2,300			140,029

Cash dividends declared on common stock		-			0			(930	)		0		0			0			(930	)
Equity incentive plan, net		-			0			0			52		(52	)		0			0
Net earnings		-			0			4,615			0		0			0			4,615
Change in accumulated other comprehensive income, net of tax		-			0			0			0		0			1,660			1,660
Balance, As At June 30, 2021		5,789,166		$	56,910			84,504			1,901		(1,901	)		3,960			145,374

Balance, As At 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	)		0			0		0			0			(2,999	)
Cash dividends declared on common stock		-			0			(1,779	)		0		0			0			(1,779	)
Restricted stock units exercised		2,004			57			0								0			57
Equity incentive plan, net		-			0			0			64		(64	)		0			0
Net earnings		-			0			2,367			0		0			0			2,367
Change in accumulated other comprehensive income, net of tax		-			0			0			0		0			2,090			2,090
Balance, As At March 31, 2020		5,787,504			56,871			71,251			1,652		(1,652	)		5,734			133,856

Cash dividends declared on common stock		-			0			(870	)		0		0			0			(870	)
Equity incentive plan, net		-			0			0			48		(48	)		0			0
Net earnings		-			0			2,561			0		0			0			2,561
Change in accumulated other comprehensive income, net of tax		-			0			0			0		0			1,494			1,494
Balance, As At June 30, 2020		5,787,504		$	56,871			72,942			1,700		(1,700	)		7,228			137,041

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2021 and 2020
(Dollars in thousands)

	2021			2020
	(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net earnings	$	8,736			4,928
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion		2,549			2,017
Provision for (recovery of) loan losses		(681	)		2,938
Deferred income taxes		(18	)		(16	)
Gain on sale of investment securities		0			(457	)
Gain on sale of other real estate		(21	)		0
Restricted stock expense		(100	)		(75	)
Proceeds from sales of mortgage loans held for sale		54,006			43,832
Origination of mortgage loans held for sale		(50,368	)		(50,009	)
Change in:
Cash surrender value of life insurance		(196	)		(188	)
Right of use lease asset		406			255
Other assets		53			(212	)
Lease liability		(398	)		(244	)
Other liabilities		2,405			3,214

Net cash provided by operating activities		16,373			5,983

Cash flows from investing activities:
Purchases of investment securities available for sale		(141,780	)		(37,340	)
Proceeds from sales, calls and maturities of investment securities available for sale		5,300			20,592
Proceeds from paydowns of investment securities available for sale		11,073			9,305
Proceeds from paydowns on other investments		88			88
Redemptions (purchases) of FHLB stock		331			(3,031	)
Net change in loans		60,339			(116,854	)
Purchases of premises and equipment		(339	)		(1,085	)
Proceeds from sale of other real estate and repossessions		149			0

Net cash used by investing activities		(64,839	)		(128,325	)

Cash flows from financing activities:
Net change in deposits		170,968			187,812
Net change in securities sold under agreement to repurchase		5,048			7,526
Proceeds from FHLB borrowings		0			70,000
Repayments of FHLB borrowings		0			0
Repayment of Junior Subordinated Debt		0			(155	)
Proceeds from Fed Funds purchased		0			(6,935	)
Repayments of Fed Funds purchased		0			6,935
Restricted stock units exercised		39			57
Common stock repurchased		0			(2,999	)
Cash dividends paid on common stock		(1,860	)		(2,647	)

Net cash provided by financing activities		174,195			259,594

Net change in cash and cash equivalents		125,729			137,252

Cash and cash equivalents at beginning of period		161,580			52,387

Cash and cash equivalents at end of period	$	287,309			189,639

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

C~~onsolidated Statements of Cash Flows~~

~~Nine Months Ended Septemer 30, 2020 and 2019~~

~~(Dollars in thousands)~~

2020

2019

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net earnings
$9,437
  11,101
Adjustments to reconcile net earnings to


net cash provided by operating activities:


Depreciation, amortization and accretion
  3,080
  2,949
Provision for loan losses
  3,460
  677
Deferred income taxes
  (25)
  (7)
Gain on sale of investment securities
  (2,145)
  (226)
Loss (gain) on sale of other real estate
  -
  1
Write-down of other real estate
  47
  17
Loss on sale of premises and equipment
  -
  138
Restricted stock expense
  (73)
  201
Proceeds from sales of mortgage loans held for sale
  78,526
  34,002
Origination of mortgage loans held for sale
  (83,069)
  (37,585)
Change in:


Cash surrender value of life insurance
  (283)
  (286)
Right of use lease asset
  525
  585
Other assets
  (219)
  (790)
Lease liabilty
  (508)
  (935)
Other liabilities
  (677)
  (765)
Net cash provided by operating activities
  8,076
  9,077



Cash flows from investing activities:


Purchases of investment securities available for sale
  (90,233)
  (36,515)
Proceeds from sales, calls and maturities of investment securities


available for sale
  52,289
  36,700
Proceeds from paydowns of investment securities available for sale
  14,635
  11,416
Purchases of other investments
  -
  -
Proceeds from paydowns on other investments
  132
  132
Purchases of FHLB stock
  (3,031)
  (2,976)
Net change in loans
  (120,781)
  (42,146)
Purchases of premises and equipment
  (2,298)
  (2,800)
Purchases of bank owned life insurance
  (140)
  -
Proceeds from sale of premises and equipment
  -
  697
Proceeds from sale of other real estate and repossessions
  -
  9
Net cash used by investing activities
  (149,427)
  (35,483)



Cash flows from financing activities:


Net change in deposits
  219,879
  84,355
Net change in securities sold under agreement to repurchase
  9,930
  (36,168)
Proceeds from FHLB borrowings
  70,000
  184,500
Repayments of FHLB borrowings
  -
  (114,500)
Proceeds from Fed Funds purchased
  6,935
  100,075
Repayments of Fed Funds purchased
  (6,935)
  (100,075)
Repayment of Junior Subordinated Debt
  (155)
  -
Restricted stock units exercised
  57
  -
Common stock repurchased
  (2,999)
  (2,490)
Cash dividends paid on common stock
  (3,520)
  (3,108)
Net cash provided by financing activities
  293,192
  112,589



Net change in cash and cash equivalents
  151,841
  86,183



Cash and cash equivalents at beginning of period
  52,387
  43,370



Cash and cash equivalents at end of period
$204,228
  129,553

~~PEOPLES BANCORP OF NORTH CAROLINA, INC.~~

Consolidated Statements of Cash Flows, continued

~~Nine~~

Six Months Ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~

2020

(Dollars in thousands)

2020

2019

(Unaudited)

(Unaudited)

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest
$1,908
  2,510
Income taxes
$1,651
  2,463



Noncash investing and financing activities:


Change in unrealized gain on investment securities


available for sale, net
$2,356
  3,356
Issuance of accrued restricted stock units
$57
  207
Transfers of loans to other real estate and repossessions
$175
  26
Initial recognition of lease right of use asset and lease liability
$450
  4,401

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,653		1,909
Income taxes	$	2,000		796

Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	$	(1,440	)	3,584
Issuance of accrued restricted stock units	$	39		57
Transfer of premises and equipment to other assets held for sale	$	408		-

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

N~~otes~~

Notes to Consolidated Financial Statements (Unaudited)

(1)

Summary of Significant Accounting Policies

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

The Bank ~~operates~~formerly operated 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~~Two of these offices ~~are now branded~~remain open as Bank branches ~~and considered a separate market territory of~~that offer the ~~Bank as they offer normal and customary~~same banking services ~~as are~~ offered in the Bank’s other branches such as the taking of deposits and the making of loans.

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, ~~2019)~~2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~6, 2021 Annual Meeting of Shareholders.

~~Recent Accounting Pronouncements~~

Correction of an Error

Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The ~~following table provides~~deferred compensation plan requires all deferral amounts and contributions to be held in a ~~summary of Accounting Standards Updates (“ASU”) issued~~rabbi trust, and the assets held by the ~~Financial Accounting Standards Board (“FASB”)~~trust should be recorded on the Company’s financial statements along with a corresponding liability.

For balances related to mutual fund investments held in the rabbi trust, the accrued interest receivable and other assets, accrued interest payable and other liabilities, total assets, and total liabilities line items on the Consolidated Balance Sheets were adjusted as of December 31, 2020 to reflect the asset and corresponding liability associated with the portion of the rabbi trust held in mutual fund investments. This resulted in an increase to these line items of $1.3 million. Additionally, an adjustment to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets has been made to disclose the number of shares of Company stock held by the rabbi trust and the cost basis for those shares, as well as a corresponding liability for the deferred compensation as of December 31, 2020.

On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.44 to $0.46 for the three months ended June 30, 2020 and from $0.84 to $0.87 for the six months ended June 30, 2020. The impact of the changes in the fair value of the mutual funds held in the rabbi trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements.

In addition to the adjustments to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets, the Company ~~has recently adopted.~~

adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the rabbi trust, as well as the corresponding deferred compensation associated with these shares.

The Company’s Consolidated Statements of Cash Flows were adjusted for the six months ended June 30, 2020 in order to reflect the changes to other assets and other liabilities made on the Consolidated Balance Sheets.

~~Recently Adopted Accounting Guidance~~
			9
~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
~~ASU 2016-02: Leases~~	~~Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.~~	~~January 1, 2019~~	~~See section titled "ASU 2016-02" below for a description~~Table of ~~the effect on the Company’s results of operations, financial position and disclosures.~~Contents
~~ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities~~	~~Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.~~	~~January 1, 2019~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-11: Leases (Topic 842): Targeted Improvements~~	~~Intended to reduce costs and ease implementation of ASU 2016-02.~~	~~January 1, 2019~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-20: Narrow- Scope Improvements for Lessors~~	Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.	~~January 1, 2019~~	~~See comments for ASU 2016-02 below.~~
~~ASU 2019-07: Codification Updates to SEC Sections~~	~~Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.~~	~~Effective upon issuance~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~

~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
~~ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)~~	~~Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.~~	~~January 1, 2020~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606~~	~~Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.~~	~~January 1, 2020 Early adoption permitted~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-19: Leases (Topic 842): Codification Improvements~~	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	~~January 1, 2020~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~

~~ASU 2014-09~~

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of the periods presented. All adjustments were not considered material to the financial statements.

Revenue Recognition

The Company has applied ~~ASU~~Accounting Standards Update (“ASU”) 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and ~~noninterest~~non-interest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues are not affected. Appraisal management fee income and expense from the Bank’s subsidiary, CBRES, was reported as a net amount prior to March 31, 2018, which was included in miscellaneous non-interest income. This income and expense is now reported on separate line items under non-interest income and non-interest expense. See below for additional information related to revenue generated from contracts with customers.

Revenue and Method of Adoption

The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment advisory, and appraisal services. On January 1, 2018, the Company adopted the requirements of ASU 2014-09. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company adopted ASU 2014-09 using the modified retrospective transition approach which does not require restatement of prior periods. The method was selected as there were no material changes in the timing of revenue recognition resulting in no comparability issues with prior periods. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of, and reason for, the change, which is solely a result of the adoption of the required standard. When applying the modified retrospective transition approach under ASU 2014-09, the Company has elected, as a practical expedient, to apply this approach only to contracts that were not completed as of January 1, 2018. A completed contract is considered to be a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that was in effect before January 1, 2018. There were no uncompleted contracts as of January 1, 2018 for which application of the new standard required an adjustment to retained earnings.

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was ~~$646,000~~$260,000 and ~~$641,000~~$241,000 for the ~~nine~~three months ended ~~September~~June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts was $498,000 and ~~2019,~~$446,000 for the six months ended June 30, 2021 and 2020, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was ~~$3.1~~$1.2 million and ~~$3.1~~$972,000 for the three months ended June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with these third parties was $2.5 million and $2.0 million for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively. This revenue is reflected in the “Miscellaneous” line under “Non-interest income” on the Company’s June 30, 2021 consolidated statements of earnings. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was ~~$618,000~~$180,000 and ~~$500,000~~$181,000 for the ~~nine~~three months ended ~~September~~June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with customers was $388,000 for the six months ended June 30, 2021 and ~~2019, respectively.~~2020. This revenue is reflected in the “Miscellaneous” line under “Non-interest income” on the Company’s June 30, 2021 consolidated statements of earnings. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was ~~$5.0~~$1.8 million and ~~$3.3~~$1.4 million for the ~~nine~~three months ended ~~September~~June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with customers was $3.8 million and ~~2019,~~$3.1 million for the six months ended June 30, 2021 and 2020, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

Table of Contents

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 derived from contracts in which services are transferred at a point in time was approximately ~~$6.0~~$4.7 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable on the balance sheet. Most contracts call for payment by a charge or deduction to the respective customer account but there are some that require a receipt of payment from the customer. For fee per transaction contracts, the customers are billed as the transactions are processed. The Company has no contracts in which customers are billed in advance for services to be performed. These types of contracts would create contract liabilities or deferred revenue, as the customers pay in advance for services. There are no contract liabilities or accounts receivables balances that are material to the Company’s balance sheet.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASU 2014-09. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied as the service is provided to the customer at a point in time. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts within the scope of ASU 2014-09 contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated.

Significant Judgements. All of the Company’s contracts create performance obligations that are satisfied at a point in time excluding some immaterial deposit revenues. Revenue is recognized as services are billed to the customers. Variable consideration does exist for contracts related to the Company’s contract with its registered investment advisor as some revenues earned pursuant to that contract are based on market values of accounts at the end of the period.

~~ASU 2016-02~~

On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements.

Recent Accounting Pronouncements

The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease agreements. The key difference of Topic 842 from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the previous guidance. Topic 842 states that a contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company reviewed its material non-real estate contracts to determine if they included a lease and did not note any that would need to be considered under Topic 842. The Company’s lease agreements in which Topic 842 has been applied are primarily for retail branch real estate properties. These real estate leases have lease terms from less than 12 months to leases with options up to 15 years, and payment terms vary with some being fixed payments or based on a fixed annual increase while others are variable and the annual increases are based on market rates or other indexes.

Initially transition from Topic 840 to Topic 842 required a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11, which, among other things, provided an additional transition method that would allow entities to not apply the initial guidance of ASU 2016-02 to the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company chose the transition method of adoption provided by ASU 2018-11, therefore, the Company has applied this standard to all existing leases as of the adoption date of January 1, 2019, recording a ROU asset and a lease liability and a cumulative-effect adjustment to the opening balance of retained earnings (if applicable) in the period of adoption. With this transition method, comparative prior period disclosures will be under the previous accounting guidance for leases (Topic 840). This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

~~Topic 842~~following table provides a ~~package~~summary of practical expedients in applying the lease standard to be chosen at the date of adoption. The Company has chosen to elect the package of practical expedients provided under ASU 2016-02 whereby it will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also chosen not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company will account for lease and non-lease components separately because such amounts are readily determinable under its lease contracts. Additionally, the Company has chosen to elect the use of hindsight, when applicable, in determining the lease term, in assessing the likelihood that a lessee purchase option will be exercised; and in assessing the impairment of ROU assets.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determined that all of its leases are classified as operating leases under Topic 842. For operating and finance leases, lease liabilities are initially measured at commencement date based on the present value of lease payments not yet paid, discounted using the discount rate for the lease at the lease commencement date over the lease term. For operating and finance leases, ROU assets are measured at the commencement date as the amount of the initial liability, adjusted for lease payments made to the lessor at or before commencement date, minus incentives; and for any initial direct costs incurredASUs issued by the ~~lessee. Based on the transition method~~Financial Accounting Standards Board (“FASB”) that the Company has ~~chosen to follow, the initial application date of the lease term for all existing leases is January 1, 2019.~~

For operating leases, after lease commencement, the lease liability is recorded at the present value of the unpaid lease payments discounted at the discount rate for the lease established at the commencement date. Lease expense is determined by the sum of the lease payments to be recognized on a straight-line basis over the lease term. The ROU asset is subsequently amortized as the difference between the straight line lease cost for the period and the periodic accretion of the lease liability. The lease term used for the calculation of the initial operating ROU asset and lease liability will include the initial lease term in addition to one renewal option the Company thinks it is reasonably certain to exercise or incur. Regarding the discount rate, Topic 842 requires that the implicit rate within the lease agreement be used if available. If not available, the Company should use its incremental borrowing rate in effect at the time of the lease commencement date. The Company utilized Federal Home Loan Bank (“FHLB”) Atlanta’s Fixed Rate Credit rates for terms consistent with the Company’s lease terms.

The Company recorded operating ROU assets and operating lease liabilities of $4.4 million and $4.4 million, respectively at the commencement date of January 1, 2019. The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations, financial position or disclosures.

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $173,000 for the nine months ended September 30, 2020 and 2019. The Bank purchased these branch facilities in September 2020.

recently adopted.

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2018-13: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020 Early adoption permitted	The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures.

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The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of ~~September~~June 30, ~~2020,~~2021, which may impact the Company’s financial statements.

~~Recently Issued Accounting Guidance Not Yet Adopted~~ ASU
Description
~~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 is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.

ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans ~~(Subtopic 715-20)~~	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	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 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 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, 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.

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ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
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~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	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 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	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 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	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 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 is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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ASU

Description

Effective Date

Effect on Financial Statements or Other Significant Matters

ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

January 1, 2022

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

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 ofoperations, financial position or disclosures.

Reclassification

Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings.

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Investment Securities

Investment securities available for sale at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

(Dollars in thousands)

September 30, 2020

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Mortgage-backed securities
$112,274
  3,242
  533
  114,983
U.S. Government




sponsored enterprises
  7,479
  342
  213
  7,608
State and political subdivisions
  95,196
  4,975
  21
  100,150
Trust preferred securities
  250
  -
  -
  250
Total
$215,199
  8,559
  767
  222,991

(Dollars in thousands)

December 31, 2019

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Mortgage-backed securities
$77,812
  1,371
  227
  78,956
U.S. Government




sponsored enterprises
  28,265
  443
  311
  28,397
State and political subdivisions
  84,686
  3,657
  200
  88,143
Trust preferred securities
  250
  -
  -
  250
Total
$191,013
  5,471
  738
  195,746

(Dollars in thousands)
	June 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S Treasuries	$	7,961		30		31		7,960
U.S. Government sponsored enterprises		15,098		291		195		15,194
Mortgage-backed securities		207,289		2,483		654		209,118
State and political subdivisions		132,038		4,185		966		135,257
Total	$	362,386		6,989		1,846		367,529

(Dollars in thousands)
	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
U.S. Government sponsored enterprises	$	7,384		331		208		7,507
Mortgage-backed securities		143,095		2,812		593		145,314
State and political subdivisions		87,757		4,758		87		92,428
Total	$	238,236		7,901		888		245,249

The current fair value and associated unrealized losses on investments in securities with unrealized losses at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands)

September 30, 2020

Less than 12 Months

12 Months or More

  Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Mortgage-backed securities
$24,665
  532
  3,013
  1
  27,678
  533
U.S. Government






sponsored enterprises
  -
  -
  4,284
  213
  4,284
  213
State and political subdivisions
  3,410
  21
  -
  -
  3,410
  21
Total
$28,075
  553
  7,297
  214
  35,372
  767

(Dollars in thousands)

December 31, 2019

Less than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Mortgage-backed securities
$28,395
  177
  6,351
  50
  34,746
  227
U.S. Government






sponsored enterprises
  2,899
  10
  6,151
  301
  9,050
  311
State and political subdivisions
  7,367
  200
  -
  -
  7,367
  200
Total
$38,661
  387
  12,502
  351
  51,163
  738

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(Dollars in thousands)
	June 30, 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	$	4,975		31		0		0		4,975		31
U.S. Government sponsored enterprises		5,515		4		3,841		191		9,356		195
Mortgage-backed securities		41,819		635		1,980		19		43,799		654
State and political subdivisions		34,460		966		0		0		34,460		966
Total	$	86,769		1,636		5,821		210		92,590		1,846

(Dollars in thousands)
	December 31, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Government sponsored enterprises	$	0		0		4,193		208		4,193		208
Mortgage-backed securities		80,827		565		4,762		28		85,589		593
State and political subdivisions		7,126		87		0		0		7,126		87
Total	$	87,953		652		8,955		236		96,908		888

At ~~September~~June 30, ~~2020,~~2021, unrealized losses in the investment securities portfolio relating to debt securities totaled ~~$767,000.~~$1.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the ~~September~~June 30, ~~2020~~2021 tables above, ~~three~~one out of ~~120~~two U.S. Treasury securities, 29 out of 129 securities issued by state and political subdivisions and 1321 out of 7392 securities issued by U.S. Government sponsored enterprises contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The amortized cost and estimated fair value of investment securities available for sale at ~~September~~June 30, ~~2020,~~2021, 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.

September 30, 2020

(Dollars in thousands)

Amortized Cost

Estimated Fair Value

Due within one year
$9,837
  9,988
Due from one to five years
  24,402
  25,770
Due from five to ten years
  61,085
  64,485
Due after ten years
  7,351
  7,515
Mortgage-backed securities
  112,274
  114,983
Trust preferred securities
  250
  250
Total
$215,199
  222,991

June 30, 2021
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	12,347		12,511
Due from one to five years		10,160		10,812
Due from five to ten years		102,044		104,879
Due after ten years		30,546		30,209
Mortgage-backed securities		207,289		209,118
Total	$	362,386		367,529

No securities available for sale were sold during the three and six months ended June 30, 2021. Proceeds from sales of securities available for sale during the three and six months ended ~~September~~June 30, 2020 were ~~$29.2~~$17.0 million and resulted in net gains of $1.7 million. Proceeds from sales of securities available for sale during the nine months ended September 30, 2020 were $46.1 million and resulted in net gains of $2.1 million. Proceeds from sales of securities available for sale during the three months ended September 30, 2019 were $8.4 million and resulted in net losses of $5,000. Proceeds from sales of securities available for sale during the nine months ended September 30, 2019 were $20.7 million and resulted in net gains of $226,000.

$457,000.

Securities with a fair value of approximately ~~$77.7~~$79.3 million and ~~$66.0~~$77.3 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public deposits and for other purposes as required by law.

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(3)

Loans

Major classifications of loans at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows:

(Dollars in thousands)

September 30,
2020

December 31,
2019

Real estate loans:

Construction and land development
$96,866
  92,596
Single-family residential
  272,246
  269,475
Single-family residential -


Banco de la Gente non-traditional
  28,099
  30,793
Commercial
  318,596
  291,255
Multifamily and farmland
  49,584
  48,090
Total real estate loans
  765,391
  732,209



Loans not secured by real estate:


Commercial loans
  182,862
  100,263
Farm loans
  851
  1,033
Consumer loans
  7,341
  8,432
All other loans
  13,787
  7,937



Total loans
  970,232
  849,874



Less allowance for loan losses
  9,892
  6,680



Total net loans
$960,340
  843,194

(Dollars in thousands)
	June 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	90,579			94,124
Single-family residential		257,901			272,325
Single-family residential - Banco de la Gente non-traditional		25,198			26,883
Commercial		340,216			332,971
Multifamily and farmland		59,142			48,880
Total real estate loans		773,036			775,183

Loans not secured by real estate:
Commercial loans		104,506			161,740
Farm loans		742			855
Consumer loans		6,519			7,113
All other loans		3,557			3,748

Total loans		888,360			948,639

Less allowance for loan losses		(9,287	)		(9,908	)

Total net loans	$	879,073			938,731

The Bank grants 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, Durham and ~~Durham~~Rowan 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. As of September 30, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

●

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. As of September 30, 2020, single-family residential loans comprised approximately 31% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.

●

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 a 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. As of September 30, 2020, commercial real estate loans comprised approximately 33% of the Bank’s total loan portfolio.

●

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. As of September 30, 2020, commercial loans comprised approximately 19% of the Bank’s total loan portfolio, including $98.4 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.

	·	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. As of June 30, 2021, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

	·	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. As of June 30, 2021, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.

	·	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 a 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. As of June 30, 2021, commercial real estate loans comprised approximately 38% of the Bank’s total loan portfolio.

	·	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. As of June 30, 2021, commercial loans comprised approximately 12% of the Bank’s total loan portfolio, including $35.7 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $75.8 million in PPP loans at December 31, 2020.

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Loans are considered past due if the required principal and interest payments have not been received as 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. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. 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 of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present an age analysis of past due loans, by loan type, as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~

September 30, 2020

(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
$8
  -
  8
  96,858
  96,866
  -
Single-family residential
  837
  378
  1,215
  271,031
  272,246
  -
Single-family residential -






Banco de la Gente non-traditional
  428
  131
  559
  27,540
  28,099
  84
Commercial
  -
  -
  -
  318,596
  318,596
  -
Multifamily and farmland
  -
  -
  -
  49,584
  49,584
  -
Total real estate loans
  1,273
  509
  1,782
  763,609
  765,391
  84







Loans not secured by real estate:






Commercial loans
  130
  -
  130
  182,732
  182,862
  -
Farm loans
  -
  -
  -
  851
  851
  -
Consumer loans
  84
  2
  86
  7,255
  7,341
  -
All other loans
  -
  -
  -
  13,787
  13,787
  -
Total loans
$1,487
  511
  1,998
  968,234
  970,232
  84

December 31, 2019

(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
$803
  -
  803
  91,793
  92,596
  -
Single-family residential
  3,000
  126
  3,126
  266,349
  269,475
  -
Single-family residential -






Banco de la Gente non-traditional
  4,834
  413
  5,247
  25,546
  30,793
  -
Commercial
  504
  176
  680
  290,575
  291,255
  -
Multifamily and farmland
  -
  -
  -
  48,090
  48,090
  -
Total real estate loans
  9,141
  715
  9,856
  722,353
  732,209
  -







Loans not secured by real estate:






Commercial loans
  432
  -
  432
  99,831
  100,263
  -
Farm loans
  -
  -
  -
  1,033
  1,033
  -
Consumer loans
  170
  22
  192
  8,240
  8,432
  -
All other loans
  -
  -
  -
  7,937
  7,937
  -
Total loans
$9,743
  737
  10,480
  839,394
  849,874
  -

2020:

June 30, 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	$	49		0		49		90,530		90,579		0
Single-family residential		1,114		44		1,158		256,743		257,901		0
Single-family residential -
Banco de la Gente non-traditional		306		41		347		24,851		25,198		0
Commercial		0		0		0		340,216		340,216		0
Multifamily and farmland		0		0		0		59,142		59,142		0
Total real estate loans		1,469		85		1,554		771,482		773,036		0

Loans not secured by real estate:
Commercial loans		110		0		110		104,396		104,506		0
Farm loans		0		0		0		742		742		0
Consumer loans		61		1		62		6,457		6,519		0
All other loans		0		0		0		3,557		3,557		0
Total loans	$	1,640		86		1,726		886,634		888,360		0

December 31, 2020
(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	$	298		0		298		93,826			94,124		0
Single-family residential		3,660		270		3,930		268,395	��		272,325		0
Single-family residential -
Banco de la Gente non-traditional		3,566		105		3,671		23,212			26,883		0
Commercial		36		0		36		332,935			332,971		0
Multifamily and farmland		0		0		0		48,880			48,880		0
Total real estate loans		7,560		375		7,935		767,248			775,183		0

Loans not secured by real estate:
Commercial loans		0		0		0		161,740			161,740		0
Farm loans		0		0		0		855			855		0
Consumer loans		45		2		47		7,066			7,113		0
All other loans		0		0		0		3,748			3,748		0
Total loans	$	7,605		377		7,982		940,657			948,639		0

Table of Contents

The following table presents non-accrual loans as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~

(Dollars in thousands)

September 30,
2020

December 31,
2019

Real estate loans:

Construction and land development
$-
  -
Single-family residential
  1,019
  1,378
Single-family residential -


Banco de la Gente non-traditional
  1,733
  1,764
Commercial
  451
  256
Total real estate loans
  3,203
  3,398



Loans not secured by real estate:


Commercial loans
  255
  122
Consumer loans
  17
  33
Total
$3,475
  3,553

2020:

(Dollars in thousands)
	June 30, 2021		December 31, 2020
Real estate loans:
Single-family residential		1,273		1,266
Single-family residential -
Banco de la Gente non-traditional		1,516		1,709
Commercial		412		440
Multifamily and farmland		111		117
Total real estate loans		3,312		3,532

Loans not secured by real estate:
Commercial loans		59		212
Consumer loans		7		14
Total	$	3,378		3,758

At 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 that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. 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 restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were ~~$21.0~~$19.7 million, $21.3 million and ~~$21.4~~$22.5 million at ~~September~~June 30, ~~2020,~~2021, December 31, ~~2019~~2020 and ~~September~~June 30, ~~2019,~~2020, respectively. Interest income recognized on accruing impaired loans was ~~$934,000, $1.3~~$536,000, $1.2 million, and ~~$1.0 million~~$635,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, the year ended December 31, ~~2019~~2020 and the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Interest income recognized on accruing impaired loans was $253,000 and $306,000 for the three months ended June 30, 2021 and 2020, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following table presents impaired loans as of ~~September~~June 30, ~~2020:~~

September 30, 2020

(Dollars in thousands)

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

Recorded Investment in Impaired Loans

Related Allowance

Real estate loans:

Construction and land development
$113
  -
  113
  113
  4
Single-family residential
  5,110
  388
  4,309
  4,697
  18
Single-family residential -





Banco de la Gente stated income
  13,854
  -
  13,055
  13,055
  865
Commercial
  2,579
  351
  2,206
  2,557
  13
Multifamily and farmland
  -
  -
  -
  -
  -
Total impaired real estate loans
  21,656
  739
  19,683
  20,422
  900






Loans not secured by real estate:





Commercial loans
  569
  255
  259
  514
  2
Consumer loans
  53
  -
  49
  49
  1
Total impaired loans
$22,278
  994
  19,991
  20,985
  903

2021:

June 30, 2021
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	78		0		78		78		3
Single-family residential		4,886		277		4,417		4,694		31
Single-family residential -
Banco de la Gente non-traditional		12,692		0		12,075		12,075		806
Commercial		2,466		441		1,987		2,428		15
Multifamily and farmland		116		0		111		111		0
Total impaired real estate loans		20,238		718		18,668		19,386		855

Loans not secured by real estate:
Commercial loans		319		59		199		258		3
Consumer loans		15		0		11		11		0
Total impaired loans	$	20,572		777		18,878		19,655		858

Table of Contents

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~

(Dollars in thousands)

Three months ended

Nine months ended

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019

Average Balance

Interest Income Recognized

Average Balance

Interest Income Recognized

Average Balance

Interest Income Recognized

Average Balance

Interest Income Recognized

Real estate loans:

Construction and land development
$153
  -
  188
  3
  123
  7
  232
  9
Single-family residential
  5,107
  63
  4,360
  70
  4,451
  181
  4,724
  188
Single-family residential -








Banco de la Gente stated income
  13,402
  197
  14,805
  241
  13,785
  617
  14,916
  732
Commercial
  2,665
  31
  1,808
  26
  2,772
  103
  1,823
  71
Multifamily and farmland
  -
  -
  -
  -
  -
  -
  -
  -
Total impaired real estate loans
  21,327
  291
  21,161
  340
  21,131
  908
  21,695
  1,000









Loans not secured by real estate:








Commercial loans
  494
  7
  153
  16
  553
��22
  127
  20
Consumer loans
  74
  1
  94
  1
  57
  4
  102
  5
Total impaired loans
$21,895
  299
  21,408
  357
  21,741
  934
  21,924
  1,025

2020.

(Dollars in thousands)
	Three months ended								Six months ended
	June 30, 2021				June 30, 2020				June 30, 2021				June 30, 2020
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	91		1		157		4		97		3		166		7
Single-family residential		6,100		57		4,778		59		5,731		118		4,734		118
Single-family residential -
Banco de la Gente stated income		10,835		160		13,856		193		11,407		337		14,028		421
Commercial		2,682		29		3,115		43		2,779		64		2,700		72
Multifamily and farmland		113		1		0		0		114		2		0		0
Total impaired real estate loans		19,821		248		21,906		299		20,128		524		21,628		618

Loans not secured by real estate:
Commercial loans		315		5		643		6		362		11		487		15
Farm loans (non RE)		-		-		-		-				-		-		-
Consumer loans		15		0		77		1		22		1		83		2
Total impaired loans	$	20,151		253		22,626		306		20,512		536		22,198		635

The following table presents impaired loans as of and for the year ended December 31, ~~2019:~~

December 31, 2019

(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
$183
  -
  183
  183
  7
  231
  12
Single-family residential
  5,152
  403
  4,243
  4,646
  36
  4,678
  269
Single-family residential -







Banco de la Gente non-traditional
  15,165
  -
  14,371
  14,371
  944
  14,925
  956
Commercial
  1,879
  -
  1,871
  1,871
  7
  1,822
  91
Total impaired real estate loans
  22,379
  403
  20,668
  21,071
  994
  21,656
  1,328








Loans not secured by real estate:







Commercial loans
  180
  92
  84
  176
  -
  134
  9
Consumer loans
  100
  -
  96
  96
  2
  105
  7
Total impaired loans
$22,659
  495
  20,848
  21,343
  996
  21,895
  1,344

~~Changes~~2020:

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		Interest Income Recognized
Real estate loans:
Construction and land development	$	108		0		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		0		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		0		117		117		0		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		0		37		37		1		60		5
Total impaired loans	$	22,501		1,672		19,616		21,288		919		21,848		1,250

Impaired loans collectively evaluated for impairment totaled $5.7 million and $6.2 million at June 30, 2021 and 2020, respectively and are included in the tables above.

The following tables present changes in the allowance for loan losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019 were~~2020. PPP loans are excluded from the allowance for loan losses 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

Nine months ended September 30, 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)
  -
  (109)
  -
  (343)
  -
  (529)
Recoveries
  2
  59
  -
  45
  -
  27
  -
  148
  -
  281
Provision
  573
  482
  (11)
  751
  (4)
  355
  -
  254
  1,060
  3,460
Ending balance
$1,264
  1,750
  1,062
  2,094
  116
  961
  -
  197
  2,448
  9,892





















Allowance for loan losses:










Beginning balance
$1,531
  1,813
  1,114
  2,051
  115
  980
  -
  162
  1,667
  9,433
Charge-offs
  -
  (65)
  -
  -
  -
  -
  -
  (87)
  -
  (152)
Recoveries
  -
  34
  -
  11
  -
  2
  -
  42
  -
  89
Provision
  (267)
  (32)
  (52)
  32
  1
  (21)
  -
  80
  781
  522
Ending balance
$1,264
  1,750
  1,062
  2,094
  116
  961
  -
  197
  2,448
  9,892











Allowance for loan losses at September 30, 2020:









Ending balance: individually










evaluated for impairment
$2
  4
  859
  11
  -
  -
  -
  -
  -
  876
Ending balance: collectively










evaluated for impairment
  1,262
  1,746
  203
  2,083
  116
  961
  -
  197
  2,448
  9,016
Ending balance
$1,264
  1,750
  1,062
  2,094
  116
  961
  -
  197
  2,448
  9,892











Loans at September 30, 2020:










Ending balance
$96,866
  272,246
  28,099
  318,596
  49,584
  182,862
  851
  21,128
  -
  970,232











Ending balance: individually










evaluated for impairment
$8
  1,582
  11,630
  1,685
  -
  255
  -
  -
  -
  15,160
Ending balance: collectively










evaluated for impairment
$96,858
  270,664
  16,469
  316,911
  49,584
  182,607
  851
  21,128
  -
  955,072

(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

Nine months ended September 30, 2019:

Allowance for loan losses:

Beginning balance
$813
  1,325
  1,177
  1,278
  83
  626
  -
  161
  982
  6,445
Charge-offs
  (21)
  (42)
  -
  -
  -
  (389)
  -
  (459)
  -
  (911)
Recoveries
  44
  59
  -
  27
  -
  80
  -
  157
  -
  367
Provision
  (141)
  22
  (87)
  (26)
  35
  333
  -
  303
  238
  677
Ending balance
$695
  1,364
  1,090
  1,279
  118
  650
  -
  162
  1,220
  6,578











Three months ended September 30, 2019:









Allowance for loan losses:










Beginning balance
$763
  1,312
  1,116
  1,334
  110
  548
  -
  161
  1,197
  6,541
Charge-offs
  -
  (19)
  -
  -
  -
  (388)
  -
  (144)
  -
  (551)
Recoveries
  41
  6
  -
  4
  -
  66
  -
  49
  -
  166
Provision
  (109)
  65
  (26)
  (59)
  8
  424
  -
  96
  23
  422
Ending balance
$695
  1,364
  1,090
  1,279
  118
  650
  -
  162
  1,220
  6,578











Allowance for loan losses at September 30, 2019:








Ending balance: individually










evaluated for impairment
$-
  2
  948
  10
  -
  -
  -
  -
  -
  960
Ending balance: collectively










evaluated for impairment
  695
  1,362
  142
  1,269
  118
  650
  -
  162
  1,220
  5,618
Ending balance
$695
  1,364
  1,090
  1,279
  118
  650
  -
  162
  1,220
  6,578











Loans at September 30, 2019:










Ending balance
$95,622
  269,304
  31,673
  281,607
  47,266
  99,382
  1,101
  19,644
  -
  845,599











Ending balance: individually










evaluated for impairment
$11
  1,719
  13,196
  1,628
  -
  100
  -
  -
  -
  16,654
Ending balance: collectively










evaluated for impairment
$95,611
  267,585
  18,477
  279,979
  47,266
  99,282
  1,101
  19,644
  -
  828,945

PPP loans are 100 percent guaranteed by the SBA. PPP loans are classified as risk grade 3.

Table of Contents

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Six months ended June 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212			122		1,345			0		128			2,010		9,908
Charge-offs		0			0			0			0			0		(78	)		0		(158	)		0		(236	)
Recoveries		90			78			0			48			0		6			0		74			0		296
Provision		(248	)		(198	)		(72	)		(80	)		26		(277	)		0		45			123		(681	)
Ending balance	$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Three months ended June 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,061			1,850			1,033			2,252			145		1,244			0		91			1,856		9,532
Charge-offs		0			0			0			0			0		(78	)		0		(73	)		0		(151	)
Recoveries		40			18			0			36			0		0			0		38			0		132
Provision		(63	)		(145	)		(53	)		(108	)		3		(170	)		0		33			277		(226	)
Ending balance	$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Allowance for loan losses at June 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			5			790			10			0		0			0		0			0		806
Ending balance: collectively
evaluated for impairment		1,037			1,718			190			2,170			148		996			0		89			2,133		8,481
Ending balance	$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Loans at June 30, 2021:
Ending balance	$	90,579			257,901			25,198			340,216			59,142		104,506			742		10,076			0		888,360

Ending balance: individually evaluated for impairment	$	6			1,426			10,722			1,741			0		59			0		0			0		13,954
Ending balance: collectively evaluated for impairment	$	90,573			256,475			14,476			338,475			59,142		104,447			742		10,076			0		874,406

(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
Six months ended June 30, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274		1,073		1,305			120			688			0		138			1,388		6,680
Charge-offs		(5	)		0		0		(7	)		0			(109	)		0		(257	)		0		(378	)
Recoveries		2			25		0		34			0			26			0		106			0		193
Provision		840			514		41		719			(5	)		375			0		175			279		2,938
Ending balance	$	1,531			1,813		1,114		2,051			115			980			0		162			1,667		9,433

Three months ended June 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,293			1,713		1,084		1,799			118			1,017			0		180			908		8,112
Charge-offs		0			0		0		0			0			(78	)		0		(90	)		0		(168	)
Recoveries		0			9		0		11			0			0			0		52			0		72
Provision		238			91		30		241			(3	)		41			0		20			759		1,417
Ending balance	$	1,531			1,813		1,114		2,051			115			980			0		162			1,667		9,433

Allowance for loan losses at June 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			5		894		11			0			0			0		0			0		912
Ending balance: collectively
evaluated for impairment		1,529			1,808		220		2,040			115			980			0		162			1,667		8,521
Ending balance	$	1,531			1,813		1,114		2,051			115			980			0		162			1,667		9,433

Loans at June 30, 2020:
Ending balance	$	110,077			268,174		29,325		303,828			49,465			188,398			887		16,389			0		966,543

Ending balance: individually
evaluated for impairment	$	8			1,657		12,297		2,084			0			275			0		0			0		16,321
Ending balance: collectively
evaluated for impairment	$	110,069			266,517		17,028		301,744			49,465			188,123			887		16,389			0		950,222

Table of Contents

The provision for loan losses for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~$522,000,~~a recovery of $226,000, compared to ~~$422,000~~a provision of $1.4 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the ~~qualitative factors applied~~volume of loans in the general reserve pool. At June 30, 2021, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $283,000. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model ~~due to the impact to the economy from the COVID-19 pandemic~~as they have a higher likelihood of risk, and a ~~$26.2 million increase in~~higher reserve rate has been applied to that pool. Of all loans excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. PPP loans are excluded from ALLL as PPP loans are 100 percent guaranteed by the SBA. The ALLL model also includes reserves on $119.7 million in loans with payment modifications made in 2020modified as a result of the COVID-19 ~~pandemic. Reserves associated with COVID-19 payment modifications were $1.6~~pandemic, $108.2 million ~~at June 30, 2020~~have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and ~~September 30, 2020. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million~~additional losses may be present in loans ~~secured by commercial real estate, $23.0 million in~~that are currently modified and/or loans ~~secured by residential real estate, $8.7 in~~that were once modified. At December 31, 2020, the balance for all loans secured by other real estate, $8.0 million in commercial loans not secured by real estate and $765,000 in consumer loans not secured by real estate at September 30, 2020. These payment modifications are primarily interest only payments for three to six months. Loans with COVID-19 related payment modifications that ~~have reverted~~were then currently modified or previously modified but returned to their original terms ~~are still included with reserves associated with COVID-19 payment modifications at September~~was $119.6 million. The $11.4 million decrease from December 31, 2020 to June 30, ~~2020. There is still uncertainty about~~2021 in the ~~ongoing and future effects~~balance of ~~national and local policy decisions on these borrowers~~currently or previously modified loans that ~~could still limit their ability to adhere~~had returned to their original ~~payment terms. Approximately 12% of~~terms is primarily due to loans ~~with COVID-19 payment modifications at September~~paid off during the six months ended June 30, ~~2020 have received secondary payment modifications as a result of the COVID-19 pandemic.~~2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

The provision for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$3.5 million,~~a recovery of $681,000, compared to ~~$677,000~~a provision of $2.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~a decrease in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in SBA PPP loans, from September 30, 2019 to September 30, 2020. PPP loans are excluded from ALLL as PPP loans are 100 percent guaranteed by the SBA. The ALLL model also includes reserves on ~~$119.7 million in~~ loans with payment modifications made ~~in 2020~~ as a result of the COVID-19 ~~pandemic.~~

pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

The Company 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. Certificates of deposit 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 Company’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 Company’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 Company’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 Company 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 as 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.

	·	Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit 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 Company’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 Company’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 Company’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 Company 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 as 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.

Table of Contents

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019:~~

September 30, 2020

(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
$230
  9,184
  -
  -
  -
  739
  -
  675
  -
  10,828
2- High Quality
  17,962
  125,821
  -
  30,959
  261
  24,377
  -
  2,373
  1,643
  203,396
3- Good Quality
  70,142
  112,716
  10,896
  236,533
  44,393
  143,379
  785
  3,917
  11,424
  634,185
4- Management Attention
  5,506
  18,472
  12,643
  41,687
  4,344
  12,555
  66
  336
  720
  96,329
5- Watch
  2,939
  2,997
  2,003
  8,517
  586
  1,500
  -
  7
  -
  18,549
6- Substandard
  87
  3,056
  2,557
  900
  -
  312
  -
  33
  -
  6,945
7- Doubtful
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
8- Loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
Total
$96,866
  272,246
  28,099
  318,596
  49,584
  182,862
  851
  7,341
  13,787
  970,232

December 31, 2019

(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
$-
  8,819
  -
  -
  -
  330
  -
  693
  -
  9,842
2- High Quality
  32,029
  128,757
  -
  21,829
  256
  20,480
  -
  2,708
  1,860
  207,919
3- Good Quality
  52,009
  107,246
  12,103
  231,003
  42,527
  72,417
  948
  4,517
  5,352
  528,122
4- Management Attention
  5,487
  18,409
  13,737
  35,095
  4,764
  6,420
  85
  458
  725
  85,180
5- Watch
  3,007
  3,196
  2,027
  3,072
  543
  492
  -
  8
  -
  12,345
6- Substandard
  64
  3,048
  2,926
  256
  -
  124
  -
  48
  -
  6,466
7- Doubtful
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
8- Loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
Total
$92,596
  269,475
  30,793
  291,255
  48,090
  100,263
  1,033
  8,432
  7,937
  849,874

2020:

June 30, 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	$	0		4,463		0		0		0		427		0		724		0		5,614
2- High Quality		8,186		105,826		0		36,894		20		15,825		0		2,034		1,430		170,215
3- Good Quality		78,058		124,184		9,350		257,930		55,338		80,494		728		3,450		1,442		610,974
4- Management Attention		4,218		17,083		11,515		34,508		3,110		5,711		14		278		685		77,122
5- Watch		39		2,999		1,862		10,031		563		1,985		0		5		0		17,484
6- Substandard		78		3,346		2,471		853		111		64		0		28		0		6,951
7- Doubtful		0		0		0		0		0		0		0		0		0		0
8- Loss		0		0		0		0		0		0		0		0		0		0
Total	$	90,579		257,901		25,198		340,216		59,142		104,506		742		6,519		3,557		888,360

December 31, 2020
(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	$	228		9,867		0		0		0		406		0		678		0		11,179
2- High Quality		9,092		121,331		0		40,569		22		19,187		0		2,237		1,563		194,001
3- Good Quality		76,897		115,109		10,170		241,273		44,890		128,727		832		3,826		1,477		623,201
4- Management Attention		4,917		20,012		12,312		39,370		3,274		11,571		23		336		708		92,523
5- Watch		2,906		2,947		1,901		10,871		694		1,583		0		6		0		20,908
6- Substandard		84		3,059		2,500		888		0	��	266		0		30		0		6,827
7- Doubtful		0		0		0		0		0		0		0		0		0		0
8- Loss		0		0		0		0		0		0		0		0		0		0
Total	$	94,124		272,325		26,883		332,971		48,880		161,740		855		7,113		3,748		948,639

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled ~~$2.6~~$2.2 million and ~~$4.3~~$3.8 million at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~

2020.

There were no new TDR modifications during the ~~nine~~three and six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~

2020.

There were no loans modified as TDR that defaulted during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

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 may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. ~~The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding.~~ A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. ~~As of September 30, 2020,~~The Bank is participating as a lender in the ~~Bank had originated $34.5 million in PPP loans during the second round of PPP funding.~~PPP. Total PPP loans originated as of ~~September~~June 30, ~~2020~~2021 amounted to ~~$98.8~~$128.1 million. The outstanding balance of PPP loans was $35.7 million and $75.8 million at June 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million and $4.0 million in fees from the SBA for PPP loans originated as of ~~September~~June 30, ~~2020.~~2021. The Bank ~~has~~ recognized ~~$361,000~~$2.5 million and $1.4 million PPP loan fee income ~~as of September~~for the six months ended June 30, ~~2020.~~

~~The Bank has continued to modify payments on loans due to~~2021 and the ~~COVID-19 pandemic. At September~~year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended June 30, ~~2020, loans totaling $119.7 million had payment modifications due to~~2021 was $1.5 million. No PPP loan fee income was recognized for the COVID-19 pandemic. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million in loans secured by commercial real estate, $23.0 million in loans secured by residential real estate, $8.7 in loans secured by other real estate, $8.0 million in commercial loans not secured by real estatethree and ~~$765,000 in consumer loans not secured by real estate at September~~six months ended June 30, 2020. These payment modifications are primarily interest only payments for three to nine months. 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.

Table of Contents

(4)

Net Earnings Per Share

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

The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 is as follows:

For the three months ended September 30, 2020

Net Earnings (Dollars in thousands)

Weighted Average Number of Shares

Per Share Amount

Basic earnings per share
$4,509
  5,787,504
$0.78
Effect of dilutive securities:



Restricted stock units
  -
  15,299

Diluted earnings per share
$4,509
  5,802,803
$0.78

For the nine months ended September 30, 2020

Net Earnings (Dollars in thousands)

Weighted Average Number of Shares

Per Share Amount

Basic earnings per share
$9,437
  5,815,044
$1.62
Effect of dilutive securities:



Restricted stock units
  -
  13,960

Diluted earnings per share
$9,437
  5,829,004
$1.62

For the three months ended September 30, 2019

Net Earnings (Dollars in thousands)

Weighted Average Number of Shares

Per Share Amount

Basic earnings per share
$3,621
  5,919,322
$0.62
Effect of dilutive securities:



Restricted stock units
  -
  25,883

Diluted earnings per share
$3,621
  5,945,205
$0.61

For the nine months ended September 30, 2019

Net Earnings (Dollars in thousands)

Weighted Average Number of Shares

Per Share Amount

Basic earnings per share
$11,101
  5,951,840
$1.87
Effect of dilutive securities:



Restricted stock units
  -
  24,908

Diluted earnings per share
$11,101
  5,976,748
$1.86

(5)

For the three months ended June 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,615		5,630,580	$	0.82
Effect of dilutive securities:
Restricted stock units		0		12,683
Shares held in deferred comp plan				157,897
Diluted earnings per share	$	4,615		5,801,160	$	0.80

For the six months ended June 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	8,736		5,630,995	$	1.55
Effect of dilutive securities:
Restricted stock units		0		12,427
Shares held in deferred comp plan				157,227
Diluted earnings per share	$	8,736		5,800,649	$	1.51

For the three months ended June 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,561		5,637,711	$	0.46
Effect of dilutive securities:
Restricted stock units		0		13,127
Shares held in deferred comp plan		0		149,013
Diluted earnings per share	$	2,561		5,799,851	$	0.44

For the six months ended June 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,928		5,680,625	$	0.87
Effect of dilutive securities:
Restricted stock units		0		13,284
Shares held in deferred comp plan		0		147,814
Diluted earnings per share	$	4,928		5,841,723	$	0.84

(5) 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. As of ~~September~~June 30, ~~2020,~~2021, there were no outstanding shares reserved for possible issuance under the 2009 Plan.

Table of Contents

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 period of time the restrictions are in place (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 ~~September~~June 30, ~~2020,~~2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was ~~$72,000.~~

$66,000.

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 ~~292,365~~300,000 shares ~~are currently~~were reserved for possible issuance under the 2020 Plan when it was adopted. As of June 30, 2021, a total of 285,075 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or 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 7,290 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 recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 and 2021 grants). As of ~~September~~June 30, ~~2020,~~2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was ~~$106,000.~~

$308,000.

The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $99,000 for the six months ended June 30, 2021. The Company recognized a ~~$73,000~~$75,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the ~~nine~~six months ended ~~September~~June 30, 2020 due to a reduction in the Company’s stock price from $32.85 per share at December 31, 2019, compared to ~~$15.43~~$17.67 per share at ~~September~~June 30, 2020. ~~The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan of $201,000 for the nine months ended September 30, 2019.~~

(6)

Fair Value

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance. The methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s ~~2019~~2020 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01.

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.

��

	·	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.

Table of Contents

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 the 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

In accordance with ASU No. 2016-01, 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.

~~Cash Surrender Value of Life Insurance~~

Mutual Funds

For ~~cash surrender value of life insurance,~~mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. ~~Cash surrender value of life insurance is~~Mutual funds held in the deferred compensation trust are included in other assets on 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.

Table of Contents

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 ~~table~~tables below ~~presents~~present 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 ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~

(Dollars in thousands)

September 30, 2020

Fair Value Measurements

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage-backed securities
$114,983
  -
  114,983
  -
U.S. Government




sponsored enterprises
$7,608
  -
  7,608
  -
State and political subdivisions
$100,150
  -
  100,150
  -
Trust preferred securities
$250
  -
  -
  250

(Dollars in thousands)

December 31, 2019

Fair Value Measurements

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage-backed securities
$78,956
  -
  78,956
  -
U.S. Government




sponsored enterprises
$28,397
  -
  28,397
  -
State and political subdivisions
$88,143
  -
  88,143
  -
Trust preferred securities
$250
  -
  -
  250

2020.

(Dollars in thousands)
	June 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,960		0	$	7,960		0
U.S. Government
sponsored enterprises		15,194		0		15,194		0
Mortgage-backed securities		209,118		0		209,118		0
State and political subdivisions		135,257		0		135,257		0

(Dollars in thousands)
	December 31, 2020
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U.S. Government
sponsored enterprises	$	7,507		0		7,507		0
Mortgage-backed securities		145,314		0		145,314		0
State and political subdivisions		92,428		0		92,428		0

The ~~following is an analysis~~tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value ~~measurements~~on a recurring basis by level within the fair value hierarchy, as of ~~investment securities available for sale using Level 3, significant unobservable inputs, for the nine months ended September~~June 30, 2021 and December 31, 2020.

~~(Dollars in thousands)~~
	~~Investment Securities Available for Sale~~
	~~Level 3 Valuation~~
~~Balance, beginning of period~~	$~~250~~
~~Change in book value~~	-
~~Change in gain/(loss) realized and unrealized~~	-
~~Purchases/(sales and calls)~~	-
~~Transfers in and/or (out) of Level 3~~	-
~~Balance, end of period~~	$~~250~~

~~Change in unrealized gain/(loss) for assets still held in Level 3~~	$-

(Dollars in thousands)
	June 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,421		0		1,421		0

(Dollars in thousands)
	December 31, 2020
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,320		0		1,320		0

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

(Dollars in thousands)

Fair Value Measurements September 30, 2020

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage loans held for sale
$8,960
  -
  -
  8,960
Impaired loans
$20,082
  -
  -
  20,082

(Dollars in thousands)

Fair Value Measurements December 31, 2019

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage loans held for sale
$4,417
  -
  -
  4,417
Impaired loans
$20,347
  -
  -
  20,347

(Dollars in thousands)

Fair Value September 30, 2020

Fair Value December 31, 2019

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Mortgage loans held for sale
$8,960
  4,417
Rate lock commitment
  N/A
  N/A
Impaired loans
$20,082
  20,347
Appraised value and discounted cash flows

Discounts to reflect current market conditions and ultimate collectability

  0 - 25%

Table of Contents

(Dollars in thousands)
	Fair Value Measurements June 30, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	5,501		0		0		5,501
Impaired loans		18,797		0		0		18,797

(Dollars in thousands)
	Fair Value Measurements December 31, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	9,139		0		0		9,139
Impaired loans		20,369		0		0		20,369
Other real estate		128		0		0		128

(Dollars in thousands)
	Fair Value June 30, 2021		Fair Value December 31, 2020		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	5,501		9,139	Rate lock commitment		N/A		N/A
Impaired loans		18,797		20,369	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability		0 - 25		%
Other real estate		0		128	Appraised value	Discounts to reflect current market conditions and estimated costs to sell		0 - 25		%

The carrying amount and estimated fair value of financial instruments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

(Dollars in thousands)

Fair Value Measurements at September 30, 2020

Carrying Amount

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents
$204,228
  204,228
  -
  -
  204,228
Investment securities available for sale
$222,991
  -
  222,741
  250
  222,991
Other investments
$7,163
  -
  -
  7,163
  7,163
Mortgage loans held for sale
$8,960
  -
  -
  8,960
  8,960
Loans, net
$960,340
  -
  -
  950,020
  950,020
Cash surrender value of life insurance
$16,742
  -
  16,742
  -
  16,742






Liabilities:





Deposits
$1,186,396
  -
  -
  1,182,713
  1,182,713
Securities sold under agreements





to repurchase
$34,151
  -
  34,151
  -
  34,151
FHLB borrowings
$70,000
  -
  -
  69,988
  69,988
Junior subordinated debentures
$15,464
  -
  15,464
  -
  15,464

(Dollars in thousands)

Fair Value Measurements at December 31, 2019

Carrying Amount

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents
$52,387
  52,387
  -
  -
  52,387
Investment securities available for sale
$195,746
  -
  195,496
  250
  195,746
Other investments
$4,231
  -
  -
  4,231
  4,231
Mortgage loans held for sale
$4,417
  -
  -
  4,417
  4,417
Loans, net
$843,194
  -
  -
  819,397
  819,397
Cash surrender value of life insurance
$16,319
  -
  16,319
  -
  16,319






Liabilities:





Deposits
$966,517
  -
  -
  955,766
  955,766
Securities sold under agreements





to repurchase
$24,221
  -
  24,221
  -
  24,221
Junior subordinated debentures
$15,619
  -
  15,619
  -
  15,619

(Dollars in thousands)
			Fair Value Measurements at June 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	287,309		287,309		0		0		287,309
Investment securities available for sale		367,529		0		367,529		0		367,529
Other investments		3,758		0		0		3,758		3,758
Mortgage loans held for sale		5,501		0		0		5,501		5,501
Loans, net		879,073		0		0		861,686		861,686
Mutual funds held in deferred
compensation trust		1,421		0		1,421		0		1,421

Liabilities:
Deposits	$	1,392,054		0		0		1,389,964		1,389,964
Securities sold under agreements
to repurchase		31,249		0		31,249		0		31,249
Junior subordinated debentures		15,464		0		15,464		0		15,464

Table of Contents

(Dollars in thousands)
			Fair Value Measurements at December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		0		0		161,580
Investment securities available for sale		245,249		0		245,249		0		245,249
Other investments		4,155		0		0		4,155		4,155
Mortgage loans held for sale		9,139		0		0		9,139		9,139
Loans, net		938,731		0		0		924,845		924,845
Mutual funds held in deferred
compensation trust		1,320		0		1,320		0		1,320

Liabilities:
Deposits	$	1,221,086		0		0		1,216,503		1,216,503
Securities sold under agreements
to repurchase		26,201		0		26,201		0		26,201
Junior subordinated debentures		15,464		0		15,464		0		15,464

(7)

Leases

As of ~~September~~June 30, ~~2020,~~2021, the Company had operating ROU assets of ~~$3.1~~$3.0 million and operating lease liabilities of $3.1 million. The Company 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 Company if the option is not exercised. As allowed by ASU 2016-02, 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 ~~September~~June 30, ~~2020~~2021 and ~~2019.~~

(Dollars in thousands)

September 30,
2020

September 30,
2019

Operating lease cost $
$675
  655



Other information:


Cash paid for amounts included in the measurement of lease liabilities
  659
  650
Operating cash flows from operating leases
  -
  -
Right-of-use assets obtained in exchange for new lease liabilities - operating leases
  450
  -
Weighted-average remaining lease term - operating leases
  7.36
  7.51
Weighted-average discount rate - operating leases
  2.97%
  3.18%

2020.

(Dollars in thousands)
	June 30, 2021			June 30, 2020

Operating lease cost	$	418		$	443

Other information:
Cash paid for amounts included in the measurement of lease liabilities		404			432
Operating cash flows from operating leases		0			0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		942			132
Weighted-average remaining lease term - operating leases		6.84			7.03
Weighted-average discount rate - operating leases		2.71	%		3.13	%

Table of Contents

The following table presents lease maturities as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~

Maturity Analysis of Operating Lease Liabilities:

September 30,
2020

December 31,
2019

2020
$166
$823
2021
  664
  793
2022
  496
  501
2023
  471
  393
2024
  391
  304
Thereafter
  1,356
  1,320
      Total
  3,544
  4,134
      Less: Imputed Interest
  (405)
  (487)
      Operating Lease Liability
$3,139
$3,647

2020.

(Dollars in thousands)

Maturity Analysis of Operating Lease Liabilities:	June 30, 2021			December 31, 2020

2021	$	357		$	754
2022		550			588
2023		544			567
2024		489			489
2025		433			433
Thereafter		1,041			1,041
Total		3,414			3,872
Less: Imputed Interest		(341	)		(401	)
Operating Lease Liability	$	3,073		$	3,471

(8)

Subsequent Events

The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. ~~Management~~

The SBA has ~~concluded~~continued to forgive the Bank’s PPP loans. The outstanding balance of PPP loans was $33.1 million at July 31, 2021, as compared to $35.7 million at June 30, 2021. The decrease from June 30, 2021 to July 31, 2021 was primarily due to PPP loans being forgiven by the SBA.

The Bank closed its West Lincoln branch location on June 11, 2021. The West Lincoln branch property was sold on July 1, 2021 for a net gain of $107,000 that ~~there were no material subsequent events.~~

I~~tem~~will be recognized in the third quarter of 2021. The $408,000 net book value of the West Lincoln branch property at June 30, 2021 was classified as held for sale at June 30, 2021 and is reflected in “Accrued interest receivable and other assets” on the Company’s June 30, 2021 consolidated balance sheets.

Table of Contents

Item 2.

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

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors and the Company’s Consolidated Financial Statements and Notes thereto on pages ~~A-24~~A-26 through ~~A-68~~A-71 of the Company’s ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~6, 2021 Annual Meeting of Shareholders.

Introduction

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

Overview

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

Our operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The earnings on our assets are influenced by the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, inflation, interest rates, market and monetary fluctuations. Lending activities are affected by the demand for commercial and other types of loans, which in turn is affected by the interest rates at which such financing may be offered. Our cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. These factors can cause fluctuations in our net interest income and other income. In addition, local economic conditions can impact the credit risk of our loan portfolio, in that (1) local employers may be required to eliminate employment positions of individual borrowers, and (2) small businesses and commercial borrowers may experience a downturn in their operating performance and become unable to make timely payments on their loans. Management evaluates these factors in estimating the allowance for loan losses 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 ~~have~~ declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events ~~also may adversely affect~~generally had an adverse effect on business and consumer confidence ~~generally,~~ and the Company and its ~~customers, and their respective suppliers, vendors and processors may be adversely affected.~~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 ~~may adversely affect~~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 ~~those experienced in~~ the ~~pre-crisis~~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. See ~~Significant Developments~~COVID-19 Impact below for additional information regarding the impact of the COVID-19 pandemic on the Company’s business.

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.

Table of Contents

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

~~Significant Developments~~

COVID 19 Impact ~~of COVID-19~~

Overview. The COVID-19 pandemic inhas caused unprecedented disruption that has affected daily living and negatively impacted the ~~United States, and efforts to contain it, have had a complex and significant adverse impact on the~~global economy, the banking industry and the Company. ~~The~~While we are unable to estimate the magnitude, the COVID-19 pandemic and the related global economic crisis may adversely affect our future operating results. As such, the impact of the COVID-19 pandemic on future fiscal periods is subject to a high degree of uncertainty.

The emergence of COVID-19 and new variants of the virus around the world, and particularly in the United States and Canada, continues to present significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. The pandemic has affected the Company’s financial results and business operations, and economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic. Management cannot predict the full impact of the pandemic on the Company’s management and employees, its customers nor to economic conditions generally, and such effects could exist for an extended period of time.

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the remainder of the ~~school~~2019-2020 academic year, ~~most retail establishments, including restaurants and entertainment venues,~~businesses were ordered to temporarily close ~~for varying lengths of time,~~or reduce their business operations to accommodate social distancing and shelter in place requirements, non-critical healthcare services were significantly ~~curtailed.~~curtailed and unemployment levels rose. Since the initial shut down in March 2020, phased reopening plans began in mid-May of 2020 and continued through mid-May of 2021 subject to public health ~~reopening~~ guidelines, restrictions and limitations on capacity.

In mid-May 2021, as the number of COVID-19 cases decreased and COVID-19 vaccinations increased and new guidance was issued by the Center for Disease Control for fully vaccinated individuals, the COVID-19 restrictions were primarily lifted in North Carolina allowing businesses to operate in a manner in which they operated prior to the COVID-19 pandemic. In mid-July 2021, despite vaccinations being readily available to all individuals living in North Carolina over the age of 12, COVID-19 vaccinations have slowed and the number of COVID-19 cases have started to rise. We are unable to predict if COVID-19 cases will continue to rise and the impact that such rise will have on businesses and whether additional public health guidelines, restrictions and limitations will be implemented.

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

●

~~The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 - 0.25 percent.~~

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of September 30, 2020

●

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the financial statements for additional disclosure of loan modifications as of September 30, 2020.

●

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion.

●

In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

	·	The Federal Reserve decreased the range for the federal funds target rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on March 16, 2020, reaching a current range of 0.0 - 0.25 percent.

	·	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”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopened and expanded the PPP loan program. The changes to the PPP program allowed new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revised certain PPP requirements, including aspects of loan forgiveness on existing PPP loans. Under the Economic Aid Act, the PPP loan program was set to expire on March 31, 2021; however, the PPP Extension Act which was signed into law on March 30, 2021 extended the PPP loan program until May 31, 2021. The Bank participated as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructured (“TDR”) loans for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of June 30, 2021.

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	·	On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the financial statements for additional disclosure of loan modifications as of June 30, 2021.

	·	On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which established two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program is up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility makes short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope of its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. The Bank did not participate in the MSELF or MSNLF.

	·	In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, issued a stream of guidance in response to the COVID-19 pandemic and taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had and will likely continue to have ~~a significant~~an impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant and retail industries will continue to endure ~~significant~~ economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, ~~are~~including labor shortages, may also ~~expected to~~ impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, ~~we anticipate that~~ our financial condition, capital levels and results of operations ~~could~~may be adversely affected, as described in further detail below.

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

●

On March 13, 2020 we enacted our Pandemic Plan. We used available physical resources to achieve appropriate social distancing protocols in all facilities; in addition, we established mandatory remote work to isolate certain personnel essential to critical business continuity operations. We also expanded and tested remote access for the core banking system, funds transfer and loan operations.

●

~~We are actively working with loan customers to evaluate prudent loan modification terms.~~

●

We continue to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.

●

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities, which we are carrying out in a prudent and responsible manner.

●

On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services. Branch lobbies were reopened on May 20, 2020. One branch office remains closed due to limited lobby space. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.

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	·	We are actively working with loan customers to evaluate prudent loan modification terms.

	·	We continue to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.

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

	·	On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services. Branch lobbies were reopened on May 20, 2020. One small branch located in an assisted living facility was permanently closed effective December 31, 2020 due to limited lobby space and COVID-19 restrictions. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. While the majority of employees are now working on-site, some employees whose job responsibilities can be effectively carried out remotely continue to work from home. Employees working on-site are observing current public health guidelines.

Summary of Significant Accounting Policies

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. 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 ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~6, 2021 Annual Meeting of Shareholders.

Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The collectibility 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 collectibility. In addition, certain assets and liabilities are reflected at their estimated fair value in the consolidated financial statements. Such amounts are based on either quoted market prices or estimated values derived from dealer quotes used by the Company, market comparisons or internally generated modeling techniques. The Company’s internal models generally involve present value of cash flow techniques. The various techniques are discussed in greater detail elsewhere in this management’s discussion and analysis and the Notes to the Consolidated Financial Statements. Fair value of the Company’s financial instruments is discussed in Note (6) of the Notes to Consolidated Financial Statements (Unaudited) included in this Quarterly Report.

Results of Operations

Summary.Net earnings were ~~$4.5~~$4.6 million or ~~$0.78~~$0.82 basic net earnings per share and $0.80 diluted net earnings per share for the three months ended ~~September~~June 30, ~~2020,~~2021, as compared to ~~$3.6~~$2.6 million or ~~$0.62~~$0.46 basic net earnings per share and ~~$0.61~~$0.44 diluted net earnings per share for the same period one year ago. The increase in ~~third~~second quarter net earnings is primarily ~~the result of~~due to an increase ~~in non-interest income, which was partially offset by a decrease~~ in net interest income, ~~an increase~~a decrease in the provision for loan losses and an increase in non-interest income, which were partially offset by an increase in non-interest expense during the three months ended ~~September~~June 30, ~~2020,~~2021, compared to the three months ended ~~September~~June 30, ~~2019,~~2020, as discussed below.

The annualized return on average assets was ~~1.25%~~1.18% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~1.26%~~0.76% for the same period one year ago, and annualized return on average shareholders’ equity was ~~12.81%~~13.11% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~10.89%~~7.64% for the same period one year ago.

Net Interest Income.Net interest income, the major component of the Company’s net earnings, was ~~$10.9~~$11.7 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$11.4~~$10.7 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase in net interest income was ~~primarily~~ due to a ~~$562,000 decrease~~$879,000 increase in interest income ~~which was partially offset by~~and a ~~$52,000~~$70,000 decrease in interest expense. The ~~decrease~~increase in interest income was primarily due to a ~~$497,000~~$823,000 increase in interest income and fees on loans, which was primarily due to a $1.5 million increase in fee income on SBA PPP loans. The decrease in interest expense was primarily due to a decrease in Federal Home Loan Bank (“FHLB”) borrowings.

Interest income was $12.5 million for the three months ended June 30, 2021, compared to $11.6 million for the three months ended June 30, 2020. The increase in interest income was primarily due to a $823,000 increase in interest income and fees on loans, which was primarily due to a $1.5 million increase in fee income on SBA PPP loans. During the three months ended June 30, 2021, average loans ~~resulting~~decreased $30.9 million to $916.4 million from $947.3 million for the ~~1.50% reduction in~~three months ended June 30, 2020. During the ~~Prime Rate in March~~three months ended June 30, 2021, average investment securities available for sale increased $151.8 million to $346.9 million from $195.1 million for the three months ended June 30, 2020. The average yield on loans for the three months ended June 30, 2021 and 2020 was 4.82% and 4.32%, respectively. The average yield on investment securities available for sale was 1.80% and 3.09% for the three months ended June 30, 2021 and 2020, respectively. The average yield on earning assets was 3.43% and 3.77% for the three months ended June 30, 2021 and 2020, respectively.

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Interest expense was $842,000 for the three months ended June 30, 2021, compared to $912,000 for the three months ended June 30, 2020. The decrease in interest expense was primarily due to a decrease in ~~rates paid on~~FHLB borrowings. During the three months ended June 30, 2021, average interest-bearing ~~liabilities.~~

~~Interest income was $11.9~~non-maturity deposits increased $164.8 million to $735.0 million from $570.2 million for the three months ended ~~September~~June 30, ~~2020, compared~~2020. During the three months ended June 30, 2021, average certificates of deposit increased $6.6 million to ~~$12.4~~$106.7 million from $100.1 million for the three months ended ~~September~~June 30, ~~2019. The decrease in interest income was primarily due to a $497,000 decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March~~ 2020. ~~During the three months ended September 30, 2020, average loans increased $130.0~~Average FHLB borrowings decreased $70.0 million to ~~$970.5 million from $840.5 million~~zero for the three months ended ~~September~~June 30, ~~2019. During the three months ended September 30, 2020, average investment securities available for sale increased $19.7 million to $200.1 million~~2021 from $180.4 million for the three months ended September 30, 2019. The average yield on loans for the three months ended September 30, 2020 and 2019 was 4.31% and 5.19%, respectively. The average yield on investment securities available for sale was 2.82% and 3.29% for the three months ended September 30, 2020 and 2019, respectively. The average yield on earning assets was 3.56% and 4.79% for the three months ended September 30, 2020 and 2019, respectively.

Interest expense was $942,000 for the three months ended September 30, 2020, compared to $994,000 for the three months ended September 30, 2019. The decrease in interest expense was primarily due to a decrease in rates paid on interest-bearing liabilities. During the three months ended September 30, 2020, average interest-bearing non-maturity deposits increased $111.1 million to $607.1 million from $496.0 million for the three months ended September 30, 2019. During the three months ended September 30, 2020, average certificates of deposit decreased $3.5 million to $102.9 million from $106.4 million for the three months ended September 30, 2019. Average FHLB borrowings increased $63.4 million to $70.0 million for the three months ended ~~September~~June 30, ~~2020 from $6.6 million for the three months ended September 30, 2019.~~2020. The average rate paid on interest-bearing checking and savings accounts was ~~0.32%~~0.30% and ~~0.36%~~0.32% for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The average rate paid on certificates of deposit was ~~0.86%~~0.72% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~0.97%~~0.90% for the same period one year ago. The average rate paid on interest-bearing liabilities was ~~0.45%~~0.38% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~0.60%~~0.47% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~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 for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

Three months ended

Three months ended

September 30, 2020

September 30, 2019

(Dollars in thousands)

Average Balance

Interest

Yield / Rate

Average Balance

Interest

Yield / Rate

Interest-earning assets:

Loans receivable
$970,529
  10,507
  4.31%
$840,523
  11,004
  5.19%
Investments - taxable
  88,823
  484
  2.17%
  68,527
  517
  2.99%
Investments - nontaxable*
  118,920
  985
  3.30%
  117,140
  1,004
  3.40%
Federal funds sold
  135,548
  33
  0.10%
  -
  -
  0.00%
Other
  29,503
  21
  0.28%
  17,969
  87
  1.92%







Total interest-earning assets
  1,343,323
  12,030
  3.56%
  1,044,159
  12,612
  4.79%







Non-interest earning assets:






Cash and due from banks
  34,906


  40,415


Allowance for loan losses
  (9,399)


  (6,440)


Other assets
  69,408


  61,122









Total assets
$1,438,238


$1,139,256
















Interest-bearing liabilities:













NOW, MMDA & savings deposits
$607,111
  482
  0.32%
$495,992
  455
  0.36%
Time deposits
  102,900
  223
  0.86%
  106,366
  259
  0.97%
FHLB borrowings
  70,000
  103
  0.59%
  6,659
  21
  1.25%
Trust preferred securities
  15,464
  76
  1.96%
  20,619
  210
  4.04%
Other
  32,440
  58
  0.71%
  32,773
  49
  0.59%







Total interest-bearing liabilities
  827,915
  942
  0.45%
  662,409
  994
  0.60%








Non-interest bearing liabilities and shareholders' equity:






Demand deposits
  460,615


  336,896


Other liabilities
  9,701


  8,051


Shareholders' equity
  140,007


  131,900









Total liabilities and shareholder's equity
$1,438,238


$1,139,256









Net interest spread

$11,088
  3.11%

$11,618
  4.19%







Net yield on interest-earning assets


  3.28%


  4.41%







Taxable equivalent adjustment






Investment securities

$162


$182








Net interest income

$10,926


$11,436

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	Three months ended								Three months ended
	June 30, 2021								June 30, 2020
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:

Loans receivable	$	916,393			11,003		4.82	%	$	947,344			10,180		4.32	%
Investments - taxable		211,422			649		1.23	%		85,505			554		2.61	%
Investments - nontaxable*		139,704			936		2.69	%		117,271			1,004		3.44	%
Federal funds sold		-			-		0.00	%		75,393			22		0.12	%
Other		209,737			49		0.09	%		33,070			41		0.50	%

Total interest-earning assets		1,477,256			12,637		3.43	%		1,258,583			11,801		3.77	%

Non-interest earning assets:
Cash and due from banks		32,350								37,250
Allowance for loan losses		(9,572	)							(8,084	)
Other assets		63,536								72,659

Total assets	$	1,563,570							$	1,360,408

Interest-bearing liabilities:

Interest-bearing demand, MMDA & savings deposits	$	734,988			543		0.30	%	$	570,220			448		0.32	%
Time deposits		106,669			191		0.72	%		100,064			224		0.90	%
FHLB borrowings		-			-		0.00	%		70,000			102		0.59	%
Trust preferred securities		15,464			71		1.84	%		15,464			90		2.34	%
Other		30,295			37		0.49	%		28,804			48		0.67	%

Total interest-bearing liabilities		887,416			842		0.38	%		784,552			912		0.47	%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits		528,502								434,109
Other liabilities		6,485								6,944
Shareholders' equity		141,167								134,803

Total liabilities and shareholders' equity	$	1,563,570							$	1,360,408

Net interest spread				$	11,795		3.05	%				$	10,889		3.30	%

Net yield on interest-earning assets							3.20	%							3.48	%

Taxable equivalent adjustment
Investment securities				$	120							$	163

Net interest income				$	11,675							$	10,726

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of ~~$17.3~~$13.9 million in ~~2020~~2021 and ~~$31.2~~$24.7 million in ~~2019.~~2020. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in ~~2020~~2021 and ~~2019.~~

2020.

Year-to-date net interest income as of ~~September~~June 30, ~~2020~~2021 was ~~$32.9~~$22.8 million, compared to ~~$34.5~~$21.9 million for the same period one year ago. The ~~decrease~~increase in net interest income was ~~primarily~~ due to a ~~$1.2 million decrease~~$551,000 increase in interest income and a ~~$363,000 increase~~$296,000 decrease in interest expense. The ~~decrease~~increase in interest income was primarily due to a ~~$1.2 million decrease~~$807,000 increase in interest income and fees on loans, ~~resulting from the 1.50% reduction~~which was primarily due to a $2.5 million increase in ~~the Prime Rate in March 2020.~~fee income on SBA PPP loans. The ~~increase~~decrease in interest expense was primarily due to ~~an increase~~a decrease in ~~average outstanding balances of~~rates paid on interest-bearing ~~deposits~~liabilities and a decrease in FHLB borrowings.

Interest income was ~~$35.8~~$24.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$37.0~~$23.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~decrease~~increase in interest income was primarily due to a ~~$1.2 million decrease~~$807,000 increase in interest income and fees on loans, ~~resulting~~which was primarily due to a $2.5 million increase in fee income on SBA PPP loans. During the six months ended June 30, 2021, average loans increased $27.2 million to $931.7 million from $904.5 million for the ~~1.50% reduction in the Prime Rate in March~~six months ended June 30, 2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2020, average loans increased $97.3 million to $926.7 million from $289.4 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020,~~2021, average investment securities available for sale increased ~~$9.6~~$113.1 million to ~~$194.7~~$305.1 million from ~~$185.1~~$192.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The average yield on loans for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020 was 4.69% and ~~2019 was 4.52% and 5.24%~~4.64%, respectively. The average yield on investment securities available for sale was ~~3.02%~~1.87% and ~~3.48%~~3.12% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The average yield on earning assets was ~~3.92%~~3.49% and ~~4.89%~~4.12% for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively.

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Interest expense was ~~$2.9~~$1.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$2.5~~$2.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in interest expense was primarily due to ~~an increase~~a decrease in ~~interest bearing deposits~~rates paid on interest-bearing liabilities and ~~borrowings from~~a decrease in FHLB ~~and an increase in interest rates on deposits.~~borrowings. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, average interest-bearing non-maturity deposits increased ~~$77.8~~$157.9 million to ~~$566.3~~$703.6 million from ~~$488.5~~$545.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. During the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, average certificates of deposit ~~decreased $157,000~~increased $4.2 million to ~~$103.0~~$107.3 million from ~~$103.2~~$103.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Average FHLB borrowings ~~increased $56.6~~decreased $56.9 million to ~~$61.3~~zero for the six months ended June 30, 2021 from $56.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020 from $4.7 million for the nine months ended September 30, 2019.~~2020. The average rate paid on interest-bearing checking and savings accounts was ~~0.34%~~0.30% and ~~0.29%~~0.36% for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The average rate paid on certificates of deposit was ~~0.94%~~0.76% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~0.75%~~0.98% for the same period one year ago. The average rate paid on interest-bearing liabilities was ~~0.50%~~0.39% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~0.52%~~0.43% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~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 for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 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.

Nine months ended

Nine months ended

September 30, 2020

September 30, 2019

(Dollars in thousands)

Average Balance

Interest

Yield / Rate

Average Balance

Interest

Yield / Rate

Interest-earning assets:

Loans receivable
$926,663
  31,367
  4.52%
$829,385
  32,517
  5.24%
Investments - taxable
  85,887
  1,664
  2.59%
  62,230
  1,457
  3.13%
Investments - nontaxable*
  116,113
  2,929
  3.37%
  128,024
  3,493
  3.65%
Federal funds sold
  80,379
  178
  0.30%
  -
  -
  0.00%
Other
  26,618
  104
  0.52%
  8,934
  136
  2.04%







Total interest-earning assets
  1,235,660
  36,242
  3.92%
  1,028,573
  37,603
  4.89%







Non-interest earning assets:






Cash and due from banks
  36,372


  36,882


Allowance for loan losses
  (8,059)


  (6,475)


Other assets
  68,276


  63,246









Total assets
$1,332,249


$1,122,226
















Interest-bearing liabilities:













NOW, MMDA & savings deposits
$566,348
  1,455
  0.34%
$488,467
  1,057
  0.29%
Time deposits
  103,047
  725
  0.94%
  103,204
  581
  0.75%
FHLB borrowings
  61,314
  270
  0.59%
  4,700
  70
  1.99%
Trust preferred securities
  15,483
  296
  2.55%
  20,619
  656
  4.25%
Other
  28,086
  149
  0.71%
  39,666
  168
  0.57%







Total interest-bearing liabilities
  774,278
  2,895
  0.50%
  656,656
  2,532
  0.52%








Non-interest bearing liabilities and shareholders' equity:






Demand deposits
  413,693


  324,749


Other liabilities
  4,087


  8,768


Shareholders' equity
  140,191


  132,053









Total liabilities and shareholder's equity
$1,332,249


$1,122,226









Net interest spread

$33,347
  3.42%

$35,071
  4.37%







Net yield on interest-earning assets


  3.60%


  4.56%







Taxable equivalent adjustment






Investment securities

$486


$615


��





Net interest income

$32,861


$34,456

Table of Contents

	Six months ended								Six months ended
	June 30, 2021								June 30, 2020
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:

Loans receivable	$	931,714			21,667		4.69	%	$	904,489			20,860		4.64	%
Investments - taxable		185,350			1,190		1.29	%		84,402			1,180		2.81	%
Investments - nontaxable*		124,171			1,741		2.83	%		114,694			1,944		3.41	%
Federal funds sold		-			-		0.00	%		52,491			145		0.56	%
Other		184,755			84		0.09	%		25,161			84		0.67	%

Total interest-earning assets		1,425,990			24,682		3.49	%		1,181,237			24,213		4.12	%

Non-interest earning assets:
Cash and due from banks		31,164								37,113
Allowance for loan losses		(9,749	)							(7,382	)
Other assets		63,384								67,705

Total assets	$	1,510,789							$	1,278,673

Interest-bearing liabilities:

NOW, MMDA & savings deposits	$	703,610			1,040		0.30	%	$	545,742			973		0.36	%
Time deposits		107,343			403		0.76	%		103,121			501		0.98	%
FHLB borrowings		-			-		0.00	%		56,923			166		0.59	%
Trust preferred securities		15,464			142		1.85	%		15,520			220		2.85	%
Other		28,841			72		0.50	%		25,885			93		0.72	%

Total interest-bearing liabilities		855,258			1,657		0.39	%		747,191			1,953		0.53	%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits		508,801								389,975
Other liabilities		4,164								5,732
Shareholders' equity		142,566								135,775

Total liabilities and shareholders' equity	$	1,510,789							$	1,278,673

Net interest spread				$	23,025		3.10	%				$	22,260		3.60	%

Net yield on interest-earning assets							3.26	%							3.79	%

Taxable equivalent adjustment
Investment securities				$	243							$	325

Net interest income				$	22,782							$	21,935

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of ~~$23.1~~$10.7 million in ~~2020~~2021 and ~~$33.2~~$26.1 million in ~~2019.~~2020. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in ~~2020~~2021 and ~~2019.~~

2020.

Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents 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 interest due to both volume and rate have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

(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
$1,555
  (2,052)
  (497)
  3,553
  (4,703)
  (1,150)
Investments - taxable
  132
  (165)
  (33)
  506
  (299)
  207
Investments - nontaxable
  15
  (34)
  (19)
  (313)
  (251)
  (564)
Federal funds sold
  17
  16
  33
  89
  89
  178
Other
  32
  (98)
  (66)
  169
  (201)
  (32)
Total interest income
  1,751
  (2,333)
  (582)
  4,004
  (5,365)
  (1,361)







Interest expense:






NOW, MMDA & savings deposits
  95
  (68)
  27
  184
  214
  398
Time deposits
  (8)
  (28)
  (36)
  (1)
  145
  144
FHLB borrowings
  146
  (64)
  82
  546
  (346)
  200
Trust preferred securities
  (39)
  (95)
  (134)
  (131)
  (229)
  (360)
Other
  (1)
  10
  9
  (55)
  36
  (19)
Total interest expense
  193
  (245)
  (52)
  543
  (180)
  363
Net interest income
$1,558
  (2,088)
  (530)
  3,461
  (5,185)
  (1,724)

Table of Contents

	Three months ended June 30, 2021 compared to three months ended June 30, 2020									Six months ended June 30, 2021 compared to six months ended June 30, 2020
(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	$	(352	)		1,175			823			631			176			807
Investments - taxable		601			(506	)		95			1,030			(1,020	)		10
Investments - nontaxable		171			(239	)		(68	)		147			(350	)		(203	)
Federal funds sold		(11	)		(11	)		(22	)		(73	)		(72	)		(145	)
Other		130			(122	)		8			303			(303	)		-
Total interest income		539			297			836			2,038			(1,569	)		469

Interest expense:
NOW, MMDA & savings deposits		126			(31	)		95			257			(190	)		67
Time deposits		13			(46	)		(33	)		18			(116	)		(98	)
FHLB borrowings		(51	)		(51	)		(102	)		(83	)		(83	)		(166	)
Trust preferred securities		-			(19	)		(19	)		(1	)		(77	)		(78	)
Other		2			(13	)		(11	)		9			(30	)		(21	)
Total interest expense		90			(160	)		(70	)		200			(496	)		(296	)
Net interest income	$	449			457			906			1,838			(1,073	)		765

Provision for Loan Losses.The provision for loan losses for the three months ended ~~September~~June 30, ~~2020~~2021 was ~~$522,000,~~a recovery of $226,000, compared to ~~$422,000~~a provision of $1.4 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~a decrease in ~~the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and~~ ~~a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. The ALLL model also includes~~ reserves on ~~$119.7 million in~~ loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool. At June 30, 2021, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $283,000. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. ~~Reserves~~The loan balances associated with COVID-19 ~~payment~~pandemic related modifications ~~were $1.6 million at June 30, 2020~~have been grouped into their own pool within the Company’s ALLL model as they have a higher likelihood of risk, and ~~September 30, 2020. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million in~~a higher reserve rate has been applied to that pool. Of all loans secured by commercial real estate, $23.0 million in loans secured by residential real estate, $8.7 in loans secured by other real estate, $8.0 million in commercial loans not secured by real estate and $765,000 in consumer loans not secured by real estate at September 30, 2020. These payment modifications are primarily interest only payments for three to six months. Loans with COVID-19 related payment modifications that have reverted to their original terms are still included with reserves associated with COVID-19 payment modifications at September 30, 2020. There is still uncertainty about the ongoing and future effects of national and local policy decisions on these borrowers that could still limit their ability to adhere to their original payment terms. Approximately 12% of loans with COVID-19 payment modifications at September 30, 2020 have received secondary payment modificationsmodified as a result of the COVID-19 ~~pandemic.~~pandemic, $108.2 million have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that are currently modified and/or loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $119.6 million. The $11.4 million decrease from December 31, 2020 to June 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the six months ended June 30, 2021. 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.

The provision for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$3.5 million,~~a recovery of $681,000, compared to ~~$677,000~~a provision of $2.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~a decrease in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. The ALLL model also includes reserves on ~~$119.7 million in~~ loans with payment modifications made ~~in 2020~~ as a result of the COVID-19 ~~pandemic. Reserves associated with COVID-19 payment modifications were $1.6 million at June 30, 2020~~pandemic and ~~September 30, 2020.~~

a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

Non-Interest Income. Total non-interest income was ~~$7.1~~$6.0 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$4.7~~$5.2 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase in non-interest income is primarily attributable to a ~~$1.7 million~~$572,000 increase in ~~gains~~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 ~~sale~~Small Business Investment Company (“SBIC”) investments, and a $271,000 increase in appraisal management fee income due to an increase in the volume of ~~securities,~~appraisals.

Non-interest income was $11.9 million for the six months ended June 30, 2021, compared to $9.8 million for the six months ended June 30, 2020. The increase in non-interest income is primarily attributable to a ~~$560,000~~$708,000 increase in mortgage banking income due to an increased in mortgage loan volume, a $737,000 increase in appraisal management fee income due to an increase in the volume of appraisals and a $374,000 increase in mortgage banking income due to increased mortgage loan volume, which were partially offset by a $383,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.

Non-interest income was $17.0 million for the nine months ended September 30, 2020, compared to $13.2 million for the nine months ended September 30, 2019. The increase in non-interest income is primarily attributable to a $1.9$1.0 million increase in ~~gains on sale of securities, a $1.7 million increase in appraisal management fee~~miscellaneous non-interest income primarily due to an increase in ~~the volume of appraisals~~debit card income resulting from increased debit card activity and ~~a $801,000~~an increase in ~~mortgage banking~~ income due to increased mortgage loan volume, which were partially offset by a $779,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.

on SBIC investments.

Table of Contents

Non-Interest Expense. Total non-interest expense was ~~$11.9~~$12.1 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$11.3~~$11.5 million for the three months ended ~~September~~June 30, ~~2019.~~2020. The increase in non-interest expense was primarily attributable to a ~~$466,000~~$301,000 increase in appraisal management fee expense due to an increase in the volume of ~~appraisals.~~

appraisals and a $116,000 increase in FDIC insurance expense.

Non-interest expense was ~~$34.8~~$24.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$33.4~~$22.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The increase in non-interest expense was primarily ~~due~~attributable to ana $723,000 increase ~~of $1.3 million~~ in appraisal management fee expense due to an increase in the volume of ~~appraisals.~~

appraisals and a $590,000 increase in salaries and employee benefits expense primarily due to increases in insurance costs and incentive compensation.

Income Taxes.Income tax expense was ~~$1.1~~$1.2 million for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$834,000~~$535,000 for the three months ended ~~September~~June 30, ~~2019.~~2020. The effective tax rate was ~~19.80%~~20.55% for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~18.72%~~17.28% for the three months ended ~~September~~June 30, ~~2019.~~2020. Income tax expense was ~~$2.1~~$2.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~$2.5~~$1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. The effective tax rate was ~~18.31%~~20.41% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, compared to ~~18.16%~~16.90% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~

2020. The increase in the effective tax rate is primarily due to a reduction in non-taxable investments combined with an increase in earnings before income taxes.

Analysis of Financial Condition

Investment Securities.Available for sale securities were ~~$223.0~~$367.5 million at ~~September~~June 30, ~~2020,~~2021, compared to ~~$195.7~~$245.2 million at December 31, ~~2019.~~2020. The increase in available for sale securities is primarily due to additional securities purchases due to an increase in excess cash. Average investment securities available for sale for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 were ~~$194.7~~$305.1 million, compared to ~~$185.3~~$200.8 million for the year ended December 31, ~~2019.~~

2020.

Loans.At ~~September~~June 30, ~~2020,~~2021, loans were ~~$970.2~~$888.4 million, compared to ~~$849.9~~$948.6 million at December 31, ~~2019.~~2020. The decrease in loans is primarily due to a $38.3 million decrease in PPP loans primarily due to PPP loans being forgiven by the SBA during the six months ended June 30, 2021 and a $33.7 decrease in commercial loans due to loan payoffs during the six months ended June 30, 2021. The Company had $37.5 million and $75.8 million in PPP loans at June 30, 2021 and December 31, 2020, respectively. Average loans represented ~~75%~~65% and ~~79%~~74% of average earning assets for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and the year ended December 31, ~~2019,~~2020, respectively.

The Company had ~~$9.0~~$5.5 million and ~~$4.4~~$9.1 million in mortgage loans held for sale as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Although the Company 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 ~~September~~June 30, ~~2020,~~2021, the Company had ~~$99.9~~$93.3 million in residential mortgage loans, ~~$102.8~~$88.3 million in home equity loans and ~~$466.7~~$498.7 million in commercial mortgage loans, which include ~~$367.9~~$391.4 million secured by commercial property and ~~$98.8~~$107.3 million secured by residential property. Residential mortgage loans at June 30, 2021 include ~~$28.1~~$25.2 million in non-traditional mortgage loans from the former Banco division of the Bank. At December 31, 2020, the Company had $104.2 million in residential mortgage loans, $96.6 million in home equity loans and $476.7 million in commercial mortgage loans, which include $375.0 million secured by commercial property and $101.7 million secured by residential property. Residential mortgage loans at December 31, 2020 include $26.9 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.

~~At September 30, 2020, the~~

The Company had ~~$96.9~~$90.6 million and $94.1 million in construction and land development ~~loans.~~loans at June 30, 2021 and December 31, 2020, respectively. The following ~~table presents~~tables present a breakout of these loans.

(Dollars in thousands)

Number of Loans

Balance Outstanding

Non-accrual Balance

Land acquisition and development - commercial purposes
  36
$7,543
$-
Land acquisition and development - residential purposes
  163
  21,044
  -
1 to 4 family residential construction
  105
  19,845
  -
Commercial construction
  30
  48,434
  -
Total construction and land development
  334
$96,866
$-

June 30, 2021
(Dollars in thousands)
	Number of Loans		Balance Outstanding		Non-accrual Balance
Land acquisition and development - commercial purposes		35	$	7,211	$	-
Land acquisition and development - residential purposes		146		19,811		-
1 to 4 family residential construction		105		17,155		-
Commercial construction		40		46,402		-
Total construction and land development		326	$	90,579	$	-

Table of Contents

December 31, 2020
(Dollars in thousands)
	Number of Loans		Balance Outstanding		Non-accrual Balance
Land acquisition and development - commercial purposes		36	$	7,509	$	-
Land acquisition and development - residential purposes		161		20,444		-
1 to 4 family residential construction		93		18,897		-
Commercial construction		32		47,274		-
Total construction and land development		322	$	94,124	$	-

2020.

Allowance for Loan Losses.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. 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.~~

	·	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~~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~~third-party reviews and evaluates loan relationships greater than $1.0 million as well as a sample of commercial relationships with exposures below $1.0 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 Bank’s Board of Directors.

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 for loan losses. 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 for loan losses.

Table of Contents

The allowance for loan losses 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. At June 30, 2021, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $283,000. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At June 30, 2021, the balance for all loans that are currently modified or previously modified but have returned to their original terms was $108.2 million. The loan balances associated with COVID-19 related modifications have been grouped into their own pool within the Company’s ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $108.2 million have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that are currently modified and/or loans that were once modified.

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 loan losses for the six months ended June 30, 2021, as compared to the six months ended June 30, 2020. 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~~single-family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg County, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers.

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

~~There~~

	Percentage of Loans
	By Risk Grade
Risk Grade	06/30/2021			12/31/2020
Risk Grade 1 (Excellent Quality)		0.63	%		1.18	%
Risk Grade 2 (High Quality)		19.16	%		20.45	%
Risk Grade 3 (Good Quality)		68.78	%		65.70	%
Risk Grade 4 (Management Attention)		8.68	%		9.75	%
Risk Grade 5 (Watch)		1.97	%		2.20	%
Risk Grade 6 (Substandard)		0.78	%		0.72	%
Risk Grade 7 (Doubtful)		0.00	%		0.00	%
Risk Grade 8 (Loss)		0.00	%		0.00	%

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At June 30, 2021, including non-accrual loans, there were ~~no significant changes~~three relationships exceeding $1.0 million in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. 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 allowance for loan losses at September 30, 2020 was $9.9 million or 1.02% of total loans, compared to $6.7 million or 0.79% of total loans at~~Watch risk grade (which totaled $8.3 million). At December 31, 2019. The increase in the allowance for loan losses is due to the current economic implications and rising unemployment rate impacting the economy due to the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. The ALLL model also includes reserves on $119.7 million in loans with payment modifications as a result of the COVID-19 pandemic.

Percentage of Loans

By Risk Grade

Risk Grade

9/30/20

12/31/20

Risk Grade 1 (Excellent Quality)
  1.12%
  1.16%
Risk Grade 2 (High Quality)
  20.96%
  24.46%
Risk Grade 3 (Good Quality)
  65.36%
  62.15%
Risk Grade 4 (Management Attention)
  9.93%
  10.02%
Risk Grade 5 (Watch)
  1.91%
  1.45%
Risk Grade 6 (Substandard)
  0.72%
  0.76%
Risk Grade 7 (Doubtful)
  0.00%
  0.00%
Risk Grade 8 (Loss)
  0.00%
  0.00%

~~At September 30,~~ 2020, including non-accrual loans, there were three relationships exceeding $1.0 million in the Watch risk grade (which totaled ~~$8.0~~$7.9 million). There were no relationships exceeding $1.0 million in the Substandard risk ~~grade.~~

grade at June 30, 2021 and December 31, 2020.

Non-performing Assets.Non-performing assets totaled ~~$3.7~~$3.4 million at ~~September~~June 30, ~~2020~~2021 or ~~0.25%~~0.21% of total assets, compared to ~~$3.6~~$3.8 million or ~~0.31%~~0.27% of total assets at December 31, ~~2019.~~2020. Non-accrual loans were ~~$3.5~~$3.4 million at ~~September~~June 30, ~~2020~~2021 and ~~$3.6~~$3.9 million at December 31, ~~2019.~~2020. As a percentage of total loans outstanding, non-accrual loans were ~~0.36%~~0.38% at ~~September~~June 30, ~~2020,~~2021, compared to ~~0.42%~~0.40% at December 31, ~~2019.~~2020. Non-performing ~~loans~~assets include $3.3 million in commercial and residential mortgage loans and ~~$272,000~~$67,000 in other loans at ~~September~~June 30, ~~2020,~~2021, compared to ~~$3.4~~$3.5 million in commercial and residential mortgage loans, ~~and $155,000~~$226,000 in other loans and $128,000 in other real estate owned at December 31, ~~2019. The Bank had $84,000 in loans 90 days past due and still accruing at September 30,~~ 2020. The Bank had no loans 90 days past due and still accruing at June 30, 2021 and December 31, ~~2019. The Bank had $128,000 in other real estate owned at September 30,~~ 2020. The Bank had no other real estate owned at ~~December 31, 2019.~~

June 30, 2021.

Deposits.Total deposits at ~~September~~June 30, ~~2020~~2021 were ~~$1.2~~$1.4 billion compared to ~~$966.5 million~~$1.2 billion at December 31, ~~2019.~~2020. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.4 billion at June 30, 2021, compared to $1.2 billion at ~~September 30, 2020, compared to $932.2 million at~~ December 31, ~~2019.~~

2020.

Borrowed Funds. ~~FHLB borrowings were $70.0 million at September 30, 2020.~~ There were no FHLB borrowings outstanding at June 30, 2021 and December 31, 2019. The increase in FHLB borrowings reflects a new $70.0 million FHLB advance executed in February 2020 to take advantage of a ten-year convertible advance program available from the FHLB at a rate of 0.58%.

2020.

Securities sold under agreements to repurchase were ~~$34.2~~$31.2 million at ~~September~~June 30, ~~2020,~~2021, compared to ~~$24.2~~$26.2 million at December 31, ~~2019.~~

2020.

Junior Subordinated Debentures (related to Trust Preferred Securities).Junior subordinated debentures were $15.5 million ~~and $15.6 million~~ at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~

2020.

In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. 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, which pay a floating rate equal to three-month LIBOR plus 163 basis points. 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 asset of PEBK Trust II. PEBK Trust II is not included in the Consolidated Financial Statements.

The trust preferred securities issued by PEBK Trust II accrue and pay 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 to the extent PEBK Trust II does not have funds with which to make the distributions and other payments. The net combined effect of the trust preferred securities transaction is that the Company is obligated 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, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the indenture, 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 will retire on December 31, 2021. The overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023.

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

Table of Contents

The Company manages its exposure to fluctuations in interest rates through policies established by our Asset/Liability Committee (“ALCO”). 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 tries 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 securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 totaled ~~$1.2~~$1.4 billion, exceeding average rate sensitive liabilities of ~~$774.3~~$855.3 million by ~~$461.4~~$655.5 million.

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of ~~September~~June 30, ~~2020.~~

2021.

Included in the rate sensitive assets are ~~$233.5~~$206.7 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At ~~September~~June 30, ~~2020,~~2021, the Company had ~~$143.4~~$134.5 million in loans with interest rate floors. The floors were in effect on ~~$122.8~~$107.5 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is ~~0.84%~~0.81% higher than the indexed rate on the promissory notes without interest rate floors.

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 ~~September~~June 30, ~~2020,~~2021, such unfunded commitments to extend credit were ~~$303.0~~$312.1 million, while commitments in the form of standby letters of credit totaled ~~$4.2~~$5.1 million.

As of December 31, 2020, such unfunded commitments to extend credit were $299.0 million, while commitments in the form of standby letters of credit totaled $4.7 million.

The Company uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The 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 ~~September~~June 30, 2021, the Company’s core deposits totaled $1.4 billion, or 98.09% of total deposits. As of December 31, 2020, the Company’s core deposits totaled $1.2 billion, or ~~97.92%~~97.89% of total deposits.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Company’s policies include the ability to access wholesale funding of up to 40% of total assets. The Company’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Company’s ratio of wholesale funding to total assets was ~~5.65%~~0.69% and 0.88% as of ~~September~~June 30, ~~2020.~~

2021 and December 31, 2020, respectively.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. ~~FHLB borrowings were $70 million at September 30, 2020.~~ There were no FHLB borrowings outstanding at June 30, 2021 and December 31, ~~2019.~~2020. At ~~September~~June 30, ~~2020,~~2021, the carrying value of loans pledged as collateral to the FHLB totaled ~~$176.5~~$144.6 million compared to ~~$139.4~~$165.1 million at December 31, ~~2019.~~2020. The remaining availability under the line of credit with the FHLB was ~~$49.7~~$95.1 million at ~~September~~June 30, ~~2020~~2021 compared to ~~$86.1~~$111.4 million at December 31, ~~2019.~~2020. The Bank had no borrowings from the FRB at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At ~~September~~June 30, ~~2020,~~2021, the carrying value of loans pledged as collateral to the FRB totaled ~~$466.6~~$468.2 million compared to ~~$452.6~~$469.5 million at December 31, ~~2019.~~

2020. Availability under the line of credit with the FRB was $337.1 million and $340.0 million at June 30, 2021 and December 31, 2020, respectively.

The Bank also had the ability to borrow up to ~~$120.5~~$110.5 million for the purchase of overnight federal funds from ~~six~~five correspondent financial institutions as of ~~September~~June 30, ~~2020.~~

2021.

Table of Contents

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was ~~30.50%~~42.71% at ~~September~~June 30, ~~2020~~2021 and ~~18.20%~~28.12% at December 31, ~~2019.~~2020. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019.~~

2020.

Contractual Obligations and Off-Balance Sheet Arrangements.The Company’s contractual obligations and other commitments as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized in the table below. 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. Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.

(Dollars in thousands)

September 30,
2020

December 31,
2019

Contractual Cash Obligations

Long-term borrowings
$70,000
  -
Junior subordinated debentures
  15,464
  15,619
Operating lease obligations
  3,234
  4,134
Total
$88,698
  19,753
Other Commitments


Commitments to extend credit
$303,001
  276,338
Standby letters of credit and financial guarantees written
  4,224
  3,558
Income tax credits
  184
  333
Total
$307,409
  280,229

(Dollars in thousands)
	June 30, 2021		December 31, 2020
Contractual Cash Obligations
Junior subordinated debentures	$	15,464		15,464
Operating lease obligations		2,781		3,083
Total	$	18,245		18,547
Other Commitments
Commitments to extend credit	$	312,094		299,039
Standby letters of credit and financial guarantees written		5,095		4,745
Income tax credits		101		184
Total	$	317,290		303,968

The Company enters into derivative contracts from time to time 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. Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management”.

Capital Resources.Shareholders’ equity was ~~$139.5~~$145.4 million, or ~~9.54%~~9.09% of total assets, at ~~September~~June 30, ~~2020,~~2021, compared to ~~$134.1~~$139.9 million, or ~~11.61%~~9.88% of total assets, at December 31, ~~2019.~~

2020.

Annualized return on average equity for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~8.99%~~12.36%, compared to ~~11.24%~~7.30% for the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. Total cash dividends paid on common stock were ~~$3.5~~$1.9 million and ~~$3.1~~$2.6 million for the ~~nine~~six months ended ~~September~~June 30, 2021 and 2020, ~~and 2019,~~ respectively.

The Board of Directors, at its discretion, can issue shares of preferred stock up to a maximum of 5,000,000 shares. The Board is authorized to determine the number of shares, voting powers, designations, preferences, limitations and relative rights. The Board of Directors does not currently anticipate issuing any additional series of preferred stock.

In ~~January~~February of ~~2020,~~2021, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3$4.0 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has not repurchased ~~approximately $3.0 million, or 126,800~~any shares of its common stock under this stock repurchase program as of ~~September~~June 30, ~~2020.~~

2021.

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.

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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 ~~and $20.0 million~~ in trust preferred securities at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. The Company’s Tier 1 capital ratio was ~~14.53%~~15.63% and ~~15.37%~~15.07% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~15.49%~~16.56% and ~~16.08%~~16.07% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~13.06%~~14.13% and ~~13.79%~~13.56% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was ~~10.38%~~10.01% and ~~11.91%~~10.24% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The Bank’s Tier 1 risk-based capital ratio was ~~14.21%~~15.24% and ~~15.09%~~14.85% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The total risk-based capital ratio for the Bank was ~~15.18%~~16.17% and ~~15.79%~~15.85% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The Bank’s common equity Tier 1 capital ratio was ~~14.21%~~15.24% and ~~15.09%~~14.85% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The Bank’s Tier 1 leverage capital ratio was ~~10.10%~~9.72% and ~~11.61%~~10.04% at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, 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 ~~September~~June 30, ~~2020.~~

I~~tem~~2021.

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Part 7A. of Part II of the Company’s Form 10-K, filed with the SEC on March ~~13, 2020.~~

I~~tem~~19, 2021, which is accessible on the SEC’s website at www.sec.gov.

Item 4.

Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

P~~ART II.~~

~~OTHER INFORMATION~~

I~~tem 1.~~

~~Legal Proceedings~~

On October 19, 2018, the Bank received a draft audit report from the North Carolina Department of Revenue (“NCDOR”) setting forth certain proposed adjustments to the North Carolina income tax returns for the Bank for the tax years January 1, 2014 through December 31, 2016. The NCDOR is seeking 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 disagrees with the NCDOR’s proposed adjustments and the disallowance of certain tax credits, and is challenging 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 from State Tax Credit Exchange, LLC dated September 10, 2014 was attached to the Company’s September 30, 2018 Form 10-Q as Exhibit 99.

I~~tem 1A.~~

~~Risk Factors~~

Inaddition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Form 10-K, filed with the SEC on March 13, 2020. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also is a cautionary statement identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has adversely impacted, and an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak has led to an economic recession and other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread issues for the Company.

The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. COVID-19 continues to spread through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created a recession and reduced economic activity. We expect that we could experience significant disruptions across our business due to these effects, possibly leading to decreased earnings, significant slowdowns in our loan collections or increased loan defaults.

COVID-19 has and may continue to impact businesses’ and consumers’ desire or financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of our borrowers are in or have exposure to the various industries impacted by COVID-19 and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. Prolonged spread of COVID-19 and the related suppression of business activities would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases has resulted in and may continue to result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

~~We believe that the economic impact from COVID-19 could have an adverse impact on our business and could result in losses in our loan portfolio, all of which would impact our earnings and capital.~~Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. We do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on the Company. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 will be heightened.

As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPPand loan forgiveness applications. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

I~~tem 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~ISSUER PURCHASES OF EQUITY SECURITIES~~

Period

Total Number of Shares Purchased

Average Price Paid per Share

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

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)

July 1 - 31, 2020
  1,796
$17.66
  -
$1,178





August 1 - 31, 2020
  420
  16.90
  -
$1,178





September 1 - 30, 2020
  481
  17.14
  -
$1,178





Total
  2,697(1)
$17.40
  -

(1) The Company purchased 2,697 shares on the open market in the three months ended September 30, 2020 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

~~(2) Reflects dollar value of shares that may yet be purchased under the Company's stock repurchase program , which was funded in January 2020.~~

I~~tem~~3.

~~Defaults Upon Senior Securities~~

~~Not applicable~~

I~~tem~~5.

~~Other Information~~

~~Not applicable~~

I~~tem~~6.

~~Exhibits~~

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

	On October 19, 2018, the Bank received a draft audit report from the North Carolina Department of Revenue (“NCDOR”) setting forth certain proposed adjustments to the North Carolina income tax returns for the Bank for the tax years January 1, 2014 through December 31, 2016. The NCDOR is seeking 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 disagrees with the NCDOR’s proposed adjustments and the disallowance of certain tax credits, and is challenging 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 from State Tax Credit Exchange, LLC dated September 10, 2014 was attached to the Company’s September 30, 2018 Form 10-Q as Exhibit 99.

Item 1A.	Risk Factors

	For information regarding the risk factors that could affect the Company’s business, results of operations, financial condition and liquidity, see the information under Part I, Item 1A. “Risk Factors” in the Form 10-K filed with the SEC on March 19, 2021, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Form 10-K.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased			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)

April 1 - 30, 2021		1,426		$	23.35		-	$	4,000,000

May 1 - 31, 2021		307			25.96		-	$	4,000,000

June 1 - 30, 2021		444			25.38		-	$	4,000,000

Total		2,177	(1)	$	24.25		-

	(1) The Company purchased 2,177 shares on the open market in the three months ended June 30, 2021 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

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

	(3) Reflects dollar value of shares that may yet be purchased under the Company's stock repurchase program, which was funded in February 2021.

Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 5.	Other Information

	Not applicable

Item 6.

Exhibits

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

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

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

Exhibit (3)(i)(d)		Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form 8-K filed with the Securities and Exchange Commission on May 10, 2021

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


	47

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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 ~~13,~~16, 2020

Exhibit (10)(i)		Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Tony W. Wolfe dated December 18, 2008, incorporated by reference to Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

Exhibit (10)(ii)		Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Joseph F. Beaman, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

Exhibit (10)(iii)		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)(iv)		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)(v)		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)(vi)		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)(vii)		Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

Exhibit (10)(viii)		Employment Agreement dated January 22, 2015 between the Registrant and A. Joseph Lampron, Jr., incorporated by reference to Exhibit (10)(b) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015

Table of Contents

Exhibit (10)(ix)		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)(x)		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)(xi)		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)(xii)		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)(xiii)		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)(xiv)		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)(xv)		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)(xvi)		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

Exhibit (10)(xvii)		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)(xviii)		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


49

Table of Contents

Exhibit (10)(xix)		First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxi) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018

Exhibit (10)(xx)		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)(xxi)		2020 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(xii) to the Form ~~DEF 14A~~10-K filed with the Securities and Exchange Commission on March ~~25, 2020~~19, 2021

Exhibit (14)		Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2005

Exhibit (31)(a)		Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (31)(b)		Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (32)		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit (101)		The following materials from the Company’s 10-Q Report for the quarterly period ended ~~September~~June 30, ~~2020,~~2021, 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, tagged as blocks of text.*

*Furnished, not filed.

S~~IGNATURES~~

Table of Contents

SIGNATURES

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

Peoples Bancorp of North Carolina, Inc.

~~November~~
August 4, ~~2020~~2021		/s/ Lance A. Sellers
Date		Lance A. Sellers President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

~~November~~ August 4, ~~2020~~2021		/s/ Jeffrey N. Hooper
Date		Jeffrey N. Hooper Executive Vice President and Chief Financial Officer ~~(Principal~~ (Principal Financial and Principal Accounting Officer)

	September 30,	December 31,
Assets	2020	2019
	(Unaudited)	(Audited)

Cash and due from banks, including reserve requirements
of $0 at 9/30/20 and $13,210 at 12/31/19	$48,355	48,337
Interest-bearing deposits	15,778	720
Federal funds sold	140,095	3,330
Cash and cash equivalents	204,228	52,387

Investment securities available for sale	222,991	195,746
Other investments	7,163	4,231
Total securities	230,154	199,977

Mortgage loans held for sale	8,960	4,417

Loans	970,232	849,874
Less allowance for loan losses	(9,892)	(6,680)
Net loans	960,340	843,194

Premises and equipment, net	19,057	18,604
Cash surrender value of life insurance	16,742	16,319
Other real estate	128	-
Right of use lease asset	3,097	3,622
Accrued interest receivable and other assets	15,903	16,362
Total assets	$1,458,609	1,154,882

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$455,199	338,004
NOW, MMDA & savings	626,674	516,757
Time, $250,000 or more	24,717	34,269
Other time	79,806	77,487
Total deposits	1,186,396	966,517

Securities sold under agreements to repurchase	34,151	24,221
FHLB borrowings	70,000	-
Junior subordinated debentures	15,464	15,619
Lease liability	3,139	3,647
Accrued interest payable and other liabilities	10,008	10,758
Total liabilities	1,319,158	1,020,762

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 5,787,504 shares
at September 30, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
Retained earnings	76,580	70,663
Accumulated other comprehensive income	6,000	3,644
Total shareholders' equity	139,451	134,120
Total liabilities and shareholders' equity	$1,458,609	1,154,882

	Three months ended		Nine months ended
	September 30,		September 30,
	2020	2019	2020	2019
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)

Interest income:
Interest and fees on loans	$10,507	11,004	31,367	32,517
Interest on due from banks	19	87	103	136
Interest on fededal funds sold	33	-	178	-
Interest on investment securities:
U.S. Government sponsored enterprises	528	628	1,864	1,942
State and political subdivisions	717	671	2,042	2,265
Other	64	40	202	128
Total interest income	11,868	12,430	35,756	36,988

Interest expense:
NOW, MMDA & savings deposits	482	455	1,455	1,057
Time deposits	224	259	725	581
FHLB borrowings	103	21	269	70
Junior subordinated debentures	76	210	296	656
Other	57	49	150	168
Total interest expense	942	994	2,895	2,532
Net interest income	10,926	11,436	32,861	34,456

Provision for loan losses	522	422	3,460	677
Net interest income after provision for loan losses	10,404	11,014	29,401	33,779

Non-interest income:
Service charges	809	1,178	2,635	3,409
Other service charges and fees	188	202	543	548
Gain/(loss) on sale of investment securities	1,688	(5)	2,145	226
Mortgage banking income	750	376	1,635	834
Insurance and brokerage commissions	200	206	647	642
Appraisal management fee income	1,871	1,311	4,955	3,285
Gain/(loss) on sale and write-down of
other real estate	(47)	(1)	(47)	(18)
Miscellaneous	1,673	1,441	4,453	4,287
Total non-interest income	7,132	4,708	16,966	13,213

Non-interest expense:
Salaries and employee benefits	5,737	5,695	16,996	17,060
Occupancy	1,943	1,861	5,725	5,409
Professional fees	374	237	1,121	955
Advertising	152	234	566	775
Debit card expense	278	201	766	667
FDIC Insurance	81	(36)	169	116
Appraisal management fee expense	1,478	1,012	3,845	2,538
Other	1,871	2,063	5,627	5,907
Total non-interest expense	11,914	11,267	34,815	33,427
Earnings before income taxes	5,622	4,455	11,552	13,565

Income tax expense	1,113	834	2,115	2,464

Net earnings	$4,509	3,621	9,437	11,101

Basic net earnings per share	$0.78	0.62	1.62	1.87
Diluted net earnings per share	$0.78	0.61	1.62	1.86
Cash dividends declared per share	$0.15	0.14	0.60	0.52

				Accumulated
				Other
	Common Stock		Retained	Comprehensive
	Shares	Amount	Earnings	Income	Total
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)

Balance, December 31, 2019	5,912,300	$59,813	70,663	3,644	134,120

Common stock repurchase	(126,800)	(2,999)	-	-	(2,999)
Cash dividends declared on
common stock	-	-	(1,779)	-	(1,779)
Restricted stock units exercised	2,004	57	-	-	57
Net earnings	-	-	2,367	-	2,367
Change in accumulated other
comprehensive income, net of tax	-	-	-	2,090	2,090
Balance, March 31, 2020	5,787,504	56,871	71,251	5,734	133,856

Cash dividends declared on
common stock	-	-	(870)	-	(870)
Net earnings	-	-	2,561	-	2,561
Change in accumulated other
comprehensive income, net of tax	-	-	-	1,494	1,494
Balance, June 30, 2020	5,787,504	$56,871	72,942	7,228	137,041

Cash dividends declared on
common stock	-	-	(871)	-	(871)
Net earnings	-	-	4,509	-	4,509
Change in accumulated other
comprehensive income, net of tax	-	-	-	(1,228)	(1,228)
Balance, September 30, 2020	5,787,504	$56,871	76,580	6,000	139,451


Balance, December 31, 2018	5,995,256	$62,096	60,535	986	123,617

Common stock repurchase	(5,518)	(152)	-	-	(152)
Cash dividends declared on
common stock	-	-	(1,445)	-	(1,445)
Restricted stock units exercised	7,398	207	-	-	207
Net earnings	-	-	3,667	-	3,667
Change in accumulated other
comprehensive income, net of tax	-	-	-	690	690
Balance, March 31, 2019	5,997,136	62,151	62,757	1,676	126,584

Common stock repurchase	(63,996)	(1,761)	-	-	(1,761)
Cash dividends declared on
common stock	-	-	(832)	-	(832)
Net earnings	-	-	3,813	-	3,813
Change in accumulated other
comprehensive income, net of tax	-	-	-	2,123	2,123
Balance, June 30, 2019	5,933,140	$60,390	65,738	3,799	129,927

Common stock repurchase	(20,840)	(577)	-	-	(577)
Cash dividends declared on
common stock	-	-	(831)	-	(831)
Restricted stock units exercised	-	-	-	-	-
Net earnings	-	-	3,621	-	3,621
Change in accumulated other
comprehensive income, net of tax	-	-	-	543	543
Balance, September 30, 2019	5,912,300	$59,813	68,528	4,342	132,683

(Dollars in thousands)
	September 30, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$112,274	3,242	533	114,983
U.S. Government
sponsored enterprises	7,479	342	213	7,608
State and political subdivisions	95,196	4,975	21	100,150
Trust preferred securities	250	-	-	250
Total	$215,199	8,559	767	222,991

(Dollars in thousands)
	December 31, 2019
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$77,812	1,371	227	78,956
U.S. Government
sponsored enterprises	28,265	443	311	28,397
State and political subdivisions	84,686	3,657	200	88,143
Trust preferred securities	250	-	-	250
Total	$191,013	5,471	738	195,746

(Dollars in thousands)
	September 30, 2020
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$24,665	532	3,013	1	27,678	533
U.S. Government
sponsored enterprises	-	-	4,284	213	4,284	213
State and political subdivisions	3,410	21	-	-	3,410	21
Total	$28,075	553	7,297	214	35,372	767

(Dollars in thousands)
	September 30, 2020	December 31, 2019
Real estate loans:
Construction and land development	$96,866	92,596
Single-family residential	272,246	269,475
Single-family residential -
Banco de la Gente non-traditional	28,099	30,793
Commercial	318,596	291,255
Multifamily and farmland	49,584	48,090
Total real estate loans	765,391	732,209

Loans not secured by real estate:
Commercial loans	182,862	100,263
Farm loans	851	1,033
Consumer loans	7,341	8,432
All other loans	13,787	7,937

Total loans	970,232	849,874

Less allowance for loan losses	9,892	6,680

Total net loans	$960,340	843,194

September 30, 2020
(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	$8	-	8	96,858	96,866	-
Single-family residential	837	378	1,215	271,031	272,246	-
Single-family residential -
Banco de la Gente non-traditional	428	131	559	27,540	28,099	84
Commercial	-	-	-	318,596	318,596	-
Multifamily and farmland	-	-	-	49,584	49,584	-
Total real estate loans	1,273	509	1,782	763,609	765,391	84

Loans not secured by real estate:
Commercial loans	130	-	130	182,732	182,862	-
Farm loans	-	-	-	851	851	-
Consumer loans	84	2	86	7,255	7,341	-
All other loans	-	-	-	13,787	13,787	-
Total loans	$1,487	511	1,998	968,234	970,232	84

September 30, 2020
(Dollars in thousands)

	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance
Real estate loans:
Construction and land development	$113	-	113	113	4
Single-family residential	5,110	388	4,309	4,697	18
Single-family residential -
Banco de la Gente stated income	13,854	-	13,055	13,055	865
Commercial	2,579	351	2,206	2,557	13
Multifamily and farmland	-	-	-	-	-
Total impaired real estate loans	21,656	739	19,683	20,422	900

Loans not secured by real estate:
Commercial loans	569	255	259	514	2
Consumer loans	53	-	49	49	1
Total impaired loans	$22,278	994	19,991	20,985	903

(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
Nine months ended September 30, 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)	-	(109)	-	(343)	-	(529)
Recoveries	2	59	-	45	-	27	-	148	-	281
Provision	573	482	(11)	751	(4)	355	-	254	1,060	3,460
Ending balance	$1,264	1,750	1,062	2,094	116	961	-	197	2,448	9,892


Allowance for loan losses:
Beginning balance	$1,531	1,813	1,114	2,051	115	980	-	162	1,667	9,433
Charge-offs	-	(65)	-	-	-	-	-	(87)	-	(152)
Recoveries	-	34	-	11	-	2	-	42	-	89
Provision	(267)	(32)	(52)	32	1	(21)	-	80	781	522
Ending balance	$1,264	1,750	1,062	2,094	116	961	-	197	2,448	9,892

Allowance for loan losses at September 30, 2020:
Ending balance: individually
evaluated for impairment	$2	4	859	11	-	-	-	-	-	876
Ending balance: collectively
evaluated for impairment	1,262	1,746	203	2,083	116	961	-	197	2,448	9,016
Ending balance	$1,264	1,750	1,062	2,094	116	961	-	197	2,448	9,892

Loans at September 30, 2020:
Ending balance	$96,866	272,246	28,099	318,596	49,584	182,862	851	21,128	-	970,232

Ending balance: individually
evaluated for impairment	$8	1,582	11,630	1,685	-	255	-	-	-	15,160
Ending balance: collectively
evaluated for impairment	$96,858	270,664	16,469	316,911	49,584	182,607	851	21,128	-	955,072

For the three months ended September 30, 2020
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$4,509	5,787,504	$0.78
Effect of dilutive securities:
Restricted stock units	-	15,299
Diluted earnings per share	$4,509	5,802,803	$0.78

(Dollars in thousands)
	September 30, 2020
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$114,983	-	114,983	-
U.S. Government
sponsored enterprises	$7,608	-	7,608	-
State and political subdivisions	$100,150	-	100,150	-
Trust preferred securities	$250	-	-	250

(Dollars in thousands)
	Fair Value Measurements September 30, 2020	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$8,960	-	-	8,960
Impaired loans	$20,082	-	-	20,082

(Dollars in thousands)
	Fair Value Measurements December 31, 2019	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$4,417	-	-	4,417
Impaired loans	$20,347	-	-	20,347

(Dollars in thousands)
	Fair Value September 30, 2020	Fair Value December 31, 2019	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$8,960	4,417	Rate lock commitment	N/A	N/A
Impaired loans	$20,082	20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

(Dollars in thousands)
		Fair Value Measurements at September 30, 2020
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$204,228	204,228	-	-	204,228
Investment securities available for sale	$222,991	-	222,741	250	222,991
Other investments	$7,163	-	-	7,163	7,163
Mortgage loans held for sale	$8,960	-	-	8,960	8,960
Loans, net	$960,340	-	-	950,020	950,020
Cash surrender value of life insurance	$16,742	-	16,742	-	16,742

Liabilities:
Deposits	$1,186,396	-	-	1,182,713	1,182,713
Securities sold under agreements
to repurchase	$34,151	-	34,151	-	34,151
FHLB borrowings	$70,000	-	-	69,988	69,988
Junior subordinated debentures	$15,464	-	15,464	-	15,464

(Dollars in thousands)
		Fair Value Measurements at December 31, 2019
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$52,387	52,387	-	-	52,387
Investment securities available for sale	$195,746	-	195,496	250	195,746
Other investments	$4,231	-	-	4,231	4,231
Mortgage loans held for sale	$4,417	-	-	4,417	4,417
Loans, net	$843,194	-	-	819,397	819,397
Cash surrender value of life insurance	$16,319	-	16,319	-	16,319

Liabilities:
Deposits	$966,517	-	-	955,766	955,766
Securities sold under agreements
to repurchase	$24,221	-	24,221	-	24,221
Junior subordinated debentures	$15,619	-	15,619	-	15,619

(Dollars in thousands)
	September 30, 2020	September 30, 2019

Operating lease cost $	$675	655

Other information:
Cash paid for amounts included in the measurement of lease liabilities	659	650
Operating cash flows from operating leases	-	-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	450	-
Weighted-average remaining lease term - operating leases	7.36	7.51
Weighted-average discount rate - operating leases	2.97%	3.18%

	Three months ended September 30, 2020 compared to three months ended September 30, 2019			Nine months ended September 30, 2020 compared to nine months ended September 30, 2019
(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	$1,555	(2,052)	(497)	3,553	(4,703)	(1,150)
Investments - taxable	132	(165)	(33)	506	(299)	207
Investments - nontaxable	15	(34)	(19)	(313)	(251)	(564)
Federal funds sold	17	16	33	89	89	178
Other	32	(98)	(66)	169	(201)	(32)
Total interest income	1,751	(2,333)	(582)	4,004	(5,365)	(1,361)

Interest expense:
NOW, MMDA & savings deposits	95	(68)	27	184	214	398
Time deposits	(8)	(28)	(36)	(1)	145	144
FHLB borrowings	146	(64)	82	546	(346)	200
Trust preferred securities	(39)	(95)	(134)	(131)	(229)	(360)
Other	(1)	10	9	(55)	36	(19)
Total interest expense	193	(245)	(52)	543	(180)	363
Net interest income	$1,558	(2,088)	(530)	3,461	(5,185)	(1,724)

(Dollars in thousands)
	Number of Loans	Balance Outstanding	Non-accrual Balance
Land acquisition and development - commercial purposes	36	$7,543	$-
Land acquisition and development - residential purposes	163	21,044	-
1 to 4 family residential construction	105	19,845	-
Commercial construction	30	48,434	-
Total construction and land development	334	$96,866	$-

	Percentage of Loans
	By Risk Grade
Risk Grade	9/30/20	12/31/20
Risk Grade 1 (Excellent Quality)	1.12%	1.16%
Risk Grade 2 (High Quality)	20.96%	24.46%
Risk Grade 3 (Good Quality)	65.36%	62.15%
Risk Grade 4 (Management Attention)	9.93%	10.02%
Risk Grade 5 (Watch)	1.91%	1.45%
Risk Grade 6 (Substandard)	0.72%	0.76%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)

July 1 - 31, 2020	1,796	$17.66	-	$1,178

August 1 - 31, 2020	420	16.90	-	$1,178

September 1 - 30, 2020	481	17.14	-	$1,178

Total	2,697(1)	$17.40	-