UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: ~~September~~June 30, ~~2021~~2022

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

For the transition period from __________ to __________

000-27205

(Commission File No.)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

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

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

(828) 464-5620

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name on each exchange

on which registered

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated ~~filer~~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. ~~5,661,569~~5,641,030 shares of common stock, outstanding at ~~October~~July 31, ~~2021.~~2022.

INDEX

PART I. FINANCIAL INFORMATION

		PAGE(S)

~~PART I. FINANCIAL INFORMATION~~

Item 1.	Financial Statements	34

	Consolidated Balance Sheets at ~~September~~June 30, ~~2021~~2022 (Unaudited) and December 31, ~~2020~~2021 (Audited)	3

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

	Consolidated Statements of ~~Comprehensive Income~~Earnings for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	5

	Consolidated Statements of ~~Changes in Shareholders’ Equity~~Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 ~~and 2020~~ (Unaudited)	6

	Consolidated Statements of ~~Cash Flows~~Changes in Shareholders' Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 (Unaudited)	~~7-8~~7

	Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (Unaudited)	8-9

	Notes to Consolidated Financial Statements (Unaudited)	910-27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2928-42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4543

Item 4.	Controls and Procedures	4543

PART II. OTHER INFORMATION

~~PART II. OTHER INFORMATION~~

Item 1.	Legal Proceedings	46
		44
Item 1A.	Risk Factors	46
		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
		44
Item 3.	Defaults upon Senior Securities	46
		44
Item 5.	Other Information	46
		44
Item 6.	Exhibits	47
		45
Signatures			49
		46
Certifications

Table of Contents

FORWARD-LOOKING STATEMENTS

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, ~~2020.~~

~~Table of Contents~~

~~PART I. FINANCIAL INFORMATION~~

~~Item 1. Financial Statements~~

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

September 30, 2021 and December 31, 2020

(Dollars in thousands)

September 30,

December 31,

Assets

2021

2020

(Unaudited)

(Audited)

Cash and due from banks, including reserve requirements of $0 at both September 30, 2021 and December 31, 2020

$ 42,098

42,737

Interest-bearing deposits

221,210

118,843

Cash and cash equivalents

263,308

161,580

Investment securities available for sale

402,905

245,249

Other investments

3,725

4,155

Total securities

406,630

249,404

Mortgage loans held for sale

9,086

9,139

Loans

891,005

948,639

Less allowance for loan losses

(8,963 )

(9,908 )
Net loans

882,042

938,731

Premises and equipment, net

16,625

18,600

Cash surrender value of life insurance

17,265

16,968

Other real estate

0

128

Right of use lease asset

2,861

3,423

Accrued interest receivable and other assets

18,434

18,202

Total assets

$ 1,616,251

1,416,175

Liabilities and Shareholders' Equity

Deposits:

Noninterest-bearing demand

$ 529,118

456,980

Interest-bearing demand, MMDA & savings

777,721

657,834

Time, $250,000 or more

26,357

25,771

Other time

76,769

80,501

Total deposits

1,409,965

1,221,086

Securities sold under agreements to repurchase

32,332

26,201

Junior subordinated debentures

15,464

15,464

Lease liability

2,922

3,471

Accrued interest payable and other liabilities

12,026

10,054

Total liabilities

1,472,709

1,276,276

Commitments

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 5,661,569 shares

at September 30, 2021 and 5,787,504 shares at December 31, 2020

53,305

56,871

Common stock held by deferred compensation trust, at cost; 160,611

shares at September 30, 2021 and 155,469 shares at December 31, 2020

(1,946 )

(1,796 )
Deferred compensation

1,946

1,796

Retained earnings

86,927

77,628

Accumulated other comprehensive income

3,310

5,400

Total shareholders' equity

143,542

139,899

Total liabilities and shareholders' equity

$ 1,616,251

1,416,175

~~See accompanying Notes to Consolidated Financial Statements.~~2021.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share amounts)

Three months ended

Nine months ended

September 30,

September 30,

2021

2020

2021

2020

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Interest income:

Interest and fees on loans

$ 9,807

10,507

31,474

31,367

Interest on due from banks

89

19

172

103

Interest on federal funds sold

0

33

0

178

Interest on investment securities:

U.S. Government sponsored enterprises

679

528

1,899

1,864

State and political subdivisions

825

717

2,222

2,042

Other

21

64

93

202

Total interest income

11,421

11,868

35,860

35,756

Interest expense:

Interest-bearing demand, MMDA & savings

577

482

1,617

1,455

Time deposits

181

224

584

725

FHLB borrowings

0

103

0

269

Junior subordinated debentures

69

76

211

296

Other

34

57

106

150

Total interest expense

861

942

2,518

2,895

Net interest income

10,560

10,926

33,342

32,861

Provision for (recovery of) loan losses

(182 )

522

(863 )

3,460

Net interest income after provision for loan losses

10,742

10,404

34,205

29,401

Non-interest income:

Service charges

1,023

809

2,859

2,635

Other service charges and fees

187

188

570

543

Gain on sale of investment securities

0

1,688

0

2,145

Mortgage banking income

516

750

2,109

1,635

Insurance and brokerage commissions

266

200

764

647

Appraisal management fee income

1,954

1,871

5,775

4,955

Gain on sale of other assets

104

0

104

0

Gain (loss) on sale of other real estate

0

(47 )

21

(47 )
Miscellaneous

1,990

1,673

5,855

4,453

Total non-interest income

6,040

7,132

17,953

16,966

Non-interest expense:

Salaries and employee benefits

6,054

5,737

17,903

16,996

Occupancy

1,999

1,943

5,891

5,725

Professional fees

582

374

1,354

1,121

Advertising

91

152

388

566

Debit card expense

244

278

740

766

FDIC Insurance

108

81

304

169

Appraisal management fee expense

1,556

1,478

4,646

3,845

Other

1,934

1,871

5,742

5,627

Total non-interest expense

12,568

11,914

36,968

34,815

Earnings before income taxes

4,214

5,622

15,190

11,552

Income tax expense

824

1,113

3,064

2,115

Net earnings

$ 3,390

4,509

12,126

9,437

Basic net earnings per share

$ 0.61

0.80

2.16

1.67

Diluted net earnings per share

$ 0.59

0.78

2.10

1.62

Cash dividends declared per share

$ 0.17

0.15

0.49

0.60

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

June 30, 2022 and December 31, 2021

(Dollars in thousands)

	June 30,			December 31,
Assets	2022			2021
	(Unaudited)			(Audited)

Cash and due from banks, including reserve requirements of $0 at both 6/30/22 and 12/31/21	$	47,953			44,711
Interest-bearing deposits		175,754			232,788
Cash and cash equivalents		223,707			277,499

Investment securities available for sale		426,804			406,549
Other investments		2,791			3,668
Total securities		429,595			410,217

Mortgage loans held for sale		1,288			3,637

Loans		959,473			884,869
Less allowance for loan losses		(9,789	)		(9,355	)
Net loans		949,684			875,514

Premises and equipment, net		16,001			16,104
Cash surrender value of life insurance		17,500			17,365
Right of use lease asset		5,969			4,612
Accrued interest receivable and other assets		33,151			19,245
Total assets	$	1,676,895			1,624,193

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$	559,163			514,319
Interest-bearing demand, MMDA & savings		833,094			797,179
Time, $250,000 or more		30,856			26,333
Other time		70,857			74,917
Total deposits		1,493,970			1,412,748

Securities sold under agreements to repurchase		37,146			37,094
Junior subordinated debentures		15,464			15,464
Lease liability		6,043			4,677
Accrued interest payable and other liabilities		11,866			11,841
Total liabilities		1,564,489			1,481,824

Commitments

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 5,641,030 shares at June 30, 2022 and 5,661,569 shares at December 31, 2021		52,752			53,305
Common stock held by deferred compensation trust, at cost; 165,984 shares at June 30, 2022 and 162,193 shares at December 31, 2021		(2,099	)		(1,992	)
Deferred compensation		2,099			1,992
Retained earnings		92,741			88,968
Accumulated other comprehensive income (loss)		(33,087	)		96
Total shareholders' equity		112,406			142,369

Total liabilities and shareholders' equity	$	1,676,895			1,624,193

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

Three months ended

Nine months ended

September 30,

September 30,

2021

2020

2021

2020

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Net earnings

$ 3,390

4,509

12,126

9,437

Other comprehensive income (loss):

Unrealized holding gains (losses) on securities available for sale

(844 )

93

(2,714 )

5,204

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

0

(1,688 )

0

(2,145 )
Total other comprehensive income (loss), before income taxes

(844 )

(1,595 )

(2,714 )

3,059

Income tax expense (benefit) related to other

comprehensive income:

Unrealized holding gains (losses) on securities available for sale

(194 )

21

(624 )

1,196

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

0

(388 )

0

(493 )

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

(194 )

(367 )

(624 )

703

Total other comprehensive income (loss), net of tax

(650 )

(1,228 )

(2,090 )

2,356

Total comprehensive income

$ 2,740

3,281

10,036

11,793

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands, except per share amounts)

	Three months ended					Six months ended
	June 30,					June 30,
	2022		2021			2022		2021
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)

Interest income:
Interest and fees on loans	$	9,934		11,003			19,676		21,667
Interest on due from banks		442		48			553		83
Interest on investment securities:
U.S. Government sponsored enterprises		585		682			1,096		1,220
State and political subdivisions		1,010		758			1,953		1,397
Other		21		26			43		72
Total interest income		11,992		12,517			23,321		24,439

Interest expense:
NOW, MMDA & savings deposits		366		543			769		1,040
Time deposits		141		191			287		403
Junior subordinated debentures		103		71			178		142
Other		34		37			73		72
Total interest expense		644		842			1,307		1,657

Net interest income		11,348		11,675			22,014		22,782

Provision for (recovery of) loan losses		410		(226	)		481		(681	)

Net interest income after provision for loan losses		10,938		11,901			21,533		23,463

Non-interest income:
Service charges		1,374		910			2,542		1,836
Other service charges and fees		178		171			371		383
Mortgage banking income		99		723			299		1,593
Insurance and brokerage commissions		256		238			496		498
Appraisal management fee income		3,439		2,005			6,945		3,821
Gain on sale of other real estate		0		21			0		21
Miscellaneous		1,982		1,972			3,721		3,761
Total non-interest income		7,328		6,040			14,374		11,913

Non-interest expense:
Salaries and employee benefits		6,443		5,666			12,292		11,849
Occupancy		1,932		1,939			3,848		3,892
Professional fees		455		435			828		772
Advertising		169		154			334		297
Debit card expense		322		264			598		496
FDIC Insurance		115		164			225		196
Appraisal management fee expense		2,757		1,634			5,529		3,090
Miscellaneous		2,050		1,876			3,930		3,808
Total non-interest expense		14,243		12,132			27,584		24,400

Earnings before income taxes		4,023		5,809			8,323		10,976

Income tax expense		806		1,194			1,654		2,240

Net earnings	$	3,217		4,615			6,669		8,736

Basic net earnings per share	$	0.59		0.82			1.21		1.55
Diluted net earnings per share	$	0.57		0.80			1.18		1.51
Cash dividends declared per share	$	0.18		0.16			0.51		0.32

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

Common Stock

Held By

Accumulated

Deferred

Other

Common Stock

Retained

Deferred

Compensation

Comprehensive

Shares

Amount

Earnings

Compensation

Trust

Income

Total

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Balance, 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 loss, net of tax

-

0

0

0

0

(3,100 )

(3,100 )
Balance, 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, June 30, 2021

5,789,166

$ 56,910

84,504

1,901

(1,901 )

3,960

145,374

Common stock repurchase

(127,597 )

(3,605 )

0

0

0

0

(3,605 )
Cash dividends declared on common stock

-

0

(967 )

0

0

0

(967 )
Equity incentive plan, net

-

0

0

45

(45 )

0

0

Net earnings

-

0

3,390

0

0

0

3,390

Change in accumulated other comprehensive loss, net of tax

-

0

0

0

0

(650 )

(650 )
Balance, September 30, 2021

5,661,569

$ 53,305

86,927

1,946

(1,946 )

3,310

143,542

Balance, December 31, 2019

5,912,300

$ 59,813

70,663

1,588

(1,588 )

3,644

134,120

Common stock repurchase

(126,800 )

(2,999 )

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

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, 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, June 30, 2020

5,787,504

$ 56,871

72,942

1,700

(1,700 )

7,228

137,041

Cash dividends declared on common stock

-

0

(871 )

0

0

0

(871 )
Equity incentive plan, net

-

0

0

47

(47 )

0

0

Net earnings

-

0

4,509

0

0

0

4,509

Change in accumulated other comprehensive loss, net of tax

-

0

0

0

0

(1,228 )

(1,228 )
Balance, September 30, 2020

5,787,504

$ 56,871

76,580

1,747

(1,747 )

6,000

139,451

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

	Three months ended					Six months ended
	June 30,					June 30,
	2022			2021		2022			2021
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)

Net earnings	$	3,217			4,615		6,669			8,736

Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		(19,268	)		2,155		(43,081	)		(1,870	)

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

Unrealized holding gains (losses) on securities available for sale		(4,427	)		495		(9,898	)		(430	)

Total other comprehensive income (loss), net of tax		(14,841	)		1,660		(33,183	)		(1,440	)

Total comprehensive income (loss)	$	(11,624	)		6,275		(26,514	)		7,296

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

2021

2020

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net earnings

$ 12,126

9,437

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

Depreciation, amortization and accretion

3,991

3,080

Provision for (recovery of) loan losses

(863 )

3,460

Deferred income taxes

(27 )

(25 )
Gain on sale of investment securities

0

(2,145 )
Gain on sale of other real estate

(21 )

0

Write-down of other real estate

0

47

Gain on sale of other assets

(104
)

0

Restricted stock expense

(166 )

(73 )
Proceeds from sales of mortgage loans held for sale

76,086

78,526

Origination of mortgage loans held for sale

(76,033 )

(83,069 )
Change in:

Cash surrender value of life insurance

(297 )

(283 )
Right of use lease asset

562

525

Other assets

416

(219 )
Lease liability

(549 )

(508 )
Other liabilities

2,138

(677 )

Net cash provided by operating activities

17,259

8,076

Cash flows from investing activities:

Purchases of investment securities available for sale

(186,793 )

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

6,010

52,289

Proceeds from paydowns of investment securities available for sale

18,335

14,635

Proceeds from paydowns on other investments

132

132

Redemptions (purchases) of FHLB stock

331

(3,031 )
Net change in loans

57,552

(120,781 )
Purchases of premises and equipment

(379 )

(2,298 )
Purchases of bank owned life insurance

0

(140 )
Proceeds from sale of other assets

515

0

Proceeds from sale of other real estate and repossessions

149

0

Net cash used by investing activities

(104,148 )

(149,427 )

Cash flows from financing activities:

Net change in deposits

188,879

219,879

Net change in securities sold under agreement to repurchase

6,131

9,930

Proceeds from FHLB borrowings

0

70,000

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

(3,605 )

(2,999 )
Cash dividends paid on common stock

(2,827 )

(3,520 )

Net cash provided by financing activities

188,617

293,192

Net change in cash and cash equivalents

101,728

151,841

Cash and cash equivalents at beginning of period

161,580

52,387

Cash and cash equivalents at end of period

$ 263,308

204,228

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

Three and Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

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

Balance, December 31, 2021		5,661,569		$	53,305			88,968			1,992		(1,992	)		96			142,369

Common stock repurchase		(7,000	)		(199	)		0			0		0			0			(199	)
Cash dividends declared on common stock		-			0			(1,877	)		0		0			0			(1,877	)
Restricted stock units exercised		1,461			41			0			0		0			0			41
Equity incentive plan, net		-			0			0			50		(50	)		0			0
Net earnings		-			0			3,452			0		0			0			3,452
Change in accumulated other comprehensive loss, net of tax		-			0			0			0		0			(18,342	)		(18,342	)
Balance, March 31, 2022		5,656,030		$	53,147			90,543			2,042		(2,042	)		(18,246	)		125,444

Common stock repurchase		(15,000	)		(395	)		0			0		0			0			(395	)
Cash dividends declared on common stock		-			0			(1,019	)		0		0			0			(1,019	)
Equity incentive plan, net		-			0			0			57		(57	)		0			0
Net earnings		-			0			3,217			0		0			0			3,217
Change in accumulated other comprehensive loss, net of tax		-			0			0			0		0			(14,841	)		(14,841	)
Balance, June 30, 2022		5,641,030		$	52,752			92,741			2,099		(2,099	)		(33,087	)		112,406

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

Common stock repurchase		-			0			0			0		0			0			0
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 loss, net of tax		-			0			0			0		0			(3,100	)		(3,100	)
Balance, 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, June 30, 2021		5,789,166		$	56,910			84,504			1,901		(1,901	)		3,960			145,374

See accompanying Notes to Consolidated Financial Statements.

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PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

2021

2020

(Unaudited)

(Unaudited)

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$ 1,658

1,908

Income taxes

$ 3,221

1,651

Noncash investing and financing activities:

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

$ (2,090 )

2,356

Issuance of accrued restricted stock units

$ 39

57

Transfers of loans to other real estate and repossessions

$ 0

175

Transfers of premises and equipment to other assets held for sale

$
408

0

PEOPLES BANCORP OF NORTH CAROLINA, INC.

~~See accompanying Notes to~~ Consolidated ~~Financial Statements.~~Statements of Cash Flows

Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

	2022			2021
	(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net earnings	$	6,669			8,736
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion		3,505			2,549
Provision for (recovery of) loan losses		481			(681	)
Deferred income taxes		(21	)		(18	)
Gain on sale of other real estate		0			(21	)
Restricted stock expense		(83	)		(100	)
Proceeds from sales of mortgage loans held for sale		16,428			54,006
Origination of mortgage loans held for sale		(14,079	)		(50,368	)
Change in:
Cash surrender value of life insurance		(200	)		(196	)
Right of use lease asset		369			406
Other assets		(3,946	)		92
Lease liability		(360	)		(398	)
Other liabilities		108			2,405

Net cash provided by operating activities		8,871			16,412

Cash flows from investing activities:
Purchases of investment securities available for sale		(96,357	)		(141,780	)
Proceeds from sales, calls and maturities of investment securities available for sale		7,870			5,300
Proceeds from paydowns of investment securities available for sale		22,840			11,073
Proceeds from paydowns on other investments		982			88
Redemptions (purchases) of FHLB stock		(105	)		331
Net change in loans		(74,651	)		60,339
Purchases of premises and equipment		(1,091	)		(339	)
Proceeds from sale of other real estate and repossessions		0			149
Proceeds from bank owned life insurance		65			0

Net cash used by investing activities		(140,447	)		(64,839	)

Cash flows from financing activities:
Net change in deposits		81,222			170,968
Net change in securities sold under agreement to repurchase		52			5,048
Common stock repurchased		(594	)		0
Cash dividends paid on common stock		(2,896	)		(1,860	)

Net cash provided by financing activities		77,784			174,156

Net change in cash and cash equivalents		(53,792	)		125,729

Cash and cash equivalents at beginning of period		277,499			161,580

Cash and cash equivalents at end of period	$	223,707			287,309

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PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Six Months Ended June 30, 2022 and 2021

(Dollars in thousands)

	2022			2021
	(Unaudited)			(Unaudited)

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,293			1,653
Income taxes	$	2,319			2,000

Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	$	(33,183	)		(1,440	)
Issuance of accrued restricted stock units	$	41			39
Transfer of premises and equipment to other assets held for sale	$	0			408
Initial recognition of lease right-of-use asset and lease liability	$	1,726			0

See accompanying Notes to Consolidated Financial ~~Statements (~~~~Unaudited~~)Statements.

~~(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 formerly operated three banking offices focused on the Latino population that were operated as a division of the Bank under the name Banco de la Gente (“Banco”). Two of these offices remain open as Bank branches that offer the same banking services 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, 2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals other than Correction of an Error noted below) 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 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders.

~~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 deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the 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 $0.78 to $0.80 for the three months ended September 30, 2020 and from $1.62 to $1.67 for the nine months ended September 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 below.

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

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

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. The adjustments to correct the error noted above were not considered material

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements (Unaudited)

(1) Summary of Significant Accounting Policies

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

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

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

The Consolidated Financial Statements in this report (other than the Consolidated Balance Sheet at December 31, 2021) are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

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 2021 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2022 Annual Meeting of Shareholders.

Recent Accounting Pronouncements

The following table provides a summary of Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has not adopted as of June 30, 2022, which may impact the Company’s financial statements.

~~Recent Accounting Pronouncements~~

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

Recently ~~Adopted~~Issued Accounting Guidance Not Yet Adopted

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

~~Table of Contents~~

~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
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 did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2021-06: Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)~~	Amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.	~~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 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 did not have a material impact on the Company’s results of operations, financial position or disclosures.~~

~~Table of Contents~~

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

	~~Recently Issued Accounting Guidance Not Yet Adopted~~

	~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
	ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company 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.

Table of Contents

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
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 and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
	ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

~~Table of Contents~~

	~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
	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.
ASU 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures	~~ASU 2020-06: Debt—Debt with Conversion~~Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 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~~amends the guidance on “vintage disclosures” to ~~improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.~~require disclosure of current-period gross write-offs by year of origination.	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.~~
	ASU 2021-05: Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate	Updated guidance that requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if certain conditions are met	~~January 1, 2022~~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.

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

~~Reclassification~~

Certain amounts in the 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.

~~(2)~~	~~Investment Securities~~

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

(Dollars in thousands)

September 30, 2021

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair Value

U.S Treasuries

$ 7,963

39

12

7,990

U.S. Government

sponsored enterprises

14,566

289

178

14,677

Mortgage-backed securities

222,526

2,427

1,648

223,305

State and political subdivisions

153,551

4,327

945

156,933

Total

$ 398,606

7,082

2,783

402,905

1311

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(Dollars in thousands)

December 31, 2020

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

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

Reclassification

Certain amounts in the 2021 Consolidated Financial Statements have been reclassified to conform to the 2022 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings.

(2) Investment Securities

Investment securities available for sale at June 30, 2022 and December 31, 2021 are as follows:

(Dollars in thousands)
	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	10,940		0		882		10,058
U.S. Government sponsored enterprises		13,192		0		499		12,693
Mortgage-backed securities		263,904		538		16,243		248,199
State and political subdivisions		181,722		91		25,959		155,854
Total	$	469,758		629		43,583		426,804

(Dollars in thousands)
	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	7,964		0		75		7,889
U.S. Government sponsored enterprises		14,252		200		185		14,267
Mortgage-backed securities		218,402		1,769		3,019		217,152
State and political subdivisions		165,804		3,694		2,257		167,241
Total	$	406,422		5,663		5,536		406,549

The current fair value and associated unrealized losses on investments in securities with unrealized losses at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands)

September 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

$ 4,994

12

0

0

4,994

12

U.S. Government

sponsored enterprises

5,386

5

3,442

173

8,828

178

Mortgage-backed securities

114,889

1,505

5,897

143

120,786

1,648

State and political subdivisions

37,729

800

3,757

145

41,486

945

Total

$ 162,998

2,322

13,096

461

176,094

2,783

(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 30, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $2.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2021 tables above, one out of two U.S. Treasury securities, 35 out of 145 securities issued by state and political subdivisions and 43 out of 97 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 30, 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.

(Dollars in thousands)
	June 30, 2022
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	10,058		882		0		0		10,058		882
U.S. Government sponsored enterprises		5,261		337		7,432		162		12,693		499
Mortgage-backed securities		179,160		12,653		34,152		3,590		213,312		16,243
State and political subdivisions		129,621		21,403		15,128		4,556		144,749		25,959
Total	$	324,100		35,275		56,712		8,308		380,812		43,583

1412

Table of Contents

September 30, 2021

(Dollars in thousands)

Amortized
Cost

Fair Value

Due within one year

$ 11,591

11,689

Due from one to five years

10,143

10,763

Due from five to ten years

136,387

139,315

Due after ten years

17,959

17,833

Mortgage-backed securities

222,526

223,305

Total

$ 398,606

402,905

(Dollars in thousands)
	December 31, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	7,889		75		0		0		7,889		75
U.S. Government sponsored enterprises		5,232		15		3,263		170		8,495		185
Mortgage-backed securities		131,483		2,477		19,632		542		151,115		3,019
State and political subdivisions		80,076		1,981		5,922		276		85,998		2,257
Total	$	224,680		4,548		28,817		988		253,497		5,536

At June 30, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $43.6 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2022 tables above, all three U.S. Treasury securities, 143 out of 164 securities issued by state and political subdivisions and 104 out of 124 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed. At December 31, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $5.5 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2021 tables above, both of the U.S. Treasury securities, 70 of the 146 securities issued by state and political subdivisions contained unrealized losses and 54 of the 99 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The amortized cost and estimated fair value of investment securities available for sale at June 30, 2022, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2022
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	1,413		1,419
Due from one to five years		9,605		9,529
Due from five to ten years		74,859		68,680
Due after ten years		119,977		98,977
Mortgage-backed securities		263,904		248,199
Total	$	469,758		426,804

No securities available for sale were sold during the three and six months ended June 30, 2022 and 2021.

Securities with a fair value of approximately $98.5 million and $98.6 million at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes as required by law.

No securities available for sale were sold during the three and nine months ended September 30, 2021. Proceeds from sales of securities available for sale during the three months ended September 30, 2020 were $29.2 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.

Securities with a fair value of approximately $90.6 million and $77.3 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes as required by law.

13
~~(3)~~	~~Loans~~

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

(Dollars in thousands)

September 30,
2021

December 31,
2020

Real estate loans:

Construction and land development

$ 80,009

94,124

Single-family residential

258,403

272,325

Single-family residential -

Banco de la Gente non-traditional

24,043

26,883

Commercial

363,174

332,971

Multifamily and farmland

58,856

48,880

Total real estate loans

784,485

775,183

Loans not secured by real estate:

Commercial loans

94,376

161,740

Farm loans

633

855

Consumer loans

6,321

7,113

All other loans

5,190

3,748

Total loans

891,005

948,639

Less allowance for loan losses

(8,963 )

(9,908 )

Total net loans

$ 882,042

938,731

(3) Loans

Major classifications of loans at June 30, 2022 and December 31, 2021 are summarized as follows:

(Dollars in thousands)
	June 30, 2022			December 31, 2021
Real estate loans:
Construction and land development	$	103,241			95,760
Single-family residential		292,685			266,111
Single-family residential -
Banco de la Gente non-traditional		21,378			23,147
Commercial		386,368			337,841
Multifamily and farmland		62,687			58,366
Total real estate loans		866,359			781,225

Loans not secured by real estate:
Commercial loans		70,691			91,172
Farm loans		1,006			796
Consumer loans		6,284			6,436
All other loans		15,133			5,240

Total loans		959,473			884,869

Less allowance for loan losses		(9,789	)		(9,355	)

Total net loans	$	949,684			875,514

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

	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 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, 2021, construction and land development loans comprised approximately9% of the Bank’s total loan portfolio.~~


15

~~Table of Contents~~

	·	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, 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 athe 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, 2021, commercial real estate loans comprised approximately 41% 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, 2021, commercial loans comprised approximately 11% of the Bank’s total loan portfolio, including $25.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $75.8 million in PPP loans at December 31, 2020.

	~~Loans are considered past due if the required principal~~·	Multifamily and ~~interest payments have not been received as~~farmland loans – Decreased real estate values and higher than normal levels of ~~the date such payments were due. Loans are placed~~unemployment could contribute to losses 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.~~ these loans.

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

~~The following tables present an age analysis~~

Table of ~~past due loans, by loan type, as of September 30, 2021 and December 31, 2020:~~
Contents

September 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

$ 6

0

6

80,003

80,009

0

Single-family residential

850

230

1,080

257,323

258,403

0

Single-family residential -

Banco de la Gente non-traditional

450

39

489

23,554

24,043

0

Commercial

28

37

65

363,109

363,174

0

Multifamily and farmland

0

0

0

58,856

58,856

0

Total real estate loans

1,334

306

1,640

782,845

784,485

0

Loans not secured by real estate:

Commercial loans

176

0

176

94,200

94,376

0

Farm loans

0

0

0

633

633

0

Consumer loans

66

1

67

6,254

6,321

0

All other loans

8

0

8

5,182

5,190

0

Total loans

$ 1,584

307

1,891

889,114

891,005

0

The following tables present an age analysis of past due loans, by loan type, as of June 30, 2022 and December 31, 2021:

June 30, 2022
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	43		-		43		103,198		103,241		-
Single-family residential		1,009		370		1,379		291,306		292,685		-
Single-family residential -
Banco de la Gente non-traditional		514		171		685		20,693		21,378		-
Commercial		250		-		250		386,118		386,368		-
Multifamily and farmland		-		-		-		62,687		62,687		-
Total real estate loans		1,816		541		2,357		864,002		866,359		-

Loans not secured by real estate:
Commercial loans		99		-		99		70,592		70,691		-
Farm loans		-		-		-		1,006		1,006		-
Consumer loans		123		-		123		6,161		6,284		-
All other loans		7		-		7		15,126		15,133		-
Total loans	$	2,045		541		2,586		956,887		959,473		-

December 31, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		-		-		95,760		95,760		-
Single-family residential		2,323		634		2,957		263,154		266,111		-
Single-family residential -
Banco de la Gente non-traditional		2,593		112		2,705		20,442		23,147		-
Commercial		488		-		488		337,353		337,841		-
Multifamily and farmland		-		-		-		58,366		58,366		-
Total real estate loans		5,404		746		6,150		775,075		781,225		-

Loans not secured by real estate:
Commercial loans		43		-		43		91,129		91,172		-
Farm loans		-		-		-		796		796		-
Consumer loans		38		-		38		6,398		6,436		-
All other loans		-		-		-		5,240		5,240		-
Total loans	$	5,485		746		6,231		878,638		884,869		-

Table of Contents

The following table presents non-accrual loans as of June 30, 2022 and December 31, 2021:

(Dollars in thousands)
	June 30, 2022		December 31, 2021
Real estate loans:
Construction and land development	$	-		-
Single-family residential		1,914		1,642
Single-family residential -
Banco de la Gente non-traditional		1,416		1,232
Commercial		137		200
Multifamily and farmland		98		105
Total real estate loans		3,565		3,179

Loans not secured by real estate:
Commercial loans		-		49
Consumer loans		21		2
Total	$	3,586		3,230

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 less estimated selling costs. 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 Restructurings (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans were $16.5 million, $18.3 million and $19.7 million at June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Interest income recognized on accruing impaired loans was $433,000, $1.0 million, and $536,000 for the six months ended June 30, 2022, the year ended December 31, 2021 and the six months ended June 30, 2021, respectively. Interest income recognized on accruing impaired loans was $217,000 and $253,000 for the three months ended June 30, 2022 and the three months ended June 30, 2021, 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 June 30, 2022:

June 30, 2022
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	62		-		62		62		1
Single-family residential		4,177		514		3,378		3,892		61
Single-family residential -
Banco de la Gente non-traditional		11,022		-		10,356		10,356		654
Commercial		2,020		429		1,520		1,949		10
Multifamily and farmland		108		-		98		98		-
Total impaired real estate loans		17,389		943		15,414		16,357		726

Loans not secured by real estate:
Commercial loans		146		-		145		145		1
Consumer loans		24		-		23		23		-
Total impaired loans	$	17,559		943		15,582		16,525		727

Table of Contents

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

The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2022 and 2021.

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

(Dollars in thousands)
	Three months ended								Six months ended
	June 30, 2022				June 30, 2021				June 30, 2022				June 30, 2021
	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	$	65		1		91		1		68		3		97		3
Single-family residential		1,231		51		6,100		57		1,015		99		5,731		118
Single-family residential -
Banco de la Gente stated income		13,273		135		10,835		160		13,927		273		11,407		337
Commercial		1,984		26		2,682		29		2,004		50		2,779		64
Multifamily and farmland		100		1		113		1		102		3		114		2
Total impaired real estate loans		16,653		214		19,821		248		17,116		428		20,128		524

Loans not secured by real estate:
Commercial loans		151		2		315		5		174		4		362		11
Farm loans (non RE)		-		-		-		-				-				-
Consumer loans		16		1		15		-		12		1		22		1
Total impaired loans	$	16,820		217		20,151		253		17,302		433		20,512		536

(Dollars in thousands)

September 30,
2021

December 31,
2020

Real estate loans:

Single-family residential

$ 1,020

1,266

Single-family residential -

Banco de la Gente non-traditional

1,244

1,709

Commercial

271

440

Multifamily and farmland

109

117

Total real estate loans

2,644

3,532

Loans not secured by real estate:

Commercial loans
��

54

212

Consumer loans

6

14

Total

$ 2,704

3,758

The following table presents impaired loans as of and for the year ended December 31, 2021:

December 31, 2021
(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	73		-		73		73		3		82		6
Single-family residential		5,138		524		4,374		4,898		86		6,017		253
Single-family residential -
Banco de la Gente non-traditional		11,753		-		10,922		10,922		687		10,325		609
Commercial		2,138		435		1,608		2,043		11		2,385		109
Multifamily and farmland		113		-		105		105		-		110		6
Total impaired real estate loans		19,215		959		17,082		18,041		787		18,919		983

Loans not secured by real estate:
Commercial loans		282		49		170		219		2		271		19
Consumer loans		8		-		4		4		-		11		1
Total impaired loans	$	19,505		1,008		17,256		18,264		789		19,201		1,003

Impaired loans collectively evaluated for impairment totaled $5.1 million at June 30, 2022 and December 31, 2021 and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $44,000 and $52,000 at June 30, 2022 and December 31, 2021, respectively.

The following tables present changes in the allowance for loan losses for the three and six months ended June 30, 2022 and 2021. Unallocated balances in the following tables include allowance for loan losses based on qualitative factors such as economic outlook, concentrations of credit, interest rate risk and loan volume trends. Paycheck Protection Program ("PPP") loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the Small Business Administration (“SBA”).

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 $18.2 million, $21.3 million and $21.0 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $754,000, $1.2 million, and $934,000 for the nine months ended September 30, 2021, the year ended December 31, 2020 and the nine months ended September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $217,000 and $299,000 for the three months ended September 30, 2021 and 2020, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

Table of Contents

~~The following table presents impaired loans as of September 30, 2021:~~

September 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

$ 75

0

75

75

3

Single-family residential

4,506

275

4,021

4,296

80

Single-family residential -

Banco de la Gente non-traditional

12,269

0

11,383

11,383

724

Commercial

2,229

439

1,692

2,131

12

Multifamily and farmland

115

0

109

109

0

Total impaired real estate loans

19,194

714

17,280

17,994

819

Loans not secured by real estate:

Commercial loans

299

54

183

237

3

Consumer loans

12

0

8

8

0

Total impaired loans

$ 19,505

768

17,471

18,239

822

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

(Dollars in thousands)

Three months ended

Nine months ended

September 30, 2021

September 30, 2020

September 30, 2021

September 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

$ 76

1

153

0

91

5

123

7

Single-family residential

5,875

49

5,107

63

5,683

166

4,451

181

Single-family residential -

Banco de la Gente stated income

10,349

140

13,402

197

11,090

477

13,785

617

Commercial

2,280

20

2,665

31

2,617

85

2,772

103

Multifamily and farmland

110

2

0

0

113

4

0

0

Total impaired real estate loans

18,690

212

21,327

291

19,594

737

21,131

908

Loans not secured by real estate:

Commercial loans

248

5

494

7

330

16

553

22

Consumer loans

9

0

74

1

19

1

57

4

Total impaired loans

$ 18,947

217

21,895

299

19,943

754

21,741

934

(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, 2022:
Allowance for loan losses:
Beginning balance	$	1,193		2,013			864			2,234		150		711			0		110			2,080			9,355
Charge-offs		0		(31	)		0			0		0		(7	)		0		(246	)		0			(284	)
Recoveries		0		127			0			4		0		55			0		51			0			237
Provision		79		62			(51	)		918		7		(126	)		0		301			(709	)		481
Ending balance	$	1,272		2,171			813			3,156		157		633			0		216			1,371			9,789

Three months ended June 30, 2022:
Allowance for loan losses:
Beginning balance	$	1,163		2,095			841			3,011		147		646			0		128			1,395			9,426
Charge-offs		0		0			0			0		0		(3	)		0		(121	)		0			(124	)
Recoveries		0		10			0			2		0		36			0		29			0			77
Provision		109		66			(28	)		143		10		(46	)		0		180			(24	)		410
Ending balance	$	1,272		2,171			813			3,156		157		633			0		216			1,371			9,789

Allowance for loan losses at June 30, 2022:
Ending balance: individually
evaluated for impairment	$	0		37			640			6		0		0			0		0			0			683
Ending balance: collectively
evaluated for impairment		1,272		2,134			173			3,150		157		633			0		216			1,371			9,106
Ending balance	$	1,272		2,171			813			3,156		157		633			0		216			1,371			9,789

Loans at June 30, 2022:
Ending balance	$	103,241		292,685			21,378			386,368		62,687		70,691			1,006		21,417			0			959,473

Ending balance: individually
evaluated for impairment	$	0		845			9,214			1,413		0		0			0		-			-			11,472
Ending balance: collectively
evaluated for impairment	$	103,241		291,840			12,164			384,955		62,687		70,691			1,006		21,417			-			948,001

Table of Contents

~~The following table presents impaired loans as of and for the year ended December 31, 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 $5.1 million and $5.8 million at September 30, 2021 and December 31, 2020, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $45,000 and $61,000 at September 30, 2021 and December 31, 2020, respectively.

The following tables present changes in the allowance for loan losses for the three and nine months ended September 30, 2021 and 2020. Unallocated balances in the following tables include allowance for loan losses based on qualitative factors such as economic outlook, concentrations of credit, interest rate risk and loan volume trends. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA. PPP loans are classified as risk grade 3.

(Dollars in thousands)
	Real Estate Loans																													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				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, 2021:
Six months ended June 30, 2021:																													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			$	1,196			1,843			1,052			2,212			122		1,345			0		128			2,010		9,908
Charge-offs		0			0			0			0		0			(293	)		0		(249	)		0			(542	)			0			0			0			0			0		(78	)		0		(158	)		0		(236	)
Recoveries		121			165			0			50		3			7			0		114			0			460				90			78			0			48			0		6			0		74			0		296
Provision		(421	)		(306	)		(162	)		46		22			(153	)		0		98			13			(863	)			(248	)		(198	)		(72	)		(80	)		26		(277	)		0		45			123		(681	)
Ending balance	$	896			1,702			890			2,308		147			906			0		91			2,023			8,963			$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Three months ended September 30, 2021:
Three months ended June 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,038			1,723			980			2,180		148			996			0		89			2,133			9,287			$	1,061			1,850			1,033			2,252			145		1,244			0		91			1,856		9,532
Charge-offs		0			0			0			0		0			(215	)		0		(91	)		0			(306	)			0			0			0			0			0		(78	)		0		(73	)		0		(151	)
Recoveries		31			86			0			2		4			1			-		40			0			164				40			18			0			36			0		0			0		38			0		132
Provision		(173	)		(107	)		(90	)		126		(5	)		124			0		53			(110	)		(182	)			(63	)		(145	)		(53	)		(108	)		3		(170	)		0		33			277		(226	)
Ending balance	$	896			1,702			890			2,308		147			906			0		91			2,023			8,963			$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Allowance for loan losses at September 30, 2021:
Allowance for loan losses at June 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			58			710			7		0			0			0		0			0			776			$	1			5			790			10			0		0			0		0			0		806
Ending balance: collectively
evaluated for impairment		895			1,644			180			2,301		147			906			0		91			2,023			8,187				1,037			1,718			190			2,170			148		996			0		89			2,133		8,481
Ending balance	$	896			1,702			890			2,308		147			906			0		91			2,023			8,963			$	1,038			1,723			980			2,180			148		996			0		89			2,133		9,287

Loans at September 30, 2021:
Loans at June 30, 2021:
Ending balance	$	80,009			258,403			24,043			363,174		58,856			94,376			633		11,511			0			891,005			$	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			1,398			10,236			1,450		0			54			0		0			0			13,144			$	6			1,426			10,722			1,741			0		59			0		0			0		13,954
Ending balance: collectively
evaluated for impairment	$	80,003			257,005			13,807			361,724		58,856			94,322			633		11,511			0			877,861			$	90,573			256,475			14,476			338,475			59,142		104,447			742		10,076			0		874,406

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

Nine months ended September 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 )

(65 )

0

(7 )

0

(109 )

0

(343 )

0

(529 )
Recoveries

2

59

0

45

0

27

0

148

-

281

Provision

573

482

(11 )

751

(4 )

355

0

254

1,060

3,460

Ending balance

$ 1,264

1,750

1,062

2,094

116

961

0

197

2,448

9,892

Three months ended September 30, 2020:

Allowance for loan losses:

Beginning balance

$ 1,531

1,813

1,114

2,051

115

980

0

162

1,667

9,433

Charge-offs

0

(65 )

0

0

0

0

0

(87 )

0

(152 )
Recoveries

0

34

0

11

0

2

0

42

0

89

Provision

(267 )

(32 )

(52 )

32

1

(21 )

0

80

781

522

Ending balance

$ 1,264

1,750

1,062

2,094

116

961

0

197

2,448

9,892

Allowance for loan losses at September 30, 2020:

Ending balance: individually

evaluated for impairment

$ 2

4

859

11

0

0

0

0

0

876

Ending balance: collectively

evaluated for impairment

1,262

1,746

203

2,083

116

961

0

197

2,448

9,016

Ending balance

$ 1,264

1,750

1,062

2,094

116

961

0

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

0

970,232

Ending balance: individually

evaluated for impairment

$ 8

1,582

11,630

1,685

0

255

0

0

0

15,160

Ending balance: collectively

evaluated for impairment

$ 96,858

270,664

16,469

316,911

49,584

182,607

851

21,128

0

955,072

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

The provision for loan losses for the three months ended September 30, 2021 was a recovery of $182,000, compared to a provision of $522,000 for the three months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. 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 as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, 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 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 $18.7 million decrease from December 31, 2020 to September 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 nine months ended September 30, 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 months ended September 30, 2021 was a recovery of $863,000, compared to a provision of $3.5 million for the nine months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

~~Table of Contents~~

	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~~CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
	·	Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the ~~Company’s~~Bank’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
	·	Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the ~~Company’s~~Bank’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change). PPP loans are classified as risk grade 3.
	·	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~~Bank’s position at some future date.
	·	Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the ~~Company~~Bank will sustain some loss if the deficiencies are not corrected.
	·	Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified 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.

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

September 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

7,380

0

0

0

382

0

613

0

8,375

2- High Quality

8,982

104,288

0

35,384

19

17,846

0

1,979

1,413

169,911

3- Good Quality

67,245

124,534

9,028

283,657

55,335

69,324

621

3,415

3,777

616,936

4- Management Attention

3,626

16,239

10,878

33,620

2,841

5,122

12

290

0

72,628

5- Watch

82

2,904

1,722

9,802

552

1,644

0

1

0

16,707

6- Substandard

74

3,058

2,415

711

109

58

0

23

0

6,448

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

$ 80,009

258,403

24,043

363,174

58,856

94,376

633

6,321

5,190

891,005

Table of Contents

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

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of June 30, 2022 and December 31, 2021:

June 30, 2022
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total

1- Excellent Quality	$	0		3,556		0		0		0		1,381		0		564		0		5,501
2- High Quality		18,945		116,720		0		31,456		18		15,391		0		1,923		1,530		185,983
3- Good Quality		81,150		156,099		8,053		324,117		60,121		51,572		1,005		3,508		13,317		698,942
4- Management Attention		3,018		11,599		9,627		27,554		1,922		1,473		1		259		137		55,590
5- Watch		66		1,199		1,282		2,675		528		874		0		1		149		6,774
6- Substandard		62		3,512		2,416		566		98		0		0		29		0		6,683
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	$	103,241		292,685		21,378		386,368		62,687		70,691		1,006		6,284		15,133		959,473

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

December 31, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total

1- Excellent Quality	$	0		5,923		0		0		0		371		0		581		0		6,875
2- High Quality		11,752		109,337		0		28,546		19		16,177		0		2,039		1,309		169,179
3- Good Quality		80,325		129,856		8,712		272,786		54,945		68,183		792		3,510		3,931		623,040
4- Management Attention		3,534		14,964		10,478		30,937		2,754		5,214		4		284		0		68,169
5- Watch		76		2,464		1,703		4,938		543		1,177		0		1		0		10,902
6- Substandard		73		3,567		2,254		634		105		50		0		21		0		6,704
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	$	95,760		266,111		23,147		337,841		58,366		91,172		796		6,436		5,240		884,869

There were no loans modified as TDR loans that defaulted during the six months ended June 30, 2022 and 2021, which were within 12 months of their modification date.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP. The Bank participated as a lender in the PPP. Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $1.4 million and $18.0 million at June 30, 2022 and December 31, 2021, respectively, classified as commercial loans in the tables above. The Bank recognized $293,000 and $1.5 million of PPP loan fee income for the three months ended June 30, 2022 and the three months ended June 30, 2021, respectively. The Bank recognized $893,000 and $2.5 million of PPP loan fee income for the six months ended June 30, 2022 and six months ended June 30, 2021, respectively.

Table of Contents

(4) Net Earnings Per Share

Past due TDR loans and non-accrual TDR loans totaled $1.6 million and $3.8 million at September 30, 2021 and December 31, 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 30, 2021 and December 31, 2020.

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

There were no loans modified as TDR that defaulted during the nine months ended September 30, 2021 and 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. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP. Total PPP loans originated as of September 30, 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $25.6 million and $75.8 million at September 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million in fees from the SBA for PPP loans originated as of September 30, 2021. The Bank recognized $3.0 million and $1.4 million PPP loan fee income for the nine months ended September 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended September 30, 2021 was $489,000. PPP loan fee income recognized for the three and nine months ended September 30, 2020 was $361,000.

~~(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 months ended September 30, 2021 and 2020 is as follows:

For the three months ended September 30, 2021

Net Earnings (Dollars in thousands)

Weighted
Average
Number of
Shares

Per Share
Amount

Basic earnings per share

$ 3,390

5,544,596

$ 0.61

Effect of dilutive securities:

Restricted stock units

0

14,690

Shares held in deferred comp plan

159,797

Diluted earnings per share

$ 3,390

5,719,083

$ 0.59

The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and six months ended June 30, 2022 and 2021 is as follows:

For the nine months ended September 30, 2021
For the three months ended June 30, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount		Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	12,126		5,601,879	$	2.16	$	3,217		5,481,899	$	0.59
Effect of dilutive securities:
Restricted stock units		0		13,190
Restricted stock units - unvested										14,879
Shares held in deferred comp plan				158,039
by deferred compensation trust										164,934
Diluted earnings per share	$	12,126		5,773,108	$	2.10	$	3,217		5,661,712	$	0.57

For the six months ended June 30, 2022
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	6,669		5,489,461	$	1.21
Effect of dilutive securities:
Restricted stock units - unvested				14,024
Shares held in deferred comp plan
by deferred compensation trust				164,089
Diluted earnings per share	$	6,669		5,667,574	$	1.18

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 - unvested		0		12,683
Shares held in deferred comp plan
by deferred compensation trust				157,897
Diluted earnings per share	$	4,615		5,801,160	$	0.80

Table of Contents

For the three months ended September 30, 2020
For the six months ended June 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount		Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,509		5,634,964	$	0.80	$	8,736		5,630,995	$	1.55
Effect of dilutive securities:
Restricted stock units		0		15,299
Restricted stock units - unvested								0		12,427
Shares held in deferred comp plan		-		151,658
by deferred compensation trust										157,227
Diluted earnings per share	$	4,509		5,801,921	$	0.78	$	8,736		5,800,649	$	1.51

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

5,665,294

$ 1.67

Effect of dilutive securities:

Restricted stock units

0

13,960

Shares held in deferred comp plan

-

149,163

Diluted earnings per share

$ 9,437

5,828,417

$ 1.62

(5) Fair Value

~~(5)~~ 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.	~~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 30, 2021, there were no outstanding shares reserved for possible issuance under the 2009 Plan. 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 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $57,000. The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted. As of September 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 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $312,000.

	The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $166,000 for the nine months ended September 30, 2021. The Company recognized a $73,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the nine months ended September 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 per share at September 30, 2020.

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:

~~Table of Contents~~

~~(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 2020 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01.

	·	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
	·	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
	·	Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at ~~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~~

Table 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.
Contents

Loans

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

Mutual Funds

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

Table of Contents

The tables below present all financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2022 and December 31, 2021.

~~Mutual Funds~~

~~Deposits~~

~~Securities Sold Under Agreements to Repurchase~~

~~FHLB Borrowings~~

~~Junior Subordinated Debentures~~

~~Commitments to Extend Credit and Standby Letters of Credit~~

~~Limitations~~

The tables below 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 30, 2021 and December 31, 2020.

(Dollars in thousands)
	June 30, 2022
	Fair Value		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U.S. Treasuries	$	10,058		0		10,058		0
U.S. Government sponsored enterprises	$	12,692		0		12,692		0
Mortgage-backed securities	$	248,200		0		248,200		0
State and political subdivisions	$	155,854		0		155,854		0
Mutual funds held in deferred compensation trust	$	1,332		0		1,332

(Dollars in thousands)
	September 30, 2021								December 31, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation		Fair Value		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,990		0	$	7,990		0
U.S. Government
sponsored enterprises		14,677		0		14,677		0
U.S. Treasuries									$	7,889		0		7,889		0
U.S. Government sponsored enterprises									$	14,267		0		14,267		0
Mortgage-backed securities		223,305		0		223,305		0	$	217,152		0		217,152		0
State and political subdivisions		156,933		0		156,933		0	$	167,241		0		167,241		0
Mutual funds held in deferred compensation trust									$	1,510		0		1,510		0

The fair value measurements for mortgage loans held for sale and impaired loans on a non-recurring basis at June 30, 2022 and December 31, 2021 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 June 30, 2022		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	1,288		0		0		1,288
Impaired loans	$	15,798		0		0		15,798

(Dollars in thousands)
	Fair Value Measurements December 31, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	3,637		0		0		3,637
Impaired loans	$	17,475		0		0		17,475

Table of Contents

(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

(Dollars in thousands)

Fair Value June 30, 2022

Fair Value

December 31, 2021

Valuation Technique

Significant Unobservable Inputs

General Range of Significant Unobservable Input Values

Mortgage loans held for sale

1,288

3,637

Rate lock commitment

N/A

Impaired loans

15,798

17,475

Appraised value and discounted cash flows

Discounts to reflect current market conditions and ultimate collectability

0 - 25

The carrying amount and estimated fair value of financial instruments at June 30, 2022 and December 31, 2021 are as follows:

The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2021 and December 31, 2020.

(Dollars in thousands)
	September 30, 2021										Fair Value Measurements at June 30, 2022
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation		Carrying Amount		Level 1		Level 2		Level 3		Total
Mutual funds held in deferred compensation trust	$	1,514		0		1,514		0
Assets:
Cash and cash equivalents									$	223,707		223,707		0		0		223,707
Investment securities available for sale										426,804		0		426,804		0		426,804
Other investments										2,791		0		0		2,791		2,791
Mortgage loans held for sale										1,288		0		0		1,288		1,288
Loans, net										949,684		0		0		924,433		924,433
Mutual funds held in deferred
compensation trust										1,332		0		1,332		0		1,332

Liabilities:
Deposits									$	1,493,970		0		0		1,415,392		1,415,392
Securities sold under agreements
to repurchase										37,146		0		37,146		0		37,146
Junior subordinated debentures										15,464		0		15,464		0		15,464

(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 30, 2021 and December 31, 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, 2021

Level 1
Valuation

Level 2
Valuation

Level 3
Valuation

Mortgage loans held for sale

$ 9,086

0

0

9,086

Impaired loans

17,417

0

0

17,417

(Dollars in thousands)
	Fair Value Measurements December 31, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation				Fair Value Measurements at December 31, 2021
									Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents									$	277,499		277,499		0		0		277,499
Investment securities available for sale										406,549		0		406,549		0		406,549
Other investments										3,668		0		0		3,668		3,668
Mortgage loans held for sale	$	9,139		0		0		9,139		3,637		0		0		3,637		3,637
Impaired loans		20,369		0		0		20,369
Other real estate		128		0		0		128
Loans, net										875,514		0		0		855,814		855,814
Mutual funds held in deferred
compensation trust										1,510		0		1,510		0		1,510

Liabilities:
Deposits									$	1,412,748		0		0		1,401,833		1,401,833
Securities sold under agreements to repurchase										37,094		0		37,094		0		37,094
Junior subordinated debentures										15,464		0		15,464		0		15,464

Table of Contents

(Dollars in thousands)

Fair Value
September 30,
2021

Fair Value
December 31,
2020

Valuation
Technique

Significant
Unobservable
Inputs

General Range of Significant Unobservable Input Values

Mortgage loans held for sale

$ 9,086

9,139

Rate lock commitment

N/A

N/A

Impaired loans

17,417

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
%

(6) Leases

As of June 30, 2022, the Bank had operating right of use assets of $6.0 million and operating lease liabilities of $6.0 million. The Bank maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Bank if the option is not exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

The ~~carrying amount~~following table presents lease cost and ~~estimated fair value~~other lease information as of ~~financial instruments at September~~June 30, ~~2021~~2022 and ~~December 31, 2020 are as follows:~~2021.

(Dollars in thousands)

Fair Value Measurements at September 30, 2021

Carrying
Amount

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents

$ 263,308

263,308

0

0

263,308

Investment securities available for sale

402,905

0

402,905

0

402,905

Other investments

3,725

0

0

3,725

3,725

Mortgage loans held for sale

9,086

0

0

9,086

9,086

Loans, net

882,042

0

0

862,462

862,462

Mutual funds held in deferred

compensation trust

1,514

0

1,514

0

1,514

Liabilities:

Deposits

$ 1,409,965

0

0

1,407,770

1,407,770

Securities sold under agreements

to repurchase

32,332

0

32,332

0

32,332

Junior subordinated debentures

15,464

0

15,464

0

15,464

(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

~~Table of Contents~~

~~(7)~~

~~Leases~~

As of September 30, 2021, the Company had operating right of use assets and operating lease liabilities of $2.9 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 30, 2021 and 2020.~~

(Dollars in thousands)
	September 30, 2021			September 30, 2020			June 30, 2022			June 30, 2021

Operating lease cost	$	538		$	675		$	408		$	418

Other information:
Cash paid for amounts included in the measurement of lease liabilities		520			659			670			404
Operating cash flows from operating leases		0			0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		952			450			1,726			942
Weighted-average remaining lease term - operating leases		6.72			7.36			8.54			6.84
Weighted-average discount rate - operating leases		2.71	%		2.97	%		2.14	%		2.71	%

The following table presents lease maturities as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

(Dollars in thousands)

Maturity Analysis of Operating Lease Liabilities:	September 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021

2021	$	181		$	754
2022		555			588		$	459		$	740
2023		544			567			922			746
2024		489			489			867			691
2025		433			433			812			635
2026								694			518
Thereafter		1,041			1,041			2,975			1,838
Total		3,243			3,872			6,729			5,168
Less: Imputed Interest		(321	)		(401	)		(686	)		(491	)
Operating Lease Liability	$	2,922		$	3,471		$	6,043		$	4,677

��

(7) Subsequent Events

~~(8)~~	~~Subsequent Events~~

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

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

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s Annual Report of Form 10-K and the Company’s Consolidated Financial Statements and Notes thereto on pages ~~A-26~~A-28 through ~~A-71~~A-69 of the Company’s ~~2020~~2021 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the ~~May 6, 2021~~2022 Annual Meeting of Shareholders.

Introduction

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

Overview

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

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

COVID-19 has adversely affected, and may continue to adversely affect economic activity globally, nationally and locally. Following the COVID-19 outbreak in December 2019 and January 2020, market interest rates declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events generally had an adverse effect on business and consumer confidence and the Company and its customers. On March 3, 2020, the Federal Reserve Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. Subsequently on March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic had an adverse effect on the Company’s financial condition and results of operations. Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as the economic conditions during the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. See ~~COVID-19 Impact~~“COVID-19 Impact” below for additional information regarding the impact of the COVID-19 pandemic on the Company’s business. Subsequently, concern over the ongoing economic effects of COVID19, continuing supply-chain disruption and rising inflation has caused the FOMC to increase the target federal funds rate by 225 basis points in 2022 to a range of 2.25% to 2.50% at July 31, 2022.

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

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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.

COVID 19 Impact

Overview. The COVID-19 pandemic has caused unprecedented disruption that has affected daily living and negatively impacted the global economy, the banking industry and the Company. While we are unable to estimate the magnitude, the COVID-19 pandemic and the related global economic crisis may adversely affect our future operating results. As such, the impact of the COVID-19 pandemic on future fiscal periods is subject to a high degree of uncertainty. The emergence of COVID-19 and new variants of the virus around the world, and particularly in the United States and Canada, continues to present significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. The pandemic has affected the Company’s financial results and business operations, and economic and health conditions in the United States and across most of the globe have continued to change since the beginning of the pandemic. Management cannot predict the full impact of the pandemic on the Company’s management and employees, its customers nor to economic conditions generally, and such effects could exist for an extended period of time.

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the remainder of the 2019-2020 academic year, businesses were ordered to temporarily close or reduce their business operations to accommodate social distancing and shelter in place requirements, non-critical healthcare services were significantly curtailed and unemployment levels rose. Since the initial shut down in March 2020, phased reopening plans began in mid-May of 2020 and continued ~~through mid-May of 2021 subject to public health guidelines, restrictions and limitations on capacity. In mid-May 2021, as the number of~~throughout 2021. While 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 rates slowed and the number of COVID-19 cases started to rise and continued to rise through September 2021. During that time frame, several local communities re-instated mask requirements and strongly encouraged North Carolinians to get vaccinated, while some companies and government agencies adopted policies and procedures regarding vaccination and regular COVID-19 testing. Since mid-October 2021, COVID-19 cases have started to decrease. Weare currently decreasing, we are unable to predict if COVID-19 cases will continue to decrease, if additional policies, procedures, restrictions, limitations and mandates will be implemented requiring employees to be vaccinated and/or be subject to regular COVID-19 testing and the impact that the foregoing will have on businesses, including the business of the Company and its customers.

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

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

	·	On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the PPP loan program, subject to ~~numerous~~certain limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $320 billion in funding for PPP loans was authorized. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopened and expanded the PPP loan program. The changes to the PPP loan program allowed new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revised certain PPP requirements, including aspects of loan forgiveness on existing PPP loans. Under the Economic Aid Act, the PPP loan program was set to expire on March 31, 2021; however, the PPP Extension Act which was signed into law on March 30, 2021 extended the PPP loan program until May 31, 2021. The Bank participated as a lender in the PPP loan program. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDR ~~loans~~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 ~~September~~June 30, ~~2021.~~2022.

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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 ~~September~~June 30, ~~2021.~~2022.

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

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

~~Table of Contents~~

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

	·	On March 13, 2020 we enacted our Pandemic Plan. We used available physical resources to achieve appropriate social distancing protocols in all facilities; in addition, we established mandatory remote work through June 30, 2021 to isolate certain personnel essential to critical business continuity operations. We also expanded and tested remote access for the core banking system, funds transfer and loan operations.

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

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

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

	·	On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services. Branch lobbies were reopened on May 20, 2020. One small branch located in an assisted living facility was permanently closed effective December 31, 2020 due to limited lobby space and COVID-19 restrictions. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. While the majority of employees are now working on-site, some employees whose job responsibilities can be effectively carried out remotely continue to work from home. Employees working on-site are observing current public health guidelines. ~~Effective August 19, 2021, the Company implemented mask requirements for employees.~~

Table of Contents

Summary of Significant Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. The following is a summary of some of the more subjective and complex accounting policies of the Company. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s ~~2020~~2021 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the ~~May 6, 2021~~2022 Annual Meeting of Shareholders.

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

Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The ~~collectibility~~collectability of loans is reflected through the Company’s estimate of the allowance for loan losses. The Company performs periodic and systematic detailed reviews of its lending portfolio to assess overall ~~collectibility.~~collectability. In addition, certain assets and liabilities are reflected at their estimated fair value in the ~~consolidated financial statements.~~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)~~5 of the Notes to Consolidated Financial Statements (Unaudited) included in this Quarterly Report.

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

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

Results of Operations

Summary. Net earnings were ~~$3.4~~$3.2 million or ~~$0.61 basic net earnings~~$0.59 per share and ~~$0.59~~$0.57 per diluted ~~net earnings per~~ share for the three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~$4.5~~$4.6 million or ~~$0.80 basic net earnings~~$0.82 per share and ~~$0.78~~$0.80 per diluted ~~net earnings per~~ share for the ~~same period one~~prior year ~~ago.~~period. The decrease in ~~third~~second quarter net earnings is primarily the result of a decrease in net interest income, ~~a decrease~~an increase in ~~non-interest income~~the provision for loan losses and an increase in non-interest expense, which were partially offset by ~~a decrease~~an increase in ~~the provision for loan losses during the three months ended September 30, 2021,~~non-interest income compared to the three months ended ~~September~~June 30, ~~2020,~~2022, as discussed below.

The annualized return on average assets was ~~0.83%~~0.77% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~1.25%~~1.18% for the same period one year ago, and annualized return on average shareholders’ equity was ~~9.30%~~11.02% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~12.81%~~13.11% for the same period one year ago.

Year-to-date net earnings as of ~~September~~June 30, ~~2021~~2022 were ~~$12.1~~$6.7 million or ~~$2.16 basic net earnings~~$1.21 per share and ~~$2.10~~$1.18 per diluted ~~net earnings per~~ share for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~$9.4~~$8.7 million or ~~$1.67 basic net earnings~~$1.55 per share and ~~$1.62~~$1.51 per diluted ~~net earnings per~~ share for the ~~same period one~~prior year ~~ago.~~period. The ~~increase~~decrease in year-to-date net earnings is primarily attributable to ~~an increase~~a decrease in net interest income, ~~a decrease~~an increase in the provision for loan losses and an increase in non-interest ~~income,~~expense, which were partially offset by an increase in non-interest ~~expense during the nine months ended September 30, 2021,~~income compared to the ~~nine months ended September 30, 2020,~~prior year period, as discussed below.

The annualized return on average assets was ~~1.05%~~0.81% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~0.95%~~0.89% for the same period one year ago, and annualized return on average shareholders’ equity was ~~11.04%~~10.39% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~8.99%~~9.43% for the same period one year ago.

~~Table of Contents~~

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

Table of Contents

Net interest income was ~~$10.6~~$11.3 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$10.9~~$11.7 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The decrease in net interest income is due to a ~~$447,000~~$525,000 decrease in interest income, which was partially offset by a ~~$81,000~~$198,000 decrease in interest expense. The decrease in interest income is primarily due to a ~~$700,000~~$1.1 million decrease in interest income and fees on loans, which was partially offset by an increase in interest income on balances due from banks and an increase in interest income on investment securities. The decrease in interest income and fees on loans is primarily due to a decrease in ~~total~~fee income on SBA PPP loans. The increase in interest income on investment securities is primarily due to additional securities ~~purchases due to~~purchased with additional cash resulting from an increase in ~~excess cash.~~deposits. The decrease in interest expense is primarily due to a decrease in ~~Federal Home Loan Bank (“FHLB”) borrowings and a reduction in~~ rates paid on ~~time deposits, partially offset by an increase in interest bearing demand, Money Market and savings deposits.~~interest-bearing liabilities.

Interest income was ~~$11.4~~$12.0 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$11.9~~$12.5 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The decrease in interest income is primarily due to a ~~$700,000~~$1.1 million decrease in interest income and fees on loans, which was partially offset by an increase in interest income on balances due from banks and an increase in interest income on investment securities. The decrease in interest income and fees on loans is primarily due to a decrease in ~~total~~fee income on SBA PPP loans. The Bank recognized $293,000 and $1.5 million of PPP loan fee income for the three months ended June 30, 2022 and the three months ended June 30, 2021, respectively. During the three months ended ~~September~~June 30, ~~2021,~~2022, average loans ~~decreased $81.0~~were $917.8 million, ~~to $889.5~~an increase of $1.4 million from ~~$970.5~~average loans of $916.4 million for the three months ended ~~September~~June 30, ~~2020.~~2021. During the three months ended ~~September~~June 30, ~~2021,~~2022, average PPP loans were $4.0 million, a reduction of $53.0 million from average PPP loans of $57.0 million for the three months ended June 30, 2021. During the three months ended June 30, 2022, average investment securities available for sale ~~increased $178.7~~were $455.3 million, ~~to $378.8~~an increase of $108.4 million from ~~$200.1~~average investment securities available for sale of $346.9 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The average yield on loans for the three months ended ~~September~~June 30, 2022 and 2021 was 4.34% and ~~2020 was 4.37% and 4.31%~~4.82%, respectively. The average yield on investment securities available for sale was ~~1.70%~~1.48% and ~~2.82%~~1.80% for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The average yield on earning assets was ~~2.98%~~3.03% and ~~3.56%~~3.43% for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Interest expense was ~~$861,000~~$644,000 for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$942,000~~$842,000 for the three months ended ~~September~~June 30, ~~2020.~~2021. The decrease in interest expense is primarily due to a decrease in ~~Federal Home Loan Bank (“FHLB”) borrowings and a reduction in~~ rates paid on ~~time deposits, which was partially offset by an increase in interest bearing demand, Money Market and savings deposits.~~interest-bearing liabilities. During the three months ended ~~September~~June 30, ~~2021,~~2022, average interest-bearing non-maturity deposits ~~increased $180.9~~were $823.3 million, ~~to $788.0~~an increase of $88.3 million from ~~$607.1~~average interest-bearing non-maturity deposits of $735.0 million for the three months ended ~~September~~June 30, ~~2020.~~2021. During the three months ended ~~September~~June 30, ~~2021,~~2022, average certificates of deposit ~~increased $928,000 to $103.8~~were $101.6 million, a reduction of $5.0 million from ~~$102.9~~average certificates of deposit of $106.6 million for the three months ended ~~September~~June 30, ~~2020. Average FHLB borrowings decreased $70.0 million to zero for the three months ended September 30, 2021 from $70.0 million for the three months ended September 30, 2020.~~2021. The average rate paid on interest-bearing checking and savings accounts was ~~0.29%~~0.18% and ~~0.32%~~0.30% for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The average rate paid on certificates of deposit was ~~0.68%~~0.56% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~0.86%~~0.72% for the same period one year ago. The average rate paid on interest-bearing liabilities was ~~0.36%~~0.26% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~0.45%~~0.38% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. 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, ~~2021~~2022 and ~~2020~~2021 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. 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.

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	Three months ended								Three months ended								Three months ended								Three months ended
	September 30, 2021								September 30, 2020								June 30, 2022								June 30, 2021
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:

Loans receivable	$	889,455			9,807		4.37	%	$	970,529			10,507		4.31	%	$	917,833		$	9,934		4.34	%	$	916,393		$	11,003		4.82	%
Investments - taxable		227,026			657		1.15	%		88,823			484		2.17	%		325,268			1,060		1.31	%		211,422			650		1.23	%
Investments - nontaxable*		155,986			972		2.47	%		118,920			985		3.30	%		133,529			645		1.94	%		139,704			936		2.69	%
Federal funds sold		-			-		0.00	%		135,548			33		0.10	%
Other		262,205			89		0.13	%		29,503			21		0.28	%		222,839			442		0.80	%		209,737			48		0.09	%

Total interest-earning assets		1,534,672			11,525		2.98	%		1,343,323			12,030		3.56	%		1,599,469			12,081		3.03	%		1,477,256			12,637		3.43	%

Non-interest earning assets:
Cash and due from banks		29,644								34,906								38,145								32,350
Allowance for loan losses		(9,313	)							(9,399	)							(9,427	)							(9,572	)
Other assets		64,439								69,408								39,842								63,536

Total assets	$	1,619,442							$	1,438,238							$	1,668,029							$	1,563,570

Interest-bearing liabilities:

Interest-bearing demand, MMDA & savings deposits	$	787,985			577		0.29	%	$	607,111			482		0.32	%	$	823,286		$	366		0.18	%	$	734,988		$	543		0.30	%
Time deposits		103,828			181		0.69	%		102,900			223		0.86	%		101,641			141		0.56	%		106,669			191		0.72	%
FHLB borrowings		-			-		0.00	%		70,000			103		0.59	%
Trust preferred securities		15,464			69		1.77	%		15,464			76		1.96	%
Junior subordinated debentures																		15,464			103		2.67	%		15,464			71		1.84	%
Other		29,595			34		0.46	%		32,440			58		0.71	%		37,460			34		0.36	%		30,295			37		0.49	%

Total interest-bearing liabilities		936,872			861		0.36	%		827,915			942		0.45	%		977,851			644		0.26	%		887,416			842		0.38	%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits		528,481								460,615								560,803								528,502
Other liabilities		9,439								9,701								12,234								6,485
Shareholders' equity		144,650								140,007								117,141								141,167

Total liabilities and shareholders' equity	$	1,619,442							$	1,438,238							$	1,668,029							$	1,563,570

Net interest spread				$	10,664		2.62	%				$	11,088		3.11	%				$	11,437		2.77	%				$	11,795		3.05	%

Net yield on interest-earning assets							2.76	%							3.28	%							2.87	%							3.20	%

Taxable equivalent adjustment
Investment securities				$	104							$	162							$	89							$	120

Net interest income				$	10,560							$	10,926							$	11,348							$	11,675

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of ~~$14.9~~$13.6 million in ~~2021~~2022 and ~~$17.3~~$13.9 million in ~~2020.~~2021. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in ~~2021~~2022 and ~~2020.~~2021.

Year-to-date net interest income as of June 30, 2022 was $22.0 million, compared to $22.8 million for the six months ended June 30, 2021. The decrease in net interest income is due to a $1.1 million decrease in interest income, which was partially offset by a $350,000 decrease in interest expense. The decrease in interest income is primarily due to a $2.0 million decrease in interest income and fees on loans, which was partially offset by an increase in interest income on balances due from banks and an increase in interest income on investment securities. The decrease in interest income and fees on loans is primarily due to a decrease in fee income on SBA PPP loans. The increase in interest income on investment securities is primarily due to additional securities purchased with additional cash resulting from an increase in deposits. The decrease in interest expense is primarily due to a decrease in rates paid on interest-bearing liabilities.

3433

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~~Year-to-date net interest~~Interest income ~~as of September 30, 2021~~ was ~~$33.3 million, compared to $32.9~~$23.3 million for the ~~same period one year ago.~~six months ended June 30, 2022, compared to $24.4 million for the six months ended June 30, 2021. The ~~increase~~decrease in ~~net~~ interest income is ~~due to a $104,000 increase in interest income and a $377,000 decrease in interest expense. The increase in interest income was~~ primarily due to a ~~$107,000 increase~~$2.0 million decrease in interest income and fees on loans, which was ~~primarily due to an increase in fee income on SBA PPP loans, which was~~ partially offset by ~~a decrease~~an increase in interest income on ~~loans primarily~~balances due to a decrease in total loans. Fee income on SBA PPP loans totaled $3.0 million during the nine months ended September 30, 2021, compared to $361,000 for the same period one year ago. The decrease in interest expense was primarily due to a decrease in rates paid on interest-bearing liabilitiesfrom banks and ~~a decrease in FHLB borrowings.~~

~~Interest income was $35.9 million for the nine months ended September 30, 2021, compared to $35.8 million for the nine months ended September 30, 2020. The~~an increase in interest income ~~was primarily due to a $107,000 increase~~on investment securities. The decrease in interest income and fees on loans ~~which was~~is primarily due to ~~an increase~~a decrease in fee income on SBA PPP loans. The Bank recognized $893,000 and $2.5 million of PPP loan fee income for the six months ended June 30, 2022 and the six months ended June 30, 2021, respectively. During the six months ended June 30, 2022, average loans ~~which was partially offset by~~were $901.6 million, a decrease ~~in interest income on loans primarily due to a decrease in total loans. During the nine months ended September 30, 2021,~~of $30.1 million from average loans ~~increased $9.2 million to $917.5 million from $926.7~~of $931.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, average PPP loans were $9.7 million, a decrease of $46.0 million from average PPP loans of $55.7 million for the six months ended June 30, 2021. During the six months ended June 30, 2022, average investment securities available for sale ~~increased $135.3~~were $434.4 million, ~~to $330.0~~an increase of $129.3 million from ~~$194.7~~average investment securities available for sale of $305.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The average yield on loans for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 was 4.40% and ~~2020 was 4.59% and 4.52%~~4.69%, respectively. The average yield on investment securities available for sale was ~~1.81%~~1.49% and ~~3.02%~~1.87% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The average yield on earning assets was ~~3.31%~~3.00% and ~~3.92%~~3.49% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

Interest expense was ~~$2.5~~$1.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$2.9~~$1.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The decrease in interest expense ~~was~~is primarily due to a decrease in rates paid on interest-bearing ~~liabilities and a decrease in FHLB borrowings.~~liabilities. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, average interest-bearing non-maturity deposits ~~increased $165.7~~were $811.4 million, ~~to $732.0~~an increase of $107.8 million from ~~$556.3~~average interest-bearing non-maturity deposits of $703.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, average certificates of deposit ~~increased $3.2~~were $101.0 million, ~~to $106.2~~a decrease of $6.3 million from ~~$103.0~~average certificates of deposit of $107.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020. Average FHLB borrowings decreased $61.3 million to zero for the nine months ended September 30, 2021 from $61.3 million for the nine months ended September 30, 2020.~~2021. The average rate paid on interest-bearing checking and savings accounts was ~~0.30%~~0.19% and ~~0.34%~~0.30% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The average rate paid on certificates of deposit was ~~0.74%~~0.57% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~0.94%~~0.76% for the same period one year ago. The average rate paid on interest-bearing liabilities was ~~0.38%~~0.27% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~0.50%~~0.39% 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, ~~2021~~2022 and ~~2020.~~2021. 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, ~~2021~~2022 and ~~2020~~2021 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. 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.

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	Six months ended								Six months ended
	June 30, 2022								June 30, 2021
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:

Loans receivable	$	901,586			19,676		4.40	%	$	931,714			21,667		4.69	%
Investments - taxable		306,986			2,067		1.36	%		185,350			1,191		1.30	%
Investments - nontaxable*		131,228			1,204		1.85	%		124,171			1,741		2.83	%
Other		241,126			553		0.46	%		184,755			83		0.09	%

Total interest-earning assets		1,580,926			23,500		3.00	%		1,425,990			24,682		3.49	%

Non-interest earning assets:
Cash and due from banks		36,099								31,164
Allowance for loan losses		(9,408	)							(9,749	)
Other assets		47,539								63,384

Total assets	$	1,655,156							$	1,510,789

Interest-bearing liabilities:

NOW, MMDA & savings deposits	$	811,372			769		0.19	%	$	703,610			1,040		0.30	%
Time deposits		101,006			287		0.57	%		107,343			403		0.76	%
Trust preferred securities		15,464			178		2.32	%		15,464			142		1.85	%
Other		37,963			73		0.39	%		28,841			72		0.50	%

Total interest-bearing liabilities		965,805			1,307		0.27	%		855,258			1,657		0.39	%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits		549,942								508,801
Other liabilities		9,996								4,164
Shareholders' equity		129,413								142,566

Total liabilities and shareholders' equity	$	1,655,156							$	1,510,789

Net interest spread				$	22,193		2.73	%				$	23,025		3.10	%

Net yield on interest-earning assets							2.83	%							3.26	%

Taxable equivalent adjustment
Investment securities				$	179							$	243

Net interest income				$	22,014							$	22,782

Nine months ended

Nine months ended

September 30, 2021

September 30, 2020

(Dollars in thousands)

Average Balance

Interest

Yield /
Rate

Average Balance

Interest

Yield /
Rate

Interest-earning assets:

Loans receivable

$ 917,473

31,474

4.59 %

$ 926,663

31,367

4.52 %
Investments - taxable

199,395

1,847

1.24 %

85,887

1,664

2.59 %
Investments - nontaxable*

134,893

2,714

2.69 %

116,113

2,930

3.37 %
Federal funds sold

-

-

0.00 %

80,379

178

0.30 %
Other

210,855

172

0.11 %

26,618

103

0.52 %

Total interest-earning assets

1,462,616

36,207

3.31 %

1,235,660

36,242

3.92 %

Non-interest earning assets:

Cash and due from banks

30,652

36,372

Allowance for loan losses

(9,602 )

(8,059 )

Other assets

63,739

68,276

Total assets

$ 1,547,405

$ 1,332,249

Interest-bearing liabilities:

NOW, MMDA & savings deposits

$ 732,045

1,617

0.30 %

$ 566,348

1,455

0.34 %
Time deposits

106,158

584

0.74 %

103,047

725

0.94 %
FHLB borrowings

-

-

0.00 %

61,314

270

0.59 %
Trust preferred securities

15,464

211

1.82 %

15,483

296

2.55 %
Other

29,095

106

0.49 %

28,086

149

0.71 %

Total interest-bearing liabilities

882,762

2,518

0.38 %

774,278

2,895

0.50 %

Non-interest bearing liabilities and shareholders' equity:

Demand deposits

515,433

413,693

Other liabilities

2,298

4,087

Shareholders' equity

146,912

140,191

Total liabilities and shareholders' equity

$ 1,547,405

$ 1,332,249

Net interest spread

$ 33,689

2.93 %

$ 33,347

3.42 %

Net yield on interest-earning assets

3.08 %

3.60 %

Taxable equivalent adjustment

Investment securities

$ 347

$ 486

Net interest income

$ 33,342

$ 32,861

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $12.1 million in 2021 and $23.1 million in 2020.*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $13.8 million in 2022 and $10.7 million in 2021. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2021 and 2020.

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

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	Three months ended September 30, 2021 compared to three months ended September 30, 2020									Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
																			Three months ended June 30, 2022 compared to three months ended June 30, 2021									Six months ended June 30, 2022 compared to six months ended June 30, 2021
(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)			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	$	(886	)		186			(700	)		(313	)		420			107		$	16			(1,085	)		(1,069	)		(679	)		(1,312	)		(1,991	)
Investments - taxable		577			(404	)		173			1,625			(1,442	)		183			360			50			410			800			77			877
Investments - nontaxable		269			(282	)		(13	)		426			(642	)		(216	)		(36	)		(255	)		(291	)		82			(619	)		(537	)
Federal funds sold		(16	)		(17	)		(33	)		(89	)		(89	)		(178	)
Other		122			(54	)		68			436			(367	)		69			15			379			394			77			392			469
Total interest income		66			(571	)		(505	)		2,085			(2,120	)		(35	)		355			(911	)		(556	)		280			(1,462	)		(1,182	)

Interest expense:
Interest-bearing demand, MMDA
& savings deposits		138			(43	)		95			396			(234	)		162
NOW, MMDA & savings deposits																				52			(229	)		(177	)		131			(402	)		(271	)
Time deposits		2			(44	)		(42	)		20			(161	)		(141	)		(8	)		(41	)		(49	)		(21	)		(95	)		(116	)
FHLB borrowings		(51	)		(52	)		(103	)		(135	)		(135	)		(270	)
Trust preferred securities		-			(7	)		(7	)		-			(85	)		(85	)		-			32			32			-			36			36
Other		(4	)		(20	)		(24	)		5			(48	)		(43	)		8			(12	)		(4	)		20			(19	)		1
Total interest expense		85			(166	)		(81	)		286			(663	)		(377	)		52			(250	)		(198	)		130			(480	)		(350	)
Net interest income	$	(19	)		(405	)		(424	)		1,799			(1,457	)		342		$	303			(661	)		(358	)		150			(982	)		(832	)

Provision for Loan Losses. The provision for loan losses for the three months ended ~~September~~June 30, ~~2021~~2022 was $410,000, compared to a recovery of ~~$182,000, compared to a provision of $522,000~~$226,000 for the three months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase in the provision for loan losses is primarily attributable to ~~a decrease~~an increase in reserves ondue to a net increase in the volume of loans ~~with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves~~ in the general reserve pool. ~~At September 30, 2021, there~~There were no loans with ~~existing modifications as a result of the COVID-19 pandemic. 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 Loanat June 30, 2022 and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, 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 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 $18.7 million decrease from December 31, 2020 to September 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 nine months ended September 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, ~~2021~~2022 was $481,000, compared to a recovery of ~~$863,000, compared to a provision of $3.5 million~~$681,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The ~~decrease~~increase in the provision for loan losses is primarily attributable to ~~a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease~~an increase in reserves due to a net ~~decrease~~increase in the volume of loans in the general reserve pool.

Non-Interest Income. Total non-interest income was $7.3 million for the three months ended June 30, 2022, compared to $6.0 million for the three months ended ~~September~~June 30, ~~2021, compared to $7.1 million for the three months ended September 30, 2020. The decrease in non-interest income is primarily attributable to a $1.7 million decrease in gains on sale of securities.~~

~~Non-interest income was $18.0 million for the nine months ended September 30, 2021, compared to $17.0 million for the nine months ended September 30, 2020.~~2021. The increase in non-interest income is primarily attributable to a ~~$474,000 increase in mortgage banking income due to an increase in mortgage loan volume, a $820,000~~$1.4 million increase in appraisal management fee income due to an increase in the volume of appraisals and an increase in service charge income primarily due to service charge changes implemented in March 2022, which were partially offset by a ~~$1.4~~$624,000 decrease in mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained for the Bank’s portfolio.

Non-interest income was $14.4 million for the six months ended June 30, 2022, compared to $11.9 million for the six months ended June 30, 2021. The increase in non-interest income is primarily attributable to a $3.1 million increase in ~~miscellaneous non-interest~~appraisal management fee income ~~primarily~~ due to an increase in ~~debit card income resulting from increased debit card activity~~the volume of appraisals and an increase in service charge income ~~on Small Business Investment Company (“SBIC”) investments. These increases~~primarily due to service charge changes implemented in ~~non-interest income~~March 2022, which were partially offset by a ~~$2.1~~$1.3 million decrease in ~~gains on sale of securities.~~mortgage banking income due to a decrease in mortgage loan volume and additional mortgage loans being retained for the Bank’s portfolio.

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Non-Interest Expense. Total non-interest expense was ~~$12.6~~$14.2 million for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$11.9~~$12.1 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The increase in non-interest expense ~~was~~is primarily attributable to a ~~$317,000 increase in salaries and employee benefits expense primarily due to increases in incentive compensation and restricted stock expense and a $208,000 increase in professional fees.~~

~~Non-interest expense was $37.0~~$1.1 million for the nine months ended September 30, 2021, compared to $34.8 million for the nine months ended September 30, 2020. The increase in non-interest expense was primarily attributable to a $907,000 increase in salaries and employee benefits expense primarily due to increases in insurance costs and incentive compensation and a $801,000 increase in appraisal management fee expense due to an increase in the volume of ~~appraisals.~~appraisals and a $777,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs.

Non-interest expense was $27.6 million for the six months ended June 30, 2022, compared to $24.4 million for the six months ended June 30, 2021. The increase in non-interest expense is primarily attributable to a $2.4 million increase in appraisal management fee expense due to an increase in the volume of appraisals and a $443,000 increase in salaries and employee benefits expense primarily due to an increase in insurance costs.

Income Taxes. Income tax expense was ~~$824,000~~$806,000 for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1.1~~$1.2 million for the three months ended ~~September~~June 30, ~~2020.~~2021. The effective tax rate was ~~19.55%~~20.03% for the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~19.80%~~20.55% for the three months ended ~~September~~June 30, ~~2020.~~2021. Income tax expense was ~~$3.1~~$1.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$2.1~~$2.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. The effective tax rate was ~~20.17%~~19.87% for the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~18.31%~~20.41% for the ~~nine~~six months ended ~~September~~June 30, ~~2020. The increase in the year to date effective tax rate is primarily due to a reduction in non-taxable investments combined with an increase in earnings before income taxes.~~2021.

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Analysis of Financial Condition

Investment Securities. Available for sale securities were ~~$402.9~~$426.8 million at ~~September~~June 30, ~~2021,~~2022, compared to ~~$245.2~~$406.5 million at December 31, ~~2020. The increase in available for sale securities is primarily due to additional securities purchases due to an increase in excess cash.~~2021. Average investment securities available for sale for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 were ~~$378.8~~$434.4 million, compared to ~~$200.8~~$349.6 million for the year ended December 31, ~~2020.~~2021.

Loans. At ~~September~~June 30, ~~2021,~~2022, loans were ~~$891.0~~$959.5 million, compared to ~~$948.6~~$884.9 million at December 31, 2020. The decrease in loans is primarily due to a $50.2 million decrease in PPP loans due to PPP loans being forgiven by the SBA during the nine months ended September 30, 2021 and a $37.2 million decrease in commercial loans due to loan payoffs during the nine months ended September 30, 2021. The ~~Company~~Bank had ~~$25.6~~$1.4 million and ~~$75.8~~$18.0 million in PPP loans at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Average loans represented ~~63%~~57% and ~~74%~~61% of average earning assets for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and the year ended December 31, ~~2020,~~2021, respectively.

The ~~Company~~Bank had ~~$9.1~~$1.3 million and $3.6 million in mortgage loans held for sale as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021, respectively.

Although the ~~Company~~Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At ~~September~~June 30, ~~2021,~~2022, the ~~Company~~Bank had ~~$87.5~~$93.1 million in residential mortgage loans, ~~$86.5~~$92.3 million in home equity loans and ~~$526.9~~$574.0 million in commercial mortgage loans, which include ~~$416.8~~$443.5 million secured by commercial property and ~~$110.1~~$130.5 million secured by residential property. Residential mortgage loans at ~~September~~June 30, ~~2021~~2022 include ~~$24.5~~$21.4 million in non-traditional mortgage loans from the former Banco division of the Bank. At December 31, ~~2020,~~2021, the ~~Company~~Bank had ~~$104.2~~$101.5 million in residential mortgage loans, ~~$96.6~~$85.6 million in home equity loans and ~~$476.7~~$494.4 million in commercial mortgage loans, which include ~~$375.0~~$381.0 million secured by commercial property and ~~$101.7~~$113.4 million secured by residential property. Residential mortgage loans ~~at December 31, 2020~~ include ~~$26.9~~$23.1 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

The Company had $80.0 million and $94.1 million in construction and land development loans at September 30, 2021 and December 31, 2020, respectively. The following tables present a breakout of these loans.

September 30, 2021

(Dollars in thousands)

Number of
Loans

Balance
Outstanding

Non-accrual
Balance

Land acquisition and development - commercial purposes

35

$ 7,014

$ -

Land acquisition and development - residential purposes

151

20,089

-

1 to 4 family residential construction

96

18,493

-

Commercial construction

40

34,413

-

Total construction and land development

322

$ 80,009

$ -

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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

$ -

Past due TDR loans and non-accrual TDR loans totaled ~~$1.6~~$2.4 million and ~~$3.8~~$2.2 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

There were no new TDR modifications during the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

Allowance for Loan ~~Losses.~~Losses (ALLL). The allowance for loan losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance ~~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.

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

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As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent ~~third-party~~third party reviews and evaluates loan relationships greater than ~~$1.0~~or equal to $1.5 million as well as a periodic sample of commercial relationships with exposures below ~~$1.0~~$1.5 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the ~~Bank’s Board of Directors.~~Bank Board.

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

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

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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 ~~September~~June 30, 2022 and December 31, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. At ~~December 31, 2020,~~June 30, 2022, the ~~balance~~Bank continues to maintain a pool 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~~were previously modified as a result of the COVID-19 pandemic. The loan balances associated with those loans that were previously modified as a result of the COVID-19 pandemic related modifications have been grouped into their own pool within the ~~Company’s~~Bank’s ALLL model as management considers that they have a higher ~~likelihood of~~ risk profile, and a higher reserve rate has been applied to ~~that~~this pool. ~~All loans modified as a result of the COVID-19 pandemic, totaling $100.9~~Loans included in this pool totaled $77.9 million and $88.7 million at ~~September~~June 30, 2022 and December 31, 2021, ~~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 were once modified.~~respectively.

The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for ~~loan losses for~~ the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 as compared to the three and ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

Effective December 31, 2012, certain mortgage loans from the former Banco division of the Bank were analyzed separately from other single-family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, ~~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.

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

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Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ~~allowance for loan losses.~~allowance. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations. Management believes it has established the allowance for credit losses pursuant to GAAP, and has taken into account the views of its regulators and the current economic environment. Management considers the allowance ~~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.

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	Percentage of Loans						Percentage of Loans
	By Risk Grade						By Risk Grade
Risk Grade	9/30/2021			9/30/2020			30.6.22			31.12.21
Risk Grade 1 (Excellent Quality)		0.94	%		1.12	%		0.57	%		0.78	%
Risk Grade 2 (High Quality)		19.07	%		20.96	%		19.38	%		19.12	%
Risk Grade 3 (Good Quality)		69.24	%		65.36	%		72.85	%		70.41	%
Risk Grade 4 (Management Attention)		8.15	%		9.93	%		5.79	%		7.70	%
Risk Grade 5 (Watch)		1.88	%		1.91	%		0.71	%		1.23	%
Risk Grade 6 (Substandard)		0.72	%		0.72	%		0.70	%		0.76	%
Risk Grade 7 (Doubtful)		0.00	%		0.00	%		0.00	%		0.00	%
Risk Grade 8 (Loss)		0.00	%		0.00	%		0.00	%		0.00	%

At ~~September~~June 30, ~~2021,~~2022, including non-accrual loans, there ~~were three relationships exceeding $1.0 million in the Watch risk grade, which totaled $8.1 million. There~~ were no relationships exceeding $1.0 million in the Watch and Substandard risk ~~grade.~~grades.

Non-performing Assets. Non-performing assets totaled ~~$2.7~~$3.6 million at ~~September~~June 30, ~~2021~~2022 or ~~0.17%~~0.21% of total assets, compared to ~~$3.9~~$3.2 million or ~~0.27%~~0.20% of total assets at December 31, ~~2020.~~2021. Non-accrual loans were ~~$2.7~~$3.6 million at ~~September~~June 30, ~~2021~~2022 and ~~$3.8~~$3.2 million at December 31, ~~2020.~~2021. As a percentage of total loans outstanding, non-accrual loans were ~~0.30%~~0.37% at ~~September~~June 30, ~~2021, compared to 0.40% at~~2022 and December 31, ~~2020.~~2021, respectively. Non-performing assets include ~~$2.6~~$3.6 million in commercial and residential mortgage loans and ~~$59,000~~$21,000 in other loans at ~~September~~June 30, ~~2021,~~2022, compared to ~~$3.5~~$3.2 million in commercial and residential mortgage loans, ~~$226,000~~$51,000 in other loans ~~and $128,000 in other real estate owned~~ at December 31, ~~2020.~~2021. The Bank had no loans 90 days past due and still accruing at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The Bank had no other real estate owned at ~~September~~June 30, 2022 and December 31, 2021.

Deposits. Total deposits at ~~September~~June 30, ~~2021~~2022 were ~~$1.4~~$1.5 billion compared to ~~$1.2~~$1.4 billion at December 31, ~~2020.~~2021. Core deposits, a non-GAAP measure, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.5 billion and $1.4 billion at ~~September~~June 30, ~~2021, compared to $1.2 billion at~~2022 and December 31, ~~2020.~~2021, respectively. Management believes it is useful to calculate and present core deposits because of the positive impact this low cost funding source provides to the Bank’s funding base.

Borrowed Funds. There were no FHLB borrowings outstanding at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

Securities sold under agreements to repurchase were ~~$32.3~~$37.1 million at ~~September~~June 30, ~~2021, compared to $26.2 million at~~2022 and December 31, ~~2020.~~2021.

Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. 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.~~Company. The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay ~~in December 2006~~ the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole ~~asset~~assets 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 interest quarterly at a floating rate of three-month LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the trust preferred ~~securities to the extent PEBK Trust II does not have funds with which to make the distributions and other payments.~~securities. The net combined effect of all the documents entered into in connection with the trust preferred securities ~~transaction~~ is that the Company is ~~obligated~~liable to make the distributions and other payments required on the trust preferred securities.

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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.~~2036. 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~~ceased to be published on December 31, 2021. The overnight, one-month, three-month, nine-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023.

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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.

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale 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, ~~2021~~2022 totaled ~~$1.5~~$1.6 billion, exceeding average rate sensitive liabilities of ~~$936.9~~$977.9 million by ~~$597.8~~$621.6 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, ~~2021.~~2022.

Included in the rate sensitive assets are ~~$203.1~~$175.7 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, ~~2021,~~2022, the Company had ~~$126.9~~$113.2 million in loans with interest rate floors. The floors were in effect on ~~$100.9~~$8.5 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is ~~0.81%~~0.61% 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, ~~2021,~~2022, such unfunded commitments to extend credit were ~~$300.0~~$359.0 million, while commitments in the form of standby letters of credit totaled ~~$5.1~~$4.9 million. As of December 31, ~~2020,~~2021, such unfunded commitments to extend credit were ~~$299.0~~$304.3 million, while commitments in the form of standby letters of credit totaled ~~$4.7~~$4.9 million.

The ~~Company~~Bank uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The ~~Company~~Bank considers these to be a stable portion of the ~~Company’s~~Bank’s liability mix and the result of on-going consumer and commercial banking relationships. As of ~~September~~June 30, ~~2021,~~2022, the ~~Company’s~~Bank’s core deposits, a non-GAAP measure, totaled ~~$1.4~~$1.5 billion, or ~~98.13%~~97.93% of total deposits. As of December 31, ~~2020,~~2021, the ~~Company’s~~Bank’s core deposits totaled ~~$1.2~~$1.4 billion, or ~~97.89%~~98.14% of total deposits.

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The other sources of funding for the ~~Company~~Bank are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The ~~Company’s~~Bank’s policies include the ability to access wholesale funding of up to 40% of total assets. The ~~Company’s~~Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The ~~Company’s~~Bank’s ratio of wholesale funding to total assets was ~~0.69%~~0.91% and ~~0.88%~~0.68% as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~Table of Contents~~

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings outstanding at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. At ~~September~~June 30, ~~2021,~~2022, the carrying value of loans pledged as collateral to the FHLB totaled ~~$140.0~~$140.2 million compared to ~~$165.1~~$137.4 million at December 31, ~~2020.~~2021. The remaining availability under the line of credit with the FHLB was ~~$94.6~~$85.9 million at ~~September~~June 30, ~~2021~~2022 compared to ~~$111.4~~$90.9 million at December 31, ~~2020.~~2021. The Bank had no borrowings from the FRB at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~2021. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At ~~September~~June 30, ~~2021,~~2022, the carrying value of loans pledged as collateral to the FRB totaled ~~$478.3~~$527.4 million compared to ~~$469.5~~$475.2 million at December 31, ~~2020.~~2021. Availability under the line of credit with the FRB was ~~$348.7~~$410.4 million and ~~$340.0~~$346.20 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The Bank also had the ability to borrow up to $110.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of ~~September~~June 30, ~~2021.~~2022.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was ~~42.42%~~38.50% at ~~September~~June 30, ~~2021~~2022 and ~~28.12%~~43.28% at December 31, ~~2020.~~2021. 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, ~~2021~~2022 and December 31, ~~2020.~~2021.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 are summarized in the table below. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. 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, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Contractual Cash Obligations
Junior subordinated debentures	$	15,464		15,464	$	15,464		15,464
Operating lease obligations		2,997		3,083		6,717		5,168
Total	$	18,461		18,547	$	22,181		20,632
Other Commitments
Commitments to extend credit	$	299,972		299,039	$	358,990		304,258
Standby letters of credit and financial guarantees written		5,055		4,745		4,946		4,892
SBIC investments		2,472		2,658
SBIC Investments						1,753		2,204
Income tax credits		101		184		101		101
Total	$	307,600		306,626	$	365,790		311,455

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 ~~$143.5~~$112.4 million, or ~~8.88%~~6.70% of total assets, at ~~September~~June 30, ~~2021,~~2022, compared to ~~$139.9~~$142.4 million, or ~~9.88%~~8.77% of total assets, at December 31, ~~2020.~~2021. The decrease in shareholders’ equity is primarily due to an increase in the unrealized loss on investment securities available for sale due to rate changes from December 31, 2021 to June 30, 2022.

Annualized return on average equity for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 was ~~9.30%~~10.39%, compared to ~~12.81%~~12.36% for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Total cash dividends paid on common stock were ~~$2.8~~$2.9 million and ~~$3.5~~$1.9 million for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~ 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 February of ~~2021,~~2022, the ~~Company’s~~ Board of Directors authorized a stock repurchase program, whereby up to ~~$4.0~~$2.0 million ~~will~~may be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately ~~$3.6 million,~~$594,000, or ~~127,597~~22,000 shares of its common stock, under this stock repurchase program as of ~~September~~June 30, ~~2021.~~2022.

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

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The Company’s Tier 1 capital ratio was ~~15.30%~~13.79% and ~~15.07%~~15.43% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for loan losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was ~~16.19%~~14.63% and ~~16.07%~~16.35% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was ~~13.82%~~12.50% and ~~13.56%~~13.96% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was ~~9.61%~~9.47% and ~~10.24%~~9.64% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The Bank’s Tier 1 risk-based capital ratio was ~~15.03%~~13.66% and ~~14.85%~~15.27% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The total risk-based capital ratio for the Bank was ~~15.92%~~14.50% and ~~15.85%~~16.19% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The Bank’s common equity Tier 1 capital ratio was ~~15.03%~~13.66% and ~~14.85%~~15.27% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The Bank’s Tier 1 leverage capital ratio was ~~9.39%~~9.32% and ~~10.04%~~9.50% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at ~~September~~June 30, ~~2021.~~2022.

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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.~~Item 7A of Part II of the Company’s Annual Report on Form 10-K, filed with the SEC on March ~~19, 2021, which is accessible on the SEC’s website at www.sec.gov.~~18, 2022.

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”)) asAs of the end of the period covered by this ~~report.~~report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, which are our controls and other procedures that are designed to ensure that information required to be disclosed in our periodic reports with the SEC is recorded, processed, summarized and reported within the required time periods. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is communicated to our management to allow timely decisions regarding required disclosure. Based on ~~such~~the evaluation, ~~the Company’s Chief Executive Officer~~our chief executive officer and ~~Chief Financial Officer have~~chief financial officer concluded that ~~as of the end of such period, the Company’s~~our disclosure controls and procedures are effective in ~~recording, processing, summarizing and reporting, on a~~allowing timely ~~basis,~~decisions regarding disclosure to be made about material information required to be ~~disclosed by~~included in our periodic reports with the ~~Company~~SEC. In addition, no change in ~~the reports that it files or submits under the Exchange Act.~~

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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,~~18, 2022, which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Form 10-K.

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

ISSUER PURCHASES OF EQUITY SECURITIES

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)

July 1 - 31, 2021

1,144

$ 27.85

-

$ 4,000,000

August 1 - 31, 2021

201

27.87

127,597

$ 394,344

September 1 - 30, 2021

281

28.16

-

$ 394,344

Total

1,626
(1)

$ 27.86

127,597

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)

April 1 - 30, 2022		-	$	-		-	$	1,800,500

May 1 - 31, 2022		13,533		26.47		12,000	$	1,484,300

June 1 - 30, 2022		3,568		26.22		3,000	$	1,405,790

Total		17,101	$	26.42		15,000

(1) The Company purchased ~~1,626~~2,101 shares on the open market in the three months ended ~~September~~June 30, ~~2021~~2022 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

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

(3) Reflects dollar value of ~~shares that may yet be purchased~~balance available for repurchase at end of period under the Company's stock repurchase program, which was ~~funded~~authorized in February ~~2021.~~2022 and expires in February 2023.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 5. Other Information

Not applicable

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Item 6. Exhibits

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

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

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

Exhibit (3)(i)(d)							Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form ~~8-K~~10-K filed with the Securities and Exchange Commission on ~~May 10, 2021~~March 18, 2022

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

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

~~Exhibit (4)(ii)~~	Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, incorporated by reference to Exhibit 4(ii) to the Form 10-K/A filed with the Securities and Exchange Commission on March 16, 2020

~~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

~~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 10-K filed with the Securities and Exchange Commission on March 19, 2021~~

~~Exhibit (10)(xxii)~~	Employment Agreement dated August 19, 2021 between the Registrant and Jeffrey N. Hooper, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on August 20, 2021

Exhibit (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 June 30, ~~2021,~~2022, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*Statements.

*Furnished, not filed.

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SIGNATURES

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

Peoples Bancorp of North Carolina, Inc.

~~November 4, 2021~~

August 5, 2022

/s/ Lance A. Sellers

Date

Lance A. Sellers

President and Chief Executive Officer

~~(Principal~~ (Principal Executive Officer)

~~November 4, 2021~~August 5, 2022

/s/ Jeffrey N. Hooper

Date

Jeffrey N. Hooper

Executive Vice President and Chief Financial Officer

~~(Principal~~ (Principal Financial and Principal Accounting Officer)

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PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

September 30, 2021 and December 31, 2020

(Dollars in thousands)
	September 30,			December 31,
Assets	2021			2020
	(Unaudited)			(Audited)

Cash and due from banks, including reserve requirements of $0 at both September 30, 2021 and December 31, 2020	$	42,098			42,737
Interest-bearing deposits		221,210			118,843
Cash and cash equivalents		263,308			161,580

Investment securities available for sale		402,905			245,249
Other investments		3,725			4,155
Total securities		406,630			249,404

Mortgage loans held for sale		9,086			9,139

Loans		891,005			948,639
Less allowance for loan losses		(8,963	)		(9,908	)
Net loans		882,042			938,731

Premises and equipment, net		16,625			18,600
Cash surrender value of life insurance		17,265			16,968
Other real estate		0			128
Right of use lease asset		2,861			3,423
Accrued interest receivable and other assets		18,434			18,202
Total assets	$	1,616,251			1,416,175

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$	529,118			456,980
Interest-bearing demand, MMDA & savings		777,721			657,834
Time, $250,000 or more		26,357			25,771
Other time		76,769			80,501
Total deposits		1,409,965			1,221,086

Securities sold under agreements to repurchase		32,332			26,201
Junior subordinated debentures		15,464			15,464
Lease liability		2,922			3,471
Accrued interest payable and other liabilities		12,026			10,054
Total liabilities		1,472,709			1,276,276

Commitments

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 5,661,569 shares
at September 30, 2021 and 5,787,504 shares at December 31, 2020		53,305			56,871
Common stock held by deferred compensation trust, at cost; 160,611
shares at September 30, 2021 and 155,469 shares at December 31, 2020		(1,946	)		(1,796	)
Deferred compensation		1,946			1,796
Retained earnings		86,927			77,628
Accumulated other comprehensive income		3,310			5,400
Total shareholders' equity		143,542			139,899

Total liabilities and shareholders' equity	$	1,616,251			1,416,175

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share amounts)

	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

Interest income:
Interest and fees on loans	$	9,807			10,507			31,474			31,367
Interest on due from banks		89			19			172			103
Interest on federal funds sold		0			33			0			178
Interest on investment securities:
U.S. Government sponsored enterprises		679			528			1,899			1,864
State and political subdivisions		825			717			2,222			2,042
Other		21			64			93			202
Total interest income		11,421			11,868			35,860			35,756

Interest expense:
Interest-bearing demand, MMDA & savings		577			482			1,617			1,455
Time deposits		181			224			584			725
FHLB borrowings		0			103			0			269
Junior subordinated debentures		69			76			211			296
Other		34			57			106			150
Total interest expense		861			942			2,518			2,895

Net interest income		10,560			10,926			33,342			32,861

Provision for (recovery of) loan losses		(182	)		522			(863	)		3,460

Net interest income after provision for loan losses		10,742			10,404			34,205			29,401

Non-interest income:
Service charges		1,023			809			2,859			2,635
Other service charges and fees		187			188			570			543
Gain on sale of investment securities		0			1,688			0			2,145
Mortgage banking income		516			750			2,109			1,635
Insurance and brokerage commissions		266			200			764			647
Appraisal management fee income		1,954			1,871			5,775			4,955
Gain on sale of other assets		104			0			104			0
Gain (loss) on sale of other real estate		0			(47	)		21			(47	)
Miscellaneous		1,990			1,673			5,855			4,453
Total non-interest income		6,040			7,132			17,953			16,966

Non-interest expense:
Salaries and employee benefits		6,054			5,737			17,903			16,996
Occupancy		1,999			1,943			5,891			5,725
Professional fees		582			374			1,354			1,121
Advertising		91			152			388			566
Debit card expense		244			278			740			766
FDIC Insurance		108			81			304			169
Appraisal management fee expense		1,556			1,478			4,646			3,845
Other		1,934			1,871			5,742			5,627
Total non-interest expense		12,568			11,914			36,968			34,815

Earnings before income taxes		4,214			5,622			15,190			11,552

Income tax expense		824			1,113			3,064			2,115

Net earnings	$	3,390			4,509			12,126			9,437

Basic net earnings per share	$	0.61			0.80			2.16			1.67
Diluted net earnings per share	$	0.59			0.78			2.10			1.62
Cash dividends declared per share	$	0.17			0.15			0.49			0.60

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

	2021			2020
	(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net earnings	$	12,126			9,437
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion		3,991			3,080
Provision for (recovery of) loan losses		(863	)		3,460
Deferred income taxes		(27	)		(25	)
Gain on sale of investment securities		0			(2,145	)
Gain on sale of other real estate		(21	)		0
Write-down of other real estate		0			47
Gain on sale of other assets		(104	)		0
Restricted stock expense		(166	)		(73	)
Proceeds from sales of mortgage loans held for sale		76,086			78,526
Origination of mortgage loans held for sale		(76,033	)		(83,069	)
Change in:
Cash surrender value of life insurance		(297	)		(283	)
Right of use lease asset		562			525
Other assets		416			(219	)
Lease liability		(549	)		(508	)
Other liabilities		2,138			(677	)

Net cash provided by operating activities		17,259			8,076

Cash flows from investing activities:
Purchases of investment securities available for sale		(186,793	)		(90,233	)
Proceeds from sales, calls and maturities of investment securities available for sale		6,010			52,289
Proceeds from paydowns of investment securities available for sale		18,335			14,635
Proceeds from paydowns on other investments		132			132
Redemptions (purchases) of FHLB stock		331			(3,031	)
Net change in loans		57,552			(120,781	)
Purchases of premises and equipment		(379	)		(2,298	)
Purchases of bank owned life insurance		0			(140	)
Proceeds from sale of other assets		515			0
Proceeds from sale of other real estate and repossessions		149			0

Net cash used by investing activities		(104,148	)		(149,427	)

Cash flows from financing activities:
Net change in deposits		188,879			219,879
Net change in securities sold under agreement to repurchase		6,131			9,930
Proceeds from FHLB borrowings		0			70,000
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		(3,605	)		(2,999	)
Cash dividends paid on common stock		(2,827	)		(3,520	)

Net cash provided by financing activities		188,617			293,192

Net change in cash and cash equivalents		101,728			151,841

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

Cash and cash equivalents at end of period	$	263,308			204,228

(Dollars in thousands)
	September 30, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S Treasuries	$	7,963		39		12		7,990
U.S. Government
sponsored enterprises		14,566		289		178		14,677
Mortgage-backed securities		222,526		2,427		1,648		223,305
State and political subdivisions		153,551		4,327		945		156,933
Total	$	398,606		7,082		2,783		402,905

(Dollars in thousands)
	December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		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

(Dollars in thousands)
	September 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	$	4,994		12		0		0		4,994		12
U.S. Government
sponsored enterprises		5,386		5		3,442		173		8,828		178
Mortgage-backed securities		114,889		1,505		5,897		143		120,786		1,648
State and political subdivisions		37,729		800		3,757		145		41,486		945
Total	$	162,998		2,322		13,096		461		176,094		2,783

September 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	$	6		0		6		80,003		80,009		0
Single-family residential		850		230		1,080		257,323		258,403		0
Single-family residential -
Banco de la Gente non-traditional		450		39		489		23,554		24,043		0
Commercial		28		37		65		363,109		363,174		0
Multifamily and farmland		0		0		0		58,856		58,856		0
Total real estate loans		1,334		306		1,640		782,845		784,485		0

Loans not secured by real estate:
Commercial loans		176		0		176		94,200		94,376		0
Farm loans		0		0		0		633		633		0
Consumer loans		66		1		67		6,254		6,321		0
All other loans		8		0		8		5,182		5,190		0
Total loans	$	1,584		307		1,891		889,114		891,005		0

September 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	$	75		0		75		75		3
Single-family residential		4,506		275		4,021		4,296		80
Single-family residential -
Banco de la Gente non-traditional		12,269		0		11,383		11,383		724
Commercial		2,229		439		1,692		2,131		12
Multifamily and farmland		115		0		109		109		0
Total impaired real estate loans		19,194		714		17,280		17,994		819

Loans not secured by real estate:
Commercial loans		299		54		183		237		3
Consumer loans		12		0		8		8		0
Total impaired loans	$	19,505		768		17,471		18,239		822

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

(Dollars in thousands)
	Fair Value Measurements September 30, 2021		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	9,086		0		0		9,086
Impaired loans		17,417		0		0		17,417

(Dollars in thousands)
	Fair Value September 30, 2021		Fair Value December 31, 2020		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,086		9,139	Rate lock commitment		N/A		N/A
Impaired loans		17,417		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	%

(Dollars in thousands)
			Fair Value Measurements at September 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	263,308		263,308		0		0		263,308
Investment securities available for sale		402,905		0		402,905		0		402,905
Other investments		3,725		0		0		3,725		3,725
Mortgage loans held for sale		9,086		0		0		9,086		9,086
Loans, net		882,042		0		0		862,462		862,462
Mutual funds held in deferred
compensation trust		1,514		0		1,514		0		1,514

Liabilities:
Deposits	$	1,409,965		0		0		1,407,770		1,407,770
Securities sold under agreements
to repurchase		32,332		0		32,332		0		32,332
Junior subordinated debentures		15,464		0		15,464		0		15,464

(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

September 30, 2021
(Dollars in thousands)
	Number of Loans		Balance Outstanding		Non-accrual Balance
Land acquisition and development - commercial purposes		35	$	7,014	$	-
Land acquisition and development - residential purposes		151		20,089		-
1 to 4 family residential construction		96		18,493		-
Commercial construction		40		34,413		-
Total construction and land development		322	$	80,009	$	-

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)

July 1 - 31, 2021		1,144		$	27.85		-	$	4,000,000

August 1 - 31, 2021		201			27.87		127,597	$	394,344

September 1 - 30, 2021		281			28.16		-	$	394,344

Total		1,626	(1)	$	27.86		127,597