10-Q

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 30, 2017

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

North Carolina

(State or other jurisdiction of incorporation or organization)

000-27205	56-2132396
(Commission File No.)	(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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Yes ☒  No ☐

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

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 classes of common stock, as of the latest practicable date.  5,450,412 shares of common stock, outstanding at October 31, 2017.

INDEX

PART I. FINANCIAL INFORMATION 

		PAGE(S)
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2017 (Unaudited) and December 31, 2016 (Audited)	3
	Consolidated Statements of Earnings for the three and nine months ended September 30, 2017 and 2016 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)	7-8
	Notes to Consolidated Financial Statements (Unaudited)	9-26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27-40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	43
Item 5.	Other Information	43
Item 6.	Exhibits	43-45
Signatures		46
Certifications		47-49

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 theregistrant 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, 2016.

2

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
September 30, 2017 and December 31, 2016
(Dollars in thousands)
	September 30,	December 31,
Assets	2017	2016
	(Unaudited)	(Audited)
Cash and due from banks, including reserve requirements	$55,718	53,613
of $9,337 at 9/30/17 and $6,075 at 12/31/16
Interest-bearing deposits	37,538	16,481
Cash and cash equivalents	93,256	70,094
Investment securities available for sale	235,736	249,946
Other investments	2,680	2,635
Total securities	238,416	252,581
Mortgage loans held for sale	2,623	5,709
Loans	747,437	723,811
Less allowance for loan losses	(6,844)	(7,550)
Net loans	740,593	716,261
Premises and equipment, net	19,697	16,452
Cash surrender value of life insurance	15,452	14,952
Other real estate	-	283
Accrued interest receivable and other assets	11,516	11,659
Total assets	$1,121,553	1,087,991
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$287,794	271,851
NOW, MMDA & savings	486,051	477,054
Time, $250,000 or more	21,318	26,771
Other time	106,476	117,242
Total deposits	901,639	892,918
Securities sold under agreements to repurchase	53,307	36,434
Short-term Federal Reserve Bank borrowings	-	-
FHLB borrowings	20,000	20,000
Junior subordinated debentures	20,619	20,619
Accrued interest payable and other liabilities	9,835	10,592
Total liabilities	1,005,400	980,563
Commitments
Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized
5,000,000 shares; no shares issued and outstanding	-	-
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,450,412 shares
at September 30, 2017 and 5,417,800 shares at December 31, 2016	45,102	44,187
Retained earnings	66,539	60,254
Accumulated other comprehensive income	4,512	2,987
Total shareholders' equity	116,153	107,428
Total liabilities and shareholders' equity	$1,121,553	1,087,991
See accompanying Notes to Consolidated Financial Statements.

3

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three and Nine Months Ended September 30, 2017 and 2016

(Dollars in thousands, except per share amounts)

	Three months ended		Nine months ended
	September 30,		September 30,
	2017	2016	2017	2016
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Interest income:
Interest and fees on loans	$8,966	8,188	25,935	24,185
Interest on due from banks	60	32	138	67
Interest on investment securities:
U.S. Government sponsored enterprises	578	603	1,795	1,910
State and political subdivisions	1,047	1,105	3,198	3,350
Other	47	54	157	191
Total interest income	10,698	9,982	31,223	29,703
Interest expense:
NOW, MMDA & savings deposits	156	126	431	367
Time deposits	112	142	360	452
FHLB borrowings	211	426	604	1,248
Junior subordinated debentures	152	122	432	353
Other	19	12	43	30
Total interest expense	650	828	1,870	2,450
Net interest income	10,048	9,154	29,353	27,253
Provision for (reduction of provision for) loan losses	(218)	(360)	(405)	(1,108)
Net interest income after provision for loan losses	10,266	9,514	29,758	28,361
Non-interest income:
Service charges	1,140	1,163	3,340	3,291
Other service charges and fees	145	210	447	746
Gain on sale of securities	-	-	-	324
Mortgage banking income	280	426	945	1,088
Insurance and brokerage commissions	221	163	568	476
Gain/(loss) on sale and write-down of
other real estate	43	(16)	(240)	64
Miscellaneous	1,675	1,468	4,601	4,320
Total non-interest income	3,504	3,414	9,661	10,309
Non-interest expense:
Salaries and employee benefits	4,933	4,829	15,038	14,114
Occupancy	1,669	1,755	4,981	5,243
Professional fees	303	429	788	1,603
Advertising	247	313	859	623
Debit card expense	320	271	894	870
FDIC Insurance	87	71	260	406
Other	1,792	1,930	5,661	5,339
Total non-interest expense	9,351	9,598	28,481	28,198
Earnings before income taxes	4,419	3,330	10,938	10,472
Income tax expense	1,177	872	2,680	2,597
Net earnings	$3,242	2,458	8,258	7,875
Basic net earnings per share	$0.59	0.45	1.52	1.43
Diluted net earnings per share	$0.58	0.44	1.49	1.42
Cash dividends declared per share	$0.12	0.10	0.36	0.28
See accompanying Notes to Consolidated Financial Statements.

4

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2017 and 2016

(Dollars in thousands)

	Three months ended		Nine months ended
	September 30,		September 30,
	2017	2016	2017	2016
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Net earnings	$3,242	2,458	8,258	7,875
Other comprehensive income (loss):
Unrealized holding (losses) gains on securities
available for sale	(666)	(1,676)	2,027	2,597
Reclassification adjustment for gains on
securities available for sale
included in net earnings	-	-	-	(324)
Total other comprehensive (loss) income,
before income taxes	(666)	(1,676)	2,027	2,273
Income tax (benefit) expense related to other
comprehensive (loss) income:
Unrealized holding (losses) gains on securities
available for sale	(239)	(614)	502	951
Reclassification adjustment for gains
on securities available for sale
included in net earnings	-	-	-	(126)
Total income tax expense (benefit) related to
other comprehensive income (loss)	(239)	(614)	502	825
Total other comprehensive (loss) income,
net of tax	(427)	(1,062)	1,525	1,448
Total comprehensive income	$2,815	1,396	9,783	9,323
See accompanying Notes to Consolidated Financial Statements.

5

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2017 and 2016
(Dollars in thousands)
				Accumulated
				Other
	Common Stock		Retained	Comprehensive
	Shares	Amount	Earnings	Income	Total
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Balance, December 31, 2016	5,417,800	$44,187	60,254	2,987	107,428
Common stock repurchase	-	-	-	-	-
Cash dividends declared on
common stock	-	-	(1,973)	-	(1,973)
Restricted stock units exercised	32,612	915	-	-	915
Net earnings	-	-	8,258	-	8,258
Change in accumulated other
comprehensive income, net of tax	-	-	-	1,525	1,525
Balance, September 30, 2017	5,450,412	$45,102	66,539	4,512	116,153
Balance, December 31, 2015	5,510,538	$46,171	53,183	5,510	104,864
Common stock repurchase	(92,738)	(1,983)	-	-	(1,983)
Cash dividends declared on
common stock	-	-	(1,556)	-	(1,556)
Net earnings	-	-	7,875	-	7,875
Change in accumulated other
comprehensive income, net of tax	-	-	-	1,448	1,448
Balance, September 30, 2016	5,417,800	$44,188	59,502	6,958	110,648
See accompanying Notes to Consolidated Financial Statements.

6

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2017 and 2016

(Dollars in thousands)

	2017	2016
	(Unaudited)	(Unaudited)
Cash flows from operating activities:
Net earnings	$8,258	7,875
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion	3,764	4,181
Reduction of provision for loan losses	(405)	(1,108)
Deferred income taxes	(1,122)
Gain on sale of investment securities	-	(324)
Gain on sale of other real estate	-	(81)
Write-down of other real estate	240	17
Restricted stock expense	32	476
Origination of mortgage loans held for sale	(46,173)	(50,813)
Proceeds from sales of mortgage loans held for sale	49,259	52,186
Change in:
Cash surrender value of life insurance	(500)	(307)
Other assets	763	897
Other liabilities	(408)	49
Net cash provided by operating activities	14,274	12,441
Cash flows from investing activities:
Purchases of investment securities available for sale	(6,492)	(12,642)
Proceeds from sales, calls and maturities of investment securities
available for sale	6,535	2,899
Proceeds from paydowns of investment securities available for sale	13,963	15,946
Purchases of FHLB stock	-	-
FHLB stock redemption	(45)	2
Net change in loans	(23,927)	(24,639)
Purchases of premises and equipment	(4,810)	(1,257)
Purchases of bank owned life insurance	-	-
Proceeds from sale of premises and equipment	-	-
Proceeds from sale of other real estate and repossessions	43	1,052
Net cash used by investing activities	(14,733)	(18,639)
Cash flows from financing activities:
Net change in deposits	8,721	29,772
Net change in securities sold under agreement to repurchase	16,873	23,046
Proceeds from Fed Funds purchased	-	(8,985)
Repayments of Fed Funds purchased	-	8,985
Common stock repurchased	-	(1,983)
Cash dividends paid on common stock	(1,973)	(1,556)
Net cash provided by financing activities	23,621	49,279
Net change in cash and cash equivalents	23,162	43,081
Cash and cash equivalents at beginning of period	70,094	39,763
Cash and cash equivalents at end of period	$93,256	82,844

7

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Nine Months Ended September 30, 2017 and 2016

(Dollars in thousands)

	2017	2016
	(Unaudited)	(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$1,858	2,425
Income taxes	$872	3,180
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities
available for sale, net	$1,525	1,448
Change in unrealized gain on derivative financial
instruments, net	$-	-
Issuance of accrued restricted stock units	$(915)	-
Transfers of loans to other real estate and repossessions	$-	275
See accompanying Notes to Consolidated Financial Statements.

8

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

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices are now branded as Bank branches and considered a separate market territory of the Bank as they offer normal and customary banking services as are offered in the Bank’s other branches such as the taking of deposits and the making of loans.

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2016) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management of the Company 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 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (Topic 606): Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance on therecognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU No. 2014-09 is effective for reporting periods beginning after December 15, 2017.

The Company will apply ASU No. 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU No. 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues will not be affected. The Company is currently assessing its revenue contracts related to revenue streams that are within the scope of ASU No. 2014-09. The Company’s accounting policies will not change materially since the principles of revenue recognition from ASU No. 2014-09 are largely consistent with existing guidance and the Company’s current practices. The Company has not identified material changes to the timing or amount of revenue recognition. However, the Company does anticipate that it will make changes to its revenue-related disclosures. The Company will provide qualitative disclosures of its performance obligations related to its revenue recognition and will continue to evaluate disaggregation for significant categories of revenue within the scope of ASU No. 2014-09.

In February 2016, FASB issued ASU No. 2016-02, (Topic 842): Leases. ASU No. 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The Company expects to adopt ASU No. 2016-02 using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for its existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. The Company has started an initial evaluation of its leasing contracts and activities and has started developing its methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $4.6 million). While the Company does not expect there to be a material change in the timing of expense recognition, it is too early in the evaluation process to determine if there will be a material change to the timing of expense recognition. The Company is evaluating its existing disclosures and may need to provide additional information as a result of adoption of ASU No. 2016-02.

9

In June 2016, FASB issued ASU No. 2016-13, (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.

The Company will apply the amendments to ASU No. 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in the first quarter of 2019, the Company does not expect to elect that option. The Company is evaluating the impact of ASU No. 2016-13 on its consolidated financial statements. The Company anticipates that ASU No. 2016-13 will have no material impact on the recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments. 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.

In January 2017, FASB issued ASU No. 2017-01, (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 adds guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In January 2017, FASB issued ASU No. 2017-04, (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 provides guidanceto simplify the accounting related to goodwill impairment. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope of established guidance on nonfinancial asset derecognition (issued as part of the new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers), as well as the accounting for partial sales of nonfinancial assets. ASU No. 2017-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-07, (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs. ASU No. 2017-07 amended the requirements related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU No. 2017-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-08, (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU No. 2017-08 amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium. ASU No. 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

10

In May 2017, FASB issued ASU No. 2017-09, (Topic 718): Scope of Modification Accounting. ASU No. 2017-09 amendedthe requirements related to changes to the terms or conditions of a share-based payment award. ASU No. 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. 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.

(2)          Investment Securities

Investment securities available for sale at September 30, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
	September 30, 2017
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$55,947	1,142	196	56,893
U.S. Government
sponsored enterprises	40,815	290	151	40,954
State and political subdivisions	130,175	5,954	20	136,109
Corporate bonds	1,500	30	-	1,530
Trust preferred securities	250	-	-	250
Total	$228,687	7,416	367	235,736

(Dollars in thousands)
	December 31, 2016
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$66,654	1,221	290	67,585
U.S. Government
sponsored enterprises	38,188	308	274	38,222
State and political subdivisions	137,832	4,176	152	141,856
Corporate bonds	1,500	33	-	1,533
Trust preferred securities	750	-	-	750
Total	$244,924	5,738	716	249,946

The current fair value and associated unrealized losses on investments in securities with unrealized losses at September 30, 2017 and December 31, 2016 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, 2017
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$10,540	95	4,792	101	15,332	196
U.S. Government
sponsored enterprises	5,424	47	10,762	104	16,186	151
State and political subdivisions	545	2	986 24	18	1,531	20
Total	$16,509	144	16,540	223	33,049	367

11

(Dollars in thousands)

	December 31, 2016
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$15,594	290	-	-	15,594	290
U.S. Government
sponsored enterprises	10,120	94	9,562	180	19,682	274
State and political subdivisions	10,441	123	561 24	29	11,002	152
Total	$36,155	507	10,123	209	46,278	716

At September 30, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $367,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2017 tables above, three out of 160 securities issued by state and political subdivisions contained unrealized losses, 17 out of 78 securities issued by U.S. Government sponsored enterprises contained unrealized losses, and no securities issued by corporations 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, 2017, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2017
(Dollars in thousands)
	Amortized Cost	Estimated Fair Value
Due within one year	$13,299 12,273	13,397
Due from one to five years	95,096	99,142
Due from five to ten years	55,333	57,069
Due after ten years	8,762	8,985
Mortgage-backed securities	55,947	56,893
Trust preferred securities	250	250
Total	$228,687	235,736

No securities available for sale were sold during the nine months ended September 30, 2017. Proceeds from sales of securities available for sale during the nine months ended September 30, 2016 were $804,000 and resulted in gross gains of $324,000.

Securities with a fair value of approximately $88.2 million and $95.6 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required by law.

12

(3)          Loans

Major classifications of loans at September 30, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)
	September 30, 2017	December 31, 2016
Real estate loans:
Construction and land development	$75,483	61,749
Single-family residential	247,184	240,700
Single-family residential -
Banco de la Gente stated income	37,840	40,189
Commercial	245,279	247,521
Multifamily and farmland	28,662	21,047
Total real estate loans	634,448	611,206
Loans not secured by real estate:
Commercial loans	87,019	87,596
Farm loans	895	-
Consumer loans	10,005	9,832
All other loans	15,070	15,177
Total loans	747,437	723,811
Less allowance for loan losses	6,844	7,550
Total net loans	$740,593	716,261

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 and Durham 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, 2017, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

●

Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2017, single-family residential loans comprised approximately 38% of the Bank’s total loan portfolio, and include Banco’s single-family residential stated income loans, which were approximately 5% of the Bank’s total loan portfolio.

●

Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of September 30, 2017, commercial real estate loans comprised approximately 33% of the Bank’s total loan portfolio.

●

Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2017, commercial loans comprised approximately 12% of the Bank’s total loan portfolio.

13

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

The following tables present an age analysis of past due loans, by loan type, as of September 30, 2017 and December 31, 2016:

September 30, 2017
(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	$206	-	206	75,277	75,483	-
Single-family residential	2,268	416	2,684	244,500	247,184	-
Single-family residential -
Banco de la Gente stated income	1,363	462	1,825	36,015	37,840	-
Commercial	27	229	256	245,023	245,279	-
Multifamily and farmland	-	12	12	28,650	28,662	-
Total real estate loans	3,864	1,119	4,983	629,465	634,448	-
Loans not secured by real estate:
Commercial loans	121	1,013	1,134	85,885	87,019	-
Farm loans	-	-	-	895	895	-
Consumer loans	93	5	98	9,907	10,005	-
All other loans	-	-	-	15,070	15,070	-
Total loans	$4,078	2,137	6,215	741,222	747,437	-

December 31, 2016
(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	$-	10	10	61,739	61,749	-
Single-family residential	4,890	80	4,970	235,730	240,700	-
Single-family residential -
Banco de la Gente stated income	5,250	249	5,499	34,690	40,189	-
Commercial	342	126	468	247,053	247,521	-
Multifamily and farmland	471	-	471	20,576	21,047	-
Total real estate loans	10,953	465	11,418	599,788	611,206	-
Loans not secured by real estate:
Commercial loans	273	-	273	87,323	87,596	-
Farm loans	-	-	-	-	-	-
Consumer loans	68	6	74	9,758	9,832	-
All other loans	3	-	3	15,174	15,177	-
Total loans	$11,297	471	11,768	712,043	723,811	-

14

The following table presents non-accrual loans as of September 30, 2017 and December 31, 2016:

(Dollars in thousands)
	September 30, 2017	December 31, 2016
Real estate loans:
Construction and land development	$16	22
Single-family residential	1,728	1,662
Single-family residential -
Banco de la Gente stated income	1,502	1,340
Commercial	1,422	669
Multifamily and farmland	12	78
Total real estate loans	4,680	3,771
Loans not secured by real estate:
Commercial loans	229	21
Consumer loans	22	33
Total	$4,931	3,825

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $21.3 million, $23.5 million and $22.9 million at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Interest income recognized on accruing impaired loans was $1.1 million, $871,000 and $1.2 million for the nine months ended September 30, 2017, the nine months ended September 30, 2016 and the year ended December 31, 2016, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following table presents impaired loans as of September 30, 2017:

September 30, 2017
(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	$216	-	221	221	7
Single-family residential	4,978	1,142	4,232	5,374	42
Single-family residential -
Banco de la Gente stated income	17,127	-	17,743	17,743	1,123
Commercial	3,513	1,619	2,181	3,800	45
Multifamily and farmland	12	-	78	78	-
Total impaired real estate loans	25,846	2,761	24,455	27,216	1,217
Loans not secured by real estate:
Commercial loans	233	229	39	268	-
Consumer loans	179	-	189	189	3
Total impaired loans	$26,258	2,990	24,683	27,673	1,220

15

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, 2017 and 2016.

(Dollars in thousands)
	Three months ended				Nine months ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
	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	$246	5	369	3	253	11	375	10
Single-family residential	4,783	71	6,556	40	5,113	202	8,921	122
Single-family residential -
Banco de la Gente stated income	17,283	225	17,395	207	17,235	694	17,673	657
Commercial	3,852	18	4,013	24	3,712	144	5,376	73
Multifamily and farmland	12	-	78	-	45	-	79	3
Total impaired real estate loans	26,176	319	28,411	274	26,358	1,051	32,424	865
Loans not secured by real estate:
Commercial loans	243	-	116	-	130	3	123	-
Consumer loans	183	3	225	2	206	8	235	6
Total impaired loans	$26,602	322	28,752	276	26,694	1,062	32,782	871

The following table presents impaired loans as of and for the year ended December 31, 2016:

December 31, 2016
(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	$282	-	278	278	11	330	13
Single-family residential	5,354	703	4,323	5,026	47	7,247	164
Single-family residential -
Banco de la Gente stated income	18,611	-	18,074	18,074	1,182	17,673	861
Commercial	3,750	1,299	2,197	3,496	166	4,657	152
Multifamily and farmland	78	-	78	78	-	78	-
Total impaired real estate loans	28,075	2,002	24,950	26,952	1,406	29,985	1,190
Loans not secured by real estate:
Commercial loans	27	-	27	27	-	95	-
Consumer loans	211	-	202	202	3	222	8
Total impaired loans	$28,313	2,002	25,179	27,181	1,409	30,302	1,198

16

Changes in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Stated Income	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
Nine months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$1,152	2,126	1,377	1,593	52	675	-	204	371	7,550
Charge-offs	-	(64)	-	-	(66)	(63)	-	(288)	-	(481)
Recoveries	12	26	-	17	-	23	-	102	-	180
Provision	(178)	(211)	(101)	(192)	86	(74)	-	143	122	(405)
Ending balance	$986	1,877	1,276	1,418	72	561	-	161	493	6,844
Three months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$1,183	1,819	1,293	1,463	75	704	-	158	472	7,167
Charge-offs	-	(20)	-	-	-	(26)	-	(106)	-	(152)
Recoveries	2	9	-	4	-	8	-	24	-	47
Provision	(199)	69	(17)	(49)	(3)	(125)	-	85	21	(218)
Ending balance	$986	1,877	1,276	1,418	72	561	-	161	493	6,844
Allowance for loan losses at September 30, 2017:
Ending balance: individually
evaluated for impairment	$-	-	1,104	42	-	-	-	-	-	1,146
Ending balance: collectively
evaluated for impairment	986	1,877	172	1,376	72	561	-	161	493	5,698
Ending balance	$986	1,877	1,276	1,418	72	561	-	161	493	6,844
Loans at September 30, 2017:
Ending balance	$75,483	247,184	37,840	245,279	28,662	87,019	895	25,075	-	747,437
Ending balance: individually
evaluated for impairment	$10	1,875	15,732	3,069	-	229	-	-	-	20,915
Ending balance: collectively
evaluated for impairment	$75,473	245,309	22,108	242,210	28,662	86,790	895	25,075	-	726,522

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Stated Income	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
Nine months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$2,185	2,534	1,460	1,917	-	842	-	172	479	9,589
Charge-offs	-	(158)	-	(106)	-	(129)	-	(361)	-	(754)
Recoveries	8	18	-	15	-	165	-	112	-	318
Provision	(808)	(388)	(60)	(250)	47	(118)	-	291	178	(1,108)
Ending balance	$1,385	2,006	1,400	1,576	47	760	-	214	657	8,045
Three months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$1,582	2,233	1,354	1,650	46	803	-	234	638	8,540
Charge-offs	-	(35)	-	-	-	(89)	-	(122)	-	(246)
Recoveries	2	6	-	5	-	60	-	38	-	111
Provision	(199)	(198)	46	(79)	1	(14)	-	64	19	(360)
Ending balance	$1,385	2,006	1,400	1,576	47	760	-	214	657	8,045
Allowance for loan losses at September 30, 2016:
Ending balance: individually
evaluated for impairment	$-	-	1,164	167	-	-	-	-	-	1,331
Ending balance: collectively
evaluated for impairment	1,385	2,006	236	1,409	47	760	-	214	657	6,714
Ending balance	$1,385	2,006	1,400	1,576	47	760	-	214	657	8,045
Loans at September 30, 2016:
Ending balance	$59,456	231,958	40,934	240,150	18,727	94,790	-	27,004	-	713,019
Ending balance: individually
evaluated for impairment	$-	1,019	16,890	3,586	-	-	-	-	-	21,495
Ending balance: collectively
evaluated for impairment	$59,456	230,939	24,044	236,564	18,727	94,790	-	27,004	-	691,524

17

The provision for loan losses for the three months ended September 30, 2017 was a credit of $218,000, as compared to a credit of $360,000 for the three months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

The provision for loan losses for the nine months ended September 30, 2017 was a credit of $405,000, as compared to a credit of $1.1 million for the nine months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

18

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2017 and December 31, 2016:

September 30, 2017
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Stated Income	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$-	11,007	-	-	-	562	-	838	-	12,407
2- High Quality	11,541	118,964	-	35,461	1,986	18,836	-	3,502	1,161	191,451
3- Good Quality	51,307	87,337	15,318	190,950	23,565	62,767	756	5,015	13,096	450,111
4- Management Attention	6,063	21,783	15,318	13,366	1,942	4,362	139	582	813	64,368
5- Watch	6,285	4,679	3,506	4,034	1,157	235	-	24	-	19,920
6- Substandard	287	3,414	3,698	1,468	12	257	-	44	-	9,180
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$75,483	247,184	37,840	245,279	28,662	87,019	895	10,005	15,070	747,437

December 31, 2016

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Stated Income	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$-	14,996	-	-	-	541	-	959	-	16,496
2- High Quality	9,784	109,809	-	39,769	2,884	26,006	-	3,335	2,507	194,094
3- Good Quality	33,633	82,147	16,703	176,109	14,529	55,155	-	4,842	10,921	394,039
4- Management Attention	10,892	25,219	15,580	24,753	2,355	5,586	-	619	1,749	86,753
5- Watch	7,229	4,682	3,943	4,906	1,201	246	-	31	-	22,238
6- Substandard	211	3,847	3,963	1,984	78	62	-	42	-	10,187
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	4	-	4
Total	$61,749	240,700	40,189	247,521	21,047	87,596	-	9,832	15,177	723,811

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $5.9 million at September 30, 2017 and December 31, 2016, 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 $22,000 and $81,000 in performing loans classified as TDR loans at September 30, 2017 and December 31, 2016, respectively.

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2017.

Three and nine months ended September 30, 2017
(Dollars in thousands)
	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential	2	$22	22
Total real estate TDR loans	2	22	22
Total TDR loans	2	$22	22

During the three and nine months ended September 30, 2017, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

19

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2016.

Three and nine months ended September 30, 2016

(Dollars in thousands)
	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential	1	$41	41
Total real estate TDR loans	1	41	41
Total TDR loans	1	$41	41

During the three and nine months ended September 30, 2016, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan.

There were no loans modified as TDR that defaulted during the three and nine months ended September 30, 2017 and 2016, 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.

(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 year 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, 2017 and 2016 is as follows:

For the three months ended September 30, 2017
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$3,242	5,450,412	$0.59
Effect of dilutive securities:
Restricted stock units	-	87,581
Diluted earnings per share	$3,242	5,537,993	$0.58

For the nine months ended September 30, 2017
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$8,258	5,440,995	$1.52
Effect of dilutive securities:
Restricted stock units	-	85,969
Diluted earnings per share	$8,258	5,526,964	$1.49

20

For the three months ended September 30, 2016
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$2,458	5,470,826	$0.45
Effect of dilutive securities:
Restricted stock units	-	74,042
Diluted earnings per share	$2,458	5,544,868	$0.44

For the nine months ended September 30, 2016
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$7,875	5,497,204	$1.43
Effect of dilutive securities:
Restricted stock units	-	68,122
Diluted earnings per share	$7,875	5,565,326	$1.42

(5)

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “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 258,780 shares are currently reserved for possible issuance under the Plan. All stock-based rights under the Plan must be granted or awarded by May 7, 2019 (or ten years from the Plan effective date).

The Company granted 29,514 restricted stock units under the Plan at a grant date fair value of $7.90 per share during the first quarter of 2012, of which 5,355 restricted stock units were forfeited by the executive officers of the Company as required by the agreement with the U.S. Department of the Treasury (“UST”) in conjunction with the Company’s participation in the Capital Purchase Program (“CPP”) under the Troubled Asset Relief Program (“TARP”). In July 2012, the Company granted 5,355 restricted stock units at a grant date fair value of $8.25 per share. The Company granted 26,795 restricted stock units under the Plan at a grant date fair value of $11.90 per share during the second quarter of 2013. The Company granted 21,056 restricted stock units under the Plan at a grant date fair value of $15.70 per share during the first quarter of 2014. The Company granted 15,075 restricted stock units under the Plan at a grant date fair value of $17.97 per share during the first quarter of 2015. The Company granted 5,040 restricted stock units under the Plan at a grant date fair value of $18.60 per share during the first quarter of 2016. The Company granted 3,740 restricted stock units under the Plan at a grant date fair value of $27.50 per share during the first quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the grant date for the 2013, 2015, 2016 and 2017 grants and three years from the grant date for the 2014 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of September 30, 2017, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $389,000.

The Company recognized compensation expense for restricted stock unit awards granted under the Plan of $566,000 and $476,000 for the nine months ended September 30, 2017 and 2016, respectively.

(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.

21

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

●

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

●

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

●

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at 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

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

Other Real Estate

The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Other real estate is reported in the Level 3 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 2 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.

22

Federal Home Loan Bank (“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 2 fair value category.

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2017 and December 31, 2016.

(Dollars in thousands)
	September 30, 2017
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$56,893	-	56,893	-
U.S. Government
sponsored enterprises	$40,954	-	40,954	-
State and political subdivisions	$136,109	-	136,109	-
Corporate bonds	$1,530	-	1,530	-
Trust preferred securities	$250	-	-	250

(Dollars in thousands)
	December 31, 2016
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$67,585	-	67,585	-
U.S. Government
sponsored enterprises	$38,222	-	38,222	-
State and political subdivisions	$141,856	-	141,856	-
Corporate bonds	$1,533	-	1,533	-
Trust preferred securities	$750	-	-	750

23

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the nine months ended September 30, 2017.

(Dollars in thousands)
	Investment Securities Available for Sale
	Level 3 Valuation
Balance, beginning of period	$750
Change in book value	-
Change in gain/(loss) realized and unrealized	-
Purchases/(sales and calls)	(500)
Transfers in and/or (out) of Level 3	-
Balance, end of period	$250
Change in unrealized gain/(loss) for assets still held in Level 3	$-

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at September 30, 2017 and December 31, 2016 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, 2017	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$2,623	-	-	2,623
Impaired loans	$26,453	-	-	26,453
Other real estate	$-	-	-	-

(Dollars in thousands)
	Fair Value Measurements December 31, 2016	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$5,709	-	-	5,709
Impaired loans	$25,772	-	-	25,772
Other real estate	$283	-	-	283

(Dollars in thousands)
	Fair Value September 30, 2017	Fair Value December 31, 2016	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$2,623	5,709	Rate lock commitment	N/A	N/A
Impaired loans	$26,453	25,772	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%
Other real estate	$-	283	Appraised value	Discounts to reflect current market conditions and estimated costs to sell	0 - 25%

24

The carrying amount and estimated fair value of financial instruments at September 30, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
		Fair Value Measurements at September 30, 2017
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$93,256	93,256	-	-	93,256
Investment securities available for sale	$235,736	-	235,486	250	235,736
Other investments	$2,680	-	-	2,680	2,680
Mortgage loans held for sale	$2,623	-	-	2,623	2,623
Loans, net	$740,593	-	-	745,481	745,481
Cash surrender value of life insurance	$15,452	-	15,452	-	15,452
Liabilities:
Deposits	$901,639	-	-	890,957	890,957
Securities sold under agreements
to repurchase	$53,307	-	53,307	-	53,307
FHLB borrowings	$20,000	-	19,967	-	19,967
Junior subordinated debentures	$20,619	-	20,619	-	20,619

(Dollars in thousands)
		Fair Value Measurements at December 31, 2016
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$70,094	70,094	-	-	70,094
Investment securities available for sale	$249,946	-	249,196	750	249,946
Other investments	$2,635	-	-	2,635	2,635
Mortgage loans held for sale	$5,709	-	-	5,709	5,709
Loans, net	$716,261	-	-	720,675	720,675
Cash surrender value of life insurance	$14,952	-	14,952	-	14,952
Liabilities:
Deposits	$892,918	-	-	884,510	884,510
Securities sold under agreements
to repurchase	$36,434	-	36,434	-	36,434
FHLB borrowings	$20,000	-	18,864	-	18,864
Junior subordinated debentures	$20,619	-	20,619	-	20,619

(7)          Regulatory Matters

On August 31, 2015, the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Office of the Commissioner of Banks (“Commissioner”) issued a Consent Order (the “Order”) in connection with compliance by the Bank with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”). The Order was issued pursuant to the consent of the Bank. In consenting to the issuance of the Order, the Bank did not admit or deny any unsafe or unsound banking practices or violations of law or regulation.

The Order required the Bank to take certain affirmative actions to comply with its obligations under the BSA, including, without limitation, strengthening its Board of Directors’ oversight of BSA activities; reviewing, enhancing, adopting and implementing a revised BSA compliance program; completing a BSA risk assessment; developing a revised system of internal controls designed to ensure full compliance with the BSA; reviewing and revising customer due diligence and risk assessment processes, policies and procedures; developing, adopting and implementing effective BSA training programs; assessing BSA staffing needs and resources and appointing a qualified BSA officer; establishing an independent BSA testing program; ensuring that all reports required by the BSA are accurately and properly filed and engaging an independent firm to review past account activity to determine whether suspicious activity was properly identified and reported.

During the third quarter of 2017 the Bank received notice that the Order was terminated effective August 30, 2017.

25

(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 other than the FHLB borrowings prepayment noted below.

On October 26, 2017, the Bank repaid the remaining FHLB borrowings totaling $20.0 million. Prepayment penalties totaling $508,000 will be reflected in fourth quarter 2017 non-interest expense and will be partially offset by a reduction of approximately $150,000 in fourth quarter 2017 interest expense based on current interest rates.

26

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

The following is a discussion of our financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors and the Company’s Consolidated Financial Statements and Notes thereto on pages A-24 through A-67 of the Company’s 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

Introduction

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

Overview

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

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

Current economic conditions, while not as robust as those experienced in the pre-crisis period from 2004 to 2007, have stabilized such that businesses in our market area are growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity, however, continues to limit the level of activity in our markets.

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.

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.

27

The Federal Reserve maintained the Federal Funds rate at 0.25% from December 2008 to December 2015 before increasing the Fed Funds rate to 0.50% on December 16, 2015, 0.75% on December 14, 2016, 1.00% on March 15, 2017 and 1.25% on June 14, 2017. This continued period of historically low interest rates has presented a challenge to the Company to maintain its net interest margin as loan rates fell and remained low, primarily because of competition for credit worthy customers. The cost of deposits has also fallen but has reached the point where there is little room left to reduce this cost. While the 0.25% Fed Funds rate increases in December 2015, December 2016, March 2017 and June 2017 will be helpful, the negative impact of such low interest rates will remain until the Fed Funds rate increases to levels approaching the historical norms experienced prior to the crisis beginning in 2008.

On August 31, 2015, the FDIC and the Commissioner issued the Order in connection with compliance by the Bank with the BSA. The Order was issued pursuant to the consent of the Bank. In consenting to the issuance of the Order, the Bank did not admit or deny any unsafe or unsound banking practices or violations of law or regulation.

The Order required the Bank to take certain affirmative actions to comply with its obligations under the BSA, including, without limitation, strengthening its Board of Directors’ oversight of BSA activities; reviewing, enhancing, adopting and implementing a revised BSA compliance program; completing a BSA risk assessment; developing a revised system of internal controls designed to ensure full compliance with the BSA; reviewing and revising customer due diligence and risk assessment processes, policies and procedures; developing, adopting and implementing effective BSA training programs; assessing BSA staffing needs and resources and appointing a qualified BSA officer; establishing an independent BSA testing program; ensuring that all reports required by the BSA are accurately and properly filed and engaging an independent firm to review past account activity to determine whether suspicious activity was properly identified and reported.

During the third quarter of 2017 the Bank received notice that the Order was terminated effective August 30, 2017.

Summary of Significant Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

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

Results of Operations

Summary. Net earnings were $3.2 million or $0.59 basic net earnings per share and $0.58 diluted net earnings per share for the three months ended September 30, 2017, as compared to $2.5 million or $0.45 basic net earnings per share and $0.44 diluted net earnings per share for the same period one year ago. The increase in third quarter net earnings is primarily attributable to an increase in net interest income, an increase in non-interest income and a decrease in non-interest expense, which were partially offset by a decrease in the credit to the provision for loan losses, as discussed below.

The annualized return on average assets was 1.17% for the three months ended September 30, 2017, compared to 0.90% for the same period one year ago, and annualized return on average shareholders’ equity was 11.14% for the three months ended September 30, 2017, compared to 8.68% for the same period one year ago.

Year-to-date net earnings as of September 30, 2017 were $8.3 million or $1.52 basic net earnings per share and $1.49 diluted net earnings per share, as compared to $7.9 million or $1.43 basic net earnings per share and $1.42 diluted net earnings per share for the same period one year ago. The increase in year-to-date net earnings is primarily attributable to an increase in net interest income, which was partially offset by a decrease in the credit to the provision for loan losses, a decrease in non-interest income and an increase in non-interest expense, which were partially offset by an increase in net interest income, as discussed below.

28

The annualized return on average assets was 1.01% for the nine months ended September 30, 2017, compared to 0.99% for the same period one year ago, and annualized return on average shareholders’ equity was 9.59% for the nine months ended September 30, 2017, compared to 9.29% for the same period one year ago.

Net Interest Income. Net interest income, the major component of the Company’s net earnings, was $10.0 million for the three months ended September 30, 2017, compared to $9.2 million for the three months ended September 30, 2016. The increase in net interest income was primarily due to a $716,000 increase in interest income, which was primarily attributable to an increase in the average outstanding balance of loans and a 0.75% increase in the prime rate since September 2016, combined with a $178,000 decrease in interest expense, which was primarily attributable to a decrease in the average outstanding balances of FHLB borrowings and time deposits during the three months ended September 30, 2017, as compared to the same period one year ago.

Interest income was $10.7 million for the three months ended September 30, 2017, compared to $10.0 million for the three months ended September 30, 2016. The increase in interest income was primarily due to an increase in interest income on loans, which was partially offset by a decrease in interest income on investment securities. During the quarter ended September 30, 2017, average loans increased $36.9 million to $746.6 million from $709.7 million for the quarter ended September 30, 2016. During the quarter ended September 30, 2017, average investment securities available for sale decreased $21.2 million to $231.1 million from $252.3 million for the quarter ended September 30, 2016. The average yield on loans for the quarters ended September 30, 2017 and 2016 was 4.76% and 4.59%, respectively. The average yield on investment securities available for sale was 3.77% and 3.63% for the quarters ended September 30, 2017 and 2016, respectively. The average yield on earning assets was 4.45% and 4.23% for the quarters ended September 30, 2017 and 2016, respectively.

  Interest expense was $650,000 for the three months ended September 30, 2017, compared to $828,000 for the three months ended September 30, 2016. The decrease in interest expense was the result of lower cost of funds and reductions in FHLB borrowings and certificates of deposit. The average rate paid on interest-bearing checking and savings accounts was 0.13% and 0.11% for the three months ended September 30, 2017 and 2016, respectively. The average rate paid on certificates of deposit was 0.34% for the three months ended September 30, 2017, as compared to 0.38% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.37% for the three months ended September 30, 2017, as compared to 0.46% for the same period one year ago. During the quarter ended September 30, 2017, average certificates of deposit decreased $20.3 million to $129.6 million from $149.9 million for the quarter ended September 30, 2016. Average FHLB borrowings decreased $23.5 million to $20.0 million for the three months ended September 30, 2017 from $43.5 million for the three months ended September 30, 2016.

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 30, 2017 and 2016. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 35.98% for securities that are both federal and state tax exempt and an effective tax rate of 32.98% 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.

29

	Three months ended			Three months ended
	September 30, 2017			September 30, 2016
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans receivable	$746,633	8,966	4.76%	$709,742	8,189	4.59%
Investments - taxable	62,730	409	2.59%	78,033	454	2.31%
Investments - nontaxable*	171,704	1,798	4.15%	178,500	1,869	4.17%
Other	19,725	59	1.19%	26,327	32	0.48%
Total interest-earning assets	1,000,792	11,232	4.45%	992,602	10,544	4.23%
Non-interest earning assets:
Cash and due from banks	53,828			47,263
Allowance for loan losses	( 7,129)			( 8,603)
Other assets	54,095			55,894
Total assets	$1,101,586			$1,087,156
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$476,851	156	0.13%	$453,008	126	0.11%
Time deposits	129,559	112	0.34%	149,914	142	0.38%
FHLB borrowings	20,000	211	4.19%	43,500	426	3.90%
Trust preferred securities	20,619	152	2.92%	20,619	122	2.35%
Other	52,718	19	0.14%	47,217	12	0.10%
Total interest-bearing liabilities	699,747	650	0.37%	714,258	828	0.46%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits	282,336			257,707
Other liabilities	3,991			2,610
Shareholders' equity	115,512			112,581
Total liabilities and shareholder's equity	$1,101,586			$1,087,156
Net interest spread		$10,582	4.08%		9,716	3.77%
Net yield on interest-earning assets			4.20%			3.89%
Taxable equivalent adjustment
Investment securities		$534			562
Net interest income		$10,048			9,154

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $40.1 million in 2017 and $39.5 million in 2016. Tax rates of 3.00% and 4.00% were used to calculate the tax equivalent yield on these securities in 2017 and 2016, respectively.

Year-to-date net interest income as of September 30, 2017 was $29.4 million compared to $27.3 million for the same period one year ago. The increase in net interest income was primarily due to a $1.5 million increase in interest income, which was primarily attributable to an increase in the average outstanding balance of loans and a 0.75% increase in the prime rate since September 2016, combined with a $580,000 decrease in interest expense, which was primarily attributable to a decrease in the average outstanding balances of FHLB borrowings and time deposits during the nine months ended September 30, 2017, as compared to the same period one year ago.

Interest income was $31.2 million for the nine months ended September 30, 2017, compared to $29.7 million for the nine months ended September 30, 2016. The increase in interest income was primarily due to an increase in interest income on loans, which was partially offset by a decrease in interest income on investment securities. During the nine months ended September 30, 2017, average loans increased $41.5 million to $739.9 million from $698.3 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, average investment securities available for sale decreased $18.2 million to $235.9 million from $254.1 million for the nine months ended September 30, 2016 primarily due to paydowns on mortgage-backed securities. The average yield on loans for the nine months ended September 30, 2017 and 2016 was 4.69% and 4.63%, respectively. The average yield on investment securities available for sale was 3.77% and 3.69% for the nine months ended September 30, 2017 and 2016, respectively. The average yield on earning assets was 4.41% and 4.30% for the nine months ended September 30, 2017 and 2016, respectively.

30

  Interest expense was $1.9 million for the nine months ended September 30, 2017, compared to $2.5 million for the nine months ended September 30, 2016. The decrease in interest expense was the result of lower cost of funds and reductions in FHLB borrowings and certificates of deposit. The average rate paid on interest-bearing checking and savings accounts was 0.12% and 0.11% for the nine months ended September 30, 2017 and 2016, respectively. The average rate paid on certificates of deposit was 0.36% for the nine months ended September 30, 2017, as compared to 0.40% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.36% for the nine months ended September 30, 2017, as compared to 0.47% for the same period one year ago. During the nine months ended September 30, 2017, average certificates of deposit decreased $16.8 million to $135.3 million from $152.1 million for the nine months ended September 30, 2016. Average FHLB borrowings decreased $23.6 million to $20.0 million for the nine months ended September 30, 2017 from $43.6 million for the nine months ended September 30, 2016.

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 months ended September 30, 2017 and 2016. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 35.98% for securities that are both federal and state tax exempt and an effective tax rate of 32.98% 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.

31

	Nine months ended			Nine months ended
	September 30, 2017			September 30, 2016
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans receivable	$739,857	25,935	4.69%	$698,313	24,185	4.63%
Investments - taxable	66,120	1,272	2.57%	79,476	1,485	2.50%
Investments - nontaxable*	173,113	5,512	4.26%	178,921	5,671	4.23%
Other	18,048	138	1.02%	18,816	67	0.48%
Total interest-earning assets	997,138	32,857	4.41%	975,526	31,408	4.30%
Non-interest earning assets:
Cash and due from banks	53,837			43,050
Allowance for loan losses	( 7,335)			( 9,144)
Other assets	52,862			55,223
Total assets	$1,096,502			$1,064,655
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$479,715	431	0.12%	$441,161	367	0.11%
Time deposits	135,291	360	0.36%	152,050	452	0.40%
FHLB borrowings	20,000	604	4.04%	43,646	1,248	3.82%
Trust preferred securities	20,619	432	2.80%	20,619	353	2.29%
Other	47,675	43	0.12%	39,941	30	0.10%
Total interest-bearing liabilities	703,300	1,870	0.36%	697,417	2,450	0.47%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits	277,052			254,829
Other liabilities	989			( 798)
Shareholders' equity	115,161			113,207
Total liabilities and shareholder's equity	$1,096,502			$1,064,655
Net interest spread		$30,987	4.05%		28,958	3.83%
Net yield on interest-earning assets			4.15%			3.97%
Taxable equivalent adjustment
Investment securities		$1,634			1,705
Net interest income		$29,353			27,253
*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $39.3 million in 2017 and $38.8 million in 2016. Tax rates of 3.00% and 4.00% were used to calculate the tax equivalent yield on these securities in 2017 and 2016, respectively.

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

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	Three months ended September 30, 2017 compared to three months ended September 30, 2016			Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
(Dollars in thousands)	Changes in average volume	Changes in average rates	Total Increase (Decrease)	Changes in average volume	Changes in average rates	Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$434	343	777	1,448	302	1,750
Investments - taxable	(94)	49	(45)	(253)	40	(213)
Investments - nontaxable	(71)	-	(71)	(185)	26	(159)
Other	(14)	41	27	(4)	75	71
Total interest income	255	433	688	1,006	443	1,449
Interest expense:
NOW, MMDA & savings deposits	7	23	30	33	31	64
Time deposits	(18)	(12)	(30)	(47)	(45)	(92)
FHLB borrowings	(238)	23	(215)	(695)	51	(644)
Trust preferred securities	-	30	30	-	79	79
Other	1	5	6	6	7	13
Total interest expense	(248)	69	(179)	(703)	123	(580)
Net interest income	$503	364	867	1,709	320	2,029

Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2017 was a credit of $218,000, as compared to a credit of $360,000 for the three months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

The provision for loan losses for the nine months ended September 30, 2017 was a credit of $405,000, as compared to a credit of $1.1 million for the nine months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

Non-Interest Income. Total non-interest income was $3.5 million for the three months ended September 30, 2017, compared to $3.4 million for the three months ended September 30, 2016. The increase in non-interest income is primarily attributable to a $266,000 increase in miscellaneous non-interest income during the three months ended September 30, 2017, compared to the same period one year ago. The increase in miscellaneous non-interest income is primarily attributable to a $159,000 increase in net Mastercard debit card incentives during the three months ended September 30, 2017, compared to the same period one year ago.

Non-interest income was $9.7 million for the nine months ended September 30, 2017, compared to $10.3 million for the nine months ended September 30, 2016. The decrease in non-interest income is primarily attributable to a $324,000 decrease in gains on the sale of securities, a $250,000 decrease in service charges and fees and a $143,000 decrease in mortgage banking income during the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016.

Non-Interest Expense. Total non-interest expense was $9.4 million for the three months ended September 30, 2017, compared to $9.6 million for the three months ended September 30, 2016. The decrease in non-interest expense was primarily due to a $138,000 decrease in other non-interest expense and a $126,000 decrease in professional fees, which were partially offset by a $104,000 increase in salaries and benefits expense during the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. The decrease in professional fees is primarily due to a decrease in consulting fees. The decrease in other non-interest expense is primarily due to a decrease in fraud losses. The increase in salaries and benefits expense is primarily due to an increase in the number of full-time equivalent employees and annual salary increases.

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Non-interest expense was $28.5 million for the nine months ended September 30, 2017, compared to $28.2 million for the nine months ended September 30, 2016. The increase in non-interest expense was primarily due to a $924,000 increase in salaries and benefits expense, a $322,000 increase in other non-interest expense and a $236,000 increase in advertising expenses, which were partially offset by a $815,000 decrease in professional fees and a $262,000 decrease in occupancy expense during the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016. The increase in salaries and benefits expense is primarily due to an increase in the number of full-time equivalent employees, annual salary increases and an increase in expenses associated with restricted stock units issued to officers resulting from an increase in the Company’s stock price from $25.07 at December 31, 2016 to $35.62 at September 30, 2017. The increase in other non-interest expense is primarily due to increases in telecommunications expense and deposit program expense. The increase in advertising expenses is primarily due to costs associated with the Bank’s rebranding initiative, which was introduced in March 2017. The decrease in professional fees is primarily due to a decrease in consulting fees associated with the Order issued in August 2015. The decrease in occupancy expense is primarily due to a reduction in depreciation expense.

Income Taxes. The Company reported income tax expense of $1.2 million and $872,000 for the three months ended September 30, 2017 and 2016, respectively. This represented an effective tax rate of 27% and 26% for the respective periods.

The Company reported income tax expense of $2.7 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively. This represented an effective tax rate of 25% for thenine months ended September 30, 2017 and 2016.

On October 26, 2017, the Bank repaid the remaining FHLB borrowings totaling $20.0 million.  Prepayment penalties totaling $508,000 will be reflected in fourth quarter 2017 non-interest expense and will be partially offset by a reduction of approximately $150,000 in fourth quarter 2017 interest expense based on current interest rates.

Analysis of Financial Condition

Investment Securities. Available for sale securities were $235.7 million at September 30, 2017, compared to $249.9 million at December 31, 2016. Average investment securities available for sale for the nine months ended September 30, 2017 were $235.9 million, compared to $252.7 million for the year ended December 31, 2016.

Loans. At September 30, 2017, loans were $747.4 million, compared to $723.8 million at December 31, 2016. Average loans represented 74% and 71% of average earning assets for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.

Total loans increased $2.4 million to $747.4 million at September 30, 2017, compared to $745.0 million at June 30, 2017. Loan activity during the third quarter of 2017 reflects an $8.5 million payoff of a syndication loan in which the Bank held a participation interest. The Bank did not have a participation interest in any syndicated loans at September 30, 2017. Third quarter 2017 loan activity also reflects an increase in construction lending. Unfunded construction loan commitments were $44.2 million at September 30, 2017, compared to $31.0 million at June 30, 2017 and $26.2 million at December 31, 2016.

The Company had $2.6 million and $5.7 million in mortgage loans held for sale as of September 30, 2017 and December 31, 2016, respectively.

Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At September 30, 2017, the Company had $105.1 million in residential mortgage loans, $100.8 million in home equity loans and $349.7 million in commercial mortgage loans, which include $272.9 million secured by commercial property and $76.8 million secured by residential property. Residential mortgage loans include $67.3 million made to customers in the Company’s traditional banking offices and $37.8 million in mortgage loans originated in the Company’s Latino banking offices. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

At September 30, 2017, the Company had $75.5 million in construction and land development loans. The following table presents a breakout of these loans.

(Dollars in thousands)
	Number of Loans	Balance Outstanding	Non-accrual Balance
Land acquisition and development - commercial purposes	43	$6,980	$-
Land acquisition and development - residential purposes	204	23,029	16
1 to 4 family residential construction	117	23,668	-
Commercial construction	30	21,806	-
Total construction and land development	394	$75,483	$16

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $5.9 million at September 30, 2017 and December 31, 2016, 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 $22,000 and $81,000 in performing loans classified as TDR loans at September 30, 2017 and December 31, 2016, respectively.

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

●

the Bank’s loan loss experience;

●

the amount of past due and non-performing loans;

●

specific known risks;

●

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

●

underlying estimated values of collateral securing loans;

●

current and anticipated economic conditions; and

●

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

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

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

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

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

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.

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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.

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

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

The allowance for loan losses at September 30, 2017 was $6.8 million or 0.92% of total loans, compared to $7.6 million or 1.04% of total loans at December 31, 2016.

The following table presents the percentage of loans assigned to each risk grade at September 30, 2017 and December 31, 2016.

	Percentage of Loans
	By Risk Grade
Risk Grade	9/30/2017	12/31/2016
Risk Grade 1 (Excellent Quality)	1.16%	2.28%
Risk Grade 2 (High Quality)	25.61%	26.82%
Risk Grade 3 (Good Quality)	60.40%	54.43%
Risk Grade 4 (Management Attention)	8.61%	11.99%
Risk Grade 5 (Watch)	2.67%	3.07%
Risk Grade 6 (Substandard)	1.23%	1.41%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

At September 30, 2017, including non-accrual loans, there were three relationships exceeding $1.0 million in the Watch risk grade (which totaled $5.8 million) and one relationship exceeding $1.0 million in the Substandard risk grade (which totaled $1.0 million).

Non-performing Assets. Non-performing assets totaled $4.9 million at September 30, 2017 or 0.44% of total assets, compared to $4.1 millionor 0.38% of total assets at December 31, 2016. Non-accrual loans were $4.9 million at September 30, 2017 and $3.8 million at December 31, 2016. As a percentage of total loans outstanding, non-accrual loans were 0.66% at September 30, 2017, compared to 0.53% at December 31, 2016. Non-accrual loans include $4.7 million in commercial and residential mortgage loans, $16,000 in construction and land development loans and $251,000 in other loans at September 30, 2017, compared to $3.7 million in commercial and residential mortgage loans, $22,000 in construction and land development loans and $54,000 in other loans at December 31, 2016. The Bank had no loans 90 days past due and still accruing at September 30, 2017 or December 31, 2016. The Bank had no other real estate owned at September 30, 2017, and $283,000 in other real estate owned at December 31, 2016.

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Deposits. Total deposits at September 30, 2017 were $901.6 million compared to $892.9 million at December 31, 2016. Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations less than $250,000, were $879.6 million at September 30, 2017 as compared to $865.4 million at December 31, 2016. Certificates of deposit in amounts of $250,000 or more totaled $21.3 million at September 30, 2017, as compared to $26.8 million at December 31, 2016. At September 30, 2017, brokered deposits were $5.4 million as compared to $7.2 million at December 31, 2016. Brokered deposits outstanding as of September 30, 2017 had a weighted average rate of 0.07% with a weighted average original term of 29 months as compared to brokered deposits outstanding at December 31, 2016, which had a weighted average rate of 0.05% with a weighted average original term of 23 months.

Borrowed Funds. Borrowings from theFHLB totaled $20.0 million at September 30, 2017 and December 31, 2016. The average balance of FHLB borrowings for the nine months ended September 30, 2017 was $20.0 million, compared to $42.9 million for the year ended December 31, 2016. The FHLB borrowings outstanding at September 30, 2017 had interest rates ranging from 3.11% to 4.54% and all mature in 2018.

Securities sold under agreements to repurchase were $53.3 million at September 30, 2017 compared to $36.4 million at December 31, 2016.

Junior Subordinated Debentures (related to Trust Preferred Securities). In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. All of the common securities of PEBK Trust II are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company, which pay a floating rate equal to three-month LIBOR plus 163 basis points. The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole asset of PEBK Trust II. PEBK Trust II is not included in the Consolidated Financial Statements.

The trust preferred securities issued by PEBK Trust II accrue and pay quarterly at a floating rate of three-month LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the trust preferred securities to the extent PEBK Trust II does not have funds with which to make the distributions and other payments. The net combined effect of the trust preferred securities transaction is that the Company is obligated to make the distributions and other payments required on the trust preferred securities.

These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the nine months ended September 30, 2017 totaled $997.1 million, exceeding average rate sensitive liabilities of $703.3 million by $293.8 million.

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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 30, 2017.

Included in the rate sensitive assets are $283.1 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the Federal Open Market Committee (“FOMC”). The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At September 30, 2017, the Company had $171.9 million in loans with interest rate floors. The floors were in effect on $35.6 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.69% 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 30, 2017, such unfunded commitments to extend credit were $218.3 million, while commitments in the form of standby letters of credit totaled $3.3 million.

The Company uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Company considers these to be a stable portion of the Company’s liability mix and the result of on-going consumer and commercial banking relationships. As of September 30, 2017, the Company’s core deposits totaled $879.6 million, or 98% of total deposits.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Company’s policies include the ability to access wholesale funding of up to 40% of total assets. The Company’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Company’s ratio of wholesale funding to total assets was 2.27% as of September 30, 2017.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with an outstanding balance of $20.0 million at September 30, 2017 and December 31, 2016. At September 30, 2017, the carrying value of loans pledged as collateral to the FHLB totaled $128.9 million compared to $128.3 million at December 31, 2016. The remaining availability under the line of credit with the FHLB was $60.7 million at September 30, 2017 compared to $66.8 million at December 31, 2016. The Bank had no borrowings from the FRB at September 30, 2017 or December 31, 2016. 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 30, 2017, the carrying value of loans pledged as collateral to the FRB totaled $394.5 million compared to $374.5 million at December 31, 2016.

The Bank also had the ability to borrow up to $79.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of September 30, 2017.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 26.46% at September 30, 2017 and 24.78% at December 31, 2016. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2017 and December 31, 2016.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of September 30, 2017 and December 31, 2016 are summarized in the table below. The Company’s contractual obligations include the repayment of principal and interest related to FHLB advances and 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.

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(Dollars in thousands)
	September 30, 2017	December 31, 2016
Contractual Cash Obligations
Long-term borrowings	$20,000	20,000
Junior subordinated debentures	20,619	20,619
Corporate Center renovation	74	2,170
Operating lease obligations	4,290	4,648
Total	$44,983	47,437
Other Commitments
Commitments to extend credit	$218,267	195,528
Standby letters of credit and financial guarantees written	3,292	3,728
Income tax credits	2,397	2,864
Total	$223,956	202,120

The Company enters into derivative contractsfrom 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 $116.2 million, or 10.4% of total assets, as of September 30, 2017, compared to $107.4 million, or 9.9% of total assets, as of December 31, 2016. The increase in shareholders’ equity is primarily due to an increase in retained earnings due to net income and an increase in accumulated other comprehensive income resulting from an increase in unrealized gain on investment securities.

Annualized return on average equity for the nine months ended September 30, 2017 was 9.59% compared to 9.29% for the nine months ended September 30, 2016. Total cash dividends paid on common stock were $2.0 million and $1.6 million for the nine months ended September 30, 2017 and 2016, 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 2016, the Company’s Board of Directors authorized a stock repurchase program, pursuant to which up to $2 million was allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program were 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 were determined by the Company’s management, based on its evaluation of market conditions and other factors. The Company has repurchased approximately $2.0 million, or 92,738 shares of its common stock, under this program as of September 30, 2017.

In 2013, the Federal Reserve Board 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 are being 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 at 0.625% and is being phased in through 2019 (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). This will result 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.

39

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 bythe 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 at September 30, 2017 and December 31, 2016 includes $20.0 million in trust preferred securities. The Company’s Tier 1 capital ratio was 15.44% and 15.20% at September 30, 2017 and December 31, 2016, 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 16.24% and 16.12% at September 30, 2017 and December 31, 2016, 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 13.09% and 12.75% at September 30, 2017 and December 31, 2016, 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 11.93% and 11.19% at September 30, 2017 and December 31, 2016, respectively.

The Bank’s Tier 1 risk-based capital ratio was 15.11% and 14.85% at September 30, 2017 and December 31, 2016, respectively. The total risk-based capital ratio for the Bank was 15.91% and 15.78% at September 30, 2017 and December 31, 2016, respectively. The Bank’s common equity Tier 1 capital ratio was 15.11% and 14.85% at September 30, 2017 and December 31, 2016, respectively. The Bank’s Tier 1 leverage capital ratio was 11.59% and 10.88% at September 30, 2017 and December 31, 2016, 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 30, 2017.

40

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Part 7A. of Part II of the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 16, 2017.

41

Item 4.  Controls and Procedures

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

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

42

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.  Risk Factors

As discussed in Note (7) to the Consolidated Financial Statements in Item 1, the Bank received notice that the Order was terminated effective August 30, 2017. As a result of the termination of the Order, the Risk Factors regarding the Order that were previously disclosed in the Company’s Form 10-K in response to Item 1A. of Part I to Form 10-K, filed with the Securities and Exchange Commission on March 16, 2017 are no longer applicable.

Except as set forth above, there have been no material changes from the Risk Factors from those previously disclosed in the Company’s Form 10-K in response to Item 1A. of Part I to Form 10-K, filed with the Securities and Exchange Commission on March 16, 2017.

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 - 31, 2017	775	$37.55	-	$16,180
August 1 - 31, 2017	-	-	-	$16,180
September 1 - 30, 2017	197	30.50	-	$16,180
Total	972(1)	$36.52	-

(1) The Company purchased 972 shares on the open market in the three months ended September 30, 2017 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

(2) Reflects dollar value of shares that may yet be purchased under the Stock Repurchase Plan authorized by the Company's Board of Directors in 2016.

Item 3.   Defaults Upon Senior Securities

Not applicable

Item 5.   Other Information

Not applicable

Item 6.   Exhibits

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

43

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)(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)	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 (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
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

44

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 (14)	Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2005
Exhibit (31)(a)	Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31)(b)	Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit (101)	The following materials from the Company’s 10-Q Report for the quarterly period ended September 30, 2017, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*
	*Furnished, not filed.

45

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 7, 2017	/s/ Lance A. Sellers
Date	Lance A. Sellers President and Chief Executive Officer  (Principal Executive Officer)

November 7, 2017	/s/ A. Joseph Lampron, Jr.
Date	A. Joseph Lampron, Jr. Executive Vice President and Chief Financial Officer  (Principal Financial and Principal Accounting Officer)

46

EX-31.A

EXHIBIT (31)(a)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 7, 2017	/s/ Lance A. Sellers
Date	Lance A. Sellers President and Chief Executive Officer (Principal Executive Officer)

47

EX-31.B

EXHIBIT (31)(b)

CERTIFICATIONS

I, A. Joseph Lampron, Jr., certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation ; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 7, 2017	/s/ A. Joseph Lampron, Jr.
Date	A. Joseph Lampron, Jr. Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

48

EX-32

EXHIBIT (32)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Peoples Bancorp of North Carolina, Inc. (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2017 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 7, 2017	/s/ Lance A. Sellers
Date	Lance A. Sellers Chief Executive Officer

November 7, 2017	/s/ A. Joseph Lampron, Jr.
Date	A. Joseph Lampron, Jr. Chief Financial Officer

*This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.

49

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Oct. 31, 2017
Document And Entity Information
Entity Registrant Name	PEOPLES BANCORP OF NORTH CAROLINA INC
Entity Central Index Key	0001093672
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		5,450,412
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2017

XML

Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets
Cash and due from banks, including reserve requirements of $9,337 at 9/30/17 and $6,075 at 12/31/16	$ 55,718	$ 53,613
Interest-bearing deposits	37,538	16,481
Cash and cash equivalents	93,256	70,094
Investment securities available for sale	235,736	249,946
Other investments	2,680	2,635
Total securities	238,416	252,581
Mortgage loans held for sale	2,623	5,709
Loans	747,437	723,811
Less allowance for loan losses	(6,844)	(7,550)
Net loans	740,593	716,261
Premises and equipment, net	19,697	16,452
Cash surrender value of life insurance	15,452	14,952
Other real estate	0	283
Accrued interest receivable and other assets	11,516	11,659
Total assets	1,121,553	1,087,991
Deposits:
Noninterest-bearing demand	287,794	271,851
NOW, MMDA & savings	486,051	477,054
Time, $250,000 or more	21,318	26,771
Other time	106,476	117,242
Total deposits	901,639	892,918
Securities sold under agreements to repurchase	53,307	36,434
FHLB borrowings	20,000	20,000
Junior subordinated debentures	20,619	20,619
Accrued interest payable and other liabilities	9,835	10,592
Total liabilities	1,005,400	980,563
Commitments
Shareholders' equity:
Series A preferred stock, $1,000 stated 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 5,450,412 shares at September 30, 2017 and 5,417,800 shares at December 31, 2016	45,102	44,187
Retained earnings	66,539	60,254
Accumulated other comprehensive income	4,512	2,987
Total shareholders' equity	116,153	107,428
Total liabilities and shareholders' equity	$ 1,121,553	$ 1,087,991

XML

Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets
Cash and due from banks, reserve requirements	$ 9,337	$ 6,075
Shareholders' equity:
Series A preferred stock, stated value (in dollars per share)	$ 1,000	$ 1,000
Series A preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Series A preferred stock, shares issued (in shares)	0	0
Series A preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.00	$ 0.00
Common stock, shares authorized (in shares)	20,000,000	20,000,000
Common stock, shares issued (in shares)	5,450,412	5,417,800
Common stock, shares outstanding (in shares)	5,450,412	5,417,800

XML

Consolidated Statements of Earnings (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Interest income:
Interest and fees on loans	$ 8,966	$ 8,188	$ 25,935	$ 24,185
Interest on due from banks	60	32	138	67
Interest on investment securities:
U.S. Government sponsored enterprises	578	603	1,795	1,910
State and political subdivisions	1,047	1,105	3,198	3,350
Other	47	54	157	191
Total interest income	10,698	9,982	31,223	29,703
Interest expense:
NOW, MMDA & savings deposits	156	126	431	367
Time deposits	112	142	360	452
FHLB borrowings	211	426	604	1,248
Junior subordinated debentures	152	122	432	353
Other	19	12	43	30
Total interest expense	650	828	1,870	2,450
Net interest income	10,048	9,154	29,353	27,253
Provision for (reduction of provision for) loan losses	(218)	(360)	(405)	(1,108)
Net interest income after provision for loan losses	10,266	9,514	29,758	28,361
Non-interest income:
Service charges	1,140	1,163	3,340	3,291
Other service charges and fees	145	210	447	746
Gain on sale of securities	0	0	0	324
Mortgage banking income	280	426	945	1,088
Insurance and brokerage commissions	221	163	568	476
Gain/(loss) on sale and write-down of other real estate	43	(16)	(240)	64
Miscellaneous	1,675	1,468	4,601	4,320
Total non-interest income	3,504	3,414	9,661	10,309
Non-interest expense:
Salaries and employee benefits	4,933	4,829	15,038	14,114
Occupancy	1,669	1,755	4,981	5,243
Professional fees	303	429	788	1,603
Advertising	247	313	859	623
Debit card expense	320	271	894	870
FDIC insurance	87	71	260	406
Other	1,792	1,930	5,661	5,339
Total non-interest expense	9,351	9,598	28,481	28,198
Earnings before income taxes	4,419	3,330	10,938	10,472
Income tax expense	1,177	872	2,680	2,597
Net earnings	$ 3,242	$ 2,458	$ 8,258	$ 7,875
Basic net earnings per share	$ 0.59	$ 0.45	$ 1.52	$ 1.43
Diluted net earnings per share	0.58	0.44	1.49	1.42
Cash dividends declared per share	$ 0.12	$ 0.10	$ 0.36	$ 0.28

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Consolidated Statements Of Comprehensive Income
Net earnings	$ 3,242	$ 2,458	$ 8,258	$ 7,875
Other comprehensive income (loss):
Unrealized holding (losses) gains on securities available for sale	(666)	(1,676)	2,027	2,597
Reclassification adjustment for gains on securities available for sale included in net earnings	0	0	0	(324)
Total other comprehensive (loss) income, before income taxes	(666)	(1,676)	2,027	2,273
Income tax expense related to other comprehensive income:
Unrealized holding (losses) gains on securities available for sale	(239)	(614)	502	951
Reclassification adjustment for gains on securities available for sale included in net earnings	0	0	0	(126)
Total income tax expense (benefit) related to other comprehensive income (loss)	(239)	(614)	502	825
Total other comprehensive (loss) income, net of tax	(427)	(1,062)	1,525	1,448
Total comprehensive income	$ 2,815	$ 1,396	$ 9,783	$ 9,323

XML

Consolidated Statements of Changes in Shareholders' Equity - USD ($) $ in Thousands	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income	Total
Beginning Balance, Shares at Dec. 31, 2015	5,510,538
Beginning Balance, Amount at Dec. 31, 2015	$ 46,171	$ 53,183	$ 5,510	$ 104,864
Common stock repurchase, shares	(92,738)
Common stock repurchase, amount	$ (1,983)	0	0	(1,983)
Cash dividends declared on common stock		(1,556)		(1,556)
Net earnings		7,875		7,875
Change in accumulated other comprehensive income, net of tax	$ 0	0	1,448	1,448
Ending Balance, Shares at Sep. 30, 2016	5,417,800
Ending Balance, Amount at Sep. 30, 2016	$ 44,188	59,502	6,958	110,648
Beginning Balance, Shares at Dec. 31, 2016	5,417,800
Beginning Balance, Amount at Dec. 31, 2016	$ 44,187	60,254	2,987	107,428
Common stock repurchase, amount				0
Cash dividends declared on common stock		(1,973)		(1,973)
Restricted stock units exercised, shares	32,612
Restricted stock units exercised, amount	$ 915	0	0	915
Net earnings		8,258		8,258
Change in accumulated other comprehensive income, net of tax			1,525	1,525
Ending Balance, Shares at Sep. 30, 2017	5,450,412
Ending Balance, Amount at Sep. 30, 2017	$ 45,102	$ 66,539	$ 4,512	$ 116,153

XML

Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net earnings	$ 8,258	$ 7,875
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	3,764	4,181
Reduction of provision for loan losses	(405)	(1,108)
Deferred income taxes	(1,122)	(607)
Gain on sale of investment securities	0	(324)
Gain on sale of other real estate	0	(81)
Write-down of other real estate	240	17
Loss on sale of premises and equipment	32	0
Restricted stock expense	566	476
Origination of mortgage loans held for sale	(46,173)	(50,813)
Proceeds from sales of mortgage loans held for sale	49,259	52,186
Change in:
Cash surrender value of life insurance	(500)	(307)
Other assets	763	897
Other liabilities	(408)	49
Net cash provided by operating activities	14,274	12,441
Cash flows from investing activities:
Purchases of investment securities available for sale	(6,492)	(12,642)
Proceeds from sales, calls and maturities of investment securities available for sale	6,535	2,899
Proceeds from paydowns of investment securities available for sale	13,963	15,946
FHLB stock redemption	(45)	2
Net change in loans	(23,927)	(24,639)
Purchases of premises and equipment	(4,810)	(1,257)
Proceeds from sale of other real estate and repossessions	43	1,052
Net cash used by investing activities	(14,733)	(18,639)
Cash flows from financing activities:
Net change in deposits	8,721	29,772
Net change in securities sold under agreement to repurchase	16,873	23,046
Proceeds from Fed Funds purchased	0	(8,985)
Repayments of Fed Funds purchased	0	8,985
Common stock repurchased	0	(1,983)
Cash dividends paid on common stock	(1,973)	(1,556)
Net cash provided by financing activities	23,621	49,279
Net change in cash and cash equivalents	23,162	43,081
Cash and cash equivalents at beginning of period	70,094	39,763
Cash and cash equivalents at end of period	93,256	82,844
Cash paid during the period for:
Interest	1,858	2,425
Income taxes	872	3,180
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities available for sale, net	1,525	1,448
Issuance of accrued restricted stock units	(915)	0
Transfers of loans to other real estate and repossessions	$ 0	$ 275

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1. Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Accounting Policies [Abstract]

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., Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices are now branded as Bank branches and considered a separate market territory of the Bank as they offer normal and customary banking services as are offered in the Bank’s other branches such as the taking of deposits and the making of loans.

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2016) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management of the Company 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 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (Topic 606): Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance on the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU No. 2014-09 is effective for reporting periods beginning after December 15, 2017.

The Company will apply ASU No. 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU No. 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues will not be affected. The Company is currently assessing its revenue contracts related to revenue streams that are within the scope of ASU No. 2014-09. The Company’s accounting policies will not change materially since the principles of revenue recognition from ASU No. 2014-09 are largely consistent with existing guidance and the Company’s current practices. The Company has not identified material changes to the timing or amount of revenue recognition. However, the Company does anticipate that it will make changes to its revenue-related disclosures. The Company will provide qualitative disclosures of its performance obligations related to its revenue recognition and will continue to evaluate disaggregation for significant categories of revenue within the scope of ASU No. 2014-09.

In February 2016, FASB issued ASU No. 2016-02, (Topic 842): Leases. ASU No. 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The Company expects to adopt ASU No. 2016-02 using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for its existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. The Company has started an initial evaluation of its leasing contracts and activities and has started developing its methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $4.6 million). While the Company does not expect there to be a material change in the timing of expense recognition, it is too early in the evaluation process to determine if there will be a material change to the timing of expense recognition. The Company is evaluating its existing disclosures and may need to provide additional information as a result of adoption of ASU No. 2016-02.

In June 2016, FASB issued ASU No. 2016-13, (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.

The Company will apply the amendments to ASU No. 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in the first quarter of 2019, the Company does not expect to elect that option. The Company is evaluating the impact of ASU No. 2016-13 on its consolidated financial statements. The Company anticipates that ASU No. 2016-13 will have no material impact on the recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments. 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.

In January 2017, FASB issued ASU No. 2017-01, (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 adds guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In January 2017, FASB issued ASU No. 2017-04, (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 provides guidance to simplify the accounting related to goodwill impairment. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope of established guidance on nonfinancial asset derecognition (issued as part of the new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers), as well as the accounting for partial sales of nonfinancial assets. ASU No. 2017-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-07, (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs. ASU No. 2017-07 amended the requirements related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other postretirement plans. ASU No. 2017-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-08, (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU No. 2017-08 amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium. ASU No. 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In May 2017, FASB issued ASU No. 2017-09, (Topic 718): Scope of Modification Accounting. ASU No. 2017-09 amended the requirements related to changes to the terms or conditions of a share-based payment award. ASU No. 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. 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.

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2. Investment Securities

9 Months Ended

Sep. 30, 2017

Investments, Debt and Equity Securities [Abstract]

2. Investment Securities

Investment securities available for sale at September 30, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	55,947		1,142		196		56,893
U.S. Government
sponsored enterprises		40,815		290		151		40,954
State and political subdivisions		130,175		5,954		20		136,109
Corporate bonds		1,500		30		-		1,530
Trust preferred securities		250		-		-		250
Total	$	228,687		7,416		367		235,736

(Dollars in thousands)
	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	66,654		1,221		290		67,585
U.S. Government
sponsored enterprises		38,188		308		274		38,222
State and political subdivisions		137,832		4,176		152		141,856
Corporate bonds		1,500		33		-		1,533
Trust preferred securities		750		-		-		750
Total	$	244,924		5,738		716		249,946

The current fair value and associated unrealized losses on investments in securities with unrealized losses at September 30, 2017 and December 31, 2016 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, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	10,540		95		4,792		101		15,332		196
U.S. Government
sponsored enterprises		5,424		47		10,762		104		16,186		151
State and political subdivisions		545		2		986		18		1,531		20
Total	$	16,509		144		16,540		223		33,049		367

(Dollars in thousands)

	December 31, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	15,594		290		-		-		15,594		290
U.S. Government
sponsored enterprises		10,120		94		9,562		180		19,682		274
State and political subdivisions		10,441		123		561		29		11,002		152
Total	$	36,155		507		10,123		209		46,278		716

At September 30, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $367,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2017 tables above, three out of 160 securities issued by state and political subdivisions contained unrealized losses, 17 out of 78 securities issued by U.S. Government sponsored enterprises contained unrealized losses, and no securities issued by corporations 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, 2017, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2017
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	13,299		13,397
Due from one to five years		95,096		99,142
Due from five to ten years		55,333		57,069
Due after ten years		8,762		8,985
Mortgage-backed securities		55,947		56,893
Trust preferred securities		250		250
Total	$	228,687		235,736

No securities available for sale were sold during the nine months ended September 30, 2017. Proceeds from sales of securities available for sale during the nine months ended September 30, 2016 were $804,000 and resulted in gross gains of $324,000.

Securities with a fair value of approximately $88.2 million and $95.6 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required by law.

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3. Loans

9 Months Ended

Sep. 30, 2017

Receivables [Abstract]

3. Loans

Major classifications of loans at September 30, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	75,483		61,749
Single-family residential		247,184		240,700
Single-family residential -
Banco de la Gente stated income		37,840		40,189
Commercial		245,279		247,521
Multifamily and farmland		28,662		21,047
Total real estate loans		634,448		611,206
Loans not secured by real estate:
Commercial loans		87,019		87,596
Farm loans		895		-
Consumer loans		10,005		9,832
All other loans		15,070		15,177
Total loans		747,437		723,811
Less allowance for loan losses		6,844		7,550
Total net loans	$	740,593		716,261

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 and Durham 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, 2017, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

● Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2017, single-family residential loans comprised approximately 38% of the Bank’s total loan portfolio, and include Banco’s single-family residential stated income loans, which were approximately 5% of the Bank’s total loan portfolio.

● Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of September 30, 2017, commercial real estate loans comprised approximately 33% of the Bank’s total loan portfolio.

● Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2017, commercial loans comprised approximately 12% of the Bank’s total loan portfolio.

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

The following tables present an age analysis of past due loans, by loan type, as of September 30, 2017 and December 31, 2016:

September 30, 2017
(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	$	206		-		206		75,277		75,483		-
Single-family residential		2,268		416		2,684		244,500		247,184		-
Single-family residential -
Banco de la Gente stated income		1,363		462		1,825		36,015		37,840		-
Commercial		27		229		256		245,023		245,279		-
Multifamily and farmland		-		12		12		28,650		28,662		-
Total real estate loans		3,864		1,119		4,983		629,465		634,448		-
Loans not secured by real estate:
Commercial loans		121		1,013		1,134		85,885		87,019		-
Farm loans		-		-		-		895		895		-
Consumer loans		93		5		98		9,907		10,005		-
All other loans		-		-		-		15,070		15,070		-
Total loans	$	4,078		2,137		6,215		741,222		747,437		-

December 31, 2016
(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	$	-		10		10		61,739		61,749		-
Single-family residential		4,890		80		4,970		235,730		240,700		-
Single-family residential -
Banco de la Gente stated income		5,250		249		5,499		34,690		40,189		-
Commercial		342		126		468		247,053		247,521		-
Multifamily and farmland		471		-		471		20,576		21,047		-
Total real estate loans		10,953		465		11,418		599,788		611,206		-
Loans not secured by real estate:
Commercial loans		273		-		273		87,323		87,596		-
Farm loans		-		-		-		-		-		-
Consumer loans		68		6		74		9,758		9,832		-
All other loans		3		-		3		15,174		15,177		-
Total loans	$	11,297		471		11,768		712,043		723,811		-

The following table presents non-accrual loans as of September 30, 2017 and December 31, 2016:

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	16		22
Single-family residential		1,728		1,662
Single-family residential -
Banco de la Gente stated income		1,502		1,340
Commercial		1,422		669
Multifamily and farmland		12		78
Total real estate loans		4,680		3,771
Loans not secured by real estate:
Commercial loans		229		21
Consumer loans		22		33
Total	$	4,931		3,825

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $21.3 million, $23.5 million and $22.9 million at September 30, 2017, December 31, 2016 and September 30, 2016, respectively. Interest income recognized on accruing impaired loans was $1.1 million, $871,000 and $1.2 million for the nine months ended September 30, 2017, the nine months ended September 30, 2016 and the year ended December 31, 2016, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following table presents impaired loans as of September 30, 2017:

September 30, 2017
(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	$	216		-		221		221		7
Single-family residential		4,978		1,142		4,232		5,374		42
Single-family residential -
Banco de la Gente stated income		17,127		-		17,743		17,743		1,123
Commercial		3,513		1,619		2,181		3,800		45
Multifamily and farmland		12		-		78		78		-
Total impaired real estate loans		25,846		2,761		24,455		27,216		1,217
Loans not secured by real estate:
Commercial loans		233		229		39		268		-
Consumer loans		179		-		189		189		3
Total impaired loans	$	26,258		2,990		24,683		27,673		1,220

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, 2017 and 2016.

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
	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	$	246		5		369		3		253		11		375		10
Single-family residential		4,783		71		6,556		40		5,113		202		8,921		122
Single-family residential -
Banco de la Gente stated income		17,283		225		17,395		207		17,235		694		17,673		657
Commercial		3,852		18		4,013		24		3,712		144		5,376		73
Multifamily and farmland		12		-		78		-		45		-		79		3
Total impaired real estate loans		26,176		319		28,411		274		26,358		1,051		32,424		865
Loans not secured by real estate:
Commercial loans		243		-		116		-		130		3		123		-
Consumer loans		183		3		225		2		206		8		235		6
Total impaired loans	$	26,602		322		28,752		276		26,694		1,062		32,782		871

The following table presents impaired loans as of and for the year ended December 31, 2016:

December 31, 2016
(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	$	282		-		278		278		11		330		13
Single-family residential		5,354		703		4,323		5,026		47		7,247		164
Single-family residential -
Banco de la Gente stated income		18,611		-		18,074		18,074		1,182		17,673		861
Commercial		3,750		1,299		2,197		3,496		166		4,657		152
Multifamily and farmland		78		-		78		78		-		78		-
Total impaired real estate loans		28,075		2,002		24,950		26,952		1,406		29,985		1,190
Loans not secured by real estate:
Commercial loans		27		-		27		27		-		95		-
Consumer loans		211		-		202		202		3		222		8
Total impaired loans	$	28,313		2,002		25,179		27,181		1,409		30,302		1,198

Changes in the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single- Family Residential - Banco de la Gente Stated Income			Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$	1,152			2,126			1,377			1,593			52			675			-		204			371		7,550
Charge-offs		-			(64	)		-			-			(66	)		(63	)		-		(288	)		-		(481	)
Recoveries		12			26			-			17			-			23			-		102			-		180
Provision		(178	)		(211	)		(101	)		(192	)		86			(74	)		-		143			122		(405	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Three months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$	1,183			1,819			1,293			1,463			75			704			-		158			472		7,167
Charge-offs		-			(20	)		-			-			-			(26	)		-		(106	)		-		(152	)
Recoveries		2			9			-			4			-			8			-		24			-		47
Provision		(199	)		69			(17	)		(49	)		(3	)		(125	)		-		85			21		(218	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Allowance for loan losses at September 30, 2017:
Ending balance: individually
evaluated for impairment	$	-			-			1,104			42			-			-			-		-			-		1,146
Ending balance: collectively
evaluated for impairment		986			1,877			172			1,376			72			561			-		161			493		5,698
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Loans at September 30, 2017:
Ending balance	$	75,483			247,184			37,840			245,279			28,662			87,019			895		25,075			-		747,437
Ending balance: individually
evaluated for impairment	$	10			1,875			15,732			3,069			-			229			-		-			-		20,915
Ending balance: collectively
evaluated for impairment	$	75,473			245,309			22,108			242,210			28,662			86,790			895		25,075			-		726,522

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single- Family Residential - Banco de la Gente Stated Income			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	2,185			2,534			1,460			1,917			-		842			-		172			479		9,589
Charge-offs		-			(158	)		-			(106	)		-		(129	)		-		(361	)		-		(754	)
Recoveries		8			18			-			15			-		165			-		112			-		318
Provision		(808	)		(388	)		(60	)		(250	)		47		(118	)		-		291			178		(1,108	)
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Three months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	1,582			2,233			1,354			1,650			46		803			-		234			638		8,540
Charge-offs		-			(35	)		-			-			-		(89	)		-		(122	)		-		(246	)
Recoveries		2			6			-			5			-		60			-		38			-		111
Provision		(199	)		(198	)		46			(79	)		1		(14	)		-		64			19		(360	)
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Allowance for loan losses at September 30, 2016:
Ending balance: individually
evaluated for impairment	$	-			-			1,164			167			-		-			-		-			-		1,331
Ending balance: collectively
evaluated for impairment		1,385			2,006			236			1,409			47		760			-		214			657		6,714
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Loans at September 30, 2016:
Ending balance	$	59,456			231,958			40,934			240,150			18,727		94,790			-		27,004			-		713,019
Ending balance: individually
evaluated for impairment	$	-			1,019			16,890			3,586			-		-			-		-			-		21,495
Ending balance: collectively
evaluated for impairment	$	59,456			230,939			24,044			236,564			18,727		94,790			-		27,004			-		691,524

The provision for loan losses for the three months ended September 30, 2017 was a credit of $218,000, as compared to a credit of $360,000 for the three months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

The provision for loan losses for the nine months ended September 30, 2017 was a credit of $405,000, as compared to a credit of $1.1 million for the nine months ended September 30, 2016. The decrease in the credit to the provision for loan losses is primarily attributable to a $34.4 million increase in loans from September 30, 2016 to September 30, 2017.

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

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

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

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

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

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

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

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

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

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2017 and December 31, 2016:

September 30, 2017
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single- Family Residential - Banco de la Gente Stated Income		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		11,007		-		-		-		562		-		838		-		12,407
2- High Quality		11,541		118,964		-		35,461		1,986		18,836		-		3,502		1,161		191,451
3- Good Quality		51,307		87,337		15,318		190,950		23,565		62,767		756		5,015		13,096		450,111
4- Management Attention		6,063		21,783		15,318		13,366		1,942		4,362		139		582		813		64,368
5- Watch		6,285		4,679		3,506		4,034		1,157		235		-		24		-		19,920
6- Substandard		287		3,414		3,698		1,468		12		257		-		44		-		9,180
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	75,483		247,184		37,840		245,279		28,662		87,019		895		10,005		15,070		747,437

December 31, 2016

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single- Family Residential - Banco de la Gente Stated Income		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		14,996		-		-		-		541		-		959		-		16,496
2- High Quality		9,784		109,809		-		39,769		2,884		26,006		-		3,335		2,507		194,094
3- Good Quality		33,633		82,147		16,703		176,109		14,529		55,155		-		4,842		10,921		394,039
4- Management Attention		10,892		25,219		15,580		24,753		2,355		5,586		-		619		1,749		86,753
5- Watch		7,229		4,682		3,943		4,906		1,201		246		-		31		-		22,238
6- Substandard		211		3,847		3,963		1,984		78		62		-		42		-		10,187
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		4		-		4
Total	$	61,749		240,700		40,189		247,521		21,047		87,596		-		9,832		15,177		723,811

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $5.9 million at September 30, 2017 and December 31, 2016, 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 $22,000 and $81,000 in performing loans classified as TDR loans at September 30, 2017 and December 31, 2016, respectively.

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2017.

Three and nine months ended September 30, 2017
(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential		2	$	22		22
Total real estate TDR loans		2		22		22
Total TDR loans		2	$	22		22

During the three and nine months ended September 30, 2017, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

The following table presents an analysis of TDR loan modifications during the three and nine months ended September 30, 2016.

Three and nine months ended September 30, 2016

(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential		1	$	41		41
Total real estate TDR loans		1		41		41
Total TDR loans		1	$	41		41

During the three and nine months ended September 30, 2016, one loan was modified that was considered to be a new TDR loan. The interest rate was modified on this TDR loan.

There were no loans modified as TDR that defaulted during the three and nine months ended September 30, 2017 and 2016, 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.

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4. Net Earnings Per Share

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

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 year 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, 2017 and 2016 is as follows:

For the three months ended September 30, 2017
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,242		5,450,412	$	0.59
Effect of dilutive securities:
Restricted stock units		-		87,581
Diluted earnings per share	$	3,242		5,537,993	$	0.58

For the nine months ended September 30, 2017
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	8,258		5,440,995	$	1.52
Effect of dilutive securities:
Restricted stock units		-		85,969
Diluted earnings per share	$	8,258		5,526,964	$	1.49

For the three months ended September 30, 2016
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,458		5,470,826	$	0.45
Effect of dilutive securities:
Restricted stock units		-		74,042
Diluted earnings per share	$	2,458		5,544,868	$	0.44

For the nine months ended September 30, 2016
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	7,875		5,497,204	$	1.43	B
Effect of dilutive securities:
Restricted stock units		-		68,122
Diluted earnings per share	$	7,875		5,565,326	$	1.42

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5. Stock-Based Compensation

9 Months Ended

Sep. 30, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

5. Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “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 258,780 shares are currently reserved for possible issuance under the Plan. All stock-based rights under the Plan must be granted or awarded by May 7, 2019 (or ten years from the Plan effective date).

The Company granted 29,514 restricted stock units under the Plan at a grant date fair value of $7.90 per share during the first quarter of 2012, of which 5,355 restricted stock units were forfeited by the executive officers of the Company as required by the agreement with the U.S. Department of the Treasury (“UST”) in conjunction with the Company’s participation in the Capital Purchase Program (“CPP”) under the Troubled Asset Relief Program (“TARP”). In July 2012, the Company granted 5,355 restricted stock units at a grant date fair value of $8.25 per share. The Company granted 26,795 restricted stock units under the Plan at a grant date fair value of $11.90 per share during the second quarter of 2013. The Company granted 21,056 restricted stock units under the Plan at a grant date fair value of $15.70 per share during the first quarter of 2014. The Company granted 15,075 restricted stock units under the Plan at a grant date fair value of $17.97 per share during the first quarter of 2015. The Company granted 5,040 restricted stock units under the Plan at a grant date fair value of $18.60 per share during the first quarter of 2016. The Company granted 3,740 restricted stock units under the Plan at a grant date fair value of $27.50 per share during the first quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the grant date for the 2013, 2015, 2016 and 2017 grants and three years from the grant date for the 2014 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of September 30, 2017, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $389,000.

The Company recognized compensation expense for restricted stock unit awards granted under the Plan of $566,000 and $476,000 for the nine months ended September 30, 2017 and 2016, respectively.

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6. Fair Value

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

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

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

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

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at 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

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

Other Real Estate

The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Other real estate is reported in the Level 3 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 2 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.

Federal Home Loan Bank (“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 2 fair value category.

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2017 and December 31, 2016.

(Dollars in thousands)
	September 30, 2017
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	56,893		-		56,893		-
U.S. Government
sponsored enterprises	$	40,954		-		40,954		-
State and political subdivisions	$	136,109		-		136,109		-
Corporate bonds	$	1,530		-		1,530		-
Trust preferred securities	$	250		-		-		250

(Dollars in thousands)
	December 31, 2016
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	67,585		-		67,585		-
U.S. Government
sponsored enterprises	$	38,222		-		38,222		-
State and political subdivisions	$	141,856		-		141,856		-
Corporate bonds	$	1,533		-		1,533		-
Trust preferred securities	$	750		-		-		750

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the nine months ended September 30, 2017.

(Dollars in thousands)
	Investment Securities Available for Sale
	Level 3 Valuation
Balance, beginning of period	$	750
Change in book value		-
Change in gain/(loss) realized and unrealized		-
Purchases/(sales and calls)		(500	)
Transfers in and/or (out) of Level 3		-
Balance, end of period	$	250
Change in unrealized gain/(loss) for assets still held in Level 3	$	-

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at September 30, 2017 and December 31, 2016 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, 2017		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	2,623		-		-		2,623
Impaired loans	$	26,453		-		-		26,453
Other real estate	$	-		-		-		-

(Dollars in thousands)
	Fair Value Measurements December 31, 2016		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	5,709		-		-		5,709
Impaired loans	$	25,772		-		-		25,772
Other real estate	$	283		-		-		283

(Dollars in thousands)
	Fair Value September 30, 2017		Fair Value December 31, 2016		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	2,623		5,709	Rate lock commitment		N/A		N/A
Impaired loans	$	26,453		25,772	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0 - 25%
Other real estate	$	-		283	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0 - 25%

The carrying amount and estimated fair value of financial instruments at September 30, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
			Fair Value Measurements at September 30, 2017
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	93,256		93,256		-		-		93,256
Investment securities available for sale	$	235,736		-		235,486		250		235,736
Other investments	$	2,680		-		-		2,680		2,680
Mortgage loans held for sale	$	2,623		-		-		2,623		2,623
Loans, net	$	740,593		-		-		745,481		745,481
Cash surrender value of life insurance	$	15,452		-		15,452		-		15,452
Liabilities:
Deposits	$	901,639		-		-		890,957		890,957
Securities sold under agreements
to repurchase	$	53,307		-		53,307		-		53,307
FHLB borrowings	$	20,000		-		19,967		-		19,967
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

(Dollars in thousands)
			Fair Value Measurements at December 31, 2016
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	70,094		70,094		-		-		70,094
Investment securities available for sale	$	249,946		-		249,196		750		249,946
Other investments	$	2,635		-		-		2,635		2,635
Mortgage loans held for sale	$	5,709		-		-		5,709		5,709
Loans, net	$	716,261		-		-		720,675		720,675
Cash surrender value of life insurance	$	14,952		-		14,952		-		14,952
Liabilities:
Deposits	$	892,918		-		-		884,510		884,510
Securities sold under agreements
to repurchase	$	36,434		-		36,434		-		36,434
FHLB borrowings	$	20,000		-		18,864		-		18,864
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

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7. Regulatory Matters

9 Months Ended

Sep. 30, 2017

Regulatory Matters

7. Regulatory Matters

On August 31, 2015, the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Office of the Commissioner of Banks (“Commissioner”) issued a Consent Order (the “Order”) in connection with compliance by the Bank with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”). The Order was issued pursuant to the consent of the Bank. In consenting to the issuance of the Order, the Bank did not admit or deny any unsafe or unsound banking practices or violations of law or regulation.

The Order required the Bank to take certain affirmative actions to comply with its obligations under the BSA, including, without limitation, strengthening its Board of Directors’ oversight of BSA activities; reviewing, enhancing, adopting and implementing a revised BSA compliance program; completing a BSA risk assessment; developing a revised system of internal controls designed to ensure full compliance with the BSA; reviewing and revising customer due diligence and risk assessment processes, policies and procedures; developing, adopting and implementing effective BSA training programs; assessing BSA staffing needs and resources and appointing a qualified BSA officer; establishing an independent BSA testing program; ensuring that all reports required by the BSA are accurately and properly filed and engaging an independent firm to review past account activity to determine whether suspicious activity was properly identified and reported.

During the third quarter of 2017 the Bank received notice that the Order was terminated effective August 30, 2017.

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8. Subsequent Events

9 Months Ended

Sep. 30, 2017

Subsequent Events [Abstract]

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 other than the FHLB borrowings prepayment noted below.

On October 26, 2017, the Bank repaid the remaining FHLB borrowings totaling $20.0 million. Prepayment penalties totaling $508,000 will be reflected in fourth quarter 2017 non-interest expense and will be partially offset by a reduction of approximately $150,000 in fourth quarter 2017 interest expense based on current interest rates.

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1. Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Accounting Policies [Abstract]

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (Topic 606): Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance on the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU No. 2014-09 is effective for reporting periods beginning after December 15, 2017.

The Company will apply ASU No. 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU No. 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues will not be affected. The Company is currently assessing its revenue contracts related to revenue streams that are within the scope of ASU No. 2014-09. The Company’s accounting policies will not change materially since the principles of revenue recognition from ASU No. 2014-09 are largely consistent with existing guidance and the Company’s current practices. The Company has not identified material changes to the timing or amount of revenue recognition. However, the Company does anticipate that it will make changes to its revenue-related disclosures. The Company will provide qualitative disclosures of its performance obligations related to its revenue recognition and will continue to evaluate disaggregation for significant categories of revenue within the scope of ASU No. 2014-09.

In February 2016, FASB issued ASU No. 2016-02, (Topic 842): Leases. ASU No. 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.

The Company expects to adopt ASU No. 2016-02 using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for its existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. The Company has started an initial evaluation of its leasing contracts and activities and has started developing its methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $4.6 million). While the Company does not expect there to be a material change in the timing of expense recognition, it is too early in the evaluation process to determine if there will be a material change to the timing of expense recognition. The Company is evaluating its existing disclosures and may need to provide additional information as a result of adoption of ASU No. 2016-02.

In June 2016, FASB issued ASU No. 2016-13, (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.

The Company will apply the amendments to ASU No. 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in the first quarter of 2019, the Company does not expect to elect that option. The Company is evaluating the impact of ASU No. 2016-13 on its consolidated financial statements. The Company anticipates that ASU No. 2016-13 will have no material impact on the recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments. 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.

In January 2017, FASB issued ASU No. 2017-01, (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 adds guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In January 2017, FASB issued ASU No. 2017-04, (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 provides guidance to simplify the accounting related to goodwill impairment. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope of established guidance on nonfinancial asset derecognition (issued as part of the new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers), as well as the accounting for partial sales of nonfinancial assets. ASU No. 2017-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-07, (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs. ASU No. 2017-07 amended the requirements related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other postretirement plans. ASU No. 2017-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In March 2017, FASB issued ASU No. 2017-08, (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. ASU No. 2017-08 amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium. ASU No. 2017-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

In May 2017, FASB issued ASU No. 2017-09, (Topic 718): Scope of Modification Accounting. ASU No. 2017-09 amended the requirements related to changes to the terms or conditions of a share-based payment award. ASU No. 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. 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.

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2. Investment Securities (Tables)

9 Months Ended

Sep. 30, 2017

Investments, Debt and Equity Securities [Abstract]

Investment securities available for sale

(Dollars in thousands)
	September 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	55,947		1,142		196		56,893
U.S. Government
sponsored enterprises		40,815		290		151		40,954
State and political subdivisions		130,175		5,954		20		136,109
Corporate bonds		1,500		30		-		1,530
Trust preferred securities		250		-		-		250
Total	$	228,687		7,416		367		235,736

(Dollars in thousands)
	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	66,654		1,221		290		67,585
U.S. Government
sponsored enterprises		38,188		308		274		38,222
State and political subdivisions		137,832		4,176		152		141,856
Corporate bonds		1,500		33		-		1,533
Trust preferred securities		750		-		-		750
Total	$	244,924		5,738		716		249,946

Current fair value and associated unrealized losses on investments in securities with unrealized losses

(Dollars in thousands)
	September 30, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	10,540		95		4,792		101		15,332		196
U.S. Government
sponsored enterprises		5,424		47		10,762		104		16,186		151
State and political subdivisions		545		2		986		18		1,531		20
Total	$	16,509		144		16,540		223		33,049		367

(Dollars in thousands)

	December 31, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	15,594		290		-		-		15,594		290
U.S. Government
sponsored enterprises		10,120		94		9,562		180		19,682		274
State and political subdivisions		10,441		123		561		29		11,002		152
Total	$	36,155		507		10,123		209		46,278		716

Amortized cost and estimated fair value of investment securities available for sale by contractual maturity

September 30, 2017
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	13,299		13,397
Due from one to five years		95,096		99,142
Due from five to ten years		55,333		57,069
Due after ten years		8,762		8,985
Mortgage-backed securities		55,947		56,893
Trust preferred securities		250		250
Total	$	228,687		235,736

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3. Loans (Tables)

9 Months Ended

Sep. 30, 2017

Receivables [Abstract]

Major classifications of loans

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	75,483		61,749
Single-family residential		247,184		240,700
Single-family residential -
Banco de la Gente stated income		37,840		40,189
Commercial		245,279		247,521
Multifamily and farmland		28,662		21,047
Total real estate loans		634,448		611,206
Loans not secured by real estate:
Commercial loans		87,019		87,596
Farm loans		895		-
Consumer loans		10,005		9,832
All other loans		15,070		15,177
Total loans		747,437		723,811
Less allowance for loan losses		6,844		7,550
Total net loans	$	740,593		716,261

Age analysis of past due loans, by loan type

September 30, 2017
(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	$	206		-		206		75,277		75,483		-
Single-family residential		2,268		416		2,684		244,500		247,184		-
Single-family residential -
Banco de la Gente stated income		1,363		462		1,825		36,015		37,840		-
Commercial		27		229		256		245,023		245,279		-
Multifamily and farmland		-		12		12		28,650		28,662		-
Total real estate loans		3,864		1,119		4,983		629,465		634,448		-
Loans not secured by real estate:
Commercial loans		121		1,013		1,134		85,885		87,019		-
Farm loans		-		-		-		895		895		-
Consumer loans		93		5		98		9,907		10,005		-
All other loans		-		-		-		15,070		15,070		-
Total loans	$	4,078		2,137		6,215		741,222		747,437		-

December 31, 2016
(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	$	-		10		10		61,739		61,749		-
Single-family residential		4,890		80		4,970		235,730		240,700		-
Single-family residential -
Banco de la Gente stated income		5,250		249		5,499		34,690		40,189		-
Commercial		342		126		468		247,053		247,521		-
Multifamily and farmland		471		-		471		20,576		21,047		-
Total real estate loans		10,953		465		11,418		599,788		611,206		-
Loans not secured by real estate:
Commercial loans		273		-		273		87,323		87,596		-
Farm loans		-		-		-		-		-		-
Consumer loans		68		6		74		9,758		9,832		-
All other loans		3		-		3		15,174		15,177		-
Total loans	$	11,297		471		11,768		712,043		723,811		-

Non-accrual loans

(Dollars in thousands)
	September 30, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	16		22
Single-family residential		1,728		1,662
Single-family residential -
Banco de la Gente stated income		1,502		1,340
Commercial		1,422		669
Multifamily and farmland		12		78
Total real estate loans		4,680		3,771
Loans not secured by real estate:
Commercial loans		229		21
Consumer loans		22		33
Total	$	4,931		3,825

Impaired loans

September 30, 2017
(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	$	216		-		221		221		7
Single-family residential		4,978		1,142		4,232		5,374		42
Single-family residential -
Banco de la Gente stated income		17,127		-		17,743		17,743		1,123
Commercial		3,513		1,619		2,181		3,800		45
Multifamily and farmland		12		-		78		78		-
Total impaired real estate loans		25,846		2,761		24,455		27,216		1,217
Loans not secured by real estate:
Commercial loans		233		229		39		268		-
Consumer loans		179		-		189		189		3
Total impaired loans	$	26,258		2,990		24,683		27,673		1,220

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
	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	$	246		5		369		3		253		11		375		10
Single-family residential		4,783		71		6,556		40		5,113		202		8,921		122
Single-family residential -
Banco de la Gente stated income		17,283		225		17,395		207		17,235		694		17,673		657
Commercial		3,852		18		4,013		24		3,712		144		5,376		73
Multifamily and farmland		12		-		78		-		45		-		79		3
Total impaired real estate loans		26,176		319		28,411		274		26,358		1,051		32,424		865
Loans not secured by real estate:
Commercial loans		243		-		116		-		130		3		123		-
Consumer loans		183		3		225		2		206		8		235		6
Total impaired loans	$	26,602		322		28,752		276		26,694		1,062		32,782		871

December 31, 2016
(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	$	282		-		278		278		11		330		13
Single-family residential		5,354		703		4,323		5,026		47		7,247		164
Single-family residential -
Banco de la Gente stated income		18,611		-		18,074		18,074		1,182		17,673		861
Commercial		3,750		1,299		2,197		3,496		166		4,657		152
Multifamily and farmland		78		-		78		78		-		78		-
Total impaired real estate loans		28,075		2,002		24,950		26,952		1,406		29,985		1,190
Loans not secured by real estate:
Commercial loans		27		-		27		27		-		95		-
Consumer loans		211		-		202		202		3		222		8
Total impaired loans	$	28,313		2,002		25,179		27,181		1,409		30,302		1,198

Changes in the allowance for loan losses

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single- Family Residential - Banco de la Gente Stated Income			Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$	1,152			2,126			1,377			1,593			52			675			-		204			371		7,550
Charge-offs		-			(64	)		-			-			(66	)		(63	)		-		(288	)		-		(481	)
Recoveries		12			26			-			17			-			23			-		102			-		180
Provision		(178	)		(211	)		(101	)		(192	)		86			(74	)		-		143			122		(405	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Three months ended September 30, 2017:
Allowance for loan losses:
Beginning balance	$	1,183			1,819			1,293			1,463			75			704			-		158			472		7,167
Charge-offs		-			(20	)		-			-			-			(26	)		-		(106	)		-		(152	)
Recoveries		2			9			-			4			-			8			-		24			-		47
Provision		(199	)		69			(17	)		(49	)		(3	)		(125	)		-		85			21		(218	)
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Allowance for loan losses at September 30, 2017:
Ending balance: individually
evaluated for impairment	$	-			-			1,104			42			-			-			-		-			-		1,146
Ending balance: collectively
evaluated for impairment		986			1,877			172			1,376			72			561			-		161			493		5,698
Ending balance	$	986			1,877			1,276			1,418			72			561			-		161			493		6,844
Loans at September 30, 2017:
Ending balance	$	75,483			247,184			37,840			245,279			28,662			87,019			895		25,075			-		747,437
Ending balance: individually
evaluated for impairment	$	10			1,875			15,732			3,069			-			229			-		-			-		20,915
Ending balance: collectively
evaluated for impairment	$	75,473			245,309			22,108			242,210			28,662			86,790			895		25,075			-		726,522

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single- Family Residential - Banco de la Gente Stated Income			Commercial			Multifamily and Farmland		Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	2,185			2,534			1,460			1,917			-		842			-		172			479		9,589
Charge-offs		-			(158	)		-			(106	)		-		(129	)		-		(361	)		-		(754	)
Recoveries		8			18			-			15			-		165			-		112			-		318
Provision		(808	)		(388	)		(60	)		(250	)		47		(118	)		-		291			178		(1,108	)
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Three months ended September 30, 2016:
Allowance for loan losses:
Beginning balance	$	1,582			2,233			1,354			1,650			46		803			-		234			638		8,540
Charge-offs		-			(35	)		-			-			-		(89	)		-		(122	)		-		(246	)
Recoveries		2			6			-			5			-		60			-		38			-		111
Provision		(199	)		(198	)		46			(79	)		1		(14	)		-		64			19		(360	)
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Allowance for loan losses at September 30, 2016:
Ending balance: individually
evaluated for impairment	$	-			-			1,164			167			-		-			-		-			-		1,331
Ending balance: collectively
evaluated for impairment		1,385			2,006			236			1,409			47		760			-		214			657		6,714
Ending balance	$	1,385			2,006			1,400			1,576			47		760			-		214			657		8,045
Loans at September 30, 2016:
Ending balance	$	59,456			231,958			40,934			240,150			18,727		94,790			-		27,004			-		713,019
Ending balance: individually
evaluated for impairment	$	-			1,019			16,890			3,586			-		-			-		-			-		21,495
Ending balance: collectively
evaluated for impairment	$	59,456			230,939			24,044			236,564			18,727		94,790			-		27,004			-		691,524

Credit risk profile of each loan type based on internally assigned risk grade

September 30, 2017
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single- Family Residential - Banco de la Gente Stated Income		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		11,007		-		-		-		562		-		838		-		12,407
2- High Quality		11,541		118,964		-		35,461		1,986		18,836		-		3,502		1,161		191,451
3- Good Quality		51,307		87,337		15,318		190,950		23,565		62,767		756		5,015		13,096		450,111
4- Management Attention		6,063		21,783		15,318		13,366		1,942		4,362		139		582		813		64,368
5- Watch		6,285		4,679		3,506		4,034		1,157		235		-		24		-		19,920
6- Substandard		287		3,414		3,698		1,468		12		257		-		44		-		9,180
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	75,483		247,184		37,840		245,279		28,662		87,019		895		10,005		15,070		747,437

December 31, 2016

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single- Family Residential - Banco de la Gente Stated Income		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		14,996		-		-		-		541		-		959		-		16,496
2- High Quality		9,784		109,809		-		39,769		2,884		26,006		-		3,335		2,507		194,094
3- Good Quality		33,633		82,147		16,703		176,109		14,529		55,155		-		4,842		10,921		394,039
4- Management Attention		10,892		25,219		15,580		24,753		2,355		5,586		-		619		1,749		86,753
5- Watch		7,229		4,682		3,943		4,906		1,201		246		-		31		-		22,238
6- Substandard		211		3,847		3,963		1,984		78		62		-		42		-		10,187
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		4		-		4
Total	$	61,749		240,700		40,189		247,521		21,047		87,596		-		9,832		15,177		723,811

Analysis of TDR loans by loan type

Three and nine months ended September 30, 2017
(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential		2	$	22		22
Total real estate TDR loans		2		22		22
Total TDR loans		2	$	22		22

Three and nine months ended September 30, 2016

(Dollars in thousands)
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans
Single-family residential		1	$	41		41
Total real estate TDR loans		1		41		41
Total TDR loans		1	$	41		41

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4. Net Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Reconciliations of the amounts used in the computation of both basic earnings per common share and diluted earnings per common share

For the three months ended September 30, 2017
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,242		5,450,412	$	0.59
Effect of dilutive securities:
Restricted stock units		-		87,581
Diluted earnings per share	$	3,242		5,537,993	$	0.58

For the nine months ended September 30, 2017
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	8,258		5,440,995	$	1.52
Effect of dilutive securities:
Restricted stock units		-		85,969
Diluted earnings per share	$	8,258		5,526,964	$	1.49

For the three months ended September 30, 2016
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,458		5,470,826	$	0.45
Effect of dilutive securities:
Restricted stock units		-		74,042
Diluted earnings per share	$	2,458		5,544,868	$	0.44

For the nine months ended September 30, 2016
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	7,875		5,497,204	$	1.43
Effect of dilutive securities:
Restricted stock units		-		68,122
Diluted earnings per share	$	7,875		5,565,326	$	1.42

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6. Fair Value (Tables)

9 Months Ended

Sep. 30, 2017

Fair Value Disclosures [Abstract]

Available for sale securities measured at fair value on a recurring basis

(Dollars in thousands)
	September 30, 2017
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	56,893		-		56,893		-
U.S. Government
sponsored enterprises	$	40,954		-		40,954		-
State and political subdivisions	$	136,109		-		136,109		-
Corporate bonds	$	1,530		-		1,530		-
Trust preferred securities	$	250		-		-		250

(Dollars in thousands)
	December 31, 2016
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	67,585		-		67,585		-
U.S. Government
sponsored enterprises	$	38,222		-		38,222		-
State and political subdivisions	$	141,856		-		141,856		-
Corporate bonds	$	1,533		-		1,533		-
Trust preferred securities	$	750		-		-		750

Fair value measurements of investment securities available for sale using Level 3 significant unobservable inputs

(Dollars in thousands)
	Investment Securities Available for Sale
	Level 3 Valuation
Balance, beginning of period	$	750
Change in book value		-
Change in gain/(loss) realized and unrealized		-
Purchases/(sales and calls)		(500	)
Transfers in and/or (out) of Level 3		-
Balance, end of period	$	250
Change in unrealized gain/(loss) for assets still held in Level 3	$	-

Fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis

(Dollars in thousands)
	September 30, 2017
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	56,893		-		56,893		-
U.S. Government
sponsored enterprises	$	40,954		-		40,954		-
State and political subdivisions	$	136,109		-		136,109		-
Corporate bonds	$	1,530		-		1,530		-
Trust preferred securities	$	250		-		-		250

(Dollars in thousands)
	December 31, 2016
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	67,585		-		67,585		-
U.S. Government
sponsored enterprises	$	38,222		-		38,222		-
State and political subdivisions	$	141,856		-		141,856		-
Corporate bonds	$	1,533		-		1,533		-
Trust preferred securities	$	750		-		-		750

(Dollars in thousands)
	Fair Value September 30, 2017		Fair Value December 31, 2016		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	2,623		5,709	Rate lock commitment		N/A		N/A
Impaired loans	$	26,453		25,772	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0 - 25%
Other real estate	$	-		283	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0 - 25%

Carrying amount and estimated fair value of the Company's financial instruments

(Dollars in thousands)
			Fair Value Measurements at September 30, 2017
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	93,256		93,256		-		-		93,256
Investment securities available for sale	$	235,736		-		235,486		250		235,736
Other investments	$	2,680		-		-		2,680		2,680
Mortgage loans held for sale	$	2,623		-		-		2,623		2,623
Loans, net	$	740,593		-		-		745,481		745,481
Cash surrender value of life insurance	$	15,452		-		15,452		-		15,452
Liabilities:
Deposits	$	901,639		-		-		890,957		890,957
Securities sold under agreements
to repurchase	$	53,307		-		53,307		-		53,307
FHLB borrowings	$	20,000		-		19,967		-		19,967
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

(Dollars in thousands)
			Fair Value Measurements at December 31, 2016
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	70,094		70,094		-		-		70,094
Investment securities available for sale	$	249,946		-		249,196		750		249,946
Other investments	$	2,635		-		-		2,635		2,635
Mortgage loans held for sale	$	5,709		-		-		5,709		5,709
Loans, net	$	716,261		-		-		720,675		720,675
Cash surrender value of life insurance	$	14,952		-		14,952		-		14,952
Liabilities:
Deposits	$	892,918		-		-		884,510		884,510
Securities sold under agreements
to repurchase	$	36,434		-		36,434		-		36,434
FHLB borrowings	$	20,000		-		18,864		-		18,864
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

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2. Investment Securities (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Investment securities available for sale
Amortized Cost	$ 228,687	$ 244,924
Estimated Fair Value	235,736	249,946
Mortgage-backed securities
Investment securities available for sale
Amortized Cost	55,947	66,654
Gross Unrealized Gains	1,142	1,221
Gross Unrealized Losses	196	290
Estimated Fair Value	56,893	67,585
U.S. Government sponsored enterprises
Investment securities available for sale
Amortized Cost	40,815	38,188
Gross Unrealized Gains	290	308
Gross Unrealized Losses	151	274
Estimated Fair Value	40,954	38,222
State and political subdivisions
Investment securities available for sale
Amortized Cost	130,175	137,832
Gross Unrealized Gains	5,954	4,176
Gross Unrealized Losses	20	152
Estimated Fair Value	136,109	141,856
Corporate bonds
Investment securities available for sale
Amortized Cost	1,500	1,500
Gross Unrealized Gains	30	33
Gross Unrealized Losses	0	0
Estimated Fair Value	1,530	1,533
Trust preferred securities
Investment securities available for sale
Amortized Cost	250	750
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Estimated Fair Value	250	750
Total
Investment securities available for sale
Amortized Cost	228,687	244,924
Gross Unrealized Gains	7,416	5,738
Gross Unrealized Losses	367	716
Estimated Fair Value	$ 235,736	$ 249,946

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2. Investment securities, Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Investment securities with continuous unrealized loss position
Less than 12 Months, Fair Value	$ 16,509	$ 36,155
Less than 12 Months, Unrealized Losses	144	507
12 Months or More, Fair Value	16,540	10,123
12 Months or More, Unrealized Losses	223	209
Total, Fair Value	33,049	46,278
Total, Unrealized Losses	367	716
Mortgage-backed securities
Investment securities with continuous unrealized loss position
Less than 12 Months, Fair Value	10,540	15,594
Less than 12 Months, Unrealized Losses	95	290
12 Months or More, Fair Value	4,792	0
12 Months or More, Unrealized Losses	101	0
Total, Fair Value	15,332	15,594
Total, Unrealized Losses	196	290
U.S. Government sponsored enterprises
Investment securities with continuous unrealized loss position
Less than 12 Months, Fair Value	5,424	10,120
Less than 12 Months, Unrealized Losses	47	94
12 Months or More, Fair Value	10,762	9,562
12 Months or More, Unrealized Losses	104	180
Total, Fair Value	16,186	19,682
Total, Unrealized Losses	151	274
State and political subdivisions
Investment securities with continuous unrealized loss position
Less than 12 Months, Fair Value	545	10,441
Less than 12 Months, Unrealized Losses	2	123
12 Months or More, Fair Value	986	561
12 Months or More, Unrealized Losses	18	29
Total, Fair Value	1,531	11,002
Total, Unrealized Losses	$ 20	$ 152

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2. Investment securities, Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Amortized Cost
Due within one year	$ 13,299
Due from one to five years	95,096
Due from five to ten years	55,333
Due after ten years	8,762
Mortgage-backed securities	55,947
Trust preferred securities	250
Total	228,687	$ 244,924
Estimated Fair Value
Due within one year	13,397
Due from one to five years	99,142
Due from five to ten years	57,069
Due after ten years	8,985
Mortgage-backed securities	56,893
Trust preferred securities	250
Total	$ 235,736

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2. Investment Securities (Details Narrative) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Investments, Debt and Equity Securities [Abstract]
Pledged to secure public deposits	$ 88,200	$ 95,600

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3. Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Jun. 30, 2017	Dec. 31, 2016	Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015
Major classifications
Total loans	$ 747,437		$ 723,811	$ 713,019
Less allowance for loan losses	6,844	$ 7,167	7,550	8,045	$ 8,540	$ 9,589
Total net loans	740,593		716,261
Construction and land development
Major classifications
Total loans	75,483		61,749	59,456
Less allowance for loan losses	986	1,183	1,152	1,385	1,582	2,185
Single-family residential
Major classifications
Total loans	247,184		240,700	231,958
Less allowance for loan losses	1,877	1,819	2,126	2,006	2,233	2,534
Single-family residential - Banco de la Gente stated income
Major classifications
Total loans	37,840		40,189	40,934
Less allowance for loan losses	1,276	1,293	1,377	1,400	1,354	1,460
Commercial
Major classifications
Total loans	245,279		247,521	240,150
Less allowance for loan losses	1,418	1,463	1,593	1,576	1,650	1,917
Multifamily and Farmland
Major classifications
Total loans	28,662		21,047	18,727
Less allowance for loan losses	72	75	52	47	46	0
Total real estate loans
Major classifications
Total loans	634,448		611,206
Commercial loans (not secured by real estate)
Major classifications
Total loans	87,019		87,596	94,790
Less allowance for loan losses	561	704	675	760	803	842
Farm loans (not secured by real estate)
Major classifications
Total loans	895		0	0
Less allowance for loan losses	0	$ 0	0	$ 0	$ 0	$ 0
Consumer loans (not secured by real estate)
Major classifications
Total loans	10,005		9,832
All other loans (not secured by real estate)
Major classifications
Total loans	$ 15,070		$ 15,177

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3. Loans, Past Due (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016	Sep. 30, 2016
Past due loans
Loans 30-89 Days Past Due	$ 4,078	$ 11,297
Loans 90 or More Days Past Due	2,137	471
Total Past Due Loans	6,215	11,768
Total Current Loans	741,222	712,043
Total loans	747,437	723,811	$ 713,019
Accruing Loans 90 or More Days Past Due	0	0
Construction and land development
Past due loans
Loans 30-89 Days Past Due	206	0
Loans 90 or More Days Past Due	0	10
Total Past Due Loans	206	10
Total Current Loans	75,277	61,739
Total loans	75,483	61,749
Accruing Loans 90 or More Days Past Due	0	0
Single-family residential
Past due loans
Loans 30-89 Days Past Due	2,268	4,890
Loans 90 or More Days Past Due	416	80
Total Past Due Loans	2,684	4,970
Total Current Loans	244,500	235,730
Total loans	247,184	240,700
Accruing Loans 90 or More Days Past Due	0	0
Single-family residential - Banco de la Gente stated income
Past due loans
Loans 30-89 Days Past Due	1,363	5,250
Loans 90 or More Days Past Due	462	249
Total Past Due Loans	1,825	5,499
Total Current Loans	36,015	34,690
Total loans	37,840	40,189
Accruing Loans 90 or More Days Past Due	0	0
Commercial
Past due loans
Loans 30-89 Days Past Due	27	342
Loans 90 or More Days Past Due	229	126
Total Past Due Loans	256	468
Total Current Loans	245,023	247,053
Total loans	245,279	247,521
Accruing Loans 90 or More Days Past Due	0	0
Multifamily and Farmland
Past due loans
Loans 30-89 Days Past Due	0	471
Loans 90 or More Days Past Due	12	0
Total Past Due Loans	12	471
Total Current Loans	28,650	20,576
Total loans	28,662	21,047
Accruing Loans 90 or More Days Past Due	0	0
Total real estate loans
Past due loans
Loans 30-89 Days Past Due	3,864	10,953
Loans 90 or More Days Past Due	1,119	465
Total Past Due Loans	4,983	11,418
Total Current Loans	629,465	599,788
Total loans	634,448	611,206
Accruing Loans 90 or More Days Past Due	0	0
Commercial loans (not secured by real estate)
Past due loans
Loans 30-89 Days Past Due	121	273
Loans 90 or More Days Past Due	1,013	0
Total Past Due Loans	1,134	273
Total Current Loans	85,885	87,323
Total loans	87,019	87,596
Accruing Loans 90 or More Days Past Due	0	0
Farm loans (not secured by real estate)
Past due loans
Loans 30-89 Days Past Due	0	0
Loans 90 or More Days Past Due	0	0
Total Past Due Loans	0	0
Total Current Loans	895	0
Total loans	895	0
Accruing Loans 90 or More Days Past Due	0	0
Consumer loans (not secured by real estate)
Past due loans
Loans 30-89 Days Past Due	93	68
Loans 90 or More Days Past Due	5	6
Total Past Due Loans	98	74
Total Current Loans	9,907	9,758
Total loans	10,005	9,832
Accruing Loans 90 or More Days Past Due	0	0
All other loans (not secured by real estate)
Past due loans
Loans 30-89 Days Past Due	0	3
Loans 90 or More Days Past Due	0	0
Total Past Due Loans	0	3
Total Current Loans	15,070	15,174
Total loans	15,070	15,177
Accruing Loans 90 or More Days Past Due	$ 0	$ 0

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3. Loans, Nonaccrual (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Non-accrual loans
Non-accrual loans	$ 4,931	$ 3,825
Construction and land development
Non-accrual loans
Non-accrual loans	16	22
Single-family residential
Non-accrual loans
Non-accrual loans	1,728	1,662
Single-family residential - Banco de la Gente stated income
Non-accrual loans
Non-accrual loans	1,502	1,340
Commercial
Non-accrual loans
Non-accrual loans	1,422	669
Multifamily and Farmland
Non-accrual loans
Non-accrual loans	12	78
Total real estate loans
Non-accrual loans
Non-accrual loans	4,680	3,771
Commercial loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	229	21
Consumer loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	$ 22	$ 33

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3. Loans, Impaired (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Impaired loans
Unpaid Contractual Principal Balance	$ 26,258		$ 26,258		$ 28,313
Recorded Investment With No Allowance	2,990		2,990		2,002
Recorded Investment With Allowance	24,683		24,683		25,179
Recorded Investment in Impaired Loans	27,673		27,673		27,181
Related Allowance	1,220		1,220		1,409
Average Outstanding Impaired Loans	26,602	$ 28,752	26,694	$ 32,782	30,302
Interest Income Recognized	322	276	1,062	871	1,198
Construction and land development
Impaired loans
Unpaid Contractual Principal Balance	216		216		282
Recorded Investment With No Allowance	0		0		0
Recorded Investment With Allowance	221		221		278
Recorded Investment in Impaired Loans	221		221		278
Related Allowance	7		7		11
Average Outstanding Impaired Loans	246	369	253	375	330
Interest Income Recognized	5	3	11	10	13
Single-family residential
Impaired loans
Unpaid Contractual Principal Balance	4,978		4,978		5,354
Recorded Investment With No Allowance	1,142		1,142		703
Recorded Investment With Allowance	4,232		4,232		4,323
Recorded Investment in Impaired Loans	5,374		5,374		5,026
Related Allowance	42		42		47
Average Outstanding Impaired Loans	4,783	6,556	5,113	8,921	7,247
Interest Income Recognized	71	40	202	122	164
Single-family residential - Banco de la Gente stated income
Impaired loans
Unpaid Contractual Principal Balance	17,127		17,127		18,611
Recorded Investment With No Allowance	0		0		0
Recorded Investment With Allowance	17,743		17,743		18,074
Recorded Investment in Impaired Loans	17,743		17,743		18,074
Related Allowance	1,123		1,123		1,182
Average Outstanding Impaired Loans	17,283	17,395	17,235	17,673	17,673
Interest Income Recognized	225	207	694	657	861
Commercial
Impaired loans
Unpaid Contractual Principal Balance	3,513		3,513		3,750
Recorded Investment With No Allowance	1,619		1,619		1,299
Recorded Investment With Allowance	2,181		2,181		2,197
Recorded Investment in Impaired Loans	3,800		3,800		3,496
Related Allowance	45		45		166
Average Outstanding Impaired Loans	3,852	4,013	3,712	5,376	4,657
Interest Income Recognized	18	24	144	73	152
Multifamily and Farmland
Impaired loans
Unpaid Contractual Principal Balance	12		12		78
Recorded Investment With No Allowance	0		0		0
Recorded Investment With Allowance	78		78		78
Recorded Investment in Impaired Loans	78		78		78
Related Allowance	0		0		0
Average Outstanding Impaired Loans	12	78	45	79	78
Interest Income Recognized	0	0	0	3	0
Total real estate loans
Impaired loans
Unpaid Contractual Principal Balance	25,846		25,846		28,075
Recorded Investment With No Allowance	2,761		2,761		2,002
Recorded Investment With Allowance	24,455		24,455		24,950
Recorded Investment in Impaired Loans	27,216		27,216		26,952
Related Allowance	1,217		1,217		1,406
Average Outstanding Impaired Loans	26,176	28,411	26,358	32,424	29,985
Interest Income Recognized	319	274	1,051	865	1,190
Commercial loans (not secured by real estate)
Impaired loans
Unpaid Contractual Principal Balance	233		233		27
Recorded Investment With No Allowance	229		229		0
Recorded Investment With Allowance	39		39		27
Recorded Investment in Impaired Loans	268		268		27
Related Allowance	0		0		0
Average Outstanding Impaired Loans	243	116	130	123	95
Interest Income Recognized	0	0	3	0	0
Consumer loans (not secured by real estate)
Impaired loans
Unpaid Contractual Principal Balance	179		179		211
Recorded Investment With No Allowance	0		0		0
Recorded Investment With Allowance	189		189		202
Recorded Investment in Impaired Loans	189		189		202
Related Allowance	3		3		3
Average Outstanding Impaired Loans	183	225	206	235	222
Interest Income Recognized	$ 3	$ 2	$ 8	$ 6	$ 8

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3. Loans, Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Allowance for loan losses
Beginning balance	$ 7,167	$ 8,540	$ 7,550	$ 9,589
Charge-offs	(152)	(246)	(481)	(754)
Recoveries	47	111	180	318
Provision	(218)	(360)	(405)	(1,108)
Ending balance	6,844	8,045	6,844	8,045
Ending balance: individually evaluated for impairments	1,146	1,331	1,146	1,331
Ending balance: collectively evaluated for impairments	5,698	6,714	5,698	6,714
Ending balance	6,844	8,045	6,844	8,045
Loans
Ending balance	747,437	713,019	747,437	713,019
Ending balance: individually evaluated for impairment	20,915	21,495	20,915	21,495
Ending balance: collectively evaluated for impairment	726,522	691,524	726,522	691,524
Construction and land development
Allowance for loan losses
Beginning balance	1,183	1,582	1,152	2,185
Charge-offs	0	0	0	0
Recoveries	2	2	12	8
Provision	(199)	(199)	(178)	(808)
Ending balance	986	1,385	986	1,385
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	986	1,385	986	1,385
Ending balance	986	1,385	986	1,385
Loans
Ending balance	75,483	59,456	75,483	59,456
Ending balance: individually evaluated for impairment	10	0	10	0
Ending balance: collectively evaluated for impairment	75,473	59,456	75,473	59,456
Single-family residential
Allowance for loan losses
Beginning balance	1,819	2,233	2,126	2,534
Charge-offs	(20)	(35)	(64)	(158)
Recoveries	9	6	26	18
Provision	69	(198)	(211)	(388)
Ending balance	1,877	2,006	1,877	2,006
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	1,877	2,006	1,877	2,006
Ending balance	1,877	2,006	1,877	2,006
Loans
Ending balance	247,184	231,958	247,184	231,958
Ending balance: individually evaluated for impairment	1,875	1,019	1,875	1,019
Ending balance: collectively evaluated for impairment	245,309	230,939	245,309	230,939
Single-family residential - Banco de la Gente stated income
Allowance for loan losses
Beginning balance	1,293	1,354	1,377	1,460
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(17)	46	(101)	(60)
Ending balance	1,276	1,400	1,276	1,400
Ending balance: individually evaluated for impairments	1,104	1,164	1,104	1,164
Ending balance: collectively evaluated for impairments	172	236	172	236
Ending balance	1,276	1,400	1,276	1,400
Loans
Ending balance	37,840	40,934	37,840	40,934
Ending balance: individually evaluated for impairment	15,732	16,890	15,732	16,890
Ending balance: collectively evaluated for impairment	22,108	24,044	22,108	24,044
Commercial
Allowance for loan losses
Beginning balance	1,463	1,650	1,593	1,917
Charge-offs	0	0	0	(106)
Recoveries	4	5	17	15
Provision	(49)	(79)	(192)	(250)
Ending balance	1,418	1,576	1,418	1,576
Ending balance: individually evaluated for impairments	42	167	42	167
Ending balance: collectively evaluated for impairments	1,376	1,409	1,376	1,409
Ending balance	1,418	1,576	1,418	1,576
Loans
Ending balance	245,279	240,150	245,279	240,150
Ending balance: individually evaluated for impairment	3,069	3,586	3,069	3,586
Ending balance: collectively evaluated for impairment	242,210	236,564	242,210	236,564
Multifamily and Farmland
Allowance for loan losses
Beginning balance	75	46	52	0
Charge-offs	0	0	(66)	0
Recoveries	0	0	0	0
Provision	(3)	1	86	47
Ending balance	72	47	72	47
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	72	47	72	47
Ending balance	72	47	72	47
Loans
Ending balance	28,662	18,727	28,662	18,727
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	28,662	18,727	28,662	18,727
Commercial loans (not secured by real estate)
Allowance for loan losses
Beginning balance	704	803	675	842
Charge-offs	(26)	(89)	(63)	(129)
Recoveries	8	60	23	165
Provision	(125)	(14)	(74)	(118)
Ending balance	561	760	561	760
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	561	760	561	760
Ending balance	561	760	561	760
Loans
Ending balance	87,019	94,790	87,019	94,790
Ending balance: individually evaluated for impairment	229	0	229	0
Ending balance: collectively evaluated for impairment	86,790	94,790	86,790	94,790
Farm loans (not secured by real estate)
Allowance for loan losses
Beginning balance	0	0	0	0
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	0	0	0	0
Ending balance	0	0	0	0
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	0	0	0	0
Ending balance	0	0	0	0
Loans
Ending balance	895	0	895	0
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	895	0	895	0
Consumer And All Other Loans
Allowance for loan losses
Beginning balance	158	234	204	172
Charge-offs	(106)	(122)	(288)	(361)
Recoveries	24	38	102	112
Provision	85	64	143	291
Ending balance	161	214	161	214
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	161	214	161	214
Ending balance	161	214	161	214
Loans
Ending balance	25,075	27,004	25,075	27,004
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	25,075	27,004	25,075	27,004
Unallocated
Allowance for loan losses
Beginning balance	472	638	371	479
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	21	19	122	178
Ending balance	493	657	493	657
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	493	657	493	657
Ending balance	493	657	493	657
Loans
Ending balance	0	0	0	0
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0	$ 0

XML

3. Loans, Credit Risk (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016	Sep. 30, 2016
Credit risk profile
Total Loans	$ 747,437	$ 723,811	$ 713,019
Excellent Quality
Credit risk profile
Total Loans	12,407	16,496
High Quality
Credit risk profile
Total Loans	191,451	194,094
Good Quality
Credit risk profile
Total Loans	450,111	394,039
Management Attention
Credit risk profile
Total Loans	64,368	86,753
Watch
Credit risk profile
Total Loans	19,920	22,238
Substandard
Credit risk profile
Total Loans	9,180	10,187
Doubtful
Credit risk profile
Total Loans	0	0
Loss
Credit risk profile
Total Loans	0	4
Construction and land development
Credit risk profile
Total Loans	75,483	61,749
Single-family residential
Credit risk profile
Total Loans	247,184	240,700
Single-family residential - Banco de la Gente stated income
Credit risk profile
Total Loans	37,840	40,189
Commercial
Credit risk profile
Total Loans	245,279	247,521
Multifamily and Farmland
Credit risk profile
Total Loans	28,662	21,047
Commercial loans (not secured by real estate)
Credit risk profile
Total Loans	87,019	87,596
Farm loans (not secured by real estate)
Credit risk profile
Total Loans	895	0
Consumer loans (not secured by real estate)
Credit risk profile
Total Loans	10,005	9,832
All other loans (not secured by real estate)
Credit risk profile
Total Loans	15,070	15,177
Construction and land development
Credit risk profile
Total Loans	75,483	61,749	59,456
Construction and land development | Excellent Quality
Credit risk profile
Total Loans	0	0
Construction and land development | High Quality
Credit risk profile
Total Loans	11,541	9,784
Construction and land development | Good Quality
Credit risk profile
Total Loans	51,307	33,633
Construction and land development | Management Attention
Credit risk profile
Total Loans	6,063	10,892
Construction and land development | Watch
Credit risk profile
Total Loans	6,285	7,229
Construction and land development | Substandard
Credit risk profile
Total Loans	287	211
Construction and land development | Doubtful
Credit risk profile
Total Loans	0	0
Construction and land development | Loss
Credit risk profile
Total Loans	0	0
Single-family residential
Credit risk profile
Total Loans	247,184	240,700	231,958
Single-family residential | Excellent Quality
Credit risk profile
Total Loans	11,007	14,996
Single-family residential | High Quality
Credit risk profile
Total Loans	118,964	109,809
Single-family residential | Good Quality
Credit risk profile
Total Loans	87,337	82,147
Single-family residential | Management Attention
Credit risk profile
Total Loans	21,783	25,219
Single-family residential | Watch
Credit risk profile
Total Loans	4,679	4,682
Single-family residential | Substandard
Credit risk profile
Total Loans	3,414	3,847
Single-family residential | Doubtful
Credit risk profile
Total Loans	0	0
Single-family residential | Loss
Credit risk profile
Total Loans	0	0
Single-family residential - Banco de la Gente stated income
Credit risk profile
Total Loans	37,840	40,189	40,934
Single-family residential - Banco de la Gente stated income | Excellent Quality
Credit risk profile
Total Loans	0	0
Single-family residential - Banco de la Gente stated income | High Quality
Credit risk profile
Total Loans	0	0
Single-family residential - Banco de la Gente stated income | Good Quality
Credit risk profile
Total Loans	15,318	16,703
Single-family residential - Banco de la Gente stated income | Management Attention
Credit risk profile
Total Loans	15,318	15,580
Single-family residential - Banco de la Gente stated income | Watch
Credit risk profile
Total Loans	3,506	3,943
Single-family residential - Banco de la Gente stated income | Substandard
Credit risk profile
Total Loans	3,698	3,963
Single-family residential - Banco de la Gente stated income | Doubtful
Credit risk profile
Total Loans	0	0
Single-family residential - Banco de la Gente stated income | Loss
Credit risk profile
Total Loans	0	0
Commercial
Credit risk profile
Total Loans	245,279	247,521	240,150
Commercial | Excellent Quality
Credit risk profile
Total Loans	0	0
Commercial | High Quality
Credit risk profile
Total Loans	35,461	39,769
Commercial | Good Quality
Credit risk profile
Total Loans	190,950	176,109
Commercial | Management Attention
Credit risk profile
Total Loans	13,366	24,753
Commercial | Watch
Credit risk profile
Total Loans	4,034	4,906
Commercial | Substandard
Credit risk profile
Total Loans	1,468	1,984
Commercial | Doubtful
Credit risk profile
Total Loans	0	0
Commercial | Loss
Credit risk profile
Total Loans	0	0
Multifamily and Farmland
Credit risk profile
Total Loans	28,662	21,047	18,727
Multifamily and Farmland | Excellent Quality
Credit risk profile
Total Loans	0	0
Multifamily and Farmland | High Quality
Credit risk profile
Total Loans	1,986	2,884
Multifamily and Farmland | Good Quality
Credit risk profile
Total Loans	23,565	14,529
Multifamily and Farmland | Management Attention
Credit risk profile
Total Loans	1,942	2,355
Multifamily and Farmland | Watch
Credit risk profile
Total Loans	1,157	1,201
Multifamily and Farmland | Substandard
Credit risk profile
Total Loans	12	78
Multifamily and Farmland | Doubtful
Credit risk profile
Total Loans	0	0
Multifamily and Farmland | Loss
Credit risk profile
Total Loans	0	0
Commercial loans (not secured by real estate)
Credit risk profile
Total Loans	87,019	87,596	94,790
Commercial loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total Loans	562	541
Commercial loans (not secured by real estate) | High Quality
Credit risk profile
Total Loans	18,836	26,006
Commercial loans (not secured by real estate) | Good Quality
Credit risk profile
Total Loans	62,767	55,155
Commercial loans (not secured by real estate) | Management Attention
Credit risk profile
Total Loans	4,362	5,586
Commercial loans (not secured by real estate) | Watch
Credit risk profile
Total Loans	235	246
Commercial loans (not secured by real estate) | Substandard
Credit risk profile
Total Loans	257	62
Commercial loans (not secured by real estate) | Doubtful
Credit risk profile
Total Loans	0	0
Commercial loans (not secured by real estate) | Loss
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate)
Credit risk profile
Total Loans	895	0	$ 0
Farm loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate) | High Quality
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate) | Good Quality
Credit risk profile
Total Loans	756	0
Farm loans (not secured by real estate) | Management Attention
Credit risk profile
Total Loans	139	0
Farm loans (not secured by real estate) | Watch
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate) | Substandard
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate) | Doubtful
Credit risk profile
Total Loans	0	0
Farm loans (not secured by real estate) | Loss
Credit risk profile
Total Loans	0	0
Consumer loans (not secured by real estate)
Credit risk profile
Total Loans	10,005	9,832
Consumer loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total Loans	838	959
Consumer loans (not secured by real estate) | High Quality
Credit risk profile
Total Loans	3,502	3,335
Consumer loans (not secured by real estate) | Good Quality
Credit risk profile
Total Loans	5,015	4,842
Consumer loans (not secured by real estate) | Management Attention
Credit risk profile
Total Loans	582	619
Consumer loans (not secured by real estate) | Watch
Credit risk profile
Total Loans	24	31
Consumer loans (not secured by real estate) | Substandard
Credit risk profile
Total Loans	44	42
Consumer loans (not secured by real estate) | Doubtful
Credit risk profile
Total Loans	0	0
Consumer loans (not secured by real estate) | Loss
Credit risk profile
Total Loans	0	4
All other loans (not secured by real estate)
Credit risk profile
Total Loans	15,070	15,177
All other loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total Loans	0	0
All other loans (not secured by real estate) | High Quality
Credit risk profile
Total Loans	1,161	2,507
All other loans (not secured by real estate) | Good Quality
Credit risk profile
Total Loans	13,096	10,921
All other loans (not secured by real estate) | Management Attention
Credit risk profile
Total Loans	813	1,749
All other loans (not secured by real estate) | Watch
Credit risk profile
Total Loans	0	0
All other loans (not secured by real estate) | Substandard
Credit risk profile
Total Loans	0	0
All other loans (not secured by real estate) | Doubtful
Credit risk profile
Total Loans	0	0
All other loans (not secured by real estate) | Loss
Credit risk profile
Total Loans	$ 0	$ 0

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3. Loans, TDR Loan Modifications (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017 USD ($) Integer	Sep. 30, 2016 USD ($) Integer	Sep. 30, 2017 USD ($) Integer	Sep. 30, 2016 USD ($) Integer
Single-family residential TDR
TDR Loans
Number of Contracts | Integer	2	1	2	1
Pre-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41
Post-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41
Total real estate TDR loans
TDR Loans
Number of Contracts | Integer	2	1	2	1
Pre-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41
Post-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41
Total TDR Loans
TDR Loans
Number of Contracts | Integer	2	1	2	1
Pre-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41
Post-Modification Outstanding Recorded Investment	$ 22	$ 41	$ 22	$ 41

XML

3. Loans (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016
Receivables [Abstract]
Percentage of construction and land development loans in Bank's loan portfolio	10.00%		10.00%
Percentage of single-family residential loans in Bank's loan portfolio	38.00%		38.00%
Percentage of Single-family residential - Banco de la Gente stated income loans in Bank's loan portfolio	5.00%		5.00%
Percentage of commercial real estate loans in Bank's loan portfolio	33.00%		33.00%
Percentage of commercial loans in Bank's loan portfolio	12.00%		12.00%
Accruing impaired loans	$ 21,300	$ 22,900	$ 21,300	$ 22,900	$ 23,500
Interest income recognized on accruing impaired loans	322	276	1,062	$ 871	1,198
Provision for loan losses	(218)	$ (360)
TDR loans modified, past-due TDR loans and non-accrual TDR Loans	$ 2,600		$ 2,600		$ 5,900

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4. Net Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Net Earnings
Basic earnings per share	$ 3,242	$ 2,458	$ 8,258	$ 7,875
Effect of dilutive securities: Restricted stock units	0	0	0	0
Diluted earnings per share	$ 3,242	$ 2,458	$ 8,258	$ 7,875
Weighted Average Number of Shares
Basic earnings per share (in shares)	5,450,412	5,470,826	5,440,995	5,497,204
Effect of dilutive securities: Restricted stock units (in shares)	87,581	74,042	85,969	68,122
Diluted earnings per share (in shares)	5,537,993	5,544,868	5,526,964	5,565,326
Per Share Amount
Basic earnings per share	$ 0.59	$ 0.45	$ 1.52	$ 1.43
Diluted earnings per share	$ 0.58	$ 0.44	$ 1.49	$ 1.42

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5. Stock-Based Compensation (Details Narrative) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Unrecognized compensation cost	$ 389
Recognized compensation expense	$ 566	$ 476

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6. Fair Value, Level of Hierarchy (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Estimated Fair Value	$ 235,736	$ 249,946
Level 1
Estimated Fair Value	0	0
Level 2
Estimated Fair Value	235,486	249,196
Level 3
Estimated Fair Value	250	750
Mortgage-backed securities
Estimated Fair Value	56,893	67,585
Mortgage-backed securities | Level 1
Estimated Fair Value	0	0
Mortgage-backed securities | Level 2
Estimated Fair Value	56,893	67,585
Mortgage-backed securities | Level 3
Estimated Fair Value	0	0
U.S. Government sponsored enterprises
Estimated Fair Value	40,954	38,222
U.S. Government sponsored enterprises | Level 1
Estimated Fair Value	0	0
U.S. Government sponsored enterprises | Level 2
Estimated Fair Value	40,954	38,222
U.S. Government sponsored enterprises | Level 3
Estimated Fair Value	0	0
State and political subdivisions
Estimated Fair Value	136,109	141,856
State and political subdivisions | Level 1
Estimated Fair Value	0	0
State and political subdivisions | Level 2
Estimated Fair Value	136,109	141,856
State and political subdivisions | Level 3
Estimated Fair Value	0	0
Corporate bonds
Estimated Fair Value	1,530	1,533
Corporate bonds | Level 1
Estimated Fair Value	0	0
Corporate bonds | Level 2
Estimated Fair Value	1,530	1,533
Corporate bonds | Level 3
Estimated Fair Value	0	0
Trust preferred securities
Estimated Fair Value	250	750
Trust preferred securities | Level 1
Estimated Fair Value	0	0
Trust preferred securities | Level 2
Estimated Fair Value	0	0
Trust preferred securities | Level 3
Estimated Fair Value	$ 250	$ 750

XML

6. Fair Value, Level 3 Valuation (Details) - Level 3 $ in Thousands	9 Months Ended
	Sep. 30, 2017 USD ($)
Investment Securities Available for Sale Level 3 Valuation
Balance, beginning of period	$ 750
Change in book value	0
Change in gain/(loss) realized and unrealized	0
Purchases/(sales and calls)	(500)
Transfers in and/or (out) of Level 3	0
Balance, end of period	250
Change in unrealized gain/(loss) for assets still held in Level 3	$ 0

XML

6. Fair Value, Loans Impaired (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Mortgage loans held for sale	$ 2,623	$ 5,709
Impaired loans	26,453	25,772
Other real estate	$ 0	283
Mortgage loans held for sale [Member]
Valuation Technique	Rate lock commitment
Significant Unobservable Inputs	N/A
General Range of Significant Unobservable Input Values	N/A
Impaired loans [Member]
Valuation Technique	Appraised value and discounted cash flows
Significant Unobservable Inputs	Discounts to reflect current market conditions and ultimate collectibility
General Range of Significant Unobservable Input Values	0 - 25%
Other real estate [Member]
Valuation Technique	Appraised value
Significant Unobservable Inputs	Discounts to reflect current market conditions and estimated costs to sell
General Range of Significant Unobservable Input Values	0 - 25%
Level 1
Mortgage loans held for sale	$ 0	0
Impaired loans	0	0
Other real estate	0	0
Level 2
Mortgage loans held for sale	0	0
Impaired loans	0	0
Other real estate	0	0
Level 3
Mortgage loans held for sale	2,623	5,709
Impaired loans	26,453	25,772
Other real estate	$ 0	$ 283

XML

6. Fair Value, Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Assets:
Cash and cash equivalents	$ 93,256	$ 70,094
Investment securities available for sale	235,736	249,946
Other investments	2,680	2,635
Mortgage loans held for sale	2,623	5,709
Loans, net	740,593	716,261
Cash surrender value of life insurance	15,452	14,952
Liabilities:
Deposits	901,639	892,918
Securities sold under agreements to repurchase	53,307	36,434
FHLB borrowings	20,000	20,000
Junior subordinated debentures	20,619	20,619
Estimated Fair Value
Assets:
Cash and cash equivalents	93,256	70,094
Investment securities available for sale	235,736	249,946
Other investments	2,680	2,635
Mortgage loans held for sale	2,623	5,709
Loans, net	745,481	720,675
Cash surrender value of life insurance	15,452	14,952
Liabilities:
Deposits	890,957	884,510
Securities sold under agreements to repurchase	53,307	36,434
FHLB borrowings	19,967	18,864
Junior subordinated debentures	20,619	20,619
Level 1
Assets:
Cash and cash equivalents	93,256	70,094
Investment securities available for sale	0	0
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	0	0
FHLB borrowings	0	0
Junior subordinated debentures	0	0
Level 2
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	235,486	249,196
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	15,452	14,952
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	53,307	36,434
FHLB borrowings	19,967	18,864
Junior subordinated debentures	20,619	20,619
Level 3
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	250	750
Other investments	2,680	2,635
Mortgage loans held for sale	2,623	5,709
Loans, net	745,481	720,675
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	890,957	884,510
Securities sold under agreements to repurchase	0	0
FHLB borrowings	0	0
Junior subordinated debentures	$ 0	$ 0