10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2019

Peoples Bancorp of North Carolina, Inc.

( Exact Name of Registrant as Specified in Its Charter)

North Carolina

(State or Other Jurisdiction of Incorporation)

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)

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

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

Common Stock, no par value

(title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $136,593,960 based on the closing price of such common stock on June 30, 2019, which was $30.05 per share.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,914,304 shares of common stock, outstanding at February 29, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2019 (the “Annual Report”), which will be included as Appendix A to the Proxy Statement for the 2020 Annual Meeting of Shareholders, are incorporated by reference into Part II and included as Exhibit 13 to this Form 10-K.

Portions of the Proxy Statement for the 2019 Annual Meeting of Shareholders of Peoples Bancorp of North Carolina, Inc. to be held on May 7, 2020 (the “Proxy Statement”), are incorporated by reference into Part III.

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

PEOPLES BANCORP OF NORTH CAROLINA, INC.

FORM 10-K CROSS REFERENCE INDEX

	2019 Form 10-K	Notice of 2020 Annual Meeting, Proxy Statement and Annual Report
	Page	Page
PART I
Item 1 - Business	4 - 11	N/A
Item 1A - Risk Factors	11 - 21	N/A
Item 1B - Unresolved Staff Comments	21	N/A
Item 2 - Properties	22	N/A
Item 3 - Legal Proceedings	23	N/A
Item 4 - Mine Safety Disclosures	23	N/A
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23 - 25	N/A
Item 6 - Selected Financial Data	25	A-3
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	26	A-4 - A-23
Item 7A - Quantitative and Qualitative Disclosures About Market Risk	26	A-22 - A-23
Item 8 - Financial Statements and Supplementary Data	26	A-24 - A-68
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	26	N/A
Item 9A - Controls and Procedures	26 - 27	N/A
Item 9B - Other Information	27	N/A
PART III
Item 10 - Directors and Executive Officers and Corporate Governance	27	12 and A-69
Item 11 - Executive Compensation	27	14 - 23
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	28	5 - 7
Item 13 - Certain Relationships and Related Transactions and Director Independence	28	11 and 25
Item 14 - Principal Accountant Fees and Services	28	32
PART IV
Item 15 - Exhibits and Financial Statement Schedules	29 - 32	N/A
Signatures	33	N/A

PART I

ITEM 1.

BUSINESS

General

Peoples Bancorp of North Carolina, Inc. (“Bancorp”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”). Bancorp is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. Bancorp has no operations and conducts no business of its own other than owning the Bank. Accordingly, the discussion of the business which follows concerns the business conducted by the Bank, unless otherwise indicated. Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries are collectively called the “Company”.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 20 banking offices, as of December 31, 2019, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius, Mooresville, Raleigh, and Cary North Carolina. The Bank also operates loan production offices in Charlotte, Denver and Durham, North Carolina. The Company’s fiscal year ends December 31. At December 31, 2019, the Company had total assets of $1.2 billion, net loans of $843.2 million, deposits of $966.5 million, total securities of $200.0 million, and shareholders’ equity of $134.1 million.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices 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 Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s deposit and loan customers are individuals and small to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated thorough the Bank’s Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-23 of the Annual Report, which is included in this Form 10-K as Exhibit (13).

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

At December 31, 2019, the Company employed 306 full-time employees and 31 part-time employees, which equated to 326 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2019, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property to be appraised is located. This type of service ensures that the appraisal process remains independent from the financing process within the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted. In 2019 the Company launched PB Insurance Agency, which is part of CBRES.

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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 in December 2006 to repay 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 Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.

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.

Market Area

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

Employment in the Bank’s primary market area is diversified among manufacturing, retail and wholesale trade, technology, services and utilities. Catawba County’s largest employers include Catawba County Schools, Frye Regional Medical Center, Catawba Valley Medical Center, Merchant Distributors, Inc. (wholesale food distributor), Catawba County, CommScope, Inc. (manufacturer of fiber optic cable and accessories), Corning Optical Communications (manufacturer of fiber optic cable and accessories), Ethan Allen (furniture manufacturer), HSM (manufacturing) and Advance Pierre Foods (restaurants and bakeries). Lincoln County’s largest employers include Lincoln County Schools, County of Lincoln, Charlotte Mecklenburg Hospital, RSI Home Products (manufacturing), Wal-Mart Associates Inc., The Timken Company (manufacturing), Julius Blum Inc. (manufacturing), Lowes Home Centers Inc., Cataler North America (manufacturing) and Congruity HR (professional & business services).

Competition

The Bank has operated in the Catawba Valley region of North Carolina for over 100 years and is the only financial institution headquartered in Newton, North Carolina. Nevertheless, the Bank faces strong competition both in attracting deposits and making loans. Its most direct competition for deposits has historically come from other commercial banks, credit unions and brokerage firms located in its primary market area, including large financial institutions. One national money center commercial bank is headquartered in Charlotte, North Carolina. Based upon June 30, 2019 comparative data, the Bank had 20.97% of the deposits in Catawba County, placing it second in deposit size among a total of 11 banks with branch offices in Catawba County; 9.54% of the deposits in Lincoln County, placing it fifth in deposit size among a total of ten banks with branch offices in Lincoln County; and 13.29% of the deposits in Alexander County, placing it fifth in deposit size among a total of six banks with branch offices in Alexander County.

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

 5

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

Supervision and Regulation

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

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

  In addition, insured depository institutions under common control are required to reimburse the FDIC for any loss suffered by its deposit insurance funds as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the deposit insurance funds. The FDIC’s claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

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

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

●

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

●

increased capital and liquidity requirements;

●

increased regulatory examination fees; and

●

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

6

While much of the original provisions of the Dodd-Frank Act were not directly applicable to the Company due to size thresholds, many of the requirements of the Dodd-Frank Act remain subject to implementation over the course of several years. While the Company does not currently expect the final requirements of the Dodd-Frank Act to have a material adverse impact on the Company, we do expect them to negatively impact our profitability, require changes to certain of our business practices, including limitations on fee income opportunities, and impose more stringent capital, liquidity and leverage requirements upon the Company. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with the new statutory and regulatory requirements.

In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Economic Growth Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory changes for banks and their holding companies.

The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and provides for an alternative capital rule which financial institutions and their holding companies with total consolidated assets of less than $10 billion may elect to utilize. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, which has been proposed to be 9% by the federal regulators. The Community Bank Leverage Ratio provides for a simpler calculation of a bank’s capital ratio than the Basel III provisions currently in place (see below). Any qualifying depository institution or its holding company that exceeds the Community Bank Leverage Ratio will be considered to have met generally applicable leverage and risk-based regulatory capital requirements and any qualifying depository institution that exceeds the new ratio will be considered to be “well capitalized” under the prompt corrective action rules. In addition, the Economic Growth Act includes regulatory relief for community banks of certain sizes regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans. We continue to evaluate the impact that the rules issued thus far under the Economic Growth Act will have on the Bank, but we currently do not believe that it will be significant. At this time, we do not expect to opt-in to the ability to utilize the Community Bank Leverage Ratio and will instead continue to use the Basel III standards.

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

Capital Adequacy. At December 31, 2019, the Bank exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 11.61%, common equity Tier 1 risk-based capital ratio of 15.09%, Tier 1 risk-based capital ratio of 15.09% and total risk-based capital ratio of 15.79%. At December 31, 2019, the Company also exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 11.91%, common equity Tier 1 risk-based capital ratio of 13.79%, Tier 1 risk-based capital ratio of 15.37% and total risk-based capital ratio of 16.08%.

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

●

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

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

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

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

 7

●

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

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

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

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

The final rule provides that the failure to maintain the minimum conservation buffer will result in restrictions on capital distributions and discretionary cash bonus payments to executive officers. If a banking organization’s conservation buffer is less than 0.625%, the banking organization may not make any capital distributions or discretionary cash bonus payments to executive officers. If the conservation buffer is greater than 0.625% but not greater than 1.25%, capital distributions and discretionary cash bonus payments are limited to 20% of net income for the four calendar quarters preceding the applicable calendar quarter (net of any such capital distributions), or eligible retained income. If the conservation buffer is greater than 1.25% but not greater than 1.875%, the limit is 40% of eligible retained income, and if the conservation buffer is greater than 1.875% but not greater than 2.5%, the limit is 60% of eligible retained income. The preceding thresholds for the conservation buffer and related restrictions represent the fully phased in rules effective no later than January 1, 2019. Such thresholds were phased in incrementally throughout the phase in period, with the lowest thresholds having become effective January 1, 2016.

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

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

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

 

8

We recognized approximately $119,000, $328,000, and $347,000 in FDIC insurance expense in 2019, 2018, and 2017, respectively. In November 2018, the FDIC announced that the Deposit Insurance Fund (“DIF”) reserve ratio exceeded the statutory minimum of 1.35% as of September 30, 2018. Among other things, this resulted in the FDIC awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior years. We were notified in January 2019 that we had received approximately $272,000 in credits that would be available to offset deposit insurance assessments once the DIF reached 1.38%. The DIF reached 1.38% as of June 30, 2019 and therefore, the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the second quarter of 2019. We expect to utilize all credits by end of the first quarter of 2020, and thus we expect our FDIC insurance expense to increase in 2020 compared to 2019.

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

Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.25% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity-based stock ownership requirement. On December 31, 2019, the Bank was in compliance with this requirement.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination, which was conducted during February 2017.

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

Federal Securities Law. The Company has registered its common stock with the Securities and Exchange Commission (“SEC”) pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended from time to time (the “Exchange Act”). As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company.

Transactions with Affiliates.Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.

9

Loans to One Borrower.The Bank is subject to the loans-to-one-borrower limits imposed by North Carolina law, which are substantially the same as those applicable to national banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the Bank’s total equity capital. At December 31, 2019, this limit was $22.4 million. This limit is increased by an additional 10% of the Bank’s total equity capital, or $37.3 million as of December 31, 2019, for loans and extensions of credit that are fully secured by readily marketable collateral.

 

Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act (the “GLB Act”) dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited. In doing so, it increased competition in the financial services industry, presenting greater opportunities for our larger competitors, which were more able to expand their service and products than smaller, community-oriented financial institutions, such as the Bank.

USA Patriot Act of 2001. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the “Patriot Act”) was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Patriot Act was intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The impact of the Patriot Act on financial institutions of all kinds has been significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

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

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 mandates for public companies a variety of reforms intended to address corporate and accounting fraud and provides for the establishment of the Public Company Accounting Oversight Board (the “PCAOB”) which enforces auditing, quality control and independence standards for firms that audit SEC-reporting companies. The Sarbanes-Oxley Act imposes higher standards for auditor independence and restricts the provision of consulting services by auditing firms to companies they audit and requires that certain audit partners be rotated periodically. It also requires chief executive officers and chief financial officers, or their equivalents, to certify the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement, and increases the oversight and authority of audit committees of publicly traded companies.

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

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

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

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

Available Information

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

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

ITEM 1A.

RISK FACTORS

The following are potential risks that management considers material and that could affect the future operating results and financial condition of the Bank and the Company. The risks are not listed in any particular order of importance, and there is the potential that there are other risks that have either not been identified or that management believed to be immaterial but which could in fact adversely affect the operating results and financial condition of the Bank and the Company.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

Our business could be adversely affected by current conditions in the financial markets and economic conditions generally.

Our business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on our operations and financial condition. Sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business: 

● 

a decrease in the demand for loans or other products and services offered by us;

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a decrease in the value of our loans or other assets secured by consumer or commercial real estate;

● 

a decrease in deposit balances due to overall reductions in the accounts of customers;

● 

an impairment of certain intangible assets or investment securities;

● 

a decreased ability to raise additional capital on terms acceptable to us or at all; or

● 

an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs and provision for credit losses, which would reduce our earnings.

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Financial reform legislation enacted by Congress and resulting regulations have increased, and are expected to continue to increase our costs of operations.

Congress enacted the Dodd-Frank Act in 2010. This law has significantly changed the structure of the bank regulatory system and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations. Although some of these regulations have been promulgated, additional regulations could be issued.

It is difficult to quantify what specific impact the Dodd-Frank Act and related regulations have had on the Company to date and what impact yet to be written regulations will have on us in the future. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

Notwithstanding the foregoing, on February 3, 2017, the President of the United States issued an executive order identifying “core principles” for the administration’s financial services regulatory policy and directing the Secretary of the Treasury, in consultation with the heads of other financial regulatory agencies, to evaluate how the current regulatory framework promotes or inhibits the principles and what actions have been, and are being, taken to promote the principles. In response to the executive order, on June 12, 2017, October 6, 2017 and October 26, 2017, respectively, the U.S. Department of the Treasury issued the first three of four reports recommending a number of comprehensive changes in the current regulatory system for U.S. depository institutions, the U.S. capital markets and the U.S. asset management and insurance industries that may serve to reduce the impact of existing and future regulations on our operations. There can be no assurance that such regulations will be implemented or that they will reduce the impact of existing and future regulations on our operations.

Increases in FDIC insurance premiums may adversely affect the Company’s net income and profitability.

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

Market developments may adversely affect our industry, business and results of operations.

Significant declines in the residential or commercial real estate markets, with falling prices and increasing foreclosures and unemployment, can result in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. As a consequence, the credit quality of banks may quickly deteriorate and their net income and results of operations can be adversely impacted. In such situations many lenders and institutional investors may reduce, and in some cases, cease to provide funding to borrowers including other financial institutions. Although the Company and the Bank are currently “well capitalized,” we are part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and/or reduced business activity could materially adversely affect our business, financial condition and results of operations.

Loss of key personnel could adversely impact results.

The success of the Bank has been and will continue to be greatly influenced by the ability to retain the services of existing senior management. The Bank has benefited from consistency within its senior management team, with its top three executives averaging more than 20 years of service with the Bank. The Company has entered into employment contracts with each of these top management officers. One of these officers, Joe Lampron, Executive Vice President and Chief Financial Officer of the Company and the Bank, has announced his intention to retire in June 2020. The inability to retain qualified personnel to replace Mr. Lampron, the loss of the services of any other key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on the business and financial results of the Bank.

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

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

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

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

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

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

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

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

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Changes in interest rates affect profitability and assets.

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

We measure interest rate risk under various rate scenarios using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations, is presented within “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” of the Annual Report which is included in this Form 10-K as Exhibit (13).

The Bank faces strong competition from other banks and financial institutions which can hurt its business.

The financial services industry is highly competitive. The Bank competes against commercial banks, savings banks, savings and loan associations, credit unions, mortgage banks, brokerage firms, investment advisory firms, insurance companies and other financial institutions. Many of these entities are larger organizations with significantly greater financial, management and other resources than the Bank has. Moreover, two national money center commercial banks are headquartered in Charlotte, North Carolina, only 40 miles from the Bank’s primary market area.

While management believes it can and does successfully compete with other financial institutions in our market, we may face a competitive disadvantage as a result of our smaller size and lack of geographic diversification.

Changes in technology may impact the Bank’s business.

The Bank uses various technologies in its business and the banking industry is undergoing rapid technological changes. The effective use of technology increases efficiency and enables financial institutions to reduce costs. The Bank’s future success will depend in part on its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as create additional efficiencies in the Bank’s operations. The Bank’s competitors may have substantially greater resources to invest in technological improvements.

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

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

As discussed in Item 3. Legal Proceedings, the NCDOR (as defined on page 21) is seeking to disallow certain tax credits taken by the Bank in prior tax years from an investment made by the Bank. While the Bank purchased a Guaranty Agreement along with the investment, which we believe limits our exposure, there can be no assurance that the guarantor will perform under the Guaranty Agreement or that we will recover under the Guaranty Agreement. For additional information concerning the disallowance of the tax credits, see Item 3. Legal Proceedings on page 23.

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

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

 

14

 

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

Our internal controls may be ineffective.

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

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

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

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

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

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of these possible events, there can be no assurance that any such failure, interruption or security breach will not occur or, if any does occur, that it can be sufficiently remediated.

There have been increasing efforts on the part of third parties, including through cyber-attacks, to breach data security at financial institutions or with respect to financial transactions. There have been numerous instances involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information or the destruction or theft of corporate data. In addition, because the techniques used to cause such security breaches change frequently, often are not recognized until launched against a target and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures. The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches.

The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and business.

15

Liquidity is essential to our businesses.

Our liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.

Negative publicity could damage our reputation

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

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

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

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

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

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

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

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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 December 31, 2019, commercial real estate loans comprised approximately 34% of the Bank’s total loan portfolio.

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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 December 31, 2019, commercial loans comprised approximately 12% of the Bank’s total loan portfolio.

16

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Construction and land development loans. The risk of loss is largely dependent on our 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 our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our 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 December 31, 2019, construction and land development loans comprised approximately 11% 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 December 31, 2019, single-family residential loans comprised approximately 35% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 4% of the Bank’s total loan portfolio.

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

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

●

general or local economic conditions;

●

environmental cleanup liability;

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neighborhood values;

●

interest rates;

●

real estate tax rates;

●

operating expenses of the mortgaged properties;

●

supply of and demand for rental units or properties;

●

ability to obtain and maintain adequate occupancy of the properties;

●

zoning laws;

●

governmental rules, regulations and fiscal policies; and

●

acts of God.

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

We are subject to extensive regulation and oversight, and depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action.

We are subject to extensive regulation and supervision, including examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on us if they determine, upon conclusion of their examination or otherwise, violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, consent orders, civil money penalties and termination of deposit insurance and bank closure. Enforcement actions may be taken regardless of the capital levels of the institution, and regardless of prior examination findings. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective actions. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions, paying dividends or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. The imposition of regulatory sanctions, including monetary penalties, may have a material impact on our financial condition and results of operations and/or damage our reputation. In addition, compliance with any such action could distract management’s attention from normal operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities and limit our ability to raise capital.

 17

We face risks related to the Bank Secrecy Act and other anti-money laundering statutes and regulations.

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

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

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

  The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, and investment banks. Defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Such losses could materially and adversely affect our business, financial condition or results of operations.

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

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

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

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

18

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

The trading volume in our common stock is less than that of larger public companies which can cause price volatility.

The trading history of our common stock has been characterized by relatively low trading volume. The value of a shareholder’s investment may be subject to sudden decreases due to the volatility of the price of our common stock, which trades on the NASDAQ Global Market.

The market price of our common stock may be volatile and subject to fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

●

actual or anticipated fluctuation in our operating results;

●

changes in interest rates;

●

changes in the legal or regulatory environment in which we operate;

●

press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;

●

changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;

●

future sales of our common stock;

●

changes in economic conditions in our market, general conditions in the U.S. economy, financial markets or the banking industry; and

●

other developments affecting our competitors or us.

These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent a shareholder from selling common stock at or above the current market price. These factors may also adversely affect the Company’s ability to raise capital in the open market if needed. In addition, the Company cannot say with any certainty that a more active and liquid trading market for its common stock will develop.

  Our stock price can be volatile.

Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:

●

actual or anticipated variations in quarterly results of operations;

●

recommendations by securities analysts;

●

operating results and stock price performance of other companies that investors deem comparable to us;

●

news reports relating to trends, concerns, and other issues in the financial services industry;

●

perceptions in the marketplace regarding us and/or our competitors;

●

new technology used or services offered by competitors;

●

significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; and

●

changes in government regulations.

19

Our common stock is not FDIC insured.

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

We may reduce or eliminate dividends on our common stock.

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

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

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

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

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

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

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

Pandemics, natural disasters and geopolitical events beyond our control could adversely affect us.

Pandemics, natural disasters such as extreme weather conditions, hurricanes, floods, and other acts of nature and geopolitical events involving civil unrest, changes in government regimes, terrorism, or military conflict could adversely affect our business operations and those of our customers and have significant negative impacts upon economic conditions and cause substantial damage and loss to real and personal property. These pandemics, natural disasters and geopolitical events could impair our borrowers' ability to service their loans, decrease the level and duration of deposits by customers, erode the value of loan collateral, and result in an increase in the amount of our non-performing loans and a higher level of non-performing assets (including real estate owned), net charge-offs, and provision for loan losses, and could materially and adversely affect our business, financial condition, results of operations and the value of our common stock.

20

We depend on the accuracy and completeness of information about customers.

In deciding whether to extend credit, open a bank account or enter into other transactions with customers, we may rely on information furnished to us by or on behalf of customers, including financial statements and other financial information. We also may rely on representations of customers as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. We may further rely on invoices, contracts, and other supporting documentation provided by our customers, as well as our customers' representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants' reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting or reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

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

The Bank’s five largest funding relationships, including deposits and securities sold under agreements to repurchase, amounted to $121.9 million at December 31, 2019. These balances represent 12.30% of total deposits and securities sold under agreements to repurchase combined at December 31, 2019. Total deposits for the five largest relationships referenced above amounted to $107.7 million, or 11.14% of total deposits at December 31, 2019. Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $14.2 million, or 58.76% of total securities sold under agreements to repurchase at December 31, 2019. Loss of one or more of these deposit relationships could have a negative impact on the Bank’s liquidity position.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

Not applicable.

21

ITEM 2.

PROPERTIES

At December 31, 2019, the Company and the Bank conducted their business from the headquarters office in Newton, North Carolina and its 20 other branch offices in Lincolnton, Hickory, Newton, Catawba, Conover, Claremont, Maiden, Denver, Triangle, Hiddenite, Charlotte, Cornelius, Mooresville, Raleigh and Cary, North Carolina. The Bank also operates loan production offices in Charlotte, Denver and Durham North Carolina. The following table sets forth certain information regarding the Bank’s properties at December 31, 2019.

Owned	Leased
Corporate Office 518 West C Street Newton, North Carolina 28658	1333 2nd Street NE Hickory, North Carolina 28601
420 West A Street Newton, North Carolina 28658	1910 East Main Street Lincolnton, North Carolina 28092
213 1st Street, West Conover, North Carolina 28613	760 Highway 27 West Lincolnton, North Carolina 28092
3261 East Main Street Claremont, North Carolina 28610	102 Leonard Avenue Newton, North Carolina 28658
6125 Highway 16 South Denver, North Carolina 28037	6350 South Boulevard Charlotte, North Carolina 28217
5153 N.C. Highway 90E Hiddenite, North Carolina 28636	4451 Central Avenue Suite A Charlotte, North Carolina 28205 3752/3754 Highway 16 North Denver, North Carolina 28037
200 Island Ford Road Maiden, North Carolina 28650	9624-I Bailey Road Cornelius, North Carolina 2803
3310 Springs Road NE Hickory, North Carolina 28601	3023-10 Capital Boulevard Raleigh, North Carolina 27604
142 South Highway 16 Denver, North Carolina 28037	2530 Meridian Parkway Durham, North Carolina 27713
106 North Main Street Catawba, North Carolina 28609	1117 Parkside Main Street Cary, NC, 27519
2050 Catawba Valley Boulevard Hickory, North Carolina 28601	13840 Ballantyne Corporate Place Suite 150 Charlotte, NC 2827
1074 River Highway Mooresville, North Carolina 28117

22

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

  PART II

ITEM 5. 

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

Although the payment of dividends by the Company is subject to certain requirements and limitations of North Carolina corporate law, neither the Commissioner nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends and repurchase shares. However, the ability of the Company to pay dividends and repurchase shares may be dependent upon, among other things, the Company’s receipt of dividends from the Bank. The Bank’s ability to pay dividends is limited. North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amount of dividends they are permitted to pay. Dividends may be paid by the Bank from undivided profits, which are determined by deducting and charging certain items against actual profits, including any contributions to surplus required by North Carolina law. Also, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations). Based on its current financial condition, the Bank does not expect that this provision will have any impact on the Bank’s ability to pay dividends. See Supervision and Regulation under Item 1 Business.

As of March 6, 2020, the Company had 657 shareholders of record, not including the number of persons or entitieswhose stock is held in nominee or street name through various brokerage firms or banks. The closing market price for the Company’s common stock was $24.50 on March 6, 2020.

23

STOCK PERFORMANCE GRAPH

The following graph compares the Company’s cumulative shareholder return on its common stock with a NASDAQ index and with a southeastern bank index. The graph was prepared by S&P Global Market Intelligence, using data as of December 31, 2019.

 

COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS

Performance Report for

Peoples Bancorp of North Carolina, Inc.

Peoples Bancorp of North Carolina, Inc.

		Period Ending
Index	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18	12/31/19
Peoples Bancorp of North Carolina, Inc.	100.00	109.12	144.10	197.21	159.94	219.87
NASDAQ Composite Index	100.00	106.96	116.45	150.96	146.67	200.49
SNL Southeast Bank Index	100.00	98.44	130.68	161.65	133.56	188.08

Source: S&P Global Market Intelligence

© 2020

24

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

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)
January 1 - 31, 2019	-	$-	-	$-
February 1 - 28, 2019	1,047	26.86	5,518	$4,847,977
March 1 - 31, 2019	892	28.49	-	$4,847,977
April 1 - 30, 2019	958	27.75	41,501	$3,713,337
May 1 - 31, 2019	1,239	27.98	22,495	$3,713,337
June 1 - 30, 2019	652	29.28	-	$3,087,071
July 1 - 31, 2019	958	27.50	-	$3,087,071
August 1 - 31, 2019	458	28.16	20,840	$2,509,871
September 1 - 30, 2019	-	-	-	$2,509,871
October 1 - 31, 2019	938	29.90	-	$2,509,871
November 1 - 30, 2019	196	29.82	-	$2,509,871
December 1 - 31, 2019	217	31.47	-	$2,509,871
Total	7,555(1)	$26.60	90,354

(1) The Company purchased 7,555 shares on the open market in the year ended December 31, 2019 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

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

(3) Reflects dollar value of shares that may yet be purchased under the Company's stock repurchase program , which was funded in February 2019.

ITEM 6.

SELECTED FINANCIAL DATA

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

 

25

ITEM 7. 

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

The information required by this Item is set forth in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-23 of the Annual Report, which section is included in this Form 10-K as Exhibit (13), and which section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this Item is set forth in the section captioned “Quantitative and Qualitative Disclosures About Market Risk” on page A-22 of the Annual Report, which Annual Report is included in this Form 10-K as Exhibit (13), and which section captioned “Quantitative and Qualitative Disclosures About Market Risk” is incorporated herein by reference.

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and supplementary data are set forth on pages A-24 through A-68 of the Annual Report, which Annual Report is included in this Form 10-K as Exhibit (13). The consolidated financial statements of the Company and supplementary data set forth on pages A-24 through A-68 of the Annual Report are incorporated herein by reference.

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Controls over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

26

the company and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

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

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2019.

 Elliott Davis, PLLC, an independent, registered public accounting firm, has audited the Company’s consolidated financial statements as of and for the year ended December 31, 2019, and audited the Company’s effectiveness of internal control over financial reporting as of December 31, 2019, as stated in their report, which is included in Item 8 hereof.

ITEM 9B.

OTHER INFORMATION

None

PART III

ITEM 10. 

DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11. 

EXECUTIVE COMPENSATION

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

27

ITEM 12. 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

The following table presents the number of shares of Company common stock to be issued upon the exercise of outstanding options, warrants and rights; the weighted-average price of the outstanding options, warrants and rights and the number of options, warrants and rights remaining that may be issued under the Company’s Omnibus Plan described under the section captioned “Omnibus Stock Option and Long Term Incentive Plan” contained in the Proxy Statement.

Plan Category	Number of securities to be issued upon exercise of outstanding option, warrants and rights (1), (2), (3), (4)	Weighted-average exercise price of outstanding options, warrants and rights (5)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (6)
	(a)	(b)	(c)
Equity compensation plans approved by security holders	18,233	$32.85	-
Equity compensation plans not approved by security holders	-	-	-
Total	18,233	$32.85	-

(1) Includes 5,104 restricted stock units granted on February 18, 2016 (adjusted for the 10% stock dividend paid December 15, 2017) under the Omnibus Plan. These restricted stock grants vested on February 20, 2020.

(2) Includes 4,114 restricted stock units granted on March 1, 2017 (adjusted for the 10% stock dividend paid December 15, 2017) under the Omnibus Plan. These restricted stock grants vest on March 1, 2021.

(3) Includes 3,725 restricted stock units granted on January 24, 2018 under the Omnibus Plan. These restricted stock grants vest on January 24, 2022.

(4) Includes 5,290 restricted stock units granted on February 21, 2019 under the Omnibus Plan. These restricted stock grants vest on February 21, 2023.

(5) The exercise price used for the grants of restricted stock units under the Omnibus Plan is $32.85, the closing price for the Company’s stock on December 31, 2019.

(6) No shares were available for issuance under the Omnibus Plan at December 31, 2019 due to Plan expiration on May 7, 2019.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

See the section captioned “Proposal 4 - Ratification of Selection of Independent Registered Public Accounting Firm” contained in the Proxy Statement, which section is incorporated herein by reference.

28

PART IV

ITEM 15. 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)1. 

Consolidated Financial Statements (contained in the Annual Report attached hereto as Exhibit (13) and incorporated herein by reference)

(a) 

Reports of Independent Registered Public Accounting Firm

(b) 

Consolidated Balance Sheets as of December 31, 2019 and 2018

(c) 

Consolidated Statements of Earnings for the Years Ended December 31, 2019, 2018 and 2017

(d) 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017

(e) 

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017

(f) 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

(g) 

Notes to Consolidated Financial Statements

15(a)2. 

Consolidated Financial Statement Schedules

All schedules have been omitted, as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements.

15(a)3. 

Exhibits

Exhibit (3)(i) 

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)(ii) 

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)(iii) 

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

Exhibit (3)(iv) 

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

Exhibit (4)(i) 

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

Exhibit (4)(ii) 

Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Act of 1934

29

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) 

Peoples Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(f) to the Form 10-K filed with the Securities and Exchange Commission on March 30, 2000

Exhibit (10)(viii) 

Amendment No. 1 to the Peoples Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(e)(i) to the Form 10-K filed with the Securities and Exchange Commission on March 15, 2007

Exhibit (10)(ix) 

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)(x) 

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)(xi) 

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)(xii) 

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

30

Exhibit (10)(xiii) 

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)(xiv) 

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)(xv) 

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)(xvi) 

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)(xvii) 

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)(xviii) 

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)(xix) 

2009 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(o) to the Form 10-K filed with the Securities and Exchange Commission on March 20, 2009

Exhibit (10)(xx) 

First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated February 16, 2018

Exhibit (10)(xxi) 

First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated February 16, 2018

Exhibit (10)(xxii) 

First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated February 16, 2018

Exhibit (13) 

2019 Annual Report of Peoples Bancorp of North Carolina, Inc.

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 (21) 

Subsidiaries of the Registrant

Exhibit (23) 

Consent of Elliott Davis, PLLC

31

Exhibit (31)(i) 

Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (31)(ii) 

Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (32) 

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

Exhibit (101) 

The following materials from the Company’s 10-K Report for the annual period ended December 31, 2019, formatted in eXtensible Business Reporting Language ("XBRL"): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements.

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SIGNATURES

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

	PEOPLES BANCORP OF NORTH CAROLINA, INC.
	(Registrant)
Date: March 13, 2020
	By:	/s/ Lance A. Sellers
	Lance A. Sellers
	President and Chief Executive Officer

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

Signature	Title	Date
/s/ Lance A. Sellers	President and Chief Executive Officer	March 13, 2020
Lance A. Sellers	(Principal Executive Officer)
/s/ James S. Abernethy	Director	March 13, 2020
James S. Abernethy
/s/ Robert C. Abernethy	Chairman of the Board and D irector	March 13, 2020
Robert C. Abernethy
/s/ Douglas S. Howard	Director	March 13, 2020
Douglas S. Howard
/s/ A. Joseph Lampron, Jr.	Executive Vice President and Chief	March 13, 2020
A. Joseph Lampron, Jr.	Financial Officer (Principal Financial
	and Principal Accounting Officer)
/s/ John W. Lineberger, Jr.	Director	March 13, 2020
John W. Lineberger, Jr.
/s/ Gary E. Matthews	Director	March 13, 2020
Gary E. Matthews
/s/ Billy L. Price, Jr., M.D.	Director	March 13, 2020
Billy L. Price, Jr., M.D.
/s/ Larry E. Robinson	Director	March 13, 2020
Larry E. Robinson
/s/ William Gregory Terry	Director	March 13, 2020
William Gregory Terry
/s/ Dan Ray Timmerman, Sr.	Director	March 13, 2020
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary	Director	March 13, 2020
Benjamin I. Zachary

33

EX-13.1

EXHIBIT (13)

The Annual Report to Security Holders is Appendix A to the Proxy Statement for the 2020 Annual Meeting of Shareholders and is incorporated herein by reference.

APPENDIX A

ANNUAL REPORT

OF

PEOPLES BANCORP OF NORTH CAROLINA, INC.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

General Description of Business

Peoples Bancorp of North Carolina, Inc. (“Bancorp”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”). Bancorp is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. Bancorp has no operations and conducts no business of its own other than owning the Bank. Accordingly, the discussion of the business which follows concerns the business conducted by the Bank, unless otherwise indicated. Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries are collectively called the “Company”.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 20 banking offices, as of December 31, 2019, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius, Mooresville, Raleigh, and Cary North Carolina. The Bank also operates loan production offices in Charlotte, Denver and Durham, North Carolina. The Company’s fiscal year ends December 31. At December 31, 2019, the Company had total assets of $1.2 billion, net loans of $843.2 million, deposits of $966.5 million, total securities of $200.0 million, and shareholders’ equity of $134.1 million.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices 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 Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s deposit and loan customers are individuals and small to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated thorough the Bank’s Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-23 of the Annual Report, which is included in this Form 10-K as Exhibit (13).

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

At December 31, 2019, the Company employed 306 full-time employees and 31 part-time employees, which equated to 326 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2019, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property to be appraised is located. This type of service ensures that the appraisal process remains independent from the financing process within the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted. In 2019 the Company launched PB Insurance Agency, which is part of CBRES.

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 in December 2006 to repay 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 Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.

A-1

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 Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.  

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.

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

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SELECTED FINANCIAL DATA

Dollars in Thousands Except Per Share Amounts

	2019	2018	2017	2016	2015
Summary of Operations
Interest income	$49,601	45,350	41,949	39,809	38,666
Interest expense	3,757	2,146	2,377	3,271	3,484
Net interest income	45,844	43,204	39,572	36,538	35,182
Provision for (reduction of) loan losses	863	790	(507)	(1,206)	(17)
Net interest income after provision
for loan losses	44,981	42,414	40,079	37,744	35,199
Non-interest income (1)	17,739	16,166	15,364	16,236	15,256
Non-interest expense (1)	45,517	42,574	41,228	42,242	37,722
Earnings before income taxes	17,203	16,006	14,215	11,738	12,733
Income tax expense	3,136	2,624	3,947	2,561	3,100
Net earnings	$14,067	13,382	10,268	9,177	9,633
Selected Year-End Balances
Assets	$1,154,882	1,093,251	1,092,166	1,087,991	1,038,481
Investment securities available for sale	195,746	194,578	229,321	249,946	268,530
Net loans	843,194	797,578	753,398	716,261	679,502
Mortgage loans held for sale	4,417	680	857	5,709	4,149
Interest-earning assets	1,058,937	1,007,078	996,509	999,201	977,079
Deposits	966,517	877,213	906,952	892,918	832,175
Interest-bearing liabilities	668,353	657,110	679,922	698,120	679,937
Shareholders' equity	$134,120	123,617	115,975	107,428	104,864
Shares outstanding	5,912,300	5,995,256	5,995,256	5,417,800	5,510,538
Selected Average Balances
Assets	$1,143,338	1,094,707	1,098,992	1,076,604	1,038,594
Investment securities available for sale	185,302	209,742	234,278	252,725	266,830
Loans	834,517	777,098	741,655	703,484	669,628
Interest-earning assets	1,055,730	1,007,484	998,821	985,236	952,251
Deposits	932,647	903,120	895,129	856,313	816,628
Interest-bearing liabilities	675,992	665,165	700,559	705,291	707,611
Shareholders' equity	$134,670	123,797	116,883	113,196	106,644
Shares outstanding (2)	5,941,873	5,995,256	5,988,183	6,024,970	6,115,159
Profitability Ratios
Return on average total assets	1.23%	1.22%	0.93%	0.85%	0.93%
Return on average shareholders' equity	10.45%	10.81%	8.78%	8.11%	9.03%
Dividend payout ratio	28.00%	23.41%	25.67%	22.95%	16.34%
Liquidity and Capital Ratios (averages)
Loan to deposit	89.48%	86.05%	82.85%	82.15%	82.00%
Shareholders' equity to total assets	11.78%	11.31%	10.64%	10.51%	10.27%
Per share of Common Stock (2)
Basic net earnings	$2.37	2.23	1.71	1.53	1.57
Diluted net earnings	$2.36	2.22	1.69	1.50	1.56
Cash dividends	$0.66	0.52	0.44	0.35	0.25
Book value	$22.68	20.62	19.34	18.03	17.30

(1) Appraisal management fee income and expense from the Bank’s subsidiary, CBRES, was reported as a net amount prior to March 31, 2018, which was included in miscellaneous non-interest income. This income and expense is now reported on separate line items under non-interest income and non-interest expense. Prior periods have been restated to reflect this change.

(2) Average shares outstanding and per share computations have been restated to reflect a 10% stock dividend paid during the fourth quarter of 2017.

A-3

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following is a discussion of our financial position and results of operations and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s annual report on Form 10-K and the Company’s consolidated financial statements and notes thereto on pages A-24 through A-68.

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 Peoples Bancorp of North Carolina, Inc. (“Bancorp”), for the years ended December 31, 2019, 2018 and 2017. Bancorp is a registered bank holding company operating under the supervision of the Federal Reserve Board (the “FRB”) and the parent company of Peoples Bank (the “Bank”). 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 Federal Deposit Insurance Corporation (the “FDIC”).

Overview

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

Our operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The earnings on our assets are influenced by the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (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.

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

The Federal Reserve maintained the Federal Funds rate at 0.25% from December 2008 to December 2015 before increasing the Fed Funds rate nine times since December 2015 to the Fed Funds rate of 2.50% at June 30, 2019. Those increases had a positive impact on earnings in recent periods. The Fed Funds rate decreased 0.25% three times during 2019 to a rate of 1.75% at December 31, 2019. These recent Fed Funds rate reductions are expected to have a negative impact on the Bank’s net interest income in future periods.

The Company plans to relocate its Raleigh branch office in 2020. The Company does not have specific plans for additional offices in 2020 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.

A-4

On August 31, 2015, the 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.

Summary of Significant and Critical Accounting Policies

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

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

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

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

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

The disclosure requirements for derivatives and hedging activities are intended to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses, on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

A-5

The Company has an overall interest rate risk management strategy that has, in prior years, incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. When using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimized the credit risk in derivative instruments by entering into transactions with high-quality counterparties that were reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of December 31, 2019 or 2018.

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

Results of Operations

Summary. The Company reported earnings of $14.1 million or $2.37 basic net earnings per share and $2.36 diluted net earnings per share for the year ended December 31, 2019, as compared to $13.4 million or $2.23 basic net earnings per share and $2.22 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 and an increase in non-interest income, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense, as discussed below.

The Company reported earnings of $13.4 million or $2.23 basic net earnings per share and $2.22 diluted net earnings per share for the year ended December 31, 2018, as compared to $10.3 million or $1.71 basic net earnings per share and $1.69 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, an increase in non-interest income and a decrease in income tax expense, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense.

The return on average assets in 2019 was 1.23%, as compared to 1.22% in 2018 and 0.93% in 2017. The return on average shareholders’ equity was 10.45% in 2019, as compared to 10.81% in 2018 and 8.78% in 2017.

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

Net interest income for 2019 was $45.8 million, as compared to $43.2 million in 2018. The increase in net interest income was primarily due to a $4.3 million increase in interest income, which was partially offset by a $1.6 million increase in interest expense. The increase in interest income was primarily attributable to an increase in the average outstanding balance of loans and a higher average prime rate during the year ended December 31, 2019, as compared to the same period last year. The increase in interest expense was primarily due to an increase in interest rates on deposits. Net interest income increased to $43.2 million in 2018 from $39.6 million in 2017.

Table 1 sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurredfor the years ended December 31, 2019, 2018 and 2017. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.

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Table 1- Average Balance Table
	December 31, 2019			December 31, 2018			December 31, 2017
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans	$834,517	43,301	5.19%	777,098	38,654	4.97%	741,655	34,888	4.70%
Investments - taxable	77,945	2,254	2.89%	71,093	1,936	2.72%	64,341	1,693	2.63%
Investments - nontaxable*	113,117	4,293	3.80%	142,832	5,508	3.86%	173,069	7,314	4.23%
Federal funds sold	19,078	331	1.73%	-	-	0.00%	-	-	0.00%
Other	11,073	213	1.92%	16,461	304	1.85%	19,756	219	1.11%
Total interest-earning assets	1,055,730	50,392	4.77%	1,007,484	46,402	4.61%	998,821	44,114	4.42%
Cash and due from banks	36,227			41,840			53,805
Other assets	57,880			51,704			53,557
Allowance for loan losses	(6,499)			(6,321)			(7,191)
Total assets	$1,143,338			1,094,707			1,098,992
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$495,509	1,596	0.32%	484,180	769	0.16%	481,455	598	0.12%
Time deposits	105,458	909	0.86%	112,398	472	0.42%	132,626	466	0.35%
FHLB borrowings	19,625	205	1.04%	-	-	0.00%	16,329	662	4.05%
Trust preferred securities	20,619	844	4.09%	20,619	790	3.83%	20,619	590	2.86%
Other	34,781	203	0.58%	47,968	115	0.24%	49,530	61	0.12%
Total interest-bearing liabilities	675,992	3,757	0.56%	665,165	2,146	0.32%	700,559	2,377	0.34%
Demand deposits	331,680			306,544			281,048
Other liabilities	996			(799)			502
Shareholders' equity	134,670			123,797			116,883
Total liabilities and shareholder's equity	$1,143,338			1,094,707			1,098,992
Net interest spread		$46,635	4.21%		$44,256	4.29%		$41,737	4.08%
Net yield on interest-earning assets			4.42%			4.39%			4.18%
Taxable equivalent adjustment
Investment securities		$791			$1,052			$2,165
Net interest income		$45,844			$43,204			$39,572

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $32.0 million in 2019, $38.0 million in 2018 and $40.3 million in 2017. The tax rates of 2.50%, 2.50% and 3.00% were used to calculate the tax equivalent yields on these securities in 2019, 2018 and 2017, respectively.

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

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Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis
	December 31, 2019			December 31, 2018
(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	$2,918	1,729	4,647	1,715	2,051	3,766
Investments - taxable	192	126	318	181	62	243
Investments - nontaxable	(1,137)	(78)	(1,215)	(1,222)	(584)	(1,806)
Federal funds sold	166	165	331	-	-	-
Other	(102)	12	(90)	(49)	134	85
Total interest income	2,037	1,954	3,991	625	1,663	2,288
Interest expense:
NOW, MMDA & savings deposits	27	800	827	4	167	171
Time deposits	(44)	481	437	(78)	84	6
FHLB / FRB Borrowings	103	102	205	(331)	(331)	(662)
Trust Preferred Securities	-	54	54	-	200	200
Other	(54)	142	88	(3)	57	54
Total interest expense	32	1,579	1,611	(408)	177	(231)
Net interest income	$2,005	375	2,380	1,033	1,486	2,519

Net interest income on a tax equivalent basis totaled $46.6 million in 2019, as compared to $44.3 million in 2018. The net interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 4.21% in 2019, as compared to a net interest rate spread of 4.29% in 2018. The net yield on interest-earning assets was 4.42% in 2019 and 4.39% in 2018.

Tax equivalent interest income increased $4.0 million in 2019 primarily due toan increase in interest income resulting from an increase in the average outstanding principal balance of loans, which was partially offset bya decrease in the average outstanding balance of investment securities. The average outstanding principal balance of loans increased $57.4 million to $834.5 million in 2019, as compared to $777.1 million in 2018. The average outstanding balance of investment securities decreased $22.8 million to $191.1 million in 2019, as compared to $213.9 million in 2018. The yield on interest-earning assets was 4.77% in 2019, as compared to 4.61% in 2018.

Interest expense increased $1.6 million in 2019, as compared to 2018. The increase in interest expense is primarily due to an increase in interest rates on deposits and an increase in the average outstanding balance of Federal Home Loan Bank (“FHLB”) borrowings. Average interest-bearing liabilities increased by $10.8 million to $676.0 million in 2019, as compared to $665.2 million in 2018. The cost of funds increased to 0.56% in 2019 from 0.32% in 2018.

In 2018, net interest income on a tax equivalent basis was $44.3 million, as compared to $41.7 million in 2017. The net interest spread was 4.29% in 2018, as compared to 4.08% in 2017. The net yield on interest-earning assets was 4.39% in 2018, as compared to 4.18% in 2017.

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

The provision for loan losses for the year ended December 31, 2019 was an expense of $863,000, as compared to an expense of $790,000 for the year ended December 31, 2018. The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the reserve in accordance with Accounting Standards Codification 450-20. The credit to provision for loan losses for the year ended December 31, 2017 resulted from, and was considered appropriate as part of, management’s assessment and estimate of the risks in the total loan portfolio and determination of the total allowance for loan losses for the year ended December 31, 2017. The primary factors

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contributing to the continued decrease in the allowance for loan losses as a percent of total loans outstanding were the continuing positive trends in indicators of potential losses on loans, primarily non-accrual loans and the reduction in the level of net charge-offs since 2015, as shown in Table 3 below: 

Table 3 - Net Charge-off Analysis

	Net charge-offs/(recoveries)					Net charge-offs/(recoveries) as a percent of average loans outstanding
	Years ended December 31,					Years ended December 31,
(Dollars in thousands)	2019	2018	2017	2016	2015	2019	2018	2017	2016	2015
Real estate loans
Construction and land development	$(24)	$43	(14)	(3)	153	-0.03%	0.05%	(0.02%)	(0.01%)	0.25%
Single-family residential	(24)	10	164	220	584	-0.01%	0.00%	0.07%	0.09%	0.27%
Single-family residential - Banco de la Gente non-traditional	-	-	-	-	95	0.00%	0.00%	0.00%	0.00%	0.21%
Commercial	(48)	348	(21)	299	308	-0.02%	0.13%	-0.01%	0.12%	0.13%
Multifamily and farmland	-	4	66	-	-	0.00%	0.01%	0.23%	0.00%	0.00%
Total real estate loans	(96)	405	195	516	1,140	-0.01%	0.06%	0.03%	0.09%	0.20%
Loans not secured by real estate
Commercial loans	306	22	163	(25)	(64)	0.31%	0.02%	(0.03%)	(0.03%)	(0.07%)
Farm loans	-	-	-	-	-	0.00%	0.00%	0.00%	0.00%	0.00%
Consumer loans (1)	418	284	319	342	400	4.95%	3.11%	3.10%	3.38%	4.00%
All other loans	-	-	-	-	-	0.00%	0.00%	0.00%	0.00%	0.00%
Total loans	$628	$711	677	833	1,476	0.07%	0.09%	0.09%	0.12%	0.22%
Provision for (reduction of) loan losses for the period	$863	$790	(507)	(1,206)	(17)
Allowance for loan losses at end of period	$6,680	$6,445	6,366	7,550	9,589
Total loans at end of period	$849,874	$804,023	759,764	723,811	689,091
Non-accrual loans at end of period	$3,553	$3,314	3,711	3,825	8,432
Allowance for loan losses as a percent of total loans outstanding at end of period	0.79%	0.80%	0.84%	1.04%	1.39%
Non-accrual loans as a percent of total loans outstanding at end of period	0.42%	0.41%	0.49%	0.53%	1.22%
(1) The loss ratio for consumer loans is elevated because overdraft charge-offs related to DDA and NOW accounts are reported in consumer loan charge-offs and recoveries. The net overdraft charge-offs are not considered material and are therefore not shown separately.

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

Non-Interest Income. Non-interest income was $17.7 million for the year ended December 31, 2019, as compared to $16.2 million for the year ended December 31, 2018. The increase in non-interest income is primarily attributable to a $1.3 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $413,000 increase in mortgage banking income due to an increase in mortgage loan volume.

Non-interest income was $16.2 million for the year ended December 31, 2018, as compared to $15.4 million for the year ended December 31, 2017. The increase in non-interest income is primarily attributable to an $893,000 increase in miscellaneous non-interest income, which was partially offset by a $339,000 decrease in mortgage banking income during the year ended December 31, 2018, as compared to the year ended December 31, 2017. The increase in miscellaneous non-interest income is primarily due to a $576,000 increase in net gains associated with the disposal of premises and equipment, as compared to the year ended December 31, 2017. The decrease in mortgage banking income is primarily due to a decrease in mortgage loan volume resulting from an increase in mortgage loan rates.

 The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2019, 2018 or 2017.

Table 4 presents a summary of non-interest income for the years ended December 31, 2019, 2018 and 2017.

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Table 4 - Non-Interest Income
(Dollars in thousands)	2019	2018	2017
Service charges	$4,576	4,355	4,453
Other service charges and fees	714	705	593
Gain on sale of securities	226	15	-
Mortgage banking income	1,264	851	1,190
Insurance and brokerage commissions	877	824	761
Gain/(loss) on sale and write-down of other real estate	(11)	17	(239)
Visa debit card income	4,145	3,911	3,757
Appraisal management fee income	4,484	3,206	3,306
Miscellaneous	1,464	2,282	1,543
Total non-interest income	$17,739	16,166	15,364

Non-Interest Expense. Non-interest expense was $45.5 million for the year ended December 31, 2019, as compared to $42.6 million for the year ended December 31, 2018. The increase in non-interest expense was primarily due to a $1.7 million increase in salaries and benefits expense and a $961,000 increase in appraisal management fee expense. The increase in salaries and benefits expense was primarily attributable to an increase in salary expense primarily due to annual salary increases, an increase in incentive compensation expense, an increase in insurance costs and an increase in commission expense primarily due to an increase in mortgage loan production. The increase in appraisal management fee expense was primarily due to an increase in the volume of appraisals.

Non-interest expense was $42.6 million for the year ended December 31, 2018, as compared to $41.2 million for the year ended December 31, 2017. The increase in non-interest expense was primarily due to a $1.5 million increase in salaries and benefits expense and a $469,000 increase in occupancy expense, which were partially offset by decreases in adverting expense, debit card expense and other non-interest expense, during the year ended December 31, 2018, as compared to the year ended December 31, 2017. 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. The increase in occupancy expense is primarily due to an increase in depreciation expense during the year ended December 31, 2018, as compared to the year ended December 31, 2017.

Table 5 presents a summary of non-interest expense for the years ended December 31, 2019, 2018 and 2017.

Table 5 - Non-Interest Expense
(Dollars in thousands)	2019	2018	2017
Salaries and employee benefits	$23,238	21,530	20,058
Occupancy expense	7,364	7,170	6,701
Office supplies	467	503	517
FDIC deposit insurance	119	328	347
Visa debit card expense	890	994	1,248
Professional services	517	513	451
Postage	294	249	258
Telephone	802	678	855
Director fees and expense	394	312	317
Advertising	1,021	922	1,195
Consulting fees	972	1,012	785
Taxes and licenses	287	288	263
Foreclosure/OREO expense	28	58	46
Internet banking expense	681	603	720
FHLB advance prepayment penalty	-	-	508
Appraisal management fee expense	3,421	2,460	2,526
Other operating expense	5,022	4,954	4,433
Total non-interest expense	$45,517	42,574	41,228

Income Taxes. The Company reported income tax expense of $3.1 million, $2.6 million and $3.9 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company’s effective tax rates were 18.23%, 16.39% and 27.77% in 2019, 2018 and 2017, respectively. Income tax expense for the year ended December 31, 2017 includes $588,000 additional tax expense due to the revaluation of the Company’s deferred tax asset as a result of the TCJA, which reduced the Company’s federal corporate tax rate from 34% to 21% effective January 1, 2018.

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Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of December 31, 2019, such unfunded commitments to extend credit were $276.3 million, while commitments in the form of standby letters of credit totaled $3.6 million.

The Company uses several funding sources to meet its liquidity requirements. The primary funding source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposits 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 December 31, 2019, the Company’s core deposits totaled $932.2 million, or 96% of total deposits.

The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $121.9 million and $126.9 million at December 31, 2019 and 2018, respectively. These balances represent 12.30% of total deposits and securities sold under agreements to repurchase combined at December 31, 2019, as compared to 13.51% of total deposits and securities sold under agreements to repurchase combined at December 31, 2018. Total deposits for the five largest relationships referenced above amounted to $107.7 million, or 11.14% of total deposits at December 31, 2019, as compared to $75.3 million, or 8.58% of total deposits at December 31, 2018. Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $14.2 million, or 58.76% of total securities sold under agreements to repurchase at December 31, 2019, as compared to $51.6 million, or 87.89% of total securities sold under agreements to repurchase at December 31, 2018.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreement to repurchase and FHLB borrowings. The Bank is also able to borrow from the FRB on a short-term basis. The Bank’s policies include the ability to access wholesale funding up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit. The Company’s ratio of wholesale funding to total assets was 1.93% as of December 31, 2019.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with no balances outstanding at December 31, 2019. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $139.4 million. The remaining availability under the line of credit with the FHLB was $86.1 million at December 31, 2019. The Bank had no borrowings from the FRB at December 31, 2019. The FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2019, the carrying value of loans pledged as collateral to the FRB totaled approximately $452.6 million.

The Bank also had the ability to borrow up to $82.5 million for the purchase of overnight federal funds from six correspondent financial institutions as of December 31, 2019.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits with banks, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 18.20%, 16.09% and 20.62% at December 31, 2019, 2018 and 2017, respectively. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy for on balance sheet liquidity was 10% at December 31, 2019, 2018 and 2017.

As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $13.2 million during 2019. Net cash used in investing activities was $48.2 million during 2019 and net cash provided by financing activities was $44.0 million during 2019.

Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. Table 6 presents an interest rate sensitivity analysis for the interest-earning assets and interest-bearing liabilities for the year ended December 31, 2019.

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Table 6 - Interest Sensitivity Analysis

(Dollars in thousands)	Immediate	1-3 months	4-12 months	Total Within One Year	Over One Year & Non-sensitive	Total
Interest-earning assets:
Loans	$254,120	15,170	15,584	284,874	565,000	849,874
Mortgage loans held for sale	4,417	-	-	4,417	-	4,417
Investment securities available for sale	-	5,107	9,624	14,731	181,015	195,746
Interest-bearing deposit accounts	720	-	-	720	-	720
Federal funds sold	3,330	-	-	3,330	-	3,330
Other interest-earning assets	-	-	-	-	4,850	4,850
Total interest-earning assets	262,587	20,277	25,208	308,072	750,865	1,058,937
Interest-bearing liabilities:
NOW, savings, and money market deposits	516,757	-	-	516,757	-	516,757
Time deposits	9,252	11,843	32,810	53,905	57,851	111,756
FHLB borrowings	-	-	-	-	-	-
Securities sold under
agreement to repurchase	24,221	-	-	24,221	-	24,221
Trust preferred securities	-	15,619	-	15,619	-	15,619
Total interest-bearing liabilities	550,230	27,462	32,810	610,502	57,851	668,353
Interest-sensitive gap	$(287,643)	(7,185)	(7,602)	(302,430)	693,014	390,584
Cumulative interest-sensitive gap	$(287,643)	(294,828)	(302,430)	(302,430)	390,584
Interest-earning assets as a percentage of interest-bearing liabilities	47.72%	73.84%	76.83%	50.46%	1297.93%

The Company manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Committee (“ALCO”) of the Bank. The ALCO meets quarterly and has the responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company. ALCO 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 (“AFS”) securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. At December 31, 2019, rate sensitive assets and rate sensitive liabilities totaled $1.1 billion and $668.4 million, respectively.

Included in the rate sensitive assets are $251.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the Federal Open Market Committee (“FOMC”). The Bank utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At December 31, 2019, the Bank had $143.9 million in loans with interest rate floors. The floors were in effect on $20.3 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.51% higher than the indexed rate on the promissory notes without interest rate floors.

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

Analysis of Financial Condition

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

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All of the Company’s investment securities are held in the AFS category. At December 31, 2019, the market value of AFS securities totaled $195.7 million, as compared to $194.6 million and $229.3 million at December 31, 2018 and 2017, respectively. Table 7 presents the fair value of the AFS securities held at December 31, 2019, 2018 and 2017.

 

Table 7 - Summary of Investment Portfolio
(Dollars in thousands)	2019	2018	2017
U. S. Government sponsored enterprises	$28,397	$34,634	40,380
State and political subdivisions	88,143	107,591	133,570
Mortgage-backed securities	78,956	52,103	53,609
Corporate bonds	-	-	1,512
Trust preferred securities	250	250	250
Total securities	$195,746	$194,578	229,321

The Company’s investment portfolio consists of U.S. Government sponsored enterprise securities, municipal securities, U.S. Government sponsored enterprise mortgage-backed securities, corporate bonds, trust preferred securities and equity securities. AFS securities averaged $185.3 million in 2019, $209.7 million in 2018 and $234.3 million in 2017. Table 8 presents the book value of AFS securities held by the Company by maturity category at December 31, 2019. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields are calculated on a tax equivalent basis. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax exempt securities.

Table 8 - Maturity Distribution and Weighted Average Yield on Investments

			After One Year		After 5 Years
	One Year or Less		Through 5 Years		Through 10 Years		After 10 Years		Totals
(Dollars in thousands)	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield	Amount	Yield
Book value:
U.S. Government
sponsored enterprises	$1,060	1.56%	11,076	2.45%	15,245	2.78%	1,016	3.39%	28,397	2.27%
State and political subdivisions	4,405	3.34%	47,239	3.06%	34,048	3.25%	2,451	3.52%	88,143	3.29%
Mortgage-backed securities	9,266	2.97%	28,408	2.97%	24,434	3.00%	16,848	2.98%	78,956	2.98%
Trust preferred securities	-	-	-	-	-	-	250	8.11%	250	8.11%
Total securities	$14,731	2.88%	86,723	2.90%	73,727	2.86%	20,565	3.91%	195,746	2.96%

Loans. The loan portfolio is the largest category of the Company’s earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. The Bank 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 in North Carolina.

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 December 31, 2019, the Company had $99.3 million in residential mortgage loans, $109.2 million in home equity loans and $427.7 million in commercial mortgage loans, which include $338.4 million secured by commercial property and $89.3 million secured by residential property. Residential mortgage loans include $30.8 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

At December 31, 2019, the Bank had $92.6 million in construction and land development loans. Table 9 presents a breakout of these loans.

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Table 9 - Construction and Land Development Loans

(Dollars in thousands)	Number of Loans	Balance Outstanding	Non-accrual Balance
Land acquisition and development - commercial purposes	39	$8,765	-
Land acquisition and development - residential purposes	175	19,718	-
1 to 4 family residential construction	139	30,595	-
Commercial construction	23	33,518	-
Total acquisition, development and construction	376	$92,596	-

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

The composition of the Bank’s loan portfolio at December 31 is presented in Table 10.

Table 10 - Loan Portfolio

	2019		2018		2017		2016		2015
(Dollars in thousands)	Amount	% of Loans	Amount	% of Loans	Amount	% of Loans	Amount	% of Loans	Amount	% of Loans
Real estate loans
Construction and land development	$92,596	10.90%	94,178	11.71%	84,987	11.19%	61,749	8.53%	65,791	9.55%
Single-family residential	269,475	31.71%	252,983	31.47%	246,703	32.47%	240,700	33.25%	220,690	32.03%
Single-family residential- Banco de la
Gente non-traditional	30,793	3.62%	34,261	4.26%	37,249	4.90%	40,189	5.55%	43,733	6.35%
Commercial	291,255	34.27%	270,055	33.59%	248,637	32.73%	247,521	34.20%	228,526	33.16%
Multifamily and farmland	48,090	5.66%	33,163	4.12%	28,937	3.81%	21,047	2.91%	18,080	2.62%
Total real estate loans	732,209	86.16%	684,640	85.15%	646,513	85.10%	611,206	84.44%	576,820	83.71%
Loans not secured by real estate
Commercial loans	100,263	11.80%	97,465	12.12%	89,022	11.71%	87,596	12.11%	91,010	13.22%
Farm loans	1,033	0.12%	926	0.12%	1,204	0.16%	-	0.00%	3	0.00%
Consumer loans	8,432	0.99%	9,165	1.14%	9,888	1.30%	9,832	1.36%	10,027	1.46%
All other loans	7,937	0.93%	11,827	1.47%	13,137	1.73%	15,177	2.10%	11,231	1.63%
Total loans	849,874	100.00%	804,023	100.00%	759,764	100.00%	723,811	100.00%	689,091	100.00%
Less: Allowance for loan losses	6,680		6,445		6,366		7,550		9,589
Net loans	$843,194		797,578		753,398		716,261		679,502

As of December 31, 2019, gross loans outstanding were $849.9 million, as compared to $804.0 million at December 31, 2018. Average loans represented 79% and 77% of average total earning assets for the years ended December 31, 2019 and 2018, respectively. The Bank had $4.4 million and $680,000 in mortgage loans held for sale as of December 31, 2019 and 2018, respectively.

Troubled debt restructured (“TDR”) loans modified in 2019, past due TDR loans and non-accrual TDR loans totaled $4.3 million and $4.7 million at December 31, 2019 and December 31, 2018, 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 zero and $92,000 in performing loans classified as TDR loans at December 31, 2019 and December 31, 2018, respectively.

Table 11 identifies the maturities of all loans as of December 31, 2019 and addresses the sensitivity of these loans to changes in interest rates.

A-14

Table 11 - Maturity and Repricing Data for Loans
(Dollars in thousands)	Within one year or less	After one year through five years	After five years	Total loans
Real estate loans
Construction and land development	$41,099	23,261	28,236	92,596
Single-family residential	121,190	98,237	50,048	269,475
Single-family residential- Banco de la Gente
stated income	14,057	-	16,736	30,793
Commercial	73,047	161,988	56,220	291,255
Multifamily and farmland	5,318	15,721	27,051	48,090
Total real estate loans	254,711	299,207	178,291	732,209
Loans not secured by real estate
Commercial loans	45,985	34,837	19,441	100,263
Farm loans	929	104	-	1,033
Consumer loans	4,647	3,228	557	8,432
All other loans	2,463	2,428	3,046	7,937
Total loans	$308,735	339,804	201,335	849,874
Total fixed rate loans	$23,861	286,023	201,335	511,219
Total floating rate loans	284,874	53,781	-	338,655
Total loans	$308,735	339,804	201,335	849,874

In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. At December 31, 2019, outstanding loan commitments totaled $279.9 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additional information regarding commitments is provided below in the section entitled “Commitments and Contingencies” and in Note 11 to the Consolidated Financial Statements.

Allowance for Loan Losses. 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.

A-15

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.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2019, as compared to the year ended December 31, 2018. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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

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.

A-16

Net charge-offs for 2019, 2018 and 2017 were $628,000, $711,000 and $677,000, respectively. The ratio of net charge-offs to average total loans was 0.07%in 2019, 0.09% in 2018 and 0.09% in 2017. The years ended December 31, 2017, 2018 and 2019 saw net charge-offs at historically low levels. The current level of past due and non-accrual loans currently indicate that net charge-offs may remain near these historical lows. The allowance for loan losses was $6.7 million or 0.79% of total loans outstanding at December 31, 2019. For December 31, 2018 and 2017, the allowance for loan losses amounted to $6.4 million or 0.80% of total loans outstanding and $6.4 million, or 0.84% of total loans outstanding, respectively.

Table 12 presents the percentage of loans assigned to each risk grade at December 31, 2019 and 2018.

Table 12 - Loan Risk Grade Analysis

	Percentage of Loans
	By Risk Grade
Risk Grade	2019	2018
Risk Grade 1 (Excellent Quality)	1.16%	0.94%
Risk Grade 2 (High Quality)	24.46%	25.47%
Risk Grade 3 (Good Quality)	62.15%	60.84%
Risk Grade 4 (Management Attention)	10.02%	10.19%
Risk Grade 5 (Watch)	1.45%	1.72%
Risk Grade 6 (Substandard)	0.76%	0.84%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

Table 13 presents an analysis of the allowance for loan losses, including charge-off activity.

Table 13 - Analysis of Allowance for Loan Losses

(Dollars in thousands)	2019	2018	2017	2016	2015
Allowance for loan losses at beginning	$6,445	6,366	7,550	9,589	11,082
Loans charged off:
Commercial	389	54	194	146	38
Real estate - mortgage	43	574	315	593	1,064
Real estate - construction	21	53	-	7	197
Consumer	623	452	473	492	545
Total loans charged off	1,076	1,133	982	1,238	1,844
Recoveries of losses previously charged off:
Commercial	83	32	31	170	101
Real estate - mortgage	115	212	106	74	77
Real estate - construction	45	10	14	10	45
Consumer	205	168	154	151	145
Total recoveries	448	422	305	405	368
Net loans charged off	628	711	677	833	1,476
Provision for loan losses	863	790	(507)	(1,206)	(17)
Allowance for loan losses at end of year	$6,680	6,445	6,366	7,550	9,589
Loans charged off net of recoveries, as
a percent of average loans outstanding	0.07%	0.09%	0.09%	0.12%	0.22%
Allowance for loan losses as a percent
of total loans outstanding at end of year	0.79%	0.80%	0.84%	1.04%	1.39%

Non-performing Assets. Non-performing assets were $3.6 million or 0.31% of total assets at December 31, 2019, as compared to $3.3 million or 0.31% of total assets at December 31, 2018. Non-performing loans include $3.4 million in commercial and residential mortgage loans and $155,000 in other loans at December 31, 2019, as compared to $3.2 million in commercial and residential mortgage loans, $1,000 in construction and land development loans and $99,000 in other loans at December 31, 2018. Other real estate owned totaled zero and $27,000 as of December 31, 2019 and 2018, respectively. The Bank had no repossessed assets as of December 31, 2019 and 2018.

A-17

At December 31, 2019, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $3.6 million or 0.42% of total loans. Non-performing loans at December 31, 2018 were $3.3 million or 0.41% of total loans.

Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results, liquidity or capital resources have been classified as non-performing. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performing loans. Management expects the level of non-accrual loans to continue to be in-line with the level of non-accrual loans at December 31, 2019 and 2018.

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

A summary of non-performing assets at December 31 for each of the years presented is shown in Table 14.

Table 14 - Non-performing Assets

(Dollars in thousands)	2019	2018	2017	2016	2015
Non-accrual loans	$3,553	3,314	3,711	3,825	8,432
Loans 90 days or more past due and still accruing	-	-	-	-	17
Total non-performing loans	3,553	3,314	3,711	3,825	8,449
All other real estate owned	-	27	118	283	739
Repossessed assets	-	-	-	-	-
Total non-performing assets	$3,553	3,341	3,829	4,108	9,188
TDR loans not included in above,
(not 90 days past due or on nonaccrual)	2,533	3,173	2,543	3,337	5,102
As a percent of total loans at year end
Non-accrual loans	0.42%	0.41%	0.49%	0.53%	1.22%
Loans 90 days or more past due and still accruing	0.00%	0.00%	0.00%	0.00%	0.00%
Total non-performing assets
as a percent of total assets at year end	0.31%	0.31%	0.35%	0.38%	0.88%
Total non-performing loans
as a percent of total loans at year-end	0.42%	0.41%	0.49%	0.53%	1.23%

Deposits. The Company primarily uses deposits to fund its loan and investment portfolios. The Company offers a variety of deposit accounts to individuals and businesses. Deposit accounts include checking, savings, money market and time deposits. As of December 31, 2019, total deposits were $966.5 million, as compared to $877.2 million at December 31, 2018. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $932.2 million at December 31, 2019, as compared to $859.2 million at December 31, 2018.

Time deposits in amounts of $250,000 or more totaled $34.3 million and $16.2 million at December 31, 2019 and 2018, respectively. At December 31, 2019, brokered deposits amounted to $22.3 million, as compared to $3.4 million at December 31, 2018. Certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) included in brokered deposits amounted to $3.1 million and $3.4 million as of December 31, 2019 and 2018, respectively. Brokered deposits are generally considered to be more susceptible to withdrawal as a result of interest rate changes and to be a less stable source of funds, as compared to deposits from the local market. Brokered deposits outstanding as of December 31, 2019 have a weighted average rate of 1.96% with a weighted average original term of 49 months.

Table 15 is a summary of the maturity distribution of time deposits in amounts of $250,000 or more as of December 31, 2019.

A-18

Table 15 - Maturities of Time Deposits of $250,000 or greater

(Dollars in thousands)	2019
Three months or less	$4,033
Over three months through six months	3,414
Over six months through twelve months	1,410
Over twelve months	25,412
Total	$34,269

Borrowed Funds. The Company has access to various short-term borrowings, including the purchase of federal funds and borrowing arrangements from the FHLB and other financial institutions. There were no FHLB borrowings outstanding at December 31, 2019 and 2018. Average FHLB borrowings for 2019 and 2018 were $19.6 million and zero, respectively. The maximum amount of outstanding FHLB borrowings was $70.0 million in 2019.Additional information regarding FHLB borrowings is provided in Note 7 to the Consolidated Financial Statements.

The Bank had no borrowings from the FRB at December 31, 2019 and 2018. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $452.6 million.

Securities sold under agreements to repurchase were $24.2 million at December 31, 2019, as compared to $58.1 million at December 31, 2018.

Junior subordinated debentures were $15.6 million and $20.6 million as of December 31, 2019 and 2018, respectively. The decrease in junior subordinated debentures is due to the redemption of $5.0 million of outstanding trust preferred securities in December 2019.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of December 31, 2019 are summarized in Table 16 below. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit. Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.

Table 16 - Contractual Obligations and Other Commitments

(Dollars in thousands)	Within One Year	One to Three Years	Three to Five Years	Five Years or More	Total
Contractual Cash Obligations
Junior subordinated debentures	$-	-	-	15,619	15,619
Operating lease obligations	823	1,294	697	1,320	4,134
Total	$823	1,294	697	16,939	19,753
Other Commitments
Commitments to extend credit	$109,436	31,840	16,807	118,255	276,338
Standby letters of credit
and financial guarantees written	3,558	-	-	-	3,558
Income tax credits	184	65	33	51	333
Total	$113,178	31,905	16,840	118,306	280,229

The Company enters into derivative contracts to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk. Therefore, the derivative amounts recorded on the balance sheet do not represent the amounts that may ultimately be paid under these contracts. Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management” beginning on page A-11 and in Notes 1, 11 and 16 to the Consolidated Financial Statements. There were no derivatives at December 31, 2019 or 2018.

A-19

Capital Resources. Shareholders’ equity was $134.1 million, or 11.61% of total assets, as of December 31, 2019, as compared to $123.6 million, or 11.31% of total assets, as of December 31, 2018. The increase in shareholders’ equity is primarily due to an increase in retained earnings due to net income.

Average shareholders’ equity as a percentage of total average assets is one measure used to determine capital strength. Average shareholders’ equity as a percentage of total average assets was 11.61%, 11.31% and 10.64% for 2019, 2018 and 2017, respectively. The return on average shareholders’ equity was 10.45% at December 31, 2019, as compared to 10.81% and 8.78% at December 31, 2018 and December 31, 2017, respectively. Total cash dividends paid on common stock were $3.9 million, $3.1 million and $2.6 million during 2019, 2018 and 2017, 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.

In 2019, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $5 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $2.5 million, or 90,354 shares of its common stock, under this stock repurchase program as of December 31, 2019.

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

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million and $20.0 million in trust preferred securities at December 31, 2019 and December 31, 2018, respectively. The Company’s Tier 1 capital ratio was 15.37% and 15.46% at December 31, 2019 and December 31, 2018, 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 16.08% and 16.15% at December 31, 2019 and December 31, 2018, 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 13.79% and 13.29% at December 31, 2019 and December 31, 2018, 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 11.91% and 13.05% at December 31, 2019 and December 31, 2018, respectively.

The Bank’s Tier 1 risk-based capital ratio was 15.09% and 15.21% at December 31, 2019 and December 31, 2018, respectively. The total risk-based capital ratio for the Bank was 15.79% and 15.91% at December 31, 2019 and December 31, 2018, respectively. The Bank’s common equity Tier 1 capital ratio was 15.09% and 15.21% at December 31, 2019 and December 31, 2018, respectively. The Bank’s Tier 1 leverage capital ratio was 11.61% and 12.76% at December 31, 2019 and December 31, 2018, respectively.

A-20

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at December 31, 2019.

The Company’s key equity ratios as of December 31, 2019, 2018 and 2017 are presented in Table 17.

Table 17 - Equity Ratios

	2019	2018	2017
Return on average assets	1.23%	1.22%	0.93%
Return on average equity	10.45%	10.81%	8.78%
Dividend payout ratio	28.00%	23.41%	25.67%
Average equity to average assets	11.78%	11.31%	10.64%

Quarterly Financial Data. The Company’s consolidated quarterly operating results for the years ended December 31, 2019 and 2018 are presented in Table 18.

	2019				2018
(Dollars in thousands, except per share amounts)	First	Second	Third	Fourth	First	Second	Third	Fourth
Total interest income	$12,183	12,375	12,430	12,613	$10,759	11,059	11,608	11,924
Total interest expense	757	781	994	1,225	467	513	557	609
Net interest income	11,426	11,594	11,436	11,388	10,292	10,546	11,051	11,315
Provision for loan losses	178	77	422	186	31	231	110	418
Other income	4,120	4,385	4,708	4,526	3,736	4,016	3,915	4,499
Other expense	10,916	11,244	11,267	12,090	10,042	10,560	10,702	11,270
Income before income taxes	4,452	4,658	4,455	3,638	3,955	3,771	4,154	4,126
Income tax expense	785	845	834	672	652	595	687	690
Net earnings	3,667	3,813	3,621	2,966	3,303	3,176	3,467	3,436
Basic net earnings per share	$0.61	0.64	0.62	0.50	$0.55	0.53	0.58	0.57
Diluted net earnings per share	$0.61	0.64	0.61	0.50	$0.55	0.53	0.57	0.57

A-21

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.

The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline (increase) in interest rates may adversely (positively)impact net market values and interest income. Management seeks to manage the risk through the utilization of its investment securities and off-balance sheet derivative instruments. During the years ended December 31, 2019, 2018 and 2017, the Company used interest rate contracts to manage market risk as discussed above in the section entitled “Asset Liability and Interest Rate Risk Management.”

Table 19 presents in tabular form the contractual balances and the estimated fair value of the Company’s on-balance sheet financial instruments at their expected maturity dates for the period ended December 31, 2019. The expected maturity categories take into consideration historical prepayment experience as well as management’s expectations based on the interest rate environment at December 31, 2019. For core deposits without contractual maturity (i.e. interest-bearing checking, savings, and money market accounts), the table presents principal cash flows based on management’s judgment concerning their most likely runoff or repricing behaviors.

Table 19 - Market Risk Table

(Dollars in thousands)
Loans Receivable	2020	2021	2022	2023	2024	Thereafter	Total	Fair Value
Fixed rate	$35,524	42,507	67,695	82,226	93,595	206,216	527,763	503,966
Average interest rate	4.84%	4.77%	4.87%	5.25%	5.28%	4.95%
Variable rate	$66,551	28,811	17,834	27,003	17,380	168,949	326,528	326,528
Average interest rate	5.31%	5.34%	5.48%	5.22%	5.30%	5.10%
Total							854,291	830,494
Investment Securities
Interest bearing deposits	$720	-	-	-	-	-	720	720
Average interest rate	2.10%	-	-	-	-	-
Federal funds sold	$3,330	-	-	-	-	-	3,330	3,330
Average interest rate	1.63%	-	-	-	-	-
Securities available for sale	$7,928	8,948	22,903	22,736	3,105	130,126	195,746	195,746
Average interest rate	3.73%	4.58%	4.44%	4.46%	2.86%	4.01%
Nonmarketable equity securities	$-	-	-	-	-	4,231	4,231	4,231
Average interest rate	-	-	-	-	-	2.43%
Debt Obligations
Deposits	$50,577	22,047	10,960	3,117	21,818	857,998	966,517	955,766
Average interest rate	0.41%	0.60%	0.90%	0.99%	1.23%	0.05%
Securities sold under agreement
to repurchase	$24,221	-	-	-	-	-	24,221	24,221
Average interest rate	0.57%	-	-	-	-	-
Junior subordinated debentures	$-	-	-	-	-	15,619	15,619	15,619
Average interest rate	-	-	-	-	-	3.52%

A-22

Table 20 presents the simulated impact to net interest income under varying interest rate scenarios and the theoretical impact of rate changes over a twelve-month period referred to as “rate ramps.” The table shows the estimated theoretical impact on the Company’s tax equivalent net interest income from hypothetical rate changes of plus and minus 1%, 2% and 3%, as compared to the estimated theoretical impact of rates remaining unchanged. The table also shows the simulated impact to market value of equity under varying interest rate scenarios and the theoretical impact of immediate and sustained rate changes referred to as “rate shocks” of plus and minus 1%, 2% and 3%, as compared to the theoretical impact of rates remaining unchanged. The prospective effects of the hypothetical interest rate changes are based upon various assumptions, including relative and estimated levels of key interest rates. This type of modeling has limited usefulness because it does not allow for the strategies management would utilize in response to sudden and sustained rate changes. Also, management does not believe that rate changes of the magnitude presented are likely in the forecast period presented.

Table 20 - Interest Rate Risk

(Dollars in thousands)

	Estimated Resulting Theoretical Net Interest Income
Hypothetical rate change (ramp over 12 months)	Amount	% Change
+3%	$48,075	3.59%
+2%	$47,906	3.22%
+1%	$47,276	1.87%
0%	$46,410	0.00%
-1%	$45,324	-2.34%
-2%	$44,695	-3.70%
-3%	$44,631	-3.83%

	Estimated Resulting Theoretical Market Value of Equity
Hypothetical rate change (immediate shock)	Amount	% Change
+3%	$180,259	17.15%
+2%	$182,065	18.33%
+1%	$173,722	12.90%
0%	$153,868	0.00%
-1%	$124,049	-19.38%
-2%	$90,851	-40.96%
-3%	$94,994	-38.26%

A-23

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Financial Statements

December 31, 2019, 2018 and 2017

INDEX

	PAGE(S)
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements	A-25 - A-27
Financial Statements
Consolidated Balance Sheets at December 31, 2019 and 2018	A-28
Consolidated Statements of Earnings for the years ended December 31, 2019, 2018 and 2017	A-29
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017	A-30
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2019, 2018 and 2017	A-31
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017	A-32 - A-33
Notes to Consolidated Financial Statements	A-34 - A-68

A-24

Report of Independent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 13, 2020 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

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

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Elliott Davis, PLLC

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

Charlotte, North Carolina

March 13, 2020

A-25

Report of Independent Registered Public Accounting Firm

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

Opinion on the Internal Control Over Financial Reporting

We have audited Peoples Bancorp of North Carolina, Inc.'s (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements and our report dated March 13, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A-26

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

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

/s/ Elliott Davis, PLLC

Charlotte, North Carolina

March 13, 2020

A-27

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

December 31, 2019 and December 31, 2018

(Dollars in thousands)

	December 31,	December 31,
Assets	2019	2018
Cash and due from banks, including reserve requirements of $13,210 at 12/31/19 and $8,918 at 12/31/18	$48,337	40,553
Interest-bearing deposits	720	2,817
Federal funds sold	3,330	-
Cash and cash equivalents	52,387	43,370
Investment securities available for sale	195,746	194,578
Other investments	4,231	4,361
Total securities	199,977	198,939
Mortgage loans held for sale	4,417	680
Loans	849,874	804,023
Less allowance for loan losses	(6,680)	(6,445)
Net loans	843,194	797,578
Premises and equipment, net	18,604	18,450
Cash surrender value of life insurance	16,319	15,936
Other real estate	-	27
Right of use lease asset	3,622	-
Accrued interest receivable and other assets	16,362	18,271
Total assets	$1,154,882	1,093,251
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$338,004	298,817
NOW, MMDA & savings	516,757	475,223
Time, $250,000 or more	34,269	16,239
Other time	77,487	86,934
Total deposits	966,517	877,213
Securities sold under agreements to repurchase	24,221	58,095
Junior subordinated debentures	15,619	20,619
Lease liability	3,647	-
Accrued interest payable and other liabilities	10,758	13,707
Total liabilities	1,020,762	969,634
Commitments (Note 11)
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 5,912,300 shares at December 31, 2019 and 5,995,256 shares at December 31, 2018	59,813	62,096
Retained earnings	70,663	60,535
Accumulated other comprehensive income	3,644	986
Total shareholders' equity	134,120	123,617
Total liabilities and shareholders' equity	$1,154,882	1,093,251

See accompanying Notes to Consolidated Financial Statements.

A-28

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands, except per share amounts)

	2019	2018	2017
Interest income:
Interest and fees on loans	$43,301	38,654	34,888
Interest on due from banks	213	304	219
Interest on federal funds sold	331	-	-
Interest on investment securities:
U.S. Government sponsored enterprises	2,670	2,333	2,404
States and political subdivisions	2,915	3,877	4,236
Other	171	182	202
Total interest income	49,601	45,350	41,949
Interest expense:
NOW, MMDA & savings deposits	1,596	769	598
Time deposits	909	472	466
FHLB borrowings	205	-	662
Junior subordinated debentures	844	790	590
Other	203	115	61
Total interest expense	3,757	2,146	2,377
Net interest income	45,844	43,204	39,572
Provision for (reduction of) loan losses	863	790	(507)
Net interest income after provision for loan losses	44,981	42,414	40,079
Non-interest income:
Service charges	4,576	4,355	4,453
Other service charges and fees	714	705	593
Gain on sale of securities	226	15	-
Mortgage banking income	1,264	851	1,190
Insurance and brokerage commissions	877	824	761
Appraisal management fee income	4,484	3,206	3,306
Gain (loss) on sales and write-downs of other real estate	(11)	17	(239)
Miscellaneous	5,609	6,193	5,300
Total non-interest income	17,739	16,166	15,364
Non-interest expense:
Salaries and employee benefits	23,238	21,530	20,058
Occupancy	7,364	7,170	6,701
Professional fees	1,490	1,525	1,236
Advertising	1,021	922	1,195
Debit card expense	890	994	1,248
FDIC insurance	119	328	347
Appraisal management fee expense	3,421	2,460	2,526
Other	7,974	7,645	7,917
Total non-interest expense	45,517	42,574	41,228
Earnings before income taxes	17,203	16,006	14,215
Income tax expense	3,136	2,624	3,947
Net earnings	$14,067	13,382	10,268
Basic net earnings per share	$2.37	2.23	1.71
Diluted net earnings per share	$2.36	2.22	1.69
Cash dividends declared per share	$0.66	0.52	0.44

See accompanying Notes to Consolidated Financial Statements.

A-29

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

	2019	2018	2017
Net earnings	$14,067	13,382	10,268
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	3,677	(3,370)	(355)
Reclassification adjustment for gains on securities available for sale included in net earnings	(226)	(15)	-
Total other comprehensive gain (loss), before income taxes	3,451	(3,385)	(355)
Income tax expense (benefit) related to other comprehensive gain (loss):
Unrealized holding gain (losses) on securities available for sale	845	(774)	(354)
Reclassification adjustment for gains on securities available for sale included in net earnings	(52)	(4)	-
Total income tax expense (benefit) related to other comprehensive gain (loss)	793	(778)	(354)
Total other comprehensive gain (loss), net of tax	2,658	(2,607)	(1)
Total comprehensive income	$16,725	10,775	10,267

See accompanying Notes to Consolidated Financial Statements.

A-30

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

				Accumulated
	Common	Common		Other
	Stock	Stock	Retained	Comprehensive
	Shares	Amount	Earnings	Income	Total
Balance, December 31, 2016	5,417,800	$44,187	60,254	2,987	107,428
Cash dividends declared on common stock	-	-	(2,629)	-	(2,629)
10% stock dividend	544,844	16,994	(17,000)	-	(6)
Restricted stock units exercised	32,612	915	-	-	915
Net earnings	-	-	10,268	-	10,268
Change in accumulated other comprehensive income due to Tax Cuts and Jobs Act	-	-	(607)	607	-
Change in accumulated other comprehensive income, net of tax	-	-	-	(1)	(1)
Balance, December 31, 2017	5,995,256	$62,096	50,286	3,593	115,975
Cash dividends declared on common stock	-	-	(3,133)	-	(3,133)
Net earnings			13,382		13,382
Change in accumulated other comprehensive income due to	-	-	-	(2,607)	(2,607)
Balance, December 31, 2018	5,995,256	$62,096	60,535	986	123,617
Common stock repurchase	(90,354)	(2,490)	-	-	(2,490)
Cash dividends declared on common stock	-	-	(3,939)	-	(3,939)
Restricted stock units exercised	7,398	207			207
Net earnings	-	-	14,067	-	14,067
Change in accumulated other comprehensive income, net of tax	-	-	-	2,658	2,658
Balance, December 31, 2019	5,912,300	$59,813	70,663	3,644	134,120

See accompanying Notes to Consolidated Financial Statements.

A-31

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

	2019	2018	2017
Cash flows from operating activities:
Net earnings	$14,067	13,382	10,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	3,964	4,571	5,018
Provision for (reduction of) loan losses	863	790	(507)
Deferred income taxes	176	78	2,120
Gain on sale of investment securities	(226)	(15)	-
Gain on sale of other real estate	(6)	(17)	-
Write-down of other real estate	17	-	239
(Gain) loss on sale and writedowns of premises and equipment	239	(544)	-
Restricted stock expense	270	85	592
Proceeds from sales of loans held for sale	56,364	35,922	59,193
Origination of loans held for sale	(60,101)	(35,745)	(54,341)
Change in:
Cash surrender value of life insurance	(383)	(384)	(600)
Right of use lease asset	787	-	-
Other assets	940	(3,695)	(3,982)
Lease liability	(762)	-	-
Other liabilities	(3,012)	2,759	594
Net cash provided by operating activities	13,197	17,187	18,594
Cash flows from investing activities:
Purchases of investment securities available for sale	(54,212)	(34,692)	(10,014)
Proceeds from sales, calls and maturities of investment securities available for sale	40,561	48,241	10,162
Proceeds from paydowns of investment securities available for sale	14,489	15,556	17,202
Purchases of other investments	(45)	(2,611)	(45)
Proceeds from paydowns of other investment securities	176	117	-
Net change in FHLB stock	(1)	(4)	850
Net change in loans	(46,505)	(45,094)	(36,748)
Purchases of premises and equipment	(2,835)	(1,742)	(5,557)
Proceeds from sale of premises and equipment	149	1,410	-
Proceeds from sale of other real estate and repossessions	42	232	44
Net cash used by investing activities	(48,181)	(18,587)	(24,106)
Cash flows from financing activities:
Net change in deposits	89,304	(29,739)	14,034
Net change in securities sold under agreement to repurchase	(33,874)	20,338	1,323
Proceeds from FHLB borrowings	184,500	-	1
Repayments of FHLB borrowings	(184,500)	-	(20,001)
Proceeds from FRB borrowings	1	1	1
Repayments of FRB borrowings	(1)	(1)	(1)
Proceeds from Fed Funds Purchased	100,252	4,277	187
Repayments of Fed Funds Purchased	(100,252)	(4,277)	(187)
Repayments of Junior Subordinated Debentures	(5,000)	-	-
Common stock repurchased	(2,490)	-	-
Cash dividends paid in lieu of fractional shares	-	-	(6)
Cash dividends paid on common stock	(3,939)	(3,133)	(2,629)
Net cash (used) provided by financing activities	44,001	(12,534)	(7,278)
Net change in cash and cash equivalents	9,017	(13,934)	(12,790)
Cash and cash equivalents at beginning of period	43,370	57,304	70,094
Cash and cash equivalents at end of period	$52,387	43,370	57,304

A-32

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

	2019	2018	2017
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$3,750	2,128	2,526
Income taxes	$3,206	1,163	2,408
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	$2,658	(2,607)	(1)
Transfer of loans to other real estate	$26	124	118
Issuance of accrued restricted stock units	$207	-	(915)
Initial recognition of lease right of use asset and lease liability recorded upon adoption of ASU 2016-02	$4,401
Recognition of right of use lease asset and lease liability	$8	-	-

See accompanying Notes to Consolidated Financial Statements.

A-33

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements

(1) 

Summary of Significant Accounting Policies

Organization

Peoples Bancorp of North Carolina, Inc. (“Bancorp”) received regulatory approval to operate as a bank holding company on July 22, 1999, and became effective August 31, 1999. Bancorp is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for Peoples Bank (the “Bank”).

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

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

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

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company lauched PB Insurance Agency, which is part of CBRES.

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

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices 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.

Principles of Consolidation

The consolidated financial statements include the financial statements of Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., REAS, CBRES and PBREH (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

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

Cash and Cash Equivalents

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

A-34

Investment Securities

There are three classifications the Company is able to classify its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2019 and 2018, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

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

Mortgage Loans Held for Sale

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

Loans

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

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

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

Allowance for Loan Losses

The allowance for loan losses 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.

A-35

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.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2019 as compared to the year ended December 31, 2018. 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.

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

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.

 

Mortgage Banking Activities

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

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $729,000, $866,000 and $1.0 million at December 31, 2019, 2018 and 2017, respectively.

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

Premises and Equipment

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

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

Other Real Estate

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

Income Taxes

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

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

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

Derivative Financial Instruments and Hedging Activities

In the normal course of business, the Company enters into derivative contracts to manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All material derivative financial instruments are recorded at fair value in the financial statements. The fair value of derivative contracts related to the origination of fixed rate mortgage loans and the commitments to sell these loans to a third party is immaterial and has no effect on the recorded amounts in the financial statements.

 

The disclosure requirements for derivatives and hedging activities have the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of the effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.

If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The Company formally documents all hedging relationships, including an assessment that the derivative instruments are expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged items.

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Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “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. No shares were available for issuance under the Plan at December 31, 2019 as all stock-based rights under the Plan must have been granted or awarded by May 7, 2019 (i.e., ten years from the Plan effective date).

The Company granted 32,465 restricted stock units under the Plan at a grant date fair value of $7.18 per share during the first quarter of 2012, of which 5,891 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 in conjunction with the Company’s participation in the Capital Purchase Program under the Troubled Asset Relief Program. In July 2012, the Company granted 5,891 restricted stock units at a grant date fair value of $7.50 per share. The Company granted 29,475 restricted stock units under the Plan at a grant date fair value of $10.82 per share during the second quarter of 2013. The Company granted 23,162 restricted stock units under the Plan at a grant date fair value of $14.27 per share during the first quarter of 2014. The Company granted 16,583 restricted stock units under the Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2012 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the grant date for the 2013, 2015, 2016, 2017, 2018 and 2019 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 December 31, 2019, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $238,000.

The Company recognized compensation expense for restricted stock units granted under the Plan of $270,000, $85,000 and $592,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Net Earnings Per Share

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

 

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2019, 2018 and 2017 are as follows:

For the year ended December 31, 2019

	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$14,067	5,941,873	$2.37
Effect of dilutive securities:
Restricted stock units	-	25,438
Diluted earnings per share	$14,067	5,967,311	$2.36

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For the year ended December 31, 2018

 

	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$13,382	5,995,256	$2.23
Effect of dilutive securities:
Restricted stock units	-	20,240
Diluted earnings per share	$13,382	6,015,496	$2.22

For the year ended December 31, 2017

	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$10,268	5,988,183	$1.71
Effect of dilutive securities:
Restricted stock units	-	74,667
Diluted earnings per share	$10,268	6,062,850	$1.69

 

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2014-09: Revenue from Contracts with Customers	Provides guidance on the recognition of revenue from contracts with customers. The core principle of this 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.	January 1, 2018	See section titled "ASU 2014-09" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities	Addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs	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.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-09: Scope of Modification Accounting	Amended the requirements related to changes to the terms or conditions of a share-based payment award.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-14: Income Statement—Reporting Comprehensive, Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)	Incorporates into the Accounting Standards Codification ("ASC") recent Securities and Exchange Commission ("SEC") guidance related to revenue recognition.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

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ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities	Clarifies certain aspects of the guidance issued in ASU 2016-01.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-04: Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)	Incorporates recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulation.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-06: Codification Improvements to Topic 942: Financial Services—Depository and Lending	Eliminates a reference to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges, from the ASC. The Office of the Comptroller of the Currency published the guidance in 1985 but has since rescinded it.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2016-02: Leases	Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.	January 1, 2019	See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities	Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-11: Leases (Topic 842): Targeted Improvements	Intended to reduce costs and ease implementation of ASU 2016-02.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-20: Narrow- Scope Improvements for Lessors	Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.	January 1, 2019	See comments for ASU 2016-02 below.
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2014-09

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

Revenue and Method of Adoption

The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment

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advisory, and appraisal services. On January 1, 2018, the Company adopted the requirements of ASU 2014-09. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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

 

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $876,000 and $823,000 for the years ended December 31, 2019 and 2018, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third partieswas $4.1 million and $3.9 million for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was $692,000 and $597,000 for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $4.5 million and $3.2 millionfor the years ended December 31, 2019 and 2018, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the years ended December 31, 2019 derived from contracts in which services are transferred at a point in time was approximately $9.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors impacting the customers could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair the customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASU 2014-09. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied as the service is provided to the customer at a point in time. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts within the scope of ASU 2014-09 contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is

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resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated.

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

ASU 2016-02

On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease agreements. The key difference of Topic 842 from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the previous guidance. Topic 842 states that a contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company reviewed its material non-real estate contracts to determine if they included a lease and did not note any that would need to be considered under Topic 842. The Company’s lease agreements in which Topic 842 has been applied are primarily for retail branch real estate properties. These real estate leases have lease terms from less than 12 months to leases with options up to 15 years, and payment terms vary with some being fixed payments or based on a fixed annual increase while others are variable and the annual increases are based on market rates or other indexes.

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

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

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

For operating leases, after lease commencement, the lease liability is recorded at the present value of the unpaid lease payments discounted at the discount rate for the lease established at the commencement date. Lease expense is determined by the sum of the lease payments to be recognized on a straight-line basis over the lease term. The

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

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

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $231,000 and $230,000 for the years ended December 31, 2019 and 2018, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2019, which may impact the Company’s financial statements.

 

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	January 1, 2020 Early adoption permitted	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
		See ASU 2019-10 below.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020 Early adoption permitted	The Company does not intend to adopt this guidance early. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.

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ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2018 and 2017 consolidated financial statements have been reclassified to conform to the 2019 presentation.

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Investment Securities

Investment securities available for sale at December 31, 2019 and 2018 are as follows:

(Dollars in thousands)

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

(Dollars in thousands)

	December 31, 2018
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$52,145	516	558	52,103
U.S. Government sponsored enterprises	35,356	71	793	34,634
State and political subdivisions	105,545	2,089	43	107,591
Trust preferred securities	250	-	-	250
Total	$193,296	2,676	1,394	194,578

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2019 and 2018 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands)

	December 31, 2019
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$28,395	177	6,351	50	34,746	227
U.S. Government sponsored enterprises	2,899	10	6,151	301	9,050	311
State and political subdivisions	7,367	200	-	-	7,367	200
Total	$38,661	387	12,502	351	51,163	738

              (Dollars in thousands) 

	December 31, 2018
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$6,932	56	17,670	502	24,602	558
U.S. Government sponsored enterprises	1,784	69	25,172	724	26,956	793
State and political subdivisions	4,815	26	1,578	17	6,393	43
Total	$13,531	151	44,420	1,243	57,951	1,394

At December 31, 2019, unrealized losses in the investment securities portfolio relating to debt securities totaled $738,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2019 tables above, seven out of 90 securities issued by state and political subdivisions contained unrealized losses and 24 out of 57 securities issued by U.S. Government sponsored

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enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations on each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2019, 2018 or 2017.

 

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2019, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2019

(Dollars in thousands)

	Amortized Cost	Estimated Fair Value
Due within one year	$5,490	5,465
Due from one to five years	56,399	58,315
Due from five to ten years	47,717	49,293
Due after ten years	3,595	3,717
Mortgage-backed securities	77,812	78,956
Total	$191,013	195,746

During 2019, proceeds from sales of securities available for sale were $20.7 million and resulted in net gains of $226,000. During 2018, proceeds from sales of securities available for sale were $36.0 million and resulted in gross gains of $15,000. No securities available for sale were sold during the year ended December 31, 2017.

Securities with a fair value of approximately $66.0 million and $93.0 million at December 31, 2019 and 2018, respectively, were pledged to secure public deposits, FHLB borrowings and for other purposes as required by law.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2019 and 2018.

(Dollars in thousands)

	December 31, 2019
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$78,956	-	78,956	-
U.S. Government sponsored enterprises	$28,397	-	28,397	-
State and political subdivisions	$88,143	-	88,143	-
Trust preferred securities	$250	-	-	250

(Dollars in thousands)

	December 31, 2018
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$52,103	-	52,103	-
U.S. Government sponsored enterprises	$34,634	-	34,634	-
State and political subdivisions	$107,591	-	107,591	-
Trust preferred securities	$250	-	-	250

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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.

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the year ended December 31, 2019.

(Dollars in thousands)

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

 (3) 

Loans

Major classifications of loans at December 31, 2019 and 2018 are summarized as follows:

(Dollars in thousands)

	December 31, 2019	December 31, 2018
Real estate loans:
Construction and land development	$92,596	94,178
Single-family residential	269,475	252,983
Single-family residential - Banco de la Gente non-traditional	30,793	34,261
Commercial	291,255	270,055
Multifamily and farmland	48,090	33,163
Total real estate loans	732,209	684,640
Loans not secured by real estate:
Commercial loans	100,263	97,465
Farm loans	1,033	926
Consumer loans	8,432	9,165
All other loans	7,937	11,827
Total loans	849,874	804,023
Less allowance for loan losses	6,680	6,445
Total net loans	$843,194	797,578

The above table includes deferred costs, net of deferred fees, totaling $1.5 million and $1.6 million at December 31, 2019 and 2018, respectively.

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:

 

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●

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 December 31, 2019, construction and land development loans comprised approximately 11% 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 December 31, 2019, single-family residential loans comprised approximately 35% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 4% 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 December 31, 2019, commercial real estate loans comprised approximately 34% 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 December 31, 2019, 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 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 December 31, 2019 and 2018:

December 31, 2019

(Dollars in thousands)

	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$803	-	803	91,793	92,596	-
Single-family residential	3,000	126	3,126	266,349	269,475	-
Single-family residential -
Banco de la Gente non-traditional	4,834	413	5,247	25,546	30,793	-
Commercial	504	176	680	290,575	291,255	-
Multifamily and farmland	-	-	-	48,090	48,090	-
Total real estate loans	9,141	715	9,856	722,353	732,209	-
Loans not secured by real estate:
Commercial loans	432	-	432	99,831	100,263	-
Farm loans	-	-	-	1,033	1,033	-
Consumer loans	170	22	192	8,240	8,432	-
All other loans	-	-	-	7,937	7,937	-
Total loans	$9,743	737	10,480	839,394	849,874	-

A-49

December 31, 2018

(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	$3	-	3	94,175	94,178	-
Single-family residential	4,162	570	4,732	248,251	252,983	-
Single-family residential -
Banco de la Gente non-traditional	4,627	580	5,207	29,054	34,261	-
Commercial	228	-	228	269,827	270,055	-
Multifamily and farmland	-	-	-	33,163	33,163	-
Total real estate loans	9,020	1,150	10,170	674,470	684,640	-
Loans not secured by real estate:
Commercial loans	445	90	535	96,930	97,465	-
Farm loans	-	-	-	926	926	-
Consumer loans	99	4	103	9,062	9,165	-
All other loans	-	-	-	11,827	11,827	-
Total loans	$9,564	1,244	10,808	793,215	804,023	-

The following table presents the Bank’s non-accrual loans as of December 31, 2019 and 2018:

	December 31, 2019	December 31, 2018
Real estate loans:
Construction and land development	$-	1
Single-family residential	1,378	1,530
Single-family residential -
Banco de la Gente non-traditional	1,764	1,440
Commercial	256	244
Total real estate loans	3,398	3,215
Loans not secured by real estate:
Commercial loans	122	89
Consumer loans	33	10
Total	$3,553	3,314

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. Impaired loans collectively evaluated for impairment totaled $5.3 million and $4.8 million at December 31, 2019 and 2018, respectively. Accruing impaired loans were $21.3 million and $22.8 million at December 31, 2019 and December 31, 2018, respectively. Interest income recognized on accruing impaired loans was $1.3 million for the years ended December 31, 2019 and 2018. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

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The following tables present the Bank’s impaired loans as of December 31, 2019, 2018 and 2017:

December 31, 2019

(Dollars in thousands)

	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$183	-	183	183	7	231	12
Single-family residential	5,152	403	4,243	4,646	36	4,678	269
Single-family residential -
Banco de la Gente non-traditional	15,165	-	14,371	14,371	944	14,925	956
Commercial	1,879	-	1,871	1,871	7	1,822	91
Total impaired real estate loans	22,379	403	20,668	21,071	994	21,656	1,328
Loans not secured by real estate:
Commercial loans	180	92	84	176	-	134	9
Consumer loans	100	-	96	96	2	105	7
Total impaired loans	$22,659	495	20,848	21,343	996	21,895	1,344

December 31, 2018

(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	$281	-	279	279	5	327	19
Single-family residential	5,059	422	4,188	4,610	32	6,271	261
Single-family residential -
Banco de la Gente non-traditional	16,424	-	15,776	15,776	1,042	14,619	944
Commercial	1,995	-	1,925	1,925	17	2,171	111
Total impaired real estate loans	23,759	422	22,168	22,590	1,096	23,388	1,335
Loans not secured by real estate:
Commercial loans	251	89	1	90	-	96	-
Consumer loans	116	-	113	113	2	137	7
Total impaired loans	$24,126	511	22,282	22,793	1,098	23,621	1,342

December 31, 2017

(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	-	277	277	6	253	17
Single-family residential	5,226	1,135	3,686	4,821	41	5,113	265
Single-family residential -
Banco de la Gente non-traditional	17,360	-	16,805	16,805	1,149	16,867	920
Commercial	2,761	807	1,661	2,468	1	3,411	148
Multifamily and farmland	78	-	12	12	-	28	-
Total impaired real estate loans	25,707	1,942	22,441	24,383	1,197	25,672	1,350
Loans not secured by real estate:
Commercial loans	264	100	4	104	-	149	3
Farm loans (non RE)			-
Consumer loans	158	-	154	154	2	194	9
All other loans (not secured by real estate)	-	-	-	-	-	-	-
Total impaired loans	$26,129	2,042	22,599	24,641	1,199	26,015	1,362

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2019 and 2018 are presented below. The Company’s valuation methodology is discussed in Note 15.

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(Dollars in thousands)

	Fair Value Measurements December 31, 2019	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$4,417	-	-	4,417
Impaired loans	$20,347	-	-	20,347
Other real estate	$-	-	-	-

(Dollars in thousands)

	Fair Value Measurements December 31, 2018	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$680	-	-	680
Impaired loans	$21,695	-	-	21,695
Other real estate	$27	-	-	27

Changes in the allowance for loan losses for the year ended December 31, 2019 were as follows:

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
Allowance for loan losses:
Beginning balance	$813	1,325	1,177	1,278	83	626	-	161	982	6,445
Charge-offs	(21)	(42)	-	(1)	-	(389)	-	(623)	-	(1,076)
Recoveries	45	66	-	49	-	83	-	205	-	448
Provision	(143)	(75)	(104)	(21)	37	368	-	395	406	863
Ending balance	$694	1,274	1,073	1,305	120	688	-	138	1,388	6,680
Ending balance: individuallyevaluated for impairment	$2	6	925	4	-	-	-	-	-	937
Ending balance: collectivelyevaluated for impairment	692	1,268	148	1,301	120	688	-	138	1,388	5,743
Ending balance	$694	1,274	1,073	1,305	120	688	-	138	1,388	6,680
Loans:
Ending balance	$92,596	269,475	30,793	291,255	48,090	100,263	1,033	16,369	-	849,874
Ending balance: individually evaluated for impairment	$10	1,697	12,899	1,365	-	92	-	-	-	16,063
Ending balance: collectively evaluated for impairment	$92,586	267,778	17,894	289,890	48,090	100,171	1,033	16,369	-	833,811

 

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                Changes in the allowance for loan losses for the year ended December 31, 2018 were as follows:

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
Allowance for loan losses:
Beginning balance	$804	1,812	1,280	1,193	72	574	-	155	476	6,366
Charge-offs	(53)	(116)	-	(453)	(5)	(54)	-	(452)	-	(1,133)
Recoveries	10	106	-	105	1	32	-	168	-	422
Provision	52	(477)	(103)	433	15	74	-	290	506	790
Ending balance	$813	1,325	1,177	1,278	83	626	-	161	982	6,445
Ending balance: individually evaluated for impairment	$-	-	1,023	15	-	-	-	-	-	1,038
Ending balance: collectively evaluated for impairment	813	1,325	154	1,263	83	626	-	161	982	5,407
Ending balance	$813	1,325	1,177	1,278	83	626	-	161	982	6,445
Loans:
Ending balance	$94,178	252,983	34,261	270,055	33,163	97,465	926	20,992	-	804,023
Ending balance: individually evaluated for impairment	$96	1,779	14,310	1,673	-	89	-	-	-	17,947
Ending balance: collectively evaluated for impairment	$94,082	251,204	19,951	268,382	33,163	97,376	926	20,992	-	786,076

Changes in the allowance for loan losses for the year ended December 31, 2017 were as follows:

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
Allowance for loan losses:
Beginning balance	$1,152	2,126	1,377	1,593	52	675	-	204	371	7,550
Charge-offs	-	(249)	-	-	(66)	(194)	-	(473)	-	(982)
Recoveries	14	85	-	21	-	31	-	154	-	305
Provision	(362)	(150)	(97)	(421)	86	62	-	270	105	(507)
Ending balance	$804	1,812	1,280	1,193	72	574	-	155	476	6,366
Ending balance: individually evaluated for impairment	$-	-	1,093	37	-	-	-	-	-	1,130
Ending balance: collectively evaluated for impairment	804	1,812	187	1,156	72	574	-	155	476	5,236
Ending balance	$804	1,812	1,280	1,193	72	574	-	155	476	6,366
Loans:
Ending balance	$84,987	246,703	37,249	248,637	28,937	89,022	1,204	23,025	-	759,764
Ending balance: individually evaluated for impairment	$98	1,855	15,460	2,251	-	100	-	-	-	19,764
Ending balance: collectively evaluated for  impairment	$84,889	244,848	21,789	246,386	28,937	88,922	1,204	23,025	-	740,000

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

●

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

●

Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the 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).

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●

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

●

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

  The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2019 and 2018.

December 31, 2019

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$-	8,819	-	-	-	330	-	693	-	9,842
2- High Quality	32,029	128,757	-	21,829	256	20,480	-	2,708	1,860	207,919
3- Good Quality	52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention	5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch	3,007	3,196	2,027	3,072	543	492	-	8	-	12,345
6- Substandard	64	3,048	2,926	256	-	124	-	48	-	6,466
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

December 31, 2018

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$504	5,795	-	-	-	605	-	673	-	7,577
2- High Quality	24,594	128,588	-	25,321	395	20,520	-	3,229	2,145	204,792
3- Good Quality	59,549	92,435	13,776	211,541	27,774	69,651	785	4,699	8,932	489,142
4- Management Attention	5,707	19,200	15,012	30,333	3,906	6,325	141	529	750	81,903
5- Watch	3,669	3,761	2,408	2,616	1,088	264	-	18	-	13,824
6- Substandard	155	3,204	3,065	244	-	100	-	17	-	6,785
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$94,178	252,983	34,261	270,055	33,163	97,465	926	9,165	11,827	804,023

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TDR loans modified in 2019, past due TDR loans and non-accrual TDR loans totaled $4.3 million and $4.7 million at December 31, 2019 and December 31, 2018, 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 zero and $92,000 in performing loans classified as TDR loans at December 31, 2019 and December 31, 2018, respectively.

There were no new TDR modifications during the year ended December 31, 2019.

The following table presents an analysis of loan modifications during the year ended December 31, 2018:

Year ended December 31, 2018     

(Dollars in thousands)

	Number of Contracts	Pre-Modification Outstanding Recorded Investment	Post-Modification Outstanding Recorded Investment
Real estate loans:
Single-family residential	2	$94	94
Total TDR loans	2	$94	94

During the year ended December 31, 2018, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2019 and 2018. TDR loans are deemed to be in default if they become past due by 90 days or more.

(4) Premises and Equipment

Major classifications of premises and equipment at December 31, 2019 and 2018 are summarized as follows:

(Dollars in thousands)

	2019	2018
Land	$2,793	2,889
Buildings and improvements	18,931	19,796
Furniture and equipment	24,743	22,443
Construction in process	395	381
Total premises and equipment	46,862	45,509
Less accumulated depreciation	28,258	27,059
Total net premises and equipment	$18,604	18,450

               The Company recognized approximately $2.3 million in depreciation expense for the years ended December 31, 2019 and 2018. Depreciation expense was approximately $2.1 million for the year ended December 31, 2017.

The Company had $239,000 and $544,000 net losses on the sale of and write-downs on premises and equipment for the years ended December 31, 2019 and 2018, respectively.

(5) Leases

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

Total rent expense was approximately $949,000, $785,000 and $756,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

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As of December 31, 2019 the Company had operating ROU assets of $3.6 million and operating lease liabilities of $3.6 million. The Company maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. As allowed by the standard, leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

The following table presents lease cost and other lease information as of December 31, 2019.

(Dollars in thousands)

	December 31, 2019
Operating lease cost	$893
Other information:
Cash paid for amounts included in the measurement of lease liabilities	850
Operating cash flows from operating leases	-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	8
Weighted-average remaining lease term - operating leases	7.27
Weighted-average discount rate - operating leases	3.19%

The following table presents lease maturities as of December 31, 2019.

(Dollars in thousands)

Maturity Analysis of Operating Lease Liabilities:	December 31, 2019
2020	$823
2021	793
2022	501
2023	393
2024	304
Thereafter	1,320
Total	4,134
Less: Imputed Interest	(487)
Operating Lease Liability	$3,647

(6) Time Deposits

At December 31, 2019, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)

2020	$53,905
2021	21,997
2022	10,919
2023	3,117
2024 and thereafter	21,818
Total	$111,756

At December 31, 2019 and 2018, the Bank had approximately $22.3 million and $3.4 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers. CDARS balances totaled $3.1 million and $3.4 million as of December 31, 2019 and 2018, respectively. The weighted average rate of brokered deposits as of December 31, 2019 and 2018 was 1.96% and 0.07%, respectively.

 

A-56

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

The Bank had no borrowings from the FHLB at December 31, 2019 and 2018. FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $139.4 million. The remaining availability under the line of credit with the FHLB was $86.1 million at December 31, 2019.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $983,000 and $982,000 of FHLB stock, included in other investments, at December 31, 2019 and 2018, respectively.

As of December 31, 2019 and 2018, the Bank had no borrowings from the Federal Reserve Bank (“FRB”). FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $452.6 million. Availability under the line of credit with the FRB was $344.7 million at December 31, 2019.

(8) Junior Subordinated Debentures

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

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

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

The Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.

(9) Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the TCJA in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. As such, the Company’s financial results reflect the income tax effects of the TCJA for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the TCJA for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the TCJA have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

 

A-57

The provision for income taxes is summarized as follows:

(Dollars in thousands)

	2019	2018	2017
Current expense	$2,960	2,546	1,827
Deferred income tax expense	176	78	2,120
Total income tax	$3,136	2,624	3,947

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

(Dollars in thousands)

	2019	2018	2017
Tax expense at statutory rate (21% in 2018 and 2019)	$3,613	3,361	4,833
State income tax, net of federal income tax effect	327	358	307
Tax-exempt interest income	(802)	(990)	(1,594)
Increase in cash surrender value of life insurance	(81)	(81)	(136)
Nondeductible interest and other expense	40	23	46
Impact of TCJA	-	-	588
Other	39	(47)	(97)
Total	$3,136	2,624	3,947

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities. The net deferred tax asset is included as a component of other assets at December 31, 2019 and 2018.

(Dollars in thousands)

	2019	2018
Deferred tax assets:
Allowance for loan losses	$1,535	1,481
Accrued retirement expense	1,150	1,119
Restricted stock	217	262
Accrued bonuses	266	211
Interest income on nonaccrual loans	2	1
Total gross deferred tax assets	3,170	3,074
Deferred tax liabilities:
Deferred loan fees	343	379
Accumulated depreciation	873	610
Prepaid expenses	7	10
Other	53	5
Unrealized gain on available for sale securities	1,087	294
Total gross deferred tax liabilities	2,363	1,298
Net deferred tax asset	$807	1,776

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $588,000 increase in income tax expense for the year ended December 31, 2017 and a corresponding $588,000 decrease in net deferred tax assets as of December 31, 2017.

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

The Company’s Federal income tax filings for years 2016 through 2019 were at year end 2019 open to audit under statutes of limitations by the Internal Revenue Service. The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2017 and 2018 are open to audit under the statutes of limitations by the North Carolina Department of Revenue.

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(10) Related Party Transactions

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. It is the policy of the Company that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2019 and 2018:

(Dollars in thousands)

	2019	2018
Beginning balance	$3,192	3,679
New loans	5,716	8,030
Repayments	(5,436)	(8,517)
Ending balance	$3,472	3,192

At December 31, 2019 and 2018, the Company had deposit relationships with related parties of approximately $30.4 million and $31.6 million, respectively.

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $231,000 and $230,000 during 2019 and 2018, respectively.

(11) Commitments and Contingencies

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

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

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

(Dollars in thousands)

	Contractual Amount
	2019	2018
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$276,338	268,708
Standby letters of credit and financial guarantees written	$3,558	3,651

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $279.9 million does not necessarily represent future cash requirements.

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

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

 

A-59

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

The Company has $82.5 million available for the purchase of overnight federal funds from six correspondent financial institutions as of December 31, 2019.

At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property. The Bank has funded $2.7 million of this commitment at December 31, 2019.

(12) Employee and Director Benefit Programs

The Company has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Company matched employee contributions to a maximum of 4.00% of annual compensation in 2017, 2018 and 2019. The Company’s contribution pursuant to this formula was approximately $691,000, $670,000 and $622,000 for the years 2019, 2018 and 2017, respectively. Investments of the 401(k) plan are determined by a committee comprised of senior management. No investments in Company stock have been made by the 401(k) plan. Contributions to the 401(k) plan are vested immediately.

In December 2001, the Company initiated a postretirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries. Under the postretirement benefit plan, the Company purchased life insurance contracts on the lives of the key officers and each director. The increase in cash surrender value of the contracts constitutes the Company’s contribution to the postretirement benefit plan each year. Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $361,000, $423,000 and $428,000 for the years 2019, 2018 and 2017, respectively.

The Company is currently paying medical benefits for certain retired employees. The Company did not incur any postretirement medical benefits expense in 2019, 2018 and 2017 due to an excess accrual balance.

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

(Dollars in thousands)

	2019	2018
Benefit obligation at beginning of period	$4,566	4,361
Service cost	299	362
Interest cost	58	70
Benefits paid	(223)	(227)
Benefit obligation at end of period	$4,700	4,566

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2019 and 2018 are shown in the following two tables:

(Dollars in thousands)

	2019	2018
Benefit obligation	$4,700	4,566
Fair value of plan assets	-	-

A-60

(Dollars in thousands)

	2019	2018
Funded status	$(4,700)	(4,566)
Unrecognized prior service cost/benefit	-	-
Unrecognized net actuarial loss	-	-
Net amount recognized	$(4,700)	(4,566)
Unfunded accrued liability	$(4,700)	(4,566)
Intangible assets	-	-
Net amount recognized	$(4,700)	(4,566)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2019, 2018 and 2017 consisted of the following:

(Dollars in thousands)

	2019	2018	2017
Service cost	$299	362	348
Interest cost	58	70	68
Net periodic cost	$357	432	416
Weighted average discount rate assumption used to determine benefit obligation	5.49%	5.49%	5.49%

  The Company paid benefits under the two postretirement plans totaling $223,000 and $227,000 during the years ended December 31, 2019 and 2018, respectively. Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:

(Dollars in thousands)

Year ending December 31,
2020	$237
2021	$353
2022	$342
2023	$342
2024	$354
Thereafter	$8,715

(13) Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of capital in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for loan losses, up to 1.25% of risk-weighted assets and other adjustments. Management believes, as of December 31, 2019, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

A-61

As of December 31, 2019, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

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

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

(Dollars in thousands)

	Actual		Minimum Regulatory Capital Ratio		Minimum Ratio plus Capital Conservation Buffer
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2019:
Total Capital (to Risk-Weighted Assets)
Consolidated	$152,156	16.08%	75,710	8.00%	N/A	N/A
Bank	$149,266	15.79%	75,602	8.00%	99,228	10.50%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$145,476	15.37%	56,783	6.00%	N/A	N/A
Bank	$142,586	15.09%	56,702	6.00%	80,328	8.50%
Tier 1 Capital (to Average Assets)
Consolidated	$145,476	11.91%	48,872	4.00%	N/A	N/A
Bank	$142,586	11.61%	49,106	4.00%	49,106	4.00%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$130,476	13.79%	42,587	4.50%	N/A	N/A
Bank	$142,586	15.09%	42,526	4.50%	66,152	7.00%

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(Dollars in thousands)

	Actual		Minimum Regulatory Capital Ratio		Minimum Ratio plus Capital Conservation Buffer
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2018:
Total Capital (to Risk-Weighted Assets)
Consolidated	$149,076	16.15%	73,830	8.00%	N/A	N/A
Bank	$146,640	15.91%	73,717	8.00%	91,041	9.88%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$142,631	15.46%	55,372	6.00%	N/A	N/A
Bank	$140,195	15.21%	55,288	6.00%	72,612	7.88%
Tier 1 Capital (to Average Assets)
Consolidated	$142,631	13.05%	43,723	4.00%	N/A	N/A
Bank	$140,195	12.76%	43,950	4.00%	43,950	4.00%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$122,631	13.29%	41,529	4.50%	N/A	N/A
Bank	$140,195	15.21%	41,466	4.50%	58,790	6.38%

 (14) Shareholders’ Equity

Shareholders’ equity was $134.1 million, or 11.59% of total assets, at December 31, 2019, compared to $123.6 million, or 11.31% of total assets, at December 31, 2018. The increase in shareholders’ equity is primarily due to an increase in retained earnings due to net income.

Annualized return on average equity for the year ended December 31, 2019 was 10.45% compared to 10.81% for the year ended December 31, 2018. Total cash dividends paid on common stock were $3.9 million and $3.1 million for the years ended December 31, 2019 and 2018, 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 shares of preferred stock.

In 2019, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $5 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $2.5 million, or 90,354 shares of its common stock, under this stock repurchase program as of December 31, 2019.

(15) Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019	2018	2017
Visa debit card income	$4,145	3,911	3,757
Bank owned life insurance income	383	384	400
Gain (loss) on sale of premises and equipment	(239)	544	(32)
Other	1,320	1,354	1,175
	$5,609	6,193	5,300

A-63

Other non-interest expense for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019	2018	2017
ATM expense	$579	542	673
Consulting	972	1,012	785
Data processing	616	466	426
Deposit program expense	515	586	539
Dues and subscriptions	421	421	354
FHLB advance prepayment penalty	-	-	508
Internet banking expense	681	603	720
Office supplies	467	503	517
Telephone	802	678	855
Other	2,921	2,834	2,540
	$7,974	7,645	7,917

(16) Fair Value of Financial Instruments

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

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

●

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

●

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

●

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

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

A-64

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.

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 fair value presentation for recurring assets is presented in Note 2. There were no recurring liabilities at December 31, 2019 and 2018. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2019 and 2018. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2019 and 2018 are as follows:

A-65

(Dollars in thousands)
		Fair Value Measurements at December 31, 2019
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$52,387	52,387	-	-	52,387
Investment securities available for sale	$195,746	-	195,496	250	195,746
Other investments	$4,231	-	-	4,231	4,231
Mortgage loans held for sale	$4,417	-	-	4,417	4,417
Loans, net	$843,194	-	-	819,397	819,397
Cash surrender value of life insurance	$16,319	-	16,319	-	16,319
Liabilities:
Deposits	$966,517	-	-	955,766	955,766
Securities sold under agreements to repurchase	$24,221	-	24,221	-	24,221
Junior subordinated debentures	$15,619	-	15,619	-	15,619

(Dollars in thousands)
		Fair Value Measurements at December 31, 2018
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$43,370	43,370	-	-	43,370
Investment securities available for sale	$194,578	-	194,328	250	194,578
Other investments	$4,361	-	-	4,361	4,361
Mortgage loans held for sale	$680	-	-	680	680
Loans, net	$797,578	-	-	748,917	748,917
Cash surrender value of life insurance	$15,936	-	15,936	-	15,936
Liabilities:
Deposits	$877,213	-	-	857,999	857,999
Securities sold under agreements to repurchase	$58,095	-	58,095	-	58,095
Junior subordinated debentures	$20,619	-	20,619	-	20,619

A-66

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

Balance Sheets

December 31, 2019 and 2018

(Dollars in thousands)

Assets	2019	2018
Cash	$1,187	689
Interest-bearing time deposit	1,000	1,000
Investment in subsidiaries	146,230	141,181
Investment in PEBK Capital Trust II	619	619
Investment securities available for sale	250	250
Other assets	476	533
Total assets	$149,762	144,272
Liabilities and Shareholders' Equity
Junior subordinated debentures	$15,619	20,619
Liabilities	23	36
Shareholders' equity	134,120	123,617
Total liabilities and shareholders' equity	$149,762	144,272

Statements of Earnings

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

Revenues:	2019	2018	2017
Interest and dividend income	$12,850	4,544	1,839
Total revenues	12,850	4,544	1,839
Expenses:
Interest	844	790	590
Other operating expenses	629	678	725
Total expenses	1,473	1,468	1,315
Income before income tax benefit and equity in undistributed earnings of subsidiaries	11,377	3,076	524
Income tax benefit	299	299	434
Income before equity in undistributed earnings of subsidiaries	11,676	3,375	958
Equity in undistributed earnings of subsidiaries	2,391	10,007	9,310
Net earnings	$14,067	13,382	10,268

A-67

Statements of Cash Flows

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

	2019	2018	2017
Cash flows from operating activities:
Net earnings	$14,067	13,382	10,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries	(2,391)	(10,007)	(9,310)
Change in:
Other assets	57	13	(272)
Other liabilities	(13)	6	5
Net cash provided by operating activities	11,720	3,394	691
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale	-	-	500
Net cash provided by investing activities	-	-	500
Cash flows from financing activities:
Repayment of junior subordinated debentures	(5,000)	-	-
Cash dividends paid on common stock	(3,939)	(3,133)	(2,629)
Cash in lieu stock dividend	-	-	(6)
Stock repurchase	(2,490)	-	-
Proceeds from exercise of restricted stock units	207	-	915
Net cash used by financing activities	(11,222)	(3,133)	(1,720)
Net change in cash	498	261	(529)
Cash at beginning of year	689	428	957
Cash at end of year	$1,187	689	428
Noncash investing and financing activities:	-
Change in unrealized gain on investment securities available for sale, net	$2,658	(2,607)	(1)

(18) Quarterly Data

(Dollars in thousands, except per share amounts)	First	Second	Third	Fourth	First	Second	Third	Fourth
Total interest income	$12,183	12,375	12,430	12,613	$10,759	11,059	11,608	11,924
Total interest expense	757	781	994	1,225	467	513	557	609
Net interest income	11,426	11,594	11,436	11,388	10,292	10,546	11,051	11,315
Provision for loan losses	178	77	422	186	31	231	110	418
Other income	4,120	4,385	4,708	4,526	3,736	4,016	3,915	4,499
Other expense	10,916	11,244	11,267	12,090	10,042	10,560	10,702	11,270
Income before income taxes	4,452	4,658	4,455	3,638	3,955	3,771	4,154	4,126
Income tax expense	785	845	834	672	652	595	687	690
Net earnings	3,667	3,813	3,621	2,966	3,303	3,176	3,467	3,436
Basic net earnings per share	$0.61	0.64	0.62	0.50	$0.55	0.53	0.58	0.57
Diluted net earnings per share	$0.61	0.64	0.61	0.50	$0.55	0.53	0.57	0.57

A-68

EX-21

EXHIBIT (21)

SUBSIDIARIES OF THE REGISTRANT

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

EX-23

EXHIBIT (23)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (No. 333-43426 on Form S-3, effective August 10, 2000 and No. 333-46860 on Form S-8, effective September 28, 2000) of Peoples Bancorp of North Carolina, Inc. of our reports dated March 13, 2020, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Peoples Bancorp of North Carolina, Inc., appearing in this Annual Report on Form 10-K of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2019.

/s/ Elliott Davis, PLLC

Charlotte, North Carolina

March 13, 2020

EX-31.I

EXHIBIT (31)(i)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.

I have reviewed this annual report on Form 10-K of Peoples Bancorp of North Carolina, Inc.;

2.

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

3.

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

4.

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

a)

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

b)

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

c)

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

d)

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

5.

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

a)

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

b)

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

Date: March 13, 2020	By:	/s/ Lance A. Sellers
		Lance A. Sellers
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.II

EXHIBIT (31)(ii)

CERTIFICATIONS

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

1.

I have reviewed this annual report on Form 10-K of Peoples Bancorp of North Carolina, Inc.;

2.

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

3.

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

4.

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

a)

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

b)

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

c)

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

d)

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

5.

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

a)

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

b)

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

Date: March 13, 2020	By:	/s/ A. Joseph Lampron, Jr.
		A. Joseph Lampron, Jr.
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

EX-32

EXHIBIT (32)

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Peoples Bancorp of North Carolina, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best knowledge of the undersigned:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 13, 2020	By:	/s/ Lance A. Sellers
		Lance A. Sellers
		Chief Executive Officer

Date: March 13, 2020	By:	/s/ A. Joseph Lampron, Jr.
		A. Joseph Lampron, Jr.
		Chief Financial Officer

XML

3. Loans

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

Loans

Major classifications of loans at December 31, 2019 and 2018 are summarized as follows:

(Dollars in thousands)

	December 31, 2019		December 31, 2018
Real estate loans:
Construction and land development	$	92,596		94,178
Single-family residential		269,475		252,983
Single-family residential -
Banco de la Gente non-traditional		30,793		34,261
Commercial		291,255		270,055
Multifamily and farmland		48,090		33,163
Total real estate loans		732,209		684,640
Loans not secured by real estate:
Commercial loans		100,263		97,465
Farm loans		1,033		926
Consumer loans		8,432		9,165
All other loans		7,937		11,827
Total loans		849,874		804,023
Less allowance for loan losses		6,680		6,445
Total net loans	$	843,194		797,578

The above table includes deferred costs, net of deferred fees, totaling $1.5 million and $1.6 million at December 31, 2019 and 2018, respectively.

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 December 31, 2019, construction and land development loans comprised approximately 11% 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 December 31, 2019, single-family residential loans comprised approximately 35% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 4% 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 December 31, 2019, commercial real estate loans comprised approximately 34% 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 December 31, 2019, 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 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 December 31, 2019 and 2018:

December 31, 2019

(Dollars in thousands)

	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	803		—		803		91,793		92,596		—
Single-family residential		3,000		126		3,126		266,349		269,475		—
Single-family residential -
Banco de la Gente non-traditional		4,834		413		5,247		25,546		30,793		—
Commercial		504		176		680		290,575		291,255		—
Multifamily and farmland		—		—		—		48,090		48,090		—
Total real estate loans		9,141		715		9,856		722,353		732,209		—
Loans not secured by real estate:
Commercial loans		432		—		432		99,831		100,263		—
Farm loans		—		—		—		1,033		1,033		—
Consumer loans		170		22		192		8,240		8,432		—
All other loans		—		—		—		7,937		7,937		—
Total loans	$	9,743		737		10,480		839,394		849,874		—

December 31, 2018

(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	$	3		—		3		94,175		94,178		—
Single-family residential		4,162		570		4,732		248,251		252,983		—
Single-family residential -
Banco de la Gente non-traditional		4,627		580		5,207		29,054		34,261		—
Commercial		228		—		228		269,827		270,055		—
Multifamily and farmland		—		—		—		33,163		33,163		—
Total real estate loans		9,020		1,150		10,170		674,470		684,640		—
Loans not secured by real estate:
Commercial loans		445		90		535		96,930		97,465		—
Farm loans		—		—		—		926		926		—
Consumer loans		99		4		103		9,062		9,165		—
All other loans		—		—		—		11,827		11,827		—
Total loans	$	9,564		1,244		10,808		793,215		804,023		—

The following table presents the Bank’s non-accrual loans as of December 31, 2019 and 2018:

(Dollars in thousands)

	December 31, 2019		December 31, 2018
Real estate loans:
Construction and land development	$	—		1
Single-family residential		1,378		1,530
Single-family residential -
Banco de la Gente non-traditional		1,764		1,440
Commercial		256		244
Total real estate loans		3,398		3,215
Loans not secured by real estate:
Commercial loans		122		89
Consumer loans		33		10
Total	$	3,553		3,314

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. Impaired loans collectively evaluated for impairment totaled $5.3 million and $4.8 million at December 31, 2019 and 2018, respectively. Accruing impaired loans were $21.3 million and $22.8 million at December 31, 2019 and December 31, 2018, respectively. Interest income recognized on accruing impaired loans was $1.3 million for the years ended December 31, 2019 and 2018. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Bank’s impaired loans as of December 31, 2019, 2018 and 2017:

December 31, 2019

(Dollars in thousands)

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	183		—		183		183		7		231		12
Single-family residential		5,152		403		4,243		4,646		36		4,678		269
Single-family residential -
Banco de la Gente non-traditional		15,165		—		14,371		14,371		944		14,925		956
Commercial		1,879		—		1,871		1,871		7		1,822		91
Total impaired real estate loans		22,379		403		20,668		21,071		994		21,656		1,328
Loans not secured by real estate:
Commercial loans		180		92		84		176		—		134		9
Consumer loans		100		—		96		96		2		105		7
Total impaired loans	$	22,659		495		20,848		21,343		996		21,895		1,344

December 31, 2018

(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	$	281		—		279		279		5		327		19
Single-family residential		5,059		422		4,188		4,610		32		6,271		261
Single-family residential -
Banco de la Gente non-traditional		16,424		—		15,776		15,776		1,042		14,619		944
Commercial		1,995		—		1,925		1,925		17		2,171		111
Total impaired real estate loans		23,759		422		22,168		22,590		1,096		23,388		1,335
Loans not secured by real estate:
Commercial loans		251		89		1		90		—		96		—
Consumer loans		116		—		113		113		2		137		7
Total impaired loans	$	24,126		511		22,282		22,793		1,098		23,621		1,342

December 31, 2017

(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		—		277		277		6		253		17
Single-family residential		5,226		1,135		3,686		4,821		41		5,113		265
Single-family residential -
Banco de la Gente non-traditional		17,360		—		16,805		16,805		1,149		16,867		920
Commercial		2,761		807		1,661		2,468		1		3,411		148
Multifamily and farmland		78		—		12		12		—		28		—
Total impaired real estate loans		25,707		1,942		22,441		24,383		1,197		25,672		1,350
Loans not secured by real estate:
Commercial loans		264		100		4		104		—		149		3
Farm loans (non RE)						—
Consumer loans		158		—		154		154		2		194		9
All other loans (not secured by real estate)		—		—		—		—		—		—		—
Total impaired loans	$	26,129		2,042		22,599		24,641		1,199		26,015		1,362

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2019 and 2018 are presented below. The Company’s valuation methodology is discussed in Note 15.

(Dollars in thousands)

	Fair Value Measurements December 31, 2019		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	4,417		—		—		4,417
Impaired loans	$	20,347		—		—		20,347
Other real estate	$	—		—		—		—

(Dollars in thousands)

	Fair Value Measurements December 31, 2018		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	680		—		—		680
Impaired loans	$	21,695		—		—		21,695
Other real estate	$	27		—		—		27

Changes in the allowance for loan losses for the year ended December 31, 2019 were as follows:

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland	Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	813		1,325		1,177		1,278		83	626		—	161		982	6,445
Charge-offs		(21	)	(42	)	—		(1	)	—	(389	)	—	(623	)	—	(1,076	)
Recoveries		45		66		—		49		—	83		—	205		—	448
Provision		(143	)	(75	)	(104	)	(21	)	37	368		—	395		406	863
Ending balance	$	694		1,274		1,073		1,305		120	688		—	138		1,388	6,680
Ending balance: individually
evaluated for impairment	$	2		6		925		4		—	—		—	—		—	937
Ending balance: collectively
evaluated for impairment		692		1,268		148		1,301		120	688		—	138		1,388	5,743
Ending balance	$	694		1,274		1,073		1,305		120	688		—	138		1,388	6,680
Loans:
Ending balance	$	92,596		269,475		30,793		291,255		48,090	100,263		1,033	16,369		—	849,874
Ending balance: individually
evaluated for impairment	$	10		1,697		12,899		1,365		—	92		—	—		—	16,063
Ending balance: collectively
evaluated for impairment	$	92,586		267,778		17,894		289,890		48,090	100,171		1,033	16,369		—	833,811

Changes in the allowance for loan losses for the year ended December 31, 2018 were as follows:

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Charge-offs		(53	)	(116	)	—		(453	)	(5	)	(54	)	—	(452	)	—	(1,133	)
Recoveries		10		106		—		105		1		32		—	168		—	422
Provision		52		(477	)	(103	)	433		15		74		—	290		506	790
Ending balance	$	813		1,325		1,177		1,278		83		626		—	161		982	6,445
Ending balance: individually
evaluated for impairment	$	—		—		1,023		15		—		—		—	—		—	1,038
Ending balance: collectively
evaluated for impairment		813		1,325		154		1,263		83		626		—	161		982	5,407
Ending balance	$	813		1,325		1,177		1,278		83		626		—	161		982	6,445
Loans:
Ending balance	$	94,178		252,983		34,261		270,055		33,163		97,465		926	20,992		—	804,023
Ending balance: individually
evaluated for impairment	$	96		1,779		14,310		1,673		—		89		—	—		—	17,947
Ending balance: collectively
evaluated for impairment	$	94,082		251,204		19,951		268,382		33,163		97,376		926	20,992		—	786,076

Changes in the allowance for loan losses for the year ended December 31, 2017 were as follows:

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	1,152		2,126		1,377		1,593		52		675		—	204		371	7,550
Charge-offs		—		(249	)	—		—		(66	)	(194	)	—	(473	)	—	(982	)
Recoveries		14		85		—		21		—		31		—	154		—	305
Provision		(362	)	(150	)	(97	)	(421	)	86		62		—	270		105	(507	)
Ending balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Ending balance: individually
evaluated for impairment	$	—		—		1,093		37		—		—		—	—		—	1,130
Ending balance: collectively
evaluated for impairment		804		1,812		187		1,156		72		574		—	155		476	5,236
Ending balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Loans:
Ending balance	$	84,987		246,703		37,249		248,637		28,937		89,022		1,204	23,025		—	759,764
Ending balance: individually
evaluated for impairment	$	98		1,855		15,460		2,251		—		100		—	—		—	19,764
Ending balance: collectively
evaluated for impairment	$	84,889		244,848		21,789		246,386		28,937		88,922		1,204	23,025		—	740,000

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

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

● Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the 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 Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

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

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2019 and 2018.

December 31, 2019

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	—	8,819	—	—	—	330	—	693	—	9,842
2- High Quality		32,029	128,757	—	21,829	256	20,480	—	2,708	1,860	207,919
3- Good Quality		52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention		5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch		3,007	3,196	2,027	3,072	543	492	—	8	—	12,345
6- Substandard		64	3,048	2,926	256	—	124	—	48	—	6,466
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

December 31, 2018

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	504	5,795	—	—	—	605	—	673	—	7,577
2- High Quality		24,594	128,588	—	25,321	395	20,520	—	3,229	2,145	204,792
3- Good Quality		59,549	92,435	13,776	211,541	27,774	69,651	785	4,699	8,932	489,142
4- Management Attention		5,707	19,200	15,012	30,333	3,906	6,325	141	529	750	81,903
5- Watch		3,669	3,761	2,408	2,616	1,088	264	—	18	—	13,824
6- Substandard		155	3,204	3,065	244	—	100	—	17	—	6,785
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	94,178	252,983	34,261	270,055	33,163	97,465	926	9,165	11,827	804,023

TDR loans modified in 2019, past due TDR loans and non-accrual TDR loans totaled $4.3 million and $4.7 million at December 31, 2019 and December 31, 2018, 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 zero and $92,000 in performing loans classified as TDR loans at December 31, 2019 and December 31, 2018, respectively.

There were no new TDR modifications during the year ended December 31, 2019.

The following table presents an analysis of loan modifications during the year ended December 31, 2018:

Year ended December 31, 2018     

(Dollars in thousands)

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
Single-family residential		2	$	94		94
Total TDR loans		2	$	94		94

During the year ended December 31, 2018, two loans were modified that were considered to be new TDR loans. The interest rate was modified on these TDR loans.

There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2019 and 2018. TDR loans are deemed to be in default if they become past due by 90 days or more.

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7. Federal Home Loan Bank and Federal Reserve Bank Borrowings

12 Months Ended

Dec. 31, 2019

Federal Home Loan Banks [Abstract]

Federal Home Loan Bank and Federal Reserve Bank Borrowings

The Bank had no borrowings from the FHLB at December 31, 2019 and 2018. FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $139.4 million. The remaining availability under the line of credit with the FHLB was $86.1 million at December 31, 2019.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $983,000 and $982,000 of FHLB stock, included in other investments, at December 31, 2019 and 2018, respectively.

As of December 31, 2019 and 2018, the Bank had no borrowings from the Federal Reserve Bank (“FRB”). FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2019, the carrying value of loans pledged as collateral totaled approximately $452.6 million. Availability under the line of credit with the FRB was $344.7 million at December 31, 2019.

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11. Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

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

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

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

(Dollars in thousands)

		Contractual Amount
		2019	2018
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	276,338	268,708
Standby letters of credit and financial guarantees written	$	3,558	3,651

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $279.9 million does not necessarily represent future cash requirements.

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

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

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

The Company has $82.5 million available for the purchase of overnight federal funds from six correspondent financial institutions as of December 31, 2019.

At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property. The Bank has funded $2.7 million of this commitment at December 31, 2019.

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Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Assets
Cash and due from banks, reserve requirements	$ 13,210	$ 8,918
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)	5,912,300	5,995,256
Common stock, shares outstanding (in shares)	5,912,300	5,995,256

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13. Regulatory Matters (Tables)

12 Months Ended

Dec. 31, 2019

Regulatory Matters

Bank's actual capital amounts and ratios

(Dollars in thousands)

	Actual				Minimum Regulatory Capital Ratio				Minimum Ratio plus Capital Conservation Buffer
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2019:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	152,156	16.08	%		75,710	8.00	%		N/A	N/A
Bank	$	149,266	15.79	%		75,602	8.00	%		99,228	10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	145,476	15.37	%		56,783	6.00	%		N/A	N/A
Bank	$	142,586	15.09	%		56,702	6.00	%		80,328	8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	145,476	11.91	%		48,872	4.00	%		N/A	N/A
Bank	$	142,586	11.61	%		49,106	4.00	%		49,106	4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	130,476	13.79	%		42,587	4.50	%		N/A	N/A
Bank	$	142,586	15.09	%		42,526	4.50	%		66,152	7.00	%

(Dollars in thousands)

	Actual				Minimum Regulatory Capital Ratio				Minimum Ratio plus Capital Conservation Buffer
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2018:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	149,076	16.15	%		73,830	8.00	%		N/A	N/A
Bank	$	146,640	15.91	%		73,717	8.00	%		91,041	9.88	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	142,631	15.46	%		55,372	6.00	%		N/A	N/A
Bank	$	140,195	15.21	%		55,288	6.00	%		72,612	7.88	%
Tier 1 Capital (to Average Assets)
Consolidated	$	142,631	13.05	%		43,723	4.00	%		N/A	N/A
Bank	$	140,195	12.76	%		43,950	4.00	%		43,950	4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	122,631	13.29	%		41,529	4.50	%		N/A	N/A
Bank	$	140,195	15.21	%		41,466	4.50	%		58,790	6.38	%

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9. Income Taxes (Tables)

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Components of income tax expense (benefit)

	2019		2018		2017
Current expense	$	2,960		2,546		1,827
Deferred income tax expense		176		78		2,120
Total income tax	$	3,136		2,624		3,947

Schedule of effective income Tax rate reconciliation

	2019			2018			2017
Tax expense at statutory rate (21% in 2018 and 2019)	$	3,613			3,361			4,833
State income tax, net of federal income tax effect		327			358			307
Tax-exempt interest income		(802	)		(990	)		(1,594	)
Increase in cash surrender value of life insurance		(81	)		(81	)		(136	)
Nondeductible interest and other expense		40			23			46
Impact of TCJA		—			—			588
Other		39			(47	)		(97	)
Total	$	3,136			2,624			3,947

Schedule of deferred tax assets and liabilities

	2019		2018
Deferred tax assets:
Allowance for loan losses	$	1,535		1,481
Accrued retirement expense		1,150		1,119
Restricted stock		217		262
Accrued bonuses		266		211
Interest income on nonaccrual loans		2		1
Total gross deferred tax assets		3,170		3,074
Deferred tax liabilities:
Deferred loan fees		343		379
Accumulated depreciation		873		610
Prepaid expenses		7		10
Other		53		5
Unrealized gain on available for sale securities		1,087		294
Total gross deferred tax liabilities		2,363		1,298
Net deferred tax asset	$	807		1,776

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Cash flows from operating activities:
Net earnings	$ 14,067	$ 13,382	$ 10,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	3,964	4,571	5,018
Provision for (reduction of) loan losses	863	790	(507)
Deferred income taxes	176	78	2,120
Gain on sale of investment securities	(226)	(15)	0
Gain on sale of other real estate	(6)	(17)	0
Write-down of other real estate	17	0	239
Gain (loss) on sale of premises and equipment	239	(544)	0
Restricted stock expense	270	85	592
Proceeds from sales of loans held for sale	56,364	35,922	59,193
Origination of loans held for sale	(60,101)	(35,745)	(54,341)
Change in:
Cash surrender value of life insurance	(383)	(384)	(600)
Right of use lease asset	787	0	0
Other assets	940	(3,695)	(3,982)
Lease liability	(762)	0	0
Other liabilities	(3,012)	2,759	594
Net cash provided by operating activities	13,197	17,187	18,594
Cash flows from investing activities:
Purchases of investment securities available for sale	(54,212)	(34,692)	(10,014)
Proceeds from sales, calls and maturities of investment securities available for sale	40,561	48,241	10,162
Proceeds from paydowns of investment securities available for sale	14,489	15,556	17,202
Purchases of other investments	(45)	(2,611)	(45)
Proceeds from paydowns of other investment securities	176	117	0
Net change in FHLB stock	(1)	(4)	850
Net change in loans	(46,505)	(45,094)	(36,748)
Purchases of premises and equipment	(2,835)	(1,742)	(5,557)
Proceeds from sale of premises and equipment	149	1,410	0
Proceeds from sale of other real estate and repossessions	42	232	44
Net cash used by investing activities	(48,181)	(18,587)	(24,106)
Cash flows from financing activities:
Net change in deposits	89,304	(29,739)	14,034
Net change in securities sold under agreement to repurchase	(33,874)	20,338	1,323
Proceeds from FHLB borrowings	184,500	0	1
Repayments of FHLB borrowings	(184,500)	0	(20,001)
Proceeds from FRB borrowings	1	1	1
Repayments of FRB borrowings	(1)	(1)	(1)
Proceeds from Fed Funds Purchased	100,252	4,277	187
Repayments of Fed Funds Purchased	(100,252)	(4,277)	(187)
Repayments of Junior Subordinated Debentures	(5,000)	0	0
Common stock repurchased	(2,490)	0	0
Cash dividends paid in lieu of fractional shares	0	0	(6)
Cash dividends paid on common stock	(3,939)	(3,133)	(2,629)
Net cash (used) provided by financing activities	44,001	(12,534)	(7,278)
Net change in cash and cash equivalents	9,017	(13,934)	(12,790)
Cash and cash equivalents at beginning of period	43,370	57,304	70,094
Cash and cash equivalents at end of period	52,387	43,370	57,304
Cash paid during the year for:
Interest	3,750	2,128	2,526
Income taxes	3,206	1,163	2,408
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities available for sale, net	2,658	(2,607)	(1)
Transfer of loans to other real estate and repossessions	26	124	118
Issuance of accrued restricted stock units	207	0	(915)
Initial recognition of lease right of use asset and lease liability recorded upon adoption of ASU 2016002	4,401	0	0
Recognition of right of use lease asset and lease liability	$ 8	$ 0	$ 0

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3. Loans (Details 2) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Non-accrual loans
Non-accrual loans	$ 3,553	$ 3,314
Construction and land development
Non-accrual loans
Non-accrual loans	0	1
Single-family residential
Non-accrual loans
Non-accrual loans	1,378	1,530
Single-family residential - Banco de la Gente Non-traditional
Non-accrual loans
Non-accrual loans	1,764	1,440
Commercial
Non-accrual loans
Non-accrual loans	256	244
Multifamily and Farmland
Non-accrual loans
Non-accrual loans	0	0
Total real estate loans
Non-accrual loans
Non-accrual loans	3,398	3,215
Commercial loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	122	89
Consumer loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	$ 33	$ 10

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3. Loans (Details 6) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Credit risk profile
Total loans	$ 849,874	$ 804,023	$ 759,764
Excellent Quality
Credit risk profile
Total loans	9,842	7,577
High Quality
Credit risk profile
Total loans	207,919	204,792
Good Quality
Credit risk profile
Total loans	528,122	489,142
Management Attention
Credit risk profile
Total loans	85,180	81,903
Watch
Credit risk profile
Total loans	12,345	13,824
Substandard
Credit risk profile
Total loans	6,466	6,785
Doubtful
Credit risk profile
Total loans	0	0
Loss
Credit risk profile
Total loans	0	0
Construction and land development
Credit risk profile
Total loans	92,596	94,178
Single-family residential
Credit risk profile
Total loans	269,475	252,983
Single-family residential - Banco de la Gente Non-traditional
Credit risk profile
Total loans	30,793	34,261
Commercial
Credit risk profile
Total loans	291,255	270,055
Multifamily and Farmland
Credit risk profile
Total loans	48,090	33,163
Commercial loans (not secured by real estate)
Credit risk profile
Total loans	100,263	97,465
Farm loans (not secured by real estate)
Credit risk profile
Total loans	1,033	926
Consumer loans (not secured by real estate)
Credit risk profile
Total loans	8,432	9,165
All other loans (not secured by real estate)
Credit risk profile
Total loans	7,937	11,827
Construction and land development
Credit risk profile
Total loans	92,596	94,178	84,987
Construction and land development | Excellent Quality
Credit risk profile
Total loans	0	504
Construction and land development | High Quality
Credit risk profile
Total loans	32,029	24,594
Construction and land development | Good Quality
Credit risk profile
Total loans	52,009	59,549
Construction and land development | Management Attention
Credit risk profile
Total loans	5,487	5,707
Construction and land development | Watch
Credit risk profile
Total loans	3,007	3,669
Construction and land development | Substandard
Credit risk profile
Total loans	64	155
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	269,475	252,983	246,703
Single-family residential | Excellent Quality
Credit risk profile
Total loans	8,819	5,795
Single-family residential | High Quality
Credit risk profile
Total loans	128,757	128,588
Single-family residential | Good Quality
Credit risk profile
Total loans	107,246	92,435
Single-family residential | Management Attention
Credit risk profile
Total loans	18,409	19,200
Single-family residential | Watch
Credit risk profile
Total loans	3,196	3,761
Single-family residential | Substandard
Credit risk profile
Total loans	3,048	3,204
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 Non-traditional
Credit risk profile
Total loans	30,793	34,261	37,249
Single-family residential - Banco de la Gente Non-traditional | Excellent Quality
Credit risk profile
Total loans	0	0
Single-family residential - Banco de la Gente Non-traditional | High Quality
Credit risk profile
Total loans	0	0
Single-family residential - Banco de la Gente Non-traditional | Good Quality
Credit risk profile
Total loans	12,103	13,776
Single-family residential - Banco de la Gente Non-traditional | Management Attention
Credit risk profile
Total loans	13,737	15,012
Single-family residential - Banco de la Gente Non-traditional | Watch
Credit risk profile
Total loans	2,027	2,408
Single-family residential - Banco de la Gente Non-traditional | Substandard
Credit risk profile
Total loans	2,926	3,065
Single-family residential - Banco de la Gente Non-traditional | Doubtful
Credit risk profile
Total loans	0	0
Single-family residential - Banco de la Gente Non-traditional | Loss
Credit risk profile
Total loans	0	0
Commercial
Credit risk profile
Total loans	291,255	270,055	248,637
Commercial | Excellent Quality
Credit risk profile
Total loans	0	0
Commercial | High Quality
Credit risk profile
Total loans	21,829	25,321
Commercial | Good Quality
Credit risk profile
Total loans	231,003	211,541
Commercial | Management Attention
Credit risk profile
Total loans	35,095	30,333
Commercial | Watch
Credit risk profile
Total loans	3,072	2,616
Commercial | Substandard
Credit risk profile
Total loans	256	244
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	48,090	33,163	28,937
Multifamily and Farmland | Excellent Quality
Credit risk profile
Total loans	0	0
Multifamily and Farmland | High Quality
Credit risk profile
Total loans	256	395
Multifamily and Farmland | Good Quality
Credit risk profile
Total loans	42,527	27,774
Multifamily and Farmland | Management Attention
Credit risk profile
Total loans	4,764	3,906
Multifamily and Farmland | Watch
Credit risk profile
Total loans	543	1,088
Multifamily and Farmland | Substandard
Credit risk profile
Total loans	0	0
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	100,263	97,465	89,022
Commercial loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total loans	330	605
Commercial loans (not secured by real estate) | High Quality
Credit risk profile
Total loans	20,480	20,520
Commercial loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	72,417	69,651
Commercial loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	6,420	6,325
Commercial loans (not secured by real estate) | Watch
Credit risk profile
Total loans	492	264
Commercial loans (not secured by real estate) | Substandard
Credit risk profile
Total loans	124	100
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	1,033	926	$ 1,204
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	948	785
Farm loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	85	141
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	8,432	9,165
Consumer loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total loans	693	673
Consumer loans (not secured by real estate) | High Quality
Credit risk profile
Total loans	2,708	3,229
Consumer loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	4,517	4,699
Consumer loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	458	529
Consumer loans (not secured by real estate) | Watch
Credit risk profile
Total loans	8	18
Consumer loans (not secured by real estate) | Substandard
Credit risk profile
Total loans	48	17
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	0
All other loans (not secured by real estate)
Credit risk profile
Total loans	7,937	11,827
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	1,860	2,145
All other loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	5,352	8,932
All other loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	725	750
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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13. Regulatory Matters (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Total capital (to Risk-Weighted Assets) | Consolidated
Actual, amount	$ 152,156	$ 149,076
Actual, ratio	16.08%	16.15%
For capital adequacy purposes, amount	$ 75,710	$ 73,830
For capital adequacy purposes, ratio	8.00%	8.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Total capital (to Risk-Weighted Assets) | Bank
Actual, amount	$ 149,266	$ 146,640
Actual, ratio	15.79%	15.91%
For capital adequacy purposes, amount	$ 75,602	$ 73,717
For capital adequacy purposes, ratio	8.00%	8.00%
To be well capitalized under prompt corrective action provisions, amount	$ 99,228	$ 91,041
To be well capitalized under prompt corrective action provisions, ratio	10.50%	9.88%
Tier 1 Capital (to Risk- Weighted Assets) | Consolidated
Actual, amount	$ 145,476	$ 142,631
Actual, ratio	15.37%	15.46%
For capital adequacy purposes, amount	$ 56,783	$ 55,372
For capital adequacy purposes, ratio	6.00%	6.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Tier 1 Capital (to Risk- Weighted Assets) | Bank
Actual, amount	$ 142,586	$ 140,195
Actual, ratio	15.09%	15.21%
For capital adequacy purposes, amount	$ 56,702	$ 55,288
For capital adequacy purposes, ratio	6.00%	6.00%
To be well capitalized under prompt corrective action provisions, amount	$ 80,328	$ 72,612
To be well capitalized under prompt corrective action provisions, ratio	8.50%	7.88%
Tier 1 Capital (Average Assets) | Consolidated
Actual, amount	$ 145,476	$ 142,631
Actual, ratio	11.91%	13.05%
For capital adequacy purposes, amount	$ 48,872	$ 43,723
For capital adequacy purposes, ratio	4.00%	4.00%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Tier 1 Capital (Average Assets) | Bank
Actual, amount	$ 142,586	$ 140,195
Actual, ratio	11.61%	12.76%
For capital adequacy purposes, amount	$ 49,106	$ 43,950
For capital adequacy purposes, ratio	4.00%	4.00%
To be well capitalized under prompt corrective action provisions, amount	$ 49,106	$ 43,950
To be well capitalized under prompt corrective action provisions, ratio	4.00%	4.00%
Common Equity Tier 1 (to Risk-Weighted Assets) | Consolidated
Actual, amount	$ 130,476	$ 122,631
Actual, ratio	13.79%	13.29%
For capital adequacy purposes, amount	$ 42,587	$ 41,529
For capital adequacy purposes, ratio	4.50%	4.50%
To be well capitalized under prompt corrective action provisions, amount	$ 0	$ 0
To be well capitalized under prompt corrective action provisions, ratio	0.00%	0.00%
Common Equity Tier 1 (to Risk-Weighted Assets) | Bank
Actual, amount	$ 142,586	$ 140,195
Actual, ratio	15.09%	15.21%
For capital adequacy purposes, amount	$ 42,526	$ 41,466
For capital adequacy purposes, ratio	4.50%	4.50%
To be well capitalized under prompt corrective action provisions, amount	$ 66,152	$ 58,790
To be well capitalized under prompt corrective action provisions, ratio	7.00%	6.38%

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12. Employee and Director Benefit Programs (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Retirement Benefits [Abstract]
Benefit obligation	$ 4,700	$ 4,566	$ 4,361
Fair value of plan assets	0	0
Funded status	(4,700)	(4,566)
Unrecognized prior service cost/benefit	0	0
Unrecognized net actuarial loss	0	0
Net amount recognized	(4,700)	(4,566)
Unfunded accrued liability	(4,700)	(4,566)
Intangible assets	0	0
Net amounts recognized	$ (4,700)	$ (4,566)

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16. Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Assets:
Investment securities available for sale	$ 195,746	$ 194,578
Mortgage loans held for sale	4,417	680
Carrying Amount
Assets:
Cash and cash equivalents	52,387	43,370
Investment securities available for sale	195,746	194,578
Other investments	4,231	4,361
Mortgage loans held for sale	4,417	680
Loans, net	843,194	797,578
Cash surrender value of life insurance	16,319	15,936
Liabilities:
Deposits	966,517	877,213
Securities sold under agreements to repurchase	24,221	58,095
Junior subordinated debentures	15,619	20,619
Level 1
Assets:
Cash and cash equivalents	52,387	43,370
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
Junior subordinated debentures	0	0
Level 2
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	195,496	194,328
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	16,319	15,936
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	24,221	58,095
Junior subordinated debentures	15,619	20,619
Level 3
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	250	250
Other investments	4,231	4,361
Mortgage loans held for sale	4,417	680
Loans, net	819,397	748,917
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	955,766	857,999
Securities sold under agreements to repurchase	0	0
Junior subordinated debentures	0	0
Estimated Fair Value
Assets:
Cash and cash equivalents	52,387	43,370
Investment securities available for sale	195,746	194,578
Other investments	4,231	4,361
Mortgage loans held for sale	4,417	680
Loans, net	819,397	748,917
Cash surrender value of life insurance	16,319	15,936
Liabilities:
Deposits	955,766	857,999
Securities sold under agreements to repurchase	24,221	58,095
Junior subordinated debentures	$ 15,619	$ 20,619

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10. Related Party Transactions (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Related Party Transactions [Abstract]
Related party deposits	$ 30,400	$ 31,600

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2. Investment Securities (Details 3) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Estimated fair value	$ 195,746	$ 194,578
Mortgage-backed securities
Estimated fair value	78,956	52,103
Level 1 valuation	0	0
Level 2 valuation	78,956	52,103
Level 3 valuation	0	0
U.S. Government sponsored enterprises
Estimated fair value	28,397	34,634
Level 1 valuation	0	0
Level 2 valuation	28,397	34,634
Level 3 valuation	0	0
State and political subdivisions
Estimated fair value	88,143	107,591
Level 1 valuation	0	0
Level 2 valuation	88,143	107,591
Level 3 valuation	0	0
Trust preferred securities
Estimated fair value	250	250
Level 1 valuation	0	0
Level 2 valuation	250	0
Level 3 valuation	$ 0	$ 250

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1. Summary of Significant Accounting Policies (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Unpaid principal balances of mortgage loans serviced for others	$ 729	$ 866	$ 1,000
Compensation expense for restricted stock units	$ 270	$ 85	$ 592
Building Improvements | Minimum
Estimated useful lives	10 years
Building Improvements | Maximum
Estimated useful lives	50 years
Furniture and equipment | Minimum
Estimated useful lives	3 years
Furniture and equipment | Maximum
Estimated useful lives	10 years

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4. Premises and Equipment (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 2,300	$ 2,300	$ 2,100
Net losses on the sale of and write-downs on premises and equipment	$ 239	$ (544)	$ 0

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6. Time Deposits (Details) $ in Thousands	Dec. 31, 2019 USD ($)
Time Deposits [Line Items]
2020	$ 53,905
2021	21,997
2022	10,919
2023	3,117
2024 and thereafter	21,818
Total	$ 111,756

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9. Income Taxes (Details 1) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Income Tax Disclosure [Abstract]
Tax expense at statutory rate (21% in 2018)									$ 3,613	$ 3,361	$ 4,833
Differences:
State income tax, net of federal income tax effect									327	358	307
Tax exempt interest income									(802)	(990)	(1,594)
Increase in cash surrender value of life insurance									(81)	(81)	(136)
Nondeductible interest and other expense									40	23	46
Impact of Tax Cuts and Jobs Act									0	0	588
Other									39	(47)	(97)
Total income tax	$ 672	$ 834	$ 845	$ 785	$ 690	$ 687	$ 595	$ 652	$ 3,136	$ 2,624	$ 3,947

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15. Other Operating Income and Expense

12 Months Ended

Dec. 31, 2019

Other Income and Expenses [Abstract]

Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019			2018		2017
Visa debit card income	$	4,145			3,911		3,757
Bank owned life insurance income		383			384		400
Gain (loss) on sale of premises and equipment		(239	)		544		(32	)
Other		1,320			1,354		1,175
	$	5,609			6,193		5,300

Other non-interest expense for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019		2018		2017
ATM expense	$	579		542		673
Consulting		972		1,012		785
Data processing		616		466		426
Deposit program expense		515		586		539
Dues and subscriptions		421		421		354
FHLB advance prepayment penalty		—		—		508
Internet banking expense		681		603		720
Office supplies		467		503		517
Telephone		802		678		855
Other		2,921		2,834		2,540
	$	7,974		7,645		7,917

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1. Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Organization

Peoples Bancorp of North Carolina, Inc. (“Bancorp”) received regulatory approval to operate as a bank holding company on July 22, 1999, and became effective August 31, 1999. Bancorp is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for Peoples Bank (the “Bank”).

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

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

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

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company lauched PB Insurance Agency, which is part of CBRES.

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

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices 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.

Principles of Consolidation

The consolidated financial statements include the financial statements of Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., REAS, CBRES and PBREH (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. 

Basis of Presentation

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

Cash and Cash Equivalents

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

Investment Securities

There are three classifications the Company is able to classify its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2019 and 2018, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

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

Mortgage Loans Held for Sale

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

Loans

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

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

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

Allowance for Loan Losses

The allowance for loan losses 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.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2019 as compared to the year ended December 31, 2018. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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

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.

Mortgage Banking Activities

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

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $729,000, $866,000 and $1.0 million at December 31, 2019, 2018 and 2017, respectively.

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

Premises and Equipment

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

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

Other Real Estate

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

Income Taxes

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

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

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

Derivative Financial Instruments and Hedging Activities

In the normal course of business, the Company enters into derivative contracts to manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All material derivative financial instruments are recorded at fair value in the financial statements. The fair value of derivative contracts related to the origination of fixed rate mortgage loans and the commitments to sell these loans to a third party is immaterial and has no effect on the recorded amounts in the financial statements.

The disclosure requirements for derivatives and hedging activities have the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of the effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.

If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The Company formally documents all hedging relationships, including an assessment that the derivative instruments are expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged items.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “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. No shares were available for issuance under the Plan at December 31, 2019 as all stock-based rights under the Plan must have been granted or awarded by May 7, 2019 (i.e., ten years from the Plan effective date).

The Company granted 32,465 restricted stock units under the Plan at a grant date fair value of $7.18 per share during the first quarter of 2012, of which 5,891 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 in conjunction with the Company’s participation in the Capital Purchase Program under the Troubled Asset Relief Program. In July 2012, the Company granted 5,891 restricted stock units at a grant date fair value of $7.50 per share. The Company granted 29,475 restricted stock units under the Plan at a grant date fair value of $10.82 per share during the second quarter of 2013. The Company granted 23,162 restricted stock units under the Plan at a grant date fair value of $14.27 per share during the first quarter of 2014. The Company granted 16,583 restricted stock units under the Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2012 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the grant date for the 2013, 2015, 2016, 2017, 2018 and 2019 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 December 31, 2019, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $238,000.

The Company recognized compensation expense for restricted stock units granted under the Plan of $270,000, $85,000 and $592,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Net Earnings Per Share

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

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2019, 2018 and 2017 are as follows:

For the year ended December 31, 2019

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	14,067		5,941,873	$	2.37
Effect of dilutive securities:
Restricted stock units		—		25,438
Diluted earnings per share	$	14,067		5,967,311	$	2.36

For the year ended December 31, 2018

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	13,382		5,995,256	$	2.23
Effect of dilutive securities:
Restricted stock units		—		20,240
Diluted earnings per share	$	13,382		6,015,496	$	2.22

For the year ended December 31, 2017

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	10,268		5,988,183	$	1.71
Effect of dilutive securities:
Restricted stock units		—		74,667
Diluted earnings per share	$	10,268		6,062,850	$	1.69

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2014-09: Revenue from Contracts with Customers	Provides guidance on the recognition of revenue from contracts with customers. The core principle of this 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.	January 1, 2018	See section titled "ASU 2014-09" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities	Addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs	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.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-09: Scope of Modification Accounting	Amended the requirements related to changes to the terms or conditions of a share-based payment award.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-14: Income Statement—Reporting Comprehensive, Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)	Incorporates into the Accounting Standards Codification ("ASC") recent Securities and Exchange Commission ("SEC") guidance related to revenue recognition.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities	Clarifies certain aspects of the guidance issued in ASU 2016-01.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-04: Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)	Incorporates recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulation.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-06: Codification Improvements to Topic 942: Financial Services—Depository and Lending	Eliminates a reference to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges, from the ASC. The Office of the Comptroller of the Currency published the guidance in 1985 but has since rescinded it.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2016-02: Leases	Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.	January 1, 2019	See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities	Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-11: Leases (Topic 842): Targeted Improvements	Intended to reduce costs and ease implementation of ASU 2016-02.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-20: Narrow- Scope Improvements for Lessors	Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.	January 1, 2019	See comments for ASU 2016-02 below.
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2014-09

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

Revenue and Method of Adoption

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

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

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $876,000 and $823,000 for the years ended December 31, 2019 and 2018, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was $4.1 million and $3.9 million for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was $692,000 and $597,000 for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $4.5 million and $3.2 million for the years ended December 31, 2019 and 2018, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the years ended December 31, 2019 derived from contracts in which services are transferred at a point in time was approximately $9.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors impacting the customers could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair the customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

ASU 2016-02

On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease agreements. The key difference of Topic 842 from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the previous guidance. Topic 842 states that a contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company reviewed its material non-real estate contracts to determine if they included a lease and did not note any that would need to be considered under Topic 842. The Company’s lease agreements in which Topic 842 has been applied are primarily for retail branch real estate properties. These real estate leases have lease terms from less than 12 months to leases with options up to 15 years, and payment terms vary with some being fixed payments or based on a fixed annual increase while others are variable and the annual increases are based on market rates or other indexes.

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

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

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

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

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

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $231,000 and $230,000 for the years ended December 31, 2019 and 2018, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2019, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	January 1, 2020 Early adoption permitted	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
		See ASU 2019-10 below.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020 Early adoption permitted	The Company does not intend to adopt this guidance early. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2018 and 2017 consolidated financial statements have been reclassified to conform to the 2019 presentation.

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2. Investment Securities (Details 2) $ in Thousands	Dec. 31, 2019 USD ($)
Amortized Cost
Due within one year	$ 5,490
Due from one to five years	56,399
Due from five to ten years	47,717
Due after ten years	3,595
Mortgage-backed securities	77,812
Total	191,013
Estimated Fair Value
Due within one year	5,465
Due from one to five years	58,315
Due from five to ten years	49,293
Due after ten years	3,717
Mortgage-backed securities	78,956
Total	$ 195,746

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1. Summary of Significant Accounting Policies (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Net Earnings Available to Common Shareholders
Basic earnings per common share									$ 14,067	$ 13,382	$ 10,268
Effect of dilutive securities: Restricted stock units									0	0	0
Diluted earnings per common share									$ 14,067	$ 13,382	$ 10,268
Common Shares
Basic earnings per common share (in shares)									5,941,873	5,995,256	5,988,183
Effect of dilutive securities: Restricted stock units (in shares)									25,438	20,240	74,667
Diluted earnings per common share (in shares)									5,967,311	6,015,496	6,062,850
Per Share Amount
Basic earnings per common share (in dollars per share)	$ 0.5	$ 0.62	$ 0.64	$ 0.61	$ 0.57	$ 0.58	$ 0.53	$ 0.55	$ 2.37	$ 2.23	$ 1.71
Diluted earnings per common share (in dollars per share)	$ 0.5	$ 0.61	$ 0.64	$ 0.61	$ 0.57	$ 0.57	$ 0.53	$ 0.55	$ 2.36	$ 2.22	$ 1.69

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9. Income Taxes (Details 2) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Deferred tax assets:
Allowance for loan losses	$ 1,535	$ 1,481
Accrued retirement expense	1,150	1,119
Restricted stock	217	262
Accrued bonuses	266	211
Interest income on nonaccrual loans	2	1
Total gross deferred tax assets	3,170	3,074
Deferred tax liabilities:
Deferred loan fees	343	379
Accumulated depreciation	873	610
Prepaid expenses	7	10
Other	53	5
Unrealized gain on available for sale securities	1,087	294
Total gross deferred tax liabilities	2,363	1,298
Net deferred tax asset	$ 807	$ 1,776

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5. Leases (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)
Leases [Abstract]
Operating lease cost	$ 893
Cash paid for amounts included in the measurement of lease liabilities	850
Operating cash flows from operating leases	0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$ 8
Weighted-average remaining lease term - operating leases	7 years 3 months 7 days
Weighted-average discount rate - operating leases	3.19%

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6. Time Deposits (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Time Deposits [Line Items]
Time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service ("CDARS") on behalf of local customers	$ 22,300	$ 3,400
CDARS balances	$ 3,100	$ 3,400
Weighted average rate of brokered deposits	1.96%	0.07%

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16. Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

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

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

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

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

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

Cash and Cash Equivalents

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

Investment Securities Available for Sale

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

Other Investments

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

Mortgage Loans Held for Sale

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

Loans

The fair value of 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.

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 fair value presentation for recurring assets is presented in Note 2. There were no recurring liabilities at December 31, 2019 and 2018. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2019 and 2018. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2019 and 2018 are as follows:

(Dollars in thousands)
			Fair Value Measurements at December 31, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	52,387		52,387		—		—		52,387
Investment securities available for sale	$	195,746		—		195,496		250		195,746
Other investments	$	4,231		—		—		4,231		4,231
Mortgage loans held for sale	$	4,417		—		—		4,417		4,417
Loans, net	$	843,194		—		—		819,397		819,397
Cash surrender value of life insurance	$	16,319		—		16,319		—		16,319
Liabilities:
Deposits	$	966,517		—		—		955,766		955,766
Securities sold under agreements
to repurchase	$	24,221		—		24,221		—		24,221
Junior subordinated debentures	$	15,619		—		15,619		—		15,619

(Dollars in thousands)
			Fair Value Measurements at December 31, 2018
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	43,370		43,370		—		—		43,370
Investment securities available for sale	$	194,578		—		194,328		250		194,578
Other investments	$	4,361		—		—		4,361		4,361
Mortgage loans held for sale	$	680		—		—		680		680
Loans, net	$	797,578		—		—		748,917		748,917
Cash surrender value of life insurance	$	15,936		—		15,936		—		15,936
Liabilities:
Deposits	$	877,213		—		—		857,999		857,999
Securities sold under agreements
to repurchase	$	58,095		—		58,095		—		58,095
Junior subordinated debentures	$	20,619		—		20,619		—		20,619

A-32

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1. Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

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

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	14,067		5,941,873	$	2.37
Effect of dilutive securities:
Restricted stock units		—		25,438
Diluted earnings per share	$	14,067		5,967,311	$	2.36

For the year ended December 31, 2018

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	13,382		5,995,256	$	2.23
Effect of dilutive securities:
Restricted stock units		—		20,240
Diluted earnings per share	$	13,382		6,015,496	$	2.22

For the year ended December 31, 2017

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	10,268		5,988,183	$	1.71
Effect of dilutive securities:
Restricted stock units		—		74,667
Diluted earnings per share	$	10,268		6,062,850	$	1.69

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12. Employee and Director Benefit Programs

12 Months Ended

Dec. 31, 2019

Retirement Benefits [Abstract]

Employee and Director Benefit Programs

The Company has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Company matched employee contributions to a maximum of 4.00% of annual compensation in 2017, 2018 and 2019. The Company’s contribution pursuant to this formula was approximately $691,000, $670,000 and $622,000 for the years 2019, 2018 and 2017, respectively. Investments of the 401(k) plan are determined by a committee comprised of senior management. No investments in Company stock have been made by the 401(k) plan. Contributions to the 401(k) plan are vested immediately.

In December 2001, the Company initiated a postretirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries. Under the postretirement benefit plan, the Company purchased life insurance contracts on the lives of the key officers and each director. The increase in cash surrender value of the contracts constitutes the Company’s contribution to the postretirement benefit plan each year. Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $361,000, $423,000 and $428,000 for the years 2019, 2018 and 2017, respectively.

The Company is currently paying medical benefits for certain retired employees. The Company did not incur any postretirement medical benefits expense in 2019, 2018 and 2017 due to an excess accrual balance.

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

(Dollars in thousands)

	2019			2018
Benefit obligation at beginning of period	$	4,566			4,361
Service cost		299			362
Interest cost		58			70
Benefits paid		(223	)		(227	)
Benefit obligation at end of period	$	4,700			4,566

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2019 and 2018 are shown in the following two tables:

(Dollars in thousands)

	2019		2018
Benefit obligation	$	4,700		4,566
Fair value of plan assets		—		—

(Dollars in thousands)

	2019			2018
Funded status	$	(4,700	)		(4,566	)
Unrecognized prior service cost/benefit		—			—
Unrecognized net actuarial loss		—			—
Net amount recognized	$	(4,700	)		(4,566	)
Unfunded accrued liability	$	(4,700	)		(4,566	)
Intangible assets		—			—
Net amount recognized	$	(4,700	)		(4,566	)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2019, 2018 and 2017 consisted of the following:

(Dollars in thousands)

	2019			2018			2017
Service cost	$	299			362			348
Interest cost		58			70			68
Net periodic cost	$	357			432			416
Weighted average discount rate assumption
used to determine benefit obligation		5.49	%		5.49	%		5.49	%

The Company paid benefits under the two postretirement plans totaling $223,000 and $227,000 during the years ended December 31, 2019 and 2018, respectively. Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:

(Dollars in thousands)

Year ending December 31,
	2020	$	237
	2021	$	353
	2022	$	342
	2023	$	342
	2024	$	354
	Thereafter	$	8,715

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4. Premises and Equipment

12 Months Ended

Dec. 31, 2019

Property, Plant and Equipment [Abstract]

Premises and Equipment

Major classifications of premises and equipment at December 31, 2019 and 2018 are summarized as follows:

(Dollars in thousands)

	2019		2018
Land	$	2,793		2,889
Buildings and improvements		18,931		19,796
Furniture and equipment		24,743		22,443
Construction in process		395		381
Total premises and equipment		46,862		45,509
Less accumulated depreciation		28,258		27,059
Total net premises and equipment	$	18,604		18,450

The Company recognized approximately $2.3 million in depreciation expense for the years ended December 31, 2019 and 2018. Depreciation expense was approximately $2.1 million for the year ended December 31, 2017.

The Company had $239,000 and $544,000 net losses on the sale of and write-downs on premises and equipment for the years ended December 31, 2019 and 2018, respectively.

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8. Junior Subordinated Debentures

12 Months Ended

Dec. 31, 2019

Brokers and Dealers [Abstract]

Junior Subordinated Debentures

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

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

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

The Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.

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Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Assets
Cash and due from banks, including reserve requirements of $13,210 at 12/31/19 and $8,918 at 12/31/18	$ 48,337	$ 40,553
Interest-bearing deposits	720	2,817
Federal funds sold	3,330	0
Cash and cash equivalents	52,387	43,370
Investment securities available for sale	195,746	194,578
Other investments	4,231	4,361
Total securities	199,977	198,939
Mortgage loans held for sale	4,417	680
Loans	849,874	804,023
Less allowance for loan losses	(6,680)	(6,445)
Net loans	843,194	797,578
Premises and equipment, net	18,604	18,450
Cash surrender value of life insurance	16,319	15,936
Other real estate	0	27
Right of use lease asset	3,622	0
Accrued interest receivable and other assets	16,362	18,271
Total assets	1,154,882	1,093,251
Deposits:
Non-interest bearing demand	338,004	298,817
NOW, MMDA & savings	516,757	475,223
Time, $250,000 or more	34,269	16,239
Other time	77,487	86,934
Total deposits	966,517	877,213
Securities sold under agreements to repurchase	24,221	58,095
Junior subordinated debentures	15,619	20,619
Lease liability	3,647	0
Accrued interest payable and other liabilities	10,758	13,707
Total liabilities	1,020,762	969,634
Commitments (Note 10)
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 5,912,300 shares at December 31, 2019 and 5,995,256 and December 31, 2018	59,813	62,096
Retained earnings	70,663	60,535
Accumulated other comprehensive income	3,644	986
Total shareholders' equity	134,120	123,617
Total liabilities and shareholders' equity	$ 1,154,882	$ 1,093,251

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12. Employee and Director Benefit Programs (Tables)

12 Months Ended

Dec. 31, 2019

Retirement Benefits [Abstract]

Change in accumulated benefit obligation

	2019			2018
Benefit obligation at beginning of period	$	4,566			4,361
Service cost		299			362
Interest cost		58			70
Benefits paid		(223	)		(227	)
Benefit obligation at end of period	$	4,700			4,566

Amounts recognized in the Consolidated Balance Sheet

	2019		2018
Benefit obligation	$	4,700		4,566
Fair value of plan assets		—		—

(Dollars in thousands)

	2019			2018
Funded status	$	(4,700	)		(4,566	)
Unrecognized prior service cost/benefit		—			—
Unrecognized net actuarial loss		—			—
Net amount recognized	$	(4,700	)		(4,566	)
Unfunded accrued liability	$	(4,700	)		(4,566	)
Intangible assets		—			—
Net amount recognized	$	(4,700	)		(4,566	)

Schedule of net benefit costs

	2019			2018			2017
Service cost	$	299			362			348
Interest cost		58			70			68
Net periodic cost	$	357			432			416
Weighted average discount rate assumption
used to determine benefit obligation		5.49	%		5.49	%		5.49	%

Schedule of expected benefit payments

Year ending December 31,
	2020	$	237
	2021	$	353
	2022	$	342
	2023	$	342
	2024	$	354
	Thereafter	$	8,715

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6. Time Deposits (Tables)

12 Months Ended

Dec. 31, 2019

Time Deposits [Line Items]

Scheduled maturities of time deposits

2020	$	53,905
2021		21,997
2022		10,919
2023		3,117
2024 and thereafter		21,818
Total	$	111,756

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Consolidated Statements of Changes in Shareholders' Equity - USD ($) $ in Thousands	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
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
Cash dividends declared on common stock		(2,629)		(2,629)
Restricted stock units exercised, Shares	32,612
Restricted stock units exercised, Amount	$ (915)			(915)
Net earnings		10,268		10,268
Change in accumulated other comprehensive income due to Tax Cuts and Jobs Act		(607)	607
Change in accumulated other comprehensive income, net of tax			(1)	(1)
Ending Balance, Shares at Dec. 31, 2017	5,995,256
Ending Balance, Amount at Dec. 31, 2017	$ 62,096	50,286	3,593	115,975
Common stock repurchase, Amount		(3,133)		(3,133)
Restricted stock units exercised, Amount				0
Net earnings		13,382		13,382
Change in accumulated other comprehensive income, net of tax			(2,607)	(2,607)
Ending Balance, Shares at Dec. 31, 2018	5,995,256
Ending Balance, Amount at Dec. 31, 2018	$ 62,096	60,535	986	123,617
Common stock repurchase, Shares	(90,354)
Common stock repurchase, Amount	$ (2,490)			(2,490)
Cash dividends declared on common stock		(3,939)		(3,939)
Restricted stock units exercised, Shares	7,398
Restricted stock units exercised, Amount	$ 207			207
Net earnings		14,067		14,067
Change in accumulated other comprehensive income, net of tax			2,658	2,658
Ending Balance, Shares at Dec. 31, 2019	5,912,300
Ending Balance, Amount at Dec. 31, 2019	$ 59,813	$ 70,663	$ 3,644	$ 134,120

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3. Loans (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Impaired loans
Unpaid contractual principal balance	$ 22,659	$ 24,126	$ 26,129
Recorded investment with no allowance	495	511	2,042
Recorded investment with allowance	20,848	22,282	22,599
Recorded investment in impaired loans	21,343	22,793	24,641
Related allowance	996	1,098	1,199
Average outstanding impaired loans	21,895	23,621	26,015
Year-to-date interest income recognized	1,344	1,342	1,362
Construction and land development
Impaired loans
Unpaid contractual principal balance	183	281	282
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	183	279	277
Recorded investment in impaired loans	183	279	277
Related allowance	7	5	6
Average outstanding impaired loans	231	327	253
Year-to-date interest income recognized	12	19	17
Single-family residential
Impaired loans
Unpaid contractual principal balance	5,152	5,059	5,226
Recorded investment with no allowance	403	422	1,135
Recorded investment with allowance	4,243	4,188	3,686
Recorded investment in impaired loans	4,646	4,610	4,821
Related allowance	36	32	41
Average outstanding impaired loans	4,678	6,271	5,113
Year-to-date interest income recognized	269	261	265
Single-family residential - Banco de la Gente Non-traditional
Impaired loans
Unpaid contractual principal balance	15,165	16,424	17,360
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	14,371	15,776	16,805
Recorded investment in impaired loans	14,371	15,776	16,805
Related allowance	944	1,042	1,149
Average outstanding impaired loans	14,925	14,619	16,867
Year-to-date interest income recognized	956	944	920
Commercial
Impaired loans
Unpaid contractual principal balance	1,879	1,995	2,761
Recorded investment with no allowance	0	0	807
Recorded investment with allowance	1,871	1,925	1,661
Recorded investment in impaired loans	1,871	1,925	2,468
Related allowance	7	17	1
Average outstanding impaired loans	1,822	2,171	3,411
Year-to-date interest income recognized	91	111	148
Multifamily and Farmland
Impaired loans
Unpaid contractual principal balance	0		78
Recorded investment with no allowance	0		0
Recorded investment with allowance	0		12
Recorded investment in impaired loans	0		12
Related allowance	0		0
Average outstanding impaired loans	0		28
Year-to-date interest income recognized	0		0
Total real estate loans
Impaired loans
Unpaid contractual principal balance	22,379	23,759	25,707
Recorded investment with no allowance	403	422	1,942
Recorded investment with allowance	20,668	22,168	22,441
Recorded investment in impaired loans	21,071	22,590	24,383
Related allowance	994	1,096	1,197
Average outstanding impaired loans	21,656	23,388	25,672
Year-to-date interest income recognized	1,328	1,335	1,350
Commercial loans (not secured by real estate)
Impaired loans
Unpaid contractual principal balance	180	251	264
Recorded investment with no allowance	92	89	100
Recorded investment with allowance	84	1	4
Recorded investment in impaired loans	176	90	104
Related allowance	0	0	0
Average outstanding impaired loans	134	96	149
Year-to-date interest income recognized	9	0	3
Consumer loans (not secured by real estate)
Impaired loans
Unpaid contractual principal balance	100	116	158
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	96	113	154
Recorded investment in impaired loans	96	113	154
Related allowance	2	2	2
Average outstanding impaired loans	105	137	194
Year-to-date interest income recognized	$ 7	$ 7	$ 9

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3. Loans (Details 7) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($) Integer	Dec. 31, 2018 USD ($) Integer
TDR Loans
Post-modification outstanding recorded investment	$ 4,300	$ 4,700
Single-family residential
TDR Loans
Number of contracts | Integer	2	2
Pre-modification outstanding recorded investment	$ 94	$ 94
Post-modification outstanding recorded investment	$ 94	$ 94
Total TDR Loans
TDR Loans
Number of contracts | Integer	2	2
Pre-modification outstanding recorded investment	$ 94	$ 94
Post-modification outstanding recorded investment	$ 94	$ 94

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12. Employee and Director Benefit Programs (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Retirement Benefits [Abstract]
Benefit obligation at beginning of period	$ 4,566	$ 4,361
Service cost	299	362	$ 348
Interest cost	58	70	68
Benefits paid	(223)	(227)
Benefit obligation at end of period	$ 4,700	$ 4,566	$ 4,361

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15. Other Operating Income and Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Other Income and Expenses [Abstract]
Visa debit card income	$ 4,145	$ 3,911	$ 3,757
Bank owned life insurance income	383	384	400
Gain (loss) on sale of premises and equipment	(239)	544	(32)
Other	1,320	1,354	1,175
Miscellaneous non-interest income	5,609	6,193	5,300
ATM expense	579	542	673
Consulting	972	1,012	785
Data processing	616	466	426
Deposit program expense	515	586	539
Dues and subscriptions	421	421	354
FHLB advance prepayment penalty	0	0	508
Internet banking expense	681	603	720
Office supplies	467	503	517
Telephone	802	678	855
Other	2,921	2,834	2,540
Other non-interest expense	$ 7,974	$ 7,645	$ 7,917

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10. Related Party Transactions (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Related Party Transactions [Abstract]
Beginning balance	$ 3,192	$ 3,679
New loans	5,716	8,030
Repayments	(5,436)	(8,517)
Ending balance	$ 3,472	$ 3,192

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12. Employee and Director Benefit Programs (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Retirement Benefits [Abstract]
Matching of employee contributions, percentage	4.00%	4.00%	4.00%
Defined Benefit Plan, Contributions by Employer	$ 691	$ 670	$ 622
Expenses incurred for benefits relating to the postretirement benefit plan	361	423	411
Postretirement Benefits paid	$ 223	$ 227	$ 229

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5. Leases (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Leases [Abstract]
Operating ROU assets	$ 3,622	$ 0	$ 0
Operating lease liabilities	3,647	0	0
Rent expense	$ 949	$ 785	$ 756

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9. Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Income Tax Disclosure [Abstract]
Current expense									$ 2,960	$ 2,546	$ 1,827
Deferred income tax expense									176	78	2,120
Total income tax	$ 672	$ 834	$ 845	$ 785	$ 690	$ 687	$ 595	$ 652	$ 3,136	$ 2,624	$ 3,947

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2. Investment Securities (Details 4) $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)
Investment Securities Available for Sale Level 3 Valuation
Balance, beginning of period	$ 250
Change in book value	0
Change in gain/(loss) realized and unrealized	0
Purchases/(sales and calls)	0
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

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2. Investment Securities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Investment securities available for sale
Amortized cost	$ 191,013
Estimated fair value	195,746	$ 194,578
Mortgage-backed securities
Investment securities available for sale
Amortized cost	77,812	52,145
Gross unrealized gains	1,371	516
Gross unrealized losses	227	558
Estimated fair value	78,956	52,103
U.S. Government sponsored enterprises
Investment securities available for sale
Amortized cost	28,265	35,356
Gross unrealized gains	443	71
Gross unrealized losses	311	793
Estimated fair value	28,397	34,634
State and political subdivisions
Investment securities available for sale
Amortized cost	84,686	105,545
Gross unrealized gains	3,657	2,089
Gross unrealized losses	200	43
Estimated fair value	88,143	107,591
Trust preferred securities
Investment securities available for sale
Amortized cost	250	250
Gross unrealized gains	0	0
Gross unrealized losses	0	0
Estimated fair value	250	250
Total
Investment securities available for sale
Amortized cost	191,013	193,296
Gross unrealized gains	5,471	2,676
Gross unrealized losses	738	1,394
Estimated fair value	$ 195,746	$ 194,578

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

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

Balance Sheets

Assets	2019		2018
Cash	$	1,187		689
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		146,230		141,181
Investment in PEBK Capital Trust II		619		619
Investment securities available for sale		250		250
Other assets		476		533
Total assets	$	149,762		144,272
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,619		20,619
Liabilities		23		36
Shareholders' equity		134,120		123,617
Total liabilities and shareholders' equity	$	149,762		144,272

Statements of Earnings

Revenues:	2019		2018		2017
Interest and dividend income	$	12,850		4,544		1,839
Total revenues		12,850		4,544		1,839
Expenses:
Interest		844		790		590
Other operating expenses		629		678		725
Total expenses		1,473		1,468		1,315
Income before income tax benefit and equity in
undistributed earnings of subsidiaries		11,377		3,076		524
Income tax benefit		299		299		434
Income before equity in undistributed
earnings of subsidiaries		11,676		3,375		958
Equity in undistributed earnings of subsidiaries		2,391		10,007		9,310
Net earnings	$	14,067		13,382		10,268

Statements of Cash Flows

	2019			2018			2017
Cash flows from operating activities:
Net earnings	$	14,067			13,382			10,268
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(2,391	)		(10,007	)		(9,310	)
Change in:
Other assets		57			13			(272	)
Other liabilities		(13	)		6			5
Net cash provided by operating activities		11,720			3,394			691
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities
available for sale		—			—			500
Net cash provided by investing activities		—			—			500
Cash flows from financing activities:
Repayment of junior subordinated debentures		(5,000	)		—			—
Cash dividends paid on common stock		(3,939	)		(3,133	)		(2,629	)
Cash in lieu stock dividend		—			—			(6	)
Stock repurchase		(2,490	)		—			—
Proceeds from exercise of restricted stock units		207			—			915
Net cash used by financing activities		(11,222	)		(3,133	)		(1,720	)
Net change in cash		498			261			(529	)
Cash at beginning of year		689			428			957
Cash at end of year	$	1,187			689			428
Noncash investing and financing activities:		—
Change in unrealized gain on investment securities
available for sale, net	$	2,658			(2,607	)		(1	)

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14. Shareholders' Equity

12 Months Ended

Dec. 31, 2019

Equity [Abstract]

Shareholders' Equity

Shareholders’ equity was $134.1 million, or 11.59% of total assets, at December 31, 2019, compared to $123.6 million, or 11.31% of total assets, at December 31, 2018. The increase in shareholders’ equity is primarily due to an increase in retained earnings due to net income.

Annualized return on average equity for the year ended December 31, 2019 was 10.45% compared to 10.81% for the year ended December 31, 2018. Total cash dividends paid on common stock were $3.9 million and $3.1 million for the years ended December 31, 2019 and 2018, 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 shares of preferred stock.

In 2019, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $5 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $2.5 million, or 90,354 shares of its common stock, under this stock repurchase program as of December 31, 2019.

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18. Quarterly Data

12 Months Ended

Dec. 31, 2019

Quarterly Financial Information Disclosure [Abstract]

Quarterly Data

(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First		Second		Third		Fourth
Total interest income	$	12,183		12,375		12,430		12,613	$	10,759		11,059		11,608		11,924
Total interest expense		757		781		994		1,225		467		513		557		609
Net interest income		11,426		11,594		11,436		11,388		10,292		10,546		11,051		11,315
Provision for loan losses		178		77		422		186		31		231		110		418
Other income		4,120		4,385		4,708		4,526		3,736		4,016		3,915		4,499
Other expense		10,916		11,244		11,267		12,090		10,042		10,560		10,702		11,270
Income before income taxes		4,452		4,658		4,455		3,638		3,955		3,771		4,154		4,126
Income tax expense		785		845		834		672		652		595		687		690
Net earnings		3,667		3,813		3,621		2,966		3,303		3,176		3,467		3,436
Basic net earnings per share	$	0.61		0.64		0.62		0.50	$	0.55		0.53		0.58		0.57
Diluted net earnings per share	$	0.61		0.64		0.61		0.50	$	0.55		0.53		0.57		0.57

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3. Loans (Tables)

12 Months Ended

Dec. 31, 2019

Receivables [Abstract]

Major classifications of loans

	December 31, 2019		December 31, 2018
Real estate loans:
Construction and land development	$	92,596		94,178
Single-family residential		269,475		252,983
Single-family residential -
Banco de la Gente non-traditional		30,793		34,261
Commercial		291,255		270,055
Multifamily and farmland		48,090		33,163
Total real estate loans		732,209		684,640
Loans not secured by real estate:
Commercial loans		100,263		97,465
Farm loans		1,033		926
Consumer loans		8,432		9,165
All other loans		7,937		11,827
Total loans		849,874		804,023
Less allowance for loan losses		6,680		6,445
Total net loans	$	843,194		797,578

Age analysis of past due loans, by loan type

	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	803		—		803		91,793		92,596		—
Single-family residential		3,000		126		3,126		266,349		269,475		—
Single-family residential -
Banco de la Gente non-traditional		4,834		413		5,247		25,546		30,793		—
Commercial		504		176		680		290,575		291,255		—
Multifamily and farmland		—		—		—		48,090		48,090		—
Total real estate loans		9,141		715		9,856		722,353		732,209		—
Loans not secured by real estate:
Commercial loans		432		—		432		99,831		100,263		—
Farm loans		—		—		—		1,033		1,033		—
Consumer loans		170		22		192		8,240		8,432		—
All other loans		—		—		—		7,937		7,937		—
Total loans	$	9,743		737		10,480		839,394		849,874		—

December 31, 2018

(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	$	3		—		3		94,175		94,178		—
Single-family residential		4,162		570		4,732		248,251		252,983		—
Single-family residential -
Banco de la Gente non-traditional		4,627		580		5,207		29,054		34,261		—
Commercial		228		—		228		269,827		270,055		—
Multifamily and farmland		—		—		—		33,163		33,163		—
Total real estate loans		9,020		1,150		10,170		674,470		684,640		—
Loans not secured by real estate:
Commercial loans		445		90		535		96,930		97,465		—
Farm loans		—		—		—		926		926		—
Consumer loans		99		4		103		9,062		9,165		—
All other loans		—		—		—		11,827		11,827		—
Total loans	$	9,564		1,244		10,808		793,215		804,023		—

Non-accrual loans

	December 31, 2019		December 31, 2018
Real estate loans:
Construction and land development	$	—		1
Single-family residential		1,378		1,530
Single-family residential -
Banco de la Gente non-traditional		1,764		1,440
Commercial		256		244
Total real estate loans		3,398		3,215
Loans not secured by real estate:
Commercial loans		122		89
Consumer loans		33		10
Total	$	3,553		3,314

Impaired loans

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	183		—		183		183		7		231		12
Single-family residential		5,152		403		4,243		4,646		36		4,678		269
Single-family residential -
Banco de la Gente non-traditional		15,165		—		14,371		14,371		944		14,925		956
Commercial		1,879		—		1,871		1,871		7		1,822		91
Total impaired real estate loans		22,379		403		20,668		21,071		994		21,656		1,328
Loans not secured by real estate:
Commercial loans		180		92		84		176		—		134		9
Consumer loans		100		—		96		96		2		105		7
Total impaired loans	$	22,659		495		20,848		21,343		996		21,895		1,344

December 31, 2018

(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	$	281		—		279		279		5		327		19
Single-family residential		5,059		422		4,188		4,610		32		6,271		261
Single-family residential -
Banco de la Gente non-traditional		16,424		—		15,776		15,776		1,042		14,619		944
Commercial		1,995		—		1,925		1,925		17		2,171		111
Total impaired real estate loans		23,759		422		22,168		22,590		1,096		23,388		1,335
Loans not secured by real estate:
Commercial loans		251		89		1		90		—		96		—
Consumer loans		116		—		113		113		2		137		7
Total impaired loans	$	24,126		511		22,282		22,793		1,098		23,621		1,342

December 31, 2017

(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		—		277		277		6		253		17
Single-family residential		5,226		1,135		3,686		4,821		41		5,113		265
Single-family residential -
Banco de la Gente non-traditional		17,360		—		16,805		16,805		1,149		16,867		920
Commercial		2,761		807		1,661		2,468		1		3,411		148
Multifamily and farmland		78		—		12		12		—		28		—
Total impaired real estate loans		25,707		1,942		22,441		24,383		1,197		25,672		1,350
Loans not secured by real estate:
Commercial loans		264		100		4		104		—		149		3
Farm loans (non RE)						—
Consumer loans		158		—		154		154		2		194		9
All other loans (not secured by real estate)		—		—		—		—		—		—		—
Total impaired loans	$	26,129		2,042		22,599		24,641		1,199		26,015		1,362

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

	Fair Value Measurements December 31, 2019		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	4,417		—		—		4,417
Impaired loans	$	20,347		—		—		20,347
Other real estate	$	—		—		—		—

(Dollars in thousands)

	Fair Value Measurements December 31, 2018		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	680		—		—		680
Impaired loans	$	21,695		—		—		21,695
Other real estate	$	27		—		—		27

Changes in the allowance for loan losses

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland	Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	813		1,325		1,177		1,278		83	626		—	161		982	6,445
Charge-offs		(21	)	(42	)	—		(1	)	—	(389	)	—	(623	)	—	(1,076	)
Recoveries		45		66		—		49		—	83		—	205		—	448
Provision		(143	)	(75	)	(104	)	(21	)	37	368		—	395		406	863
Ending balance	$	694		1,274		1,073		1,305		120	688		—	138		1,388	6,680
Ending balance: individually
evaluated for impairment	$	2		6		925		4		—	—		—	—		—	937
Ending balance: collectively
evaluated for impairment		692		1,268		148		1,301		120	688		—	138		1,388	5,743
Ending balance	$	694		1,274		1,073		1,305		120	688		—	138		1,388	6,680
Loans:
Ending balance	$	92,596		269,475		30,793		291,255		48,090	100,263		1,033	16,369		—	849,874
Ending balance: individually
evaluated for impairment	$	10		1,697		12,899		1,365		—	92		—	—		—	16,063
Ending balance: collectively
evaluated for impairment	$	92,586		267,778		17,894		289,890		48,090	100,171		1,033	16,369		—	833,811

Changes in the allowance for loan losses for the year ended December 31, 2018 were as follows:

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Charge-offs		(53	)	(116	)	—		(453	)	(5	)	(54	)	—	(452	)	—	(1,133	)
Recoveries		10		106		—		105		1		32		—	168		—	422
Provision		52		(477	)	(103	)	433		15		74		—	290		506	790
Ending balance	$	813		1,325		1,177		1,278		83		626		—	161		982	6,445
Ending balance: individually
evaluated for impairment	$	—		—		1,023		15		—		—		—	—		—	1,038
Ending balance: collectively
evaluated for impairment		813		1,325		154		1,263		83		626		—	161		982	5,407
Ending balance	$	813		1,325		1,177		1,278		83		626		—	161		982	6,445
Loans:
Ending balance	$	94,178		252,983		34,261		270,055		33,163		97,465		926	20,992		—	804,023
Ending balance: individually
evaluated for impairment	$	96		1,779		14,310		1,673		—		89		—	—		—	17,947
Ending balance: collectively
evaluated for impairment	$	94,082		251,204		19,951		268,382		33,163		97,376		926	20,992		—	786,076

Changes in the allowance for loan losses for the year ended December 31, 2017 were as follows:

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente Non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
Allowance for loan losses:
Beginning balance	$	1,152		2,126		1,377		1,593		52		675		—	204		371	7,550
Charge-offs		—		(249	)	—		—		(66	)	(194	)	—	(473	)	—	(982	)
Recoveries		14		85		—		21		—		31		—	154		—	305
Provision		(362	)	(150	)	(97	)	(421	)	86		62		—	270		105	(507	)
Ending balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Ending balance: individually
evaluated for impairment	$	—		—		1,093		37		—		—		—	—		—	1,130
Ending balance: collectively
evaluated for impairment		804		1,812		187		1,156		72		574		—	155		476	5,236
Ending balance	$	804		1,812		1,280		1,193		72		574		—	155		476	6,366
Loans:
Ending balance	$	84,987		246,703		37,249		248,637		28,937		89,022		1,204	23,025		—	759,764
Ending balance: individually
evaluated for impairment	$	98		1,855		15,460		2,251		—		100		—	—		—	19,764
Ending balance: collectively
evaluated for impairment	$	84,889		244,848		21,789		246,386		28,937		88,922		1,204	23,025		—	740,000

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

December 31, 2019

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	—	8,819	—	—	—	330	—	693	—	9,842
2- High Quality		32,029	128,757	—	21,829	256	20,480	—	2,708	1,860	207,919
3- Good Quality		52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention		5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch		3,007	3,196	2,027	3,072	543	492	—	8	—	12,345
6- Substandard		64	3,048	2,926	256	—	124	—	48	—	6,466
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

December 31, 2018

(Dollars in thousands)

		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	504	5,795	—	—	—	605	—	673	—	7,577
2- High Quality		24,594	128,588	—	25,321	395	20,520	—	3,229	2,145	204,792
3- Good Quality		59,549	92,435	13,776	211,541	27,774	69,651	785	4,699	8,932	489,142
4- Management Attention		5,707	19,200	15,012	30,333	3,906	6,325	141	529	750	81,903
5- Watch		3,669	3,761	2,408	2,616	1,088	264	—	18	—	13,824
6- Substandard		155	3,204	3,065	244	—	100	—	17	—	6,785
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	94,178	252,983	34,261	270,055	33,163	97,465	926	9,165	11,827	804,023

Analysis of TDR loans by loan type

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:
Single-family residential		2	$	94		94
Total TDR loans		2	$	94		94

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15. Other Operating Income and Expense (Tables)

12 Months Ended

Dec. 31, 2019

Other Income and Expenses [Abstract]

Other operating income and expense

Miscellaneous non-interest income for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019			2018		2017
Visa debit card income	$	4,145			3,911		3,757
Bank owned life insurance income		383			384		400
Gain(loss) on sale of premises and equipment		(239	)		544		(32	)
Other		1,320			1,354		1,175
	$	5,609			6,193		5,300

Other non-interest expense for the years ended December 31, 2019, 2018 and 2017 included the following items:

(Dollars in thousands)
	2019		2018		2017
ATM expense	$	579		542		673
Consulting		972		1,012		785
Data processing		616		466		426
Deposit program expense		515		586		539
Dues and subscriptions		421		421		354
FHLB advance prepayment penalty		—		—		508
Internet banking expense		681		603		720
Office supplies		467		503		517
Telephone		802		678		855
Other		2,921		2,834		2,540
	$	7,974		7,645		7,917

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1. Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

1. Summary of Significant Accounting Policies

Organization  

Peoples Bancorp of North Carolina, Inc. (“Bancorp”) received regulatory approval to operate as a bank holding company on July 22, 1999, and became effective August 31, 1999. Bancorp is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for Peoples Bank (the “Bank”).

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

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

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

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company lauched PB Insurance Agency, which is part of CBRES.

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

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices 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.

Principles of Consolidation

The consolidated financial statements include the financial statements of Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., REAS, CBRES and PBREH (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. 

Basis of Presentation

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

Cash and Cash Equivalents

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

Investment Securities

There are three classifications the Company is able to classify its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2019 and 2018, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.

Other Investments

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

Mortgage Loans Held for Sale

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

Loans

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

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

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

Allowance for Loan Losses

The allowance for loan losses 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.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2019 as compared to the year ended December 31, 2018. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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

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.

Mortgage Banking Activities

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

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $729,000, $866,000 and $1.0 million at December 31, 2019, 2018 and 2017, respectively.

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

Premises and Equipment

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

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

Other Real Estate

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

Income Taxes

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

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

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

Derivative Financial Instruments and Hedging Activities

In the normal course of business, the Company enters into derivative contracts to manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All material derivative financial instruments are recorded at fair value in the financial statements. The fair value of derivative contracts related to the origination of fixed rate mortgage loans and the commitments to sell these loans to a third party is immaterial and has no effect on the recorded amounts in the financial statements.

The disclosure requirements for derivatives and hedging activities have the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of the effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.

If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.

The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

The Company formally documents all hedging relationships, including an assessment that the derivative instruments are expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged items.

Advertising Costs

Advertising costs are expensed as incurred.

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “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. No shares were available for issuance under the Plan at December 31, 2019 as all stock-based rights under the Plan must have been granted or awarded by May 7, 2019 (i.e., ten years from the Plan effective date).

The Company granted 32,465 restricted stock units under the Plan at a grant date fair value of $7.18 per share during the first quarter of 2012, of which 5,891 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 in conjunction with the Company’s participation in the Capital Purchase Program under the Troubled Asset Relief Program. In July 2012, the Company granted 5,891 restricted stock units at a grant date fair value of $7.50 per share. The Company granted 29,475 restricted stock units under the Plan at a grant date fair value of $10.82 per share during the second quarter of 2013. The Company granted 23,162 restricted stock units under the Plan at a grant date fair value of $14.27 per share during the first quarter of 2014. The Company granted 16,583 restricted stock units under the Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2012 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the grant date for the 2013, 2015, 2016, 2017, 2018 and 2019 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 December 31, 2019, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $238,000.

The Company recognized compensation expense for restricted stock units granted under the Plan of $270,000, $85,000 and $592,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Net Earnings Per Share

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

The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2019, 2018 and 2017 are as follows:

For the year ended December 31, 2019

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	14,067		5,941,873	$	2.37
Effect of dilutive securities:
Restricted stock units		—		25,438
Diluted earnings per share	$	14,067		5,967,311	$	2.36

For the year ended December 31, 2018

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	13,382		5,995,256	$	2.23
Effect of dilutive securities:
Restricted stock units		—		20,240
Diluted earnings per share	$	13,382		6,015,496	$	2.22

For the year ended December 31, 2017

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	10,268		5,988,183	$	1.71
Effect of dilutive securities:
Restricted stock units		—		74,667
Diluted earnings per share	$	10,268		6,062,850	$	1.69

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2014-09: Revenue from Contracts with Customers	Provides guidance on the recognition of revenue from contracts with customers. The core principle of this 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.	January 1, 2018	See section titled "ASU 2014-09" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities	Addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs	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.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-09: Scope of Modification Accounting	Amended the requirements related to changes to the terms or conditions of a share-based payment award.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2017-14: Income Statement—Reporting Comprehensive, Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606)	Incorporates into the Accounting Standards Codification ("ASC") recent Securities and Exchange Commission ("SEC") guidance related to revenue recognition.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-03: Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities	Clarifies certain aspects of the guidance issued in ASU 2016-01.	January 1, 2018	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-04: Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)	Incorporates recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulation.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-06: Codification Improvements to Topic 942: Financial Services—Depository and Lending	Eliminates a reference to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges, from the ASC. The Office of the Comptroller of the Currency published the guidance in 1985 but has since rescinded it.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2016-02: Leases	Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.	January 1, 2019	See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities	Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-11: Leases (Topic 842): Targeted Improvements	Intended to reduce costs and ease implementation of ASU 2016-02.	January 1, 2019	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-20: Narrow- Scope Improvements for Lessors	Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.	January 1, 2019	See comments for ASU 2016-02 below.
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the Accounting Standards Codification to align the guidance in various SEC sections of the Codification with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2014-09

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

Revenue and Method of Adoption

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

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

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $876,000 and $823,000 for the years ended December 31, 2019 and 2018, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was $4.1 million and $3.9 million for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was $692,000 and $597,000 for the years ended December 31, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $4.5 million and $3.2 million for the years ended December 31, 2019 and 2018, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the years ended December 31, 2019 derived from contracts in which services are transferred at a point in time was approximately $9.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors impacting the customers could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair the customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

ASU 2016-02

On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease agreements. The key difference of Topic 842 from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the previous guidance. Topic 842 states that a contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company reviewed its material non-real estate contracts to determine if they included a lease and did not note any that would need to be considered under Topic 842. The Company’s lease agreements in which Topic 842 has been applied are primarily for retail branch real estate properties. These real estate leases have lease terms from less than 12 months to leases with options up to 15 years, and payment terms vary with some being fixed payments or based on a fixed annual increase while others are variable and the annual increases are based on market rates or other indexes.

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

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

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

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

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

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $231,000 and $230,000 for the years ended December 31, 2019 and 2018, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2019, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	January 1, 2020 Early adoption permitted	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
		See ASU 2019-10 below.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020 Early adoption permitted	The Company does not intend to adopt this guidance early. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2018 and 2017 consolidated financial statements have been reclassified to conform to the 2019 presentation.

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10. Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2019

Related Party Transactions [Abstract]

Summary of activity for related party loans

	2019			2018
Beginning balance	$	3,192			3,679
New loans		5,716			8,030
Repayments		(5,436	)		(8,517	)
Ending balance	$	3,472			3,192

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4. Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2019

Property, Plant and Equipment [Abstract]

Summary of premises and equipment

	2019		2018
Land	$	2,793		2,889
Buildings and improvements		18,931		19,796
Furniture and equipment		24,743		22,443
Construction in process		395		381
Total premises and equipment		46,862		45,509
Less accumulated depreciation		28,258		27,059
Total net premises and equipment	$	18,604		18,450

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Consolidated Statements of Earnings - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Interest income:
Interest and fees on loans	$ 43,301	$ 38,654	$ 34,888
Interest on due from banks	213	304	219
Interest on federal funds sold	331	0	0
Interest on investment securities:
U.S. Government sponsored enterprises	2,670	2,333	2,404
States and political subdivisions	2,915	3,877	4,236
Other	171	182	202
Total interest income	49,601	45,350	41,949
Interest expense:
NOW, MMDA & savings deposits	1,596	769	598
Time deposits	909	472	466
FHLB borrowings	205	0	662
Junior subordinated debentures	844	790	590
Other	203	115	61
Total interest expense	3,757	2,146	2,377
Net interest income	45,844	43,204	39,572
Provision for (reduction of) loan losses	863	790	(507)
Net interest income after provision for loan losses	44,981	42,414	40,079
Non-interest income:
Service charges	4,576	4,355	4,453
Other service charges and fees	714	705	593
Gain on sale of securities	226	15	0
Mortgage banking income	1,264	851	1,190
Insurance and brokerage commissions	877	824	761
Appraisal management fee income	4,484	3,206	3,306
Gain (loss) on sales and write-downs of other real estate	(11)	17	(239)
Miscellaneous	5,609	6,193	5,300
Total non-interest income	17,739	16,166	15,364
Non-interest expense:
Salaries and employee benefits	23,238	21,530	20,058
Occupancy	7,364	7,170	6,701
Professional fees	1,490	1,525	1,236
Advertising	1,021	922	1,195
Debit card expense	890	994	1,248
FDIC insurance	119	328	347
Appraisal management fee expense	3,421	2,460	2,526
Other	7,974	7,645	7,917
Total non-interest expense	45,517	42,574	41,228
Earnings before income taxes	17,203	16,006	14,215
Income tax expense	3,136	2,624	3,947
Net earnings	$ 14,067	$ 13,382	$ 10,268
Basic net earnings per share	$ 2.37	$ 2.23	$ 1.71
Diluted net earnings per share	2.36	2.22	1.69
Cash dividends declared per share	$ 0.66	$ 0.52	$ 0.44

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6. Time Deposits

12 Months Ended

Dec. 31, 2019

Time Deposits [Line Items]

Time Deposits

At December 31, 2019, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)

2020	$	53,905
2021		21,997
2022		10,919
2023		3,117
2024 and thereafter		21,818
Total	$	111,756

At December 31, 2019 and 2018, the Bank had approximately $22.3 million and $3.4 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers. CDARS balances totaled $3.1 million and $3.4 million as of December 31, 2019 and 2018, respectively. The weighted average rate of brokered deposits as of December 31, 2019 and 2018 was 1.96% and 0.07%, respectively.

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10. Related Party Transactions

12 Months Ended

Dec. 31, 2019

Related Party Transactions [Abstract]

Related Party Transactions

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. It is the policy of the Company that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2019 and 2018:

(Dollars in thousands)

	2019			2018
Beginning balance	$	3,192			3,679
New loans		5,716			8,030
Repayments		(5,436	)		(8,517	)
Ending balance	$	3,472			3,192

At December 31, 2019 and 2018, the Company had deposit relationships with related parties of approximately $30.4 million and $31.6 million, respectively.

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $231,000 and $230,000 during 2019 and 2018, respectively.

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12. Employee and Director Benefit Programs (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Retirement Benefits [Abstract]
Service cost	$ 299	$ 362	$ 348
Interest cost	58	70	68
Net periodic cost	$ 357	$ 432	$ 416
Weighted average discount rate assumption used to determine benefit obligation	5.49%	5.49%	5.49%

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17. Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2019	Dec. 31, 2018
Assets
Interest-bearing time deposit												$ 720	$ 2,817
Investment securities available for sale												195,746	194,578
Total assets												1,154,882	1,093,251
Liabilities and Shareholders' Equity
Junior subordinated debentures												15,619	20,619
Liabilities												1,020,762	969,634
Shareholders' equity												134,120	123,617
Total liabilities and shareholders' equity												1,154,882	1,093,251
Revenues:
Interest and dividend income	$ 12,613	$ 12,430	$ 12,375	$ 12,183	$ 11,924	$ 11,608	$ 11,059	$ 10,759	$ 49,601	$ 45,350	$ 41,949
Expenses:
Interest	1,225	994	781	757	609	557	513	467	3,757	2,146	2,377
Income before income tax benefit and equity in undistributed earnings of subsidiaries	3,638	4,455	4,658	4,452	4,126	4,154	3,771	3,955	17,203	16,006	14,215
Income tax benefit	672	834	845	785	690	687	595	652	3,136	2,624	3,947
Net earnings	2,966	3,621	3,813	3,667	3,436	3,467	3,176	3,303	14,067	13,382	10,268
Cash flows from operating activities:
Net earnings	2,966	$ 3,621	$ 3,813	3,667	3,436	$ 3,467	$ 3,176	3,303	14,067	13,382	10,268
Change in:
Other assets									940	(3,695)	(3,982)
Net cash provided by operating activities									13,197	17,187	18,594
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale									40,561	48,241	10,162
Net cash provided by investing activities									(48,181)	(18,587)	(24,106)
Cash flows from financing activities:
Repayment of junior subordinated debenture									5,000	0	0
Cash in lieu stock dividend									0	0	(6)
Net cash used by financing activities									44,001	(12,534)	(7,278)
Net change in cash									9,017	(13,934)	(12,790)
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net									2,658	(2,607)	(1)
Parent Company
Assets
Cash	1,187			689	689			428	1,187	428	957	1,187	689
Interest-bearing time deposit												1,000	1,000
Investment in subsidiaries												146,230	141,181
Investment in PEBK Capital Trust II												619	619
Investment securities available for sale												250	250
Other assets												476	533
Total assets												149,762	144,272
Liabilities and Shareholders' Equity
Junior subordinated debentures												15,619	20,619
Liabilities												23	36
Shareholders' equity												134,120	123,617
Total liabilities and shareholders' equity												$ 149,762	$ 144,272
Revenues:
Interest and dividend income									12,850	4,544	1,839
Total revenues									12,850	4,544	1,839
Expenses:
Interest									844	790	590
Other operating expenses									629	678	725
Total expenses									1,473	1,468	1,315
Income before income tax benefit and equity in undistributed earnings of subsidiaries									11,377	3,076	524
Income tax benefit									299	299	434
Income before equity in undistributed earnings of subsidiaries									11,676	3,375	958
Equity in undistributed earnings of subsidiaries									2,391	10,007	9,310
Net earnings									14,067	13,382	10,268
Cash flows from operating activities:
Net earnings									14,067	13,382	10,268
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries									(2,391)	(10,007)	(9,310)
Change in:
Other assets									57	13	(272)
Other liabilities									(13)	6	5
Net cash provided by operating activities									11,720	3,394	691
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale									0	0	500
Net cash provided by investing activities									0	0	500
Cash flows from financing activities:
Repayment of junior subordinated debenture									(5,000)	0	0
Cash dividends paid on common stock									(3,939)	(3,133)	(2,629)
Cash in lieu stock dividend									0	0	(6)
Stock repurchase									(2,490)	0	0
Proceeds from exercise of restricted stock units									207	0	915
Net cash used by financing activities									(11,222)	(3,133)	(1,720)
Net change in cash									498	261	(529)
Cash at beginning of year				$ 689				$ 428	689	428	957
Cash at end of year	$ 1,187				$ 689				1,187	689	428
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net									$ 2,658	$ (2,607)	$ (1)

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11. Commitments and Contingencies (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Commitments and contingencies
Commitments to extend credit
Commitments and contingencies	276,338	268,708
Standby letters of credit and financial guarantees written
Commitments and contingencies	$ 3,558	$ 3,651

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3. Loans (Details 1) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Past due loans
Loans 30-89 days past due	$ 9,743	$ 9,564
Loans 90 or more days past due	737	1,244
Total past due loans	10,480	10,808
Total current loans	839,394	793,215
Total loans	849,874	804,023	$ 759,764
Accruing loans 90 or more days past due	0	0
Construction and land development
Past due loans
Loans 30-89 days past due	803	3
Loans 90 or more days past due	0	0
Total past due loans	803	3
Total current loans	91,793	94,175
Total loans	92,596	94,178
Accruing loans 90 or more days past due	0	0
Single-family residential
Past due loans
Loans 30-89 days past due	3,000	4,162
Loans 90 or more days past due	126	570
Total past due loans	3,126	4,732
Total current loans	266,349	248,251
Total loans	269,475	252,983
Accruing loans 90 or more days past due	0	0
Single-family residential - Banco de la Gente Non-traditional
Past due loans
Loans 30-89 days past due	4,834	4,627
Loans 90 or more days past due	413	580
Total past due loans	5,247	5,207
Total current loans	25,546	29,054
Total loans	30,793	34,261
Accruing loans 90 or more days past due	0	0
Commercial
Past due loans
Loans 30-89 days past due	504	228
Loans 90 or more days past due	176	0
Total past due loans	680	228
Total current loans	290,575	269,827
Total loans	291,255	270,055
Accruing loans 90 or more days past due	0	0
Multifamily and Farmland
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	48,090	33,163
Total loans	48,090	33,163
Accruing loans 90 or more days past due	0	0
Total real estate loans
Past due loans
Loans 30-89 days past due	9,141	9,020
Loans 90 or more days past due	715	1,150
Total past due loans	9,856	10,170
Total current loans	722,353	674,470
Total loans	732,209	684,640
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	432	445
Loans 90 or more days past due	0	90
Total past due loans	432	535
Total current loans	99,831	96,930
Total loans	100,263	97,465
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	1,033	926
Total loans	1,033	926
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	170	99
Loans 90 or more days past due	22	4
Total past due loans	192	103
Total current loans	8,240	9,062
Total loans	8,432	9,165
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	0
Loans 90 or more days past due	0	0
Total past due loans	0	0
Total current loans	7,937	11,827
Total loans	7,937	11,827
Accruing loans 90 or more days past due	$ 0	$ 0

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3. Loans (Details 5) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Allowance for loan losses
Beginning balance	$ 6,445	$ 6,366	$ 7,550
Charge-offs	(1,076)	(1,133)	(982)
Recoveries	448	422	305
Provision	863	790	(507)
Ending balance	6,680	6,445	6,366
Ending balance: individually evaluated for impairments	937	1,038	1,130
Ending balance: collectively evaluated for impairments	5,743	5,407	5,236
Ending balance	6,680	6,445	6,366
Loans
Ending balance	849,874	804,023	759,764
Ending balance: individually evaluated for impairment	16,063	17,947	19,764
Ending balance: collectively evaluated for impairment	833,811	786,076	740,000
Construction and land development
Allowance for loan losses
Beginning balance	813	804	1,152
Charge-offs	(21)	(53)	0
Recoveries	45	10	14
Provision	(143)	52	(362)
Ending balance	694	813	804
Ending balance: individually evaluated for impairments	2	0	0
Ending balance: collectively evaluated for impairments	692	813	804
Ending balance	694	813	804
Loans
Ending balance	92,596	94,178	84,987
Ending balance: individually evaluated for impairment	10	96	98
Ending balance: collectively evaluated for impairment	92,586	94,082	84,889
Single-family residential
Allowance for loan losses
Beginning balance	1,325	1,812	2,126
Charge-offs	(42)	(116)	(249)
Recoveries	66	106	85
Provision	(75)	(477)	(150)
Ending balance	1,274	1,325	1,812
Ending balance: individually evaluated for impairments	6	0	0
Ending balance: collectively evaluated for impairments	1,268	1,325	1,812
Ending balance	1,274	1,325	1,812
Loans
Ending balance	269,475	252,983	246,703
Ending balance: individually evaluated for impairment	1,697	1,779	1,855
Ending balance: collectively evaluated for impairment	267,778	251,204	244,848
Single-family residential - Banco de la Gente Non-traditional
Allowance for loan losses
Beginning balance	1,177	1,280	1,377
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	(104)	(103)	(97)
Ending balance	1,073	1,177	1,280
Ending balance: individually evaluated for impairments	925	1,023	1,093
Ending balance: collectively evaluated for impairments	148	154	187
Ending balance	1,073	1,177	1,280
Loans
Ending balance	30,793	34,261	37,249
Ending balance: individually evaluated for impairment	12,899	14,310	15,460
Ending balance: collectively evaluated for impairment	17,894	19,951	21,789
Commercial
Allowance for loan losses
Beginning balance	1,278	1,193	1,593
Charge-offs	(1)	(453)	0
Recoveries	49	105	21
Provision	(21)	433	(421)
Ending balance	1,305	1,278	1,193
Ending balance: individually evaluated for impairments	4	15	37
Ending balance: collectively evaluated for impairments	1,301	1,263	1,156
Ending balance	1,305	1,278	1,193
Loans
Ending balance	291,255	270,055	248,637
Ending balance: individually evaluated for impairment	1,365	1,673	2,251
Ending balance: collectively evaluated for impairment	289,890	268,382	246,386
Multifamily and Farmland
Allowance for loan losses
Beginning balance	83	72	52
Charge-offs	0	(5)	(66)
Recoveries	0	1	0
Provision	37	15	86
Ending balance	120	83	72
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	120	83	72
Ending balance	120	83	72
Loans
Ending balance	48,090	33,163	28,937
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	48,090	33,163	28,937
Commercial loans (not secured by real estate)
Allowance for loan losses
Beginning balance	626	574	675
Charge-offs	(389)	(54)	(194)
Recoveries	83	32	31
Provision	368	74	62
Ending balance	688	626	574
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	688	626	574
Ending balance	688	626	574
Loans
Ending balance	100,263	97,465	89,022
Ending balance: individually evaluated for impairment	92	89	100
Ending balance: collectively evaluated for impairment	100,171	97,376	88,922
Farm loans (not secured by real estate)
Allowance for loan losses
Beginning balance	0	0	0
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	0	0	0
Ending balance	0	0	0
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	0	0	0
Ending balance	0	0	0
Loans
Ending balance	1,033	926	1,204
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	1,033	926	1,204
Consumer And All Other Loans
Allowance for loan losses
Beginning balance	161	155	204
Charge-offs	(623)	(452)	(473)
Recoveries	205	168	154
Provision	395	290	270
Ending balance	138	161	155
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	138	161	155
Ending balance	138	161	155
Loans
Ending balance	16,369	20,992	23,025
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	16,369	20,992	23,025
Unallocated
Allowance for loan losses
Beginning balance	982	476	371
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	406	506	105
Ending balance	1,388	982	476
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	1,388	982	476
Ending balance	1,388	982	476
Loans
Ending balance	0	0	0
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0

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4. Premises and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Property, Plant and Equipment [Abstract]
Land	$ 2,793	$ 2,889
Buildings and improvements	18,931	19,796
Furniture and equipment	24,743	22,443
Construction in process	395	381
Total premises and equipment	46,862	45,509
Less accumulated depreciation	28,258	27,059
Total net premises and equipment	$ 18,604	$ 18,450

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Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2019	Feb. 29, 2020	Jun. 30, 2019
Document And Entity Information
Entity Registrant Name	PEOPLES BANCORP OF NORTH CAROLINA INC
Entity Central Index Key	0001093672
Document Type	10-K
Document Period End Date	Dec. 31, 2019
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 Emerging Growth Company	false
Entity Small Business	true
Entity Shell Company	false
Entity Public Float			$ 136,593,960
Entity Common Stock, Shares Outstanding		5,914,304
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2019
Entity Interactive Data Current	Yes
Entity Incorporation, State or Country Code	NC
Entity File Number	000-27205

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11. Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Financial instruments with credit risk

		Contractual Amount
		2019	2018
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	276,338	268,708
Standby letters of credit and financial guarantees written	$	3,558	3,651

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5. Leases (Tables)

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Lease expense

	December 31, 2019
Operating lease cost	$	893
Other information:
Cash paid for amounts included in the measurement of lease liabilities		850
Operating cash flows from operating leases		—
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		8
Weighted-average remaining lease term - operating leases		7.27
Weighted-average discount rate - operating leases		3.19	%

Maturity analysis of operating lease liabilities

Maturity Analysis of Operating Lease Liabilities:		December 31, 2019
	2020	$	823
	2021		793
	2022		501
	2023		393
	2024		304
	Thereafter		1,320
	Total		4,134
	Less: Imputed Interest		(487	)
	Operating Lease Liability	$	3,647

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Statement of Comprehensive Income [Abstract]
Net earnings	$ 14,067	$ 13,382	$ 10,268
Other comprehensive income (loss):
Unrealized holding losses on securities available for sale	3,677	(3,370)	(355)
Reclassification adjustment for gains on securities available for sale included in net earnings	(226)	(15)	0
Total other comprehensive loss, before income taxes	3,451	(3,385)	(355)
Income tax benefit related to other comprehensive loss:
Unrealized holding losses on securities available for sale	845	(774)	(354)
Reclassification adjustment for gains on securities available for sale included in net earnings	(52)	(4)	0
Total income tax benefit related to other comprehensive loss	793	(778)	(354)
Total other comprehensive loss, net of tax	2,658	(2,607)	(1)
Total comprehensive income	$ 16,725	$ 10,775	$ 10,267

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16. Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

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

(Dollars in thousands)
			Fair Value Measurements at December 31, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	52,387		52,387		—		—		52,387
Investment securities available for sale	$	195,746		—		195,496		250		195,746
Other investments	$	4,231		—		—		4,231		4,231
Mortgage loans held for sale	$	4,417		—		—		4,417		4,417
Loans, net	$	843,194		—		—		819,397		819,397
Cash surrender value of life insurance	$	16,319		—		16,319		—		16,319
Liabilities:
Deposits	$	966,517		—		—		955,766		955,766
Securities sold under agreements
to repurchase	$	24,221		—		24,221		—		24,221
Junior subordinated debentures	$	15,619		—		15,619		—		15,619

(Dollars in thousands)
			Fair Value Measurements at December 31, 2018
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	43,370		43,370		—		—		43,370
Investment securities available for sale	$	194,578		—		194,328		250		194,578
Other investments	$	4,361		—		—		4,361		4,361
Mortgage loans held for sale	$	680		—		—		680		680
Loans, net	$	797,578		—		—		748,917		748,917
Cash surrender value of life insurance	$	15,936		—		15,936		—		15,936
Liabilities:
Deposits	$	877,213		—		—		857,999		857,999
Securities sold under agreements
to repurchase	$	58,095		—		58,095		—		58,095
Junior subordinated debentures	$	20,619		—		20,619		—		20,619

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2. Investment Securities

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

Investment Securities

Investment securities available for sale at December 31, 2019 and 2018 are as follows:

(Dollars in thousands)

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

(Dollars in thousands)

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	52,145		516		558		52,103
U.S. Government
sponsored enterprises		35,356		71		793		34,634
State and political subdivisions		105,545		2,089		43		107,591
Trust preferred securities		250		—		—		250
Total	$	193,296		2,676		1,394		194,578

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2019 and 2018 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands)

	December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	28,395		177		6,351		50		34,746		227
U.S. Government
sponsored enterprises		2,899		10		6,151		301		9,050		311
State and political subdivisions		7,367		200		—		—		7,367		200
Total	$	38,661		387		12,502		351		51,163		738

              (Dollars in thousands) 

	December 31, 2018
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	6,932		56		17,670		502		24,602		558
U.S. Government
sponsored enterprises		1,784		69		25,172		724		26,956		793
State and political subdivisions		4,815		26		1,578		17		6,393		43
Total	$	13,531		151		44,420		1,243		57,951		1,394

At December 31, 2019, unrealized losses in the investment securities portfolio relating to debt securities totaled $738,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2019 tables above, seven out of 90 securities issued by state and political subdivisions contained unrealized losses and 24 out of 57 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations on each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary.   No investment impairments were deemed other-than-temporary in 2019, 2018 or 2017.

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2019, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2019

(Dollars in thousands)

	Amortized Cost		Estimated Fair Value
Due within one year	$	5,490		5,465
Due from one to five years		56,399		58,315
Due from five to ten years		47,717		49,293
Due after ten years		3,595		3,717
Mortgage-backed securities		77,812		78,956
Total	$	191,013		195,746

During 2019, proceeds from sales of securities available for sale were $20.7 million and resulted in net gains of $226,000. During 2018, proceeds from sales of securities available for sale were $36.0 million and resulted in gross gains of $15,000. No securities available for sale were sold during the year ended December 31, 2017.

Securities with a fair value of approximately $66.0 million and $93.0 million at December 31, 2019 and 2018, respectively, were pledged to secure public deposits, FHLB of Atlanta (“FHLB”) borrowings and for other purposes as required by law.

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2019 and 2018.

(Dollars in thousands)

	December 31, 2019
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	78,956		—		78,956		—
U.S. Government
sponsored enterprises	$	28,397		—		28,397		—
State and political subdivisions	$	88,143		—		88,143		—
Trust preferred securities	$	250		—		—		250

(Dollars in thousands)

	December 31, 2018
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	52,103		—		52,103		—
U.S. Government
sponsored enterprises	$	34,634		—		34,634		—
State and political subdivisions	$	107,591		—		107,591		—
Trust preferred securities	$	250		—		—		250

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.

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the year ended December 31, 2019.

(Dollars in thousands)

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

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5. Leases

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Leases

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

Total rent expense was approximately $949,000, $785,000 and $756,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

As of December 31, 2019 the Company had operating ROU assets of $3.6 million and operating lease liabilities of $3.6 million. The Company maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. As allowed by the standard, leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.

The following table presents lease cost and other lease information as of December 31, 2019.

(Dollars in thousands)

	December 31, 2019
Operating lease cost	$	893
Other information:
Cash paid for amounts included in the measurement of lease liabilities		850
Operating cash flows from operating leases		—
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		8
Weighted-average remaining lease term - operating leases		7.27
Weighted-average discount rate - operating leases		3.19	%

The following table presents lease maturities as of December 31, 2019.

(Dollars in thousands)

Maturity Analysis of Operating Lease Liabilities:		December 31, 2019
	2020	$	823
	2021		793
	2022		501
	2023		393
	2024		304
	Thereafter		1,320
	Total		4,134
	Less: Imputed Interest		(487	)
	Operating Lease Liability	$	3,647

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9. Income Taxes

12 Months Ended

Dec. 31, 2019

Income Tax Disclosure [Abstract]

Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 34 percent to 21 percent for tax years beginning after December 31, 2017.

The Company recognized the income tax effects of the TCJA in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was signed into law. As such, the Company’s financial results reflect the income tax effects of the TCJA for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the TCJA for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the TCJA have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

The provision for income taxes is summarized as follows:

(Dollars in thousands)

	2019		2018		2017
Current expense	$	2,960		2,546		1,827
Deferred income tax expense		176		78		2,120
Total income tax	$	3,136		2,624		3,947

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

(Dollars in thousands)

	2019			2018			2017
Tax expense at statutory rate (21% in 2018 and 2019)	$	3,613			3,361			4,833
State income tax, net of federal income tax effect		327			358			307
Tax-exempt interest income		(802	)		(990	)		(1,594	)
Increase in cash surrender value of life insurance		(81	)		(81	)		(136	)
Nondeductible interest and other expense		40			23			46
Impact of TCJA		—			—			588
Other		39			(47	)		(97	)
Total	$	3,136			2,624			3,947

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities. The net deferred tax asset is included as a component of other assets at December 31, 2019 and 2018.

(Dollars in thousands)

	2019		2018
Deferred tax assets:
Allowance for loan losses	$	1,535		1,481
Accrued retirement expense		1,150		1,119
Restricted stock		217		262
Accrued bonuses		266		211
Interest income on nonaccrual loans		2		1
Total gross deferred tax assets		3,170		3,074
Deferred tax liabilities:
Deferred loan fees		343		379
Accumulated depreciation		873		610
Prepaid expenses		7		10
Other		53		5
Unrealized gain on available for sale securities		1,087		294
Total gross deferred tax liabilities		2,363		1,298
Net deferred tax asset	$	807		1,776

The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Company’s deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21 percent, resulting in a $588,000 increase in income tax expense for the year ended December 31, 2017 and a corresponding $588,000 decrease in net deferred tax assets as of December 31, 2017.

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

The Company’s Federal income tax filings for years 2016 through 2019 were at year end 2019 open to audit under statutes of limitations by the Internal Revenue Service. The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2017 and 2018 are open to audit under the statutes of limitations by the North Carolina Department of Revenue.

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12. Employee and Director Benefit Programs (Details 3) $ in Thousands	Dec. 31, 2019 USD ($)
Retirement Benefits [Abstract]
2020	$ 237
2021	353
2022	342
2023	342
2024	354
Thereafter	$ 8,715

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17. Quarterly Data (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Quarterly Financial Information Disclosure [Abstract]
Total interest income	$ 12,613	$ 12,430	$ 12,375	$ 12,183	$ 11,924	$ 11,608	$ 11,059	$ 10,759	$ 49,601	$ 45,350	$ 41,949
Total interest expense	1,225	994	781	757	609	557	513	467	3,757	2,146	2,377
Net interest income	11,388	11,436	11,594	11,426	11,315	11,051	10,546	10,292	45,844	43,204	39,572
Provision for loan losses	186	422	77	178	418	110	231	31	863	790	(507)
Other income	4,526	4,708	4,385	4,120	4,499	3,915	4,016	3,736	17,739	16,166	15,364
Other expense	12,090	11,267	11,244	10,916	11,270	10,702	10,560	10,042	45,517	42,574	41,228
Income before income taxes	3,638	4,455	4,658	4,452	4,126	4,154	3,771	3,955	17,203	16,006	14,215
Income tax expense	672	834	845	785	690	687	595	652	3,136	2,624	3,947
Net earnings	$ 2,966	$ 3,621	$ 3,813	$ 3,667	$ 3,436	$ 3,467	$ 3,176	$ 3,303	$ 14,067	$ 13,382	$ 10,268
Basic net earnings per share	$ 0.5	$ 0.62	$ 0.64	$ 0.61	$ 0.57	$ 0.58	$ 0.53	$ 0.55	$ 2.37	$ 2.23	$ 1.71
Diluted net earnings per share	$ 0.5	$ 0.61	$ 0.64	$ 0.61	$ 0.57	$ 0.57	$ 0.53	$ 0.55	$ 2.36	$ 2.22	$ 1.69

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11. Commitments and Contingencies (Details Narrative) $ in Thousands	Dec. 31, 2019 USD ($)
Commitments and Contingencies Disclosure [Abstract]
Overnight federal funds	$ 82,500

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3. Loans (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Receivables [Abstract]
Percentage of construction and land development loans in Bank's loan portfolio	11.00%	12.00%
Percentage of single-family residential loans in Bank's loan portfolio	35.00%	36.00%
Percentage of Single-family residential - Banco de la Gente Non-traditional loans in the Bank's loan portfolio	4.00%	4.00%
Percentage of commercial real estate loans in Bank's loan portfolio	34.00%	34.00%
Percentage of commercial loans in Bank's loan portfolio	12.00%	12.00%
Deferred costs	$ 1,500	$ 1,600
Accruing impaired loans	21,300	22,800
Interest income recognized on accruing impaired loans	1,300	1,300
TDR loan amounts	4,300	4,700
Amount of performing TDR loans included	$ 0	$ 92

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3. Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Major classifications
Total loans	$ 849,874	$ 804,023	$ 759,764
Less allowance for loan losses	6,680	6,445	6,366	$ 7,550
Net loans	843,194	797,578
Construction and land development
Major classifications
Total loans	92,596	94,178	84,987
Less allowance for loan losses	694	813	804	1,152
Single-family residential
Major classifications
Total loans	269,475	252,983	246,703
Less allowance for loan losses	1,274	1,325	1,812	2,126
Single-family residential - Banco de la Gente Non-traditional
Major classifications
Total loans	30,793	34,261	37,249
Less allowance for loan losses	1,073	1,177	1,280	1,377
Commercial
Major classifications
Total loans	291,255	270,055	248,637
Less allowance for loan losses	1,305	1,278	1,193	1,593
Multifamily and Farmland
Major classifications
Total loans	48,090	33,163	28,937
Less allowance for loan losses	120	83	72	52
Total real estate loans
Major classifications
Total loans	732,209	684,640
Commercial loans (not secured by real estate)
Major classifications
Total loans	100,263	97,465	89,022
Less allowance for loan losses	688	626	574	675
Farm loans (not secured by real estate)
Major classifications
Total loans	1,033	926	1,204
Less allowance for loan losses	0	0	$ 0	$ 0
Consumer loans (not secured by real estate)
Major classifications
Total loans	8,432	9,165
All other loans (not secured by real estate)
Major classifications
Total loans	$ 7,937	$ 11,827

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3. Loans (Details 4) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Mortgage loans held for sale	$ 4,417	$ 680
Impaired loans	20,347	21,695
Other real estate	0	27
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	4,417	680
Impaired loans	20,347	21,695
Other real estate	$ 0	$ 27

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5. Leases (Details 1) $ in Thousands	Dec. 31, 2019 USD ($)
Leases [Abstract]
2020	$ 823
2021	793
2022	501
2023	393
2024	304
Thereafter	1,320
Total	4,134
Less: imputed interest	(487)
Operating lease liability	$ 3,647

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7. Federal Home Loan Bank and Federal Reserve Bank Borrowings (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2019	Dec. 31, 2018
Federal Home Loan Banks [Abstract]
Loans pledged as collateral to the FHLB	$ 139,400	$ 140,000
FHLB stock owned	983	982
Carrying value of loans pledged as collateral to the FHLB	0	442,600
Availability under the line of credit with the FRB	$ 344,700	$ 335,800

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2. Investment Securities (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	$ 38,661	$ 13,531
Less than 12 months, unrealized losses	387	151
12 months or more, fair value	12,502	44,420
12 months or more, unrealized losses	351	1,243
Total, fair value	51,163	57,951
Total, unrealized losses	738	1,394
Mortgage-backed securities
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	28,395	6,932
Less than 12 months, unrealized losses	177	56
12 months or more, fair value	6,351	17,670
12 months or more, unrealized losses	50	502
Total, fair value	34,746	24,602
Total, unrealized losses	227	558
U.S. Government sponsored enterprises
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	2,899	1,784
Less than 12 months, unrealized losses	10	69
12 months or more, fair value	6,151	25,172
12 months or more, unrealized losses	301	724
Total, fair value	9,050	26,956
Total, unrealized losses	311	793
State and political subdivisions
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	7,367	4,815
Less than 12 months, unrealized losses	200	26
12 months or more, fair value	0	1,578
12 months or more, unrealized losses	0	17
Total, fair value	7,367	6,393
Total, unrealized losses	$ 200	$ 43

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18. Quarterly Data (Tables)

12 Months Ended

Dec. 31, 2019

Quarterly Financial Information Disclosure [Abstract]

Schedule of quarterly financial information

(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First		Second		Third		Fourth
Total interest income	$	12,183		12,375		12,430		12,613	$	10,759		11,059		11,608		11,924
Total interest expense		757		781		994		1,225		467		513		557		609
Net interest income		11,426		11,594		11,436		11,388		10,292		10,546		11,051		11,315
Provision for loan losses		178		77		422		186		31		231		110		418
Other income		4,120		4,385		4,708		4,526		3,736		4,016		3,915		4,499
Other expense		10,916		11,244		11,267		12,090		10,042		10,560		10,702		11,270
Income before income taxes		4,452		4,658		4,455		3,638		3,955		3,771		4,154		4,126
Income tax expense		785		845		834		672		652		595		687		690
Net earnings		3,667		3,813		3,621		2,966		3,303		3,176		3,467		3,436
Basic net earnings per share	$	0.61		0.64		0.62		0.50	$	0.55		0.53		0.58		0.57
Diluted net earnings per share	$	0.61		0.64		0.61		0.50	$	0.55		0.53		0.57		0.57

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2. Investment Securities (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Investments, Debt and Equity Securities [Abstract]
Unrealized losses in the investment securites portfolio relating to debt securities	$ 738	$ 1,400	$ 609
Proceeds from sales of investment securities available for sale	20,700	36,000	0
Gains on sales of available for sale securities	226	15	0
Securities pledged to secure public deposits	$ 66,000	$ 93,000	$ 105,600

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2. Investment Securities (Tables)

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

Investment securities available for sale

Investment securities available for sale at December 31, 2019 and 2018 are as follows:

(Dollars in thousands)

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

(Dollars in thousands)

	December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	52,145		516		558		52,103
U.S. Government
sponsored enterprises		35,356		71		793		34,634
State and political subdivisions		105,545		2,089		43		107,591
Trust preferred securities		250		—		—		250
Total	$	193,296		2,676		1,394		194,578

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

	December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	28,395		177		6,351		50		34,746		227
U.S. Government
sponsored enterprises		2,899		10		6,151		301		9,050		311
State and political subdivisions		7,367		200		—		—		7,367		200
Total	$	38,661		387		12,502		351		51,163		738

              (Dollars in thousands) 

	December 31, 2018
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	6,932		56		17,670		502		24,602		558
U.S. Government
sponsored enterprises		1,784		69		25,172		724		26,956		793
State and political subdivisions		4,815		26		1,578		17		6,393		43
Total	$	13,531		151		44,420		1,243		57,951		1,394

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

December 31, 2019

(Dollars in thousands)

	Amortized Cost		Estimated Fair Value
Due within one year	$	5,490		5,465
Due from one to five years		56,399		58,315
Due from five to ten years		47,717		49,293
Due after ten years		3,595		3,717
Mortgage-backed securities		77,812		78,956
Total	$	191,013		195,746

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

(Dollars in thousands)

	December 31, 2019
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	78,956		—		78,956		—
U.S. Government
sponsored enterprises	$	28,397		—		28,397		—
State and political subdivisions	$	88,143		—		88,143		—
Trust preferred securities	$	250		—		—		250

(Dollars in thousands)

	December 31, 2018
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	52,103		—		52,103		—
U.S. Government
sponsored enterprises	$	34,634		—		34,634		—
State and political subdivisions	$	107,591		—		107,591		—
Trust preferred securities	$	250		—		—		250

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	$	250
Change in book value		-
Change in gain/(loss) realized and unrealized		-
Purchases/(sales and calls)		-
Transfers in and/or (out) of Level 3		-
Balance, end of period	$	250
Change in unrealized gain/(loss) for assets still held in Level 3	$	-

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13. Regulatory Matters

12 Months Ended

Dec. 31, 2019

Regulatory Matters

Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of capital in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for loan losses, up to 1.25% of risk-weighted assets and other adjustments. Management believes, as of December 31, 2019, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2019, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.

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

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

(Dollars in thousands)

	Actual				Minimum Regulatory Capital Ratio				Minimum Ratio plus Capital Conservation Buffer
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2019:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	152,156	16.08	%		75,710	8.00	%		N/A	N/A
Bank	$	149,266	15.79	%		75,602	8.00	%		99,228	10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	145,476	15.37	%		56,783	6.00	%		N/A	N/A
Bank	$	142,586	15.09	%		56,702	6.00	%		80,328	8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	145,476	11.91	%		48,872	4.00	%		N/A	N/A
Bank	$	142,586	11.61	%		49,106	4.00	%		49,106	4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	130,476	13.79	%		42,587	4.50	%		N/A	N/A
Bank	$	142,586	15.09	%		42,526	4.50	%		66,152	7.00	%

(Dollars in thousands)

	Actual				Minimum Regulatory Capital Ratio				Minimum Ratio plus Capital Conservation Buffer
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of December 31, 2018:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	149,076	16.15	%		73,830	8.00	%		N/A	N/A
Bank	$	146,640	15.91	%		73,717	8.00	%		91,041	9.88	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	142,631	15.46	%		55,372	6.00	%		N/A	N/A
Bank	$	140,195	15.21	%		55,288	6.00	%		72,612	7.88	%
Tier 1 Capital (to Average Assets)
Consolidated	$	142,631	13.05	%		43,723	4.00	%		N/A	N/A
Bank	$	140,195	12.76	%		43,950	4.00	%		43,950	4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	122,631	13.29	%		41,529	4.50	%		N/A	N/A
Bank	$	140,195	15.21	%		41,466	4.50	%		58,790	6.38	%

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

12 Months Ended

Dec. 31, 2019

Condensed Financial Information Disclosure [Abstract]

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

Balance Sheets

December 31, 2019 and 2018

(Dollars in thousands)

Assets	2019		2018
Cash	$	1,187		689
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		146,230		141,181
Investment in PEBK Capital Trust II		619		619
Investment securities available for sale		250		250
Other assets		476		533
Total assets	$	149,762		144,272
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,619		20,619
Liabilities		23		36
Shareholders' equity		134,120		123,617
Total liabilities and shareholders' equity	$	149,762		144,272

Statements of Earnings

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

Revenues:	2019		2018		2017
Interest and dividend income	$	12,850		4,544		1,839
Total revenues		12,850		4,544		1,839
Expenses:
Interest		844		790		590
Other operating expenses		629		678		725
Total expenses		1,473		1,468		1,315
Income before income tax benefit and equity in
undistributed earnings of subsidiaries		11,377		3,076		524
Income tax benefit		299		299		434
Income before equity in undistributed
earnings of subsidiaries		11,676		3,375		958
Equity in undistributed earnings of subsidiaries		2,391		10,007		9,310
Net earnings	$	14,067		13,382		10,268

Statements of Cash Flows

For the Years Ended December 31, 2019, 2018 and 2017

(Dollars in thousands)

	2019			2018			2017
Cash flows from operating activities:
Net earnings	$	14,067			13,382			10,268
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(2,391	)		(10,007	)		(9,310	)
Change in:
Other assets		57			13			(272	)
Other liabilities		(13	)		6			5
Net cash provided by operating activities		11,720			3,394			691
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities
available for sale		—			—			500
Net cash provided by investing activities		—			—			500
Cash flows from financing activities:
Repayment of junior subordinated debentures		(5,000	)		—			—
Cash dividends paid on common stock		(3,939	)		(3,133	)		(2,629	)
Cash in lieu stock dividend		—			—			(6	)
Stock repurchase		(2,490	)		—			—
Proceeds from exercise of restricted stock units		207			—			915
Net cash used by financing activities		(11,222	)		(3,133	)		(1,720	)
Net change in cash		498			261			(529	)
Cash at beginning of year		689			428			957
Cash at end of year	$	1,187			689			428
Noncash investing and financing activities:		—
Change in unrealized gain on investment securities
available for sale, net	$	2,658			(2,607	)		(1	)