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, 2020

000-27205

(Commission File No.)

Peoples Bancorp of North Carolina, Inc.

(Exact Name of Registrant as Specified in Its Charter)

North Carolina (State or Other Jurisdiction of Incorporation) 56-2132396 (IRS Employer Identification No.)

518 West C Street, Newton, North Carolina	28658
(Address of Principal Executive Offices)	(Zip Code)

(828) 464-5620

(Registrant’s Telephone Number, Including Area Code)

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

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

Common Stock, no par value

(title of class)

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

Yes ☐    No  ☒

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

Yes ☐    No  ☒

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

Yes ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes ☒    No  ☐

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

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

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

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

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

Yes ☒ No  ☐

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $77,592,691 based on the closing price of such common stock on June 30, 2020, which was $17.67 per share.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

5,787,504 shares of common stock, outstanding at February 28, 2021.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2020 (the “Annual Report”), which will be included as Appendix A to the Proxy Statement for the 2021 Annual Meeting of Shareholders, are incorporated by reference into Part II and included as Exhibit 13 to this Form 10-K.

Portions of the Company’s definitive Proxy Statement for the 2021 Annual Meeting of Shareholders of Peoples Bancorp of North Carolina, Inc. to be held on May 6, 2021 (the “Proxy Statement”) to be filed pursuant to Regulation 14A, are incorporated by reference into Part III. The Proxy Statement will be filed on or before April 30, 2021.

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.

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PEOPLES BANCORP OF NORTH CAROLINA, INC.

FORM 10-K CROSS REFERENCE INDEX

	2020 Form 10-K	Notice of 2021 Annual Meeting, Proxy Statement and Annual Report
	Page	Page
PART I
Item 1 - Business	4 - 15	N/A
Item 1A - Risk Factors	15 - 26	N/A
Item 1B - Unresolved Staff Comments	27	N/A
Item 2 - Properties	27	N/A
Item 3 - Legal Proceedings	28	N/A
Item 4 - Mine Safety Disclosures	28	N/A
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities	28 - 30	N/A
Item 6 - Selected Financial Data	30	A-3
Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations	31	A-4 - A-25
Item 7A - Quantitative and Qualitative Disclosures About Market Risk	31	A-24- A-25
Item 8 - Financial Statements and Supplementary Data	31	A-26 - A-71
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure	31	N/A
Item 9A - Controls and Procedures	31- 32	N/A
Item 9B - Other Information	32	N/A
PART III
Item 10 - Directors and Executive Officers and Corporate Governance	32	15 and A-72
Item 11 - Executive Compensation	32	17- 27
Item 12 - Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters	33	8-10
Item 13 - Certain Relationships and Related Transactions
and Director Independence	33	10 and 29
Item 14 - Principal Accountant Fees and Services	33	34
PART IV
Item 15 - Exhibits and Financial Statement Schedules	34 - 37	N/A
Signatures	38	N/A

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PART I

ITEM 1.  BUSINESS

General 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”, “we”, “our” or “us” in this Annual Report on Form 10-K. Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 18 banking offices, as of December 31, 2020, 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 and Denver, North Carolina. The Company’s fiscal year ends December 31. At December 31, 2020, the Company had total assets of $1.4 billion, net loans of $938.7 million, deposits of $1.2 billion, total securities of $249.4 million, and shareholders’ equity of $139.9 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 through 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-25 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, 2020, the Company employed 290 full-time employees and 27 part-time employees, which equated to 307 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2020, 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 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 and Competition

The Bank’s primary market consists of the communities in an approximate 50-mile radius around its headquarters office in Newton, North Carolina. This area includes Catawba County, Alexander County, Lincoln County, Iredell County and portions of northeast Gaston County, North Carolina. The Bank 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, Atrium Health Lincoln, 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).

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, 2020 comparative data, the Bank had 20.32% of the deposits in Catawba County, placing it second in deposit size among a total of 11 banks with branch offices in Catawba County; 16.20% of the deposits in Lincoln County, placing it second in deposit size among a total of ten banks with branch offices in Lincoln County; and 14.01% of the deposits in Alexander County, placing it fourth 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.

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

Lending Policies and Procedures

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

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

The Bank’s legal lending limit is set by state statutes and is monitored by the FDIC and the Commissioner. Legal lending authority is held by the Board of Directors. The legal lending limit may not exceed 15% of the Bank's capital or, if greater, the percentage permitted for national banks, if loans are not fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the aggregate outstanding loan amount or up to 10% of the Bank's capital or, if greater the percentage permitted for national banks, if loans are fully secured (as described above) by readily marketable collateral. The underwriting standards and loan origination procedures include officer lending limits, which are approved by the Board of Directors. The President/Chief Executive Officer of the Bank has loan authority of up to the legal lending limit of the Bank. The individual secured/unsecured lending authority of the Chief Credit Officer/Executive Vice President is set at $4 million.

It is the policy of the Bank to ensure that its Board of Directors is fully apprised of the status and critical factors affecting the quality and performance of the loan portfolio. These factors include, but are not limited to: (1) credit underwriting policies and procedures; (2) results of loan reviews and loan audits; and, (3) Credit concentrations (single borrowers and specific industries).

               Management provides the Bank's Board of Directors with the loan portfolio information as described below:

Monthly:

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

● Loan Quality/Yield/Growth/Trend Report

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

● Commercial Loan Delinquency

● New Loans - $250,000 and Greater

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

● Outstanding Commitments - $250,000 and greater

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

● Underwriting Exception Report (Commercial, and Consumer and Mortgage)

● Documentation Exception Report (Commercial and Consumer)

Quarterly:

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

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

● Status of Other Real Estate Owned

● Nonaccrual

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● Impaired Loan Report

● Letters of Credit Outstanding

● Portfolio Status Report - Detailed analytical report summarizing the composition of the bank's loan portfolio

● Portfolio Stress Tests

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

● Documentation Exception Quarterly Trend Report

● Matured Home Equity Loan Report 

Semi-annually:

The following reports are submitted to the Board of Directors for review and approval on a semi-annual basis:

● Participation Status Report

Annually:

On an annual basis, the Board of Directors:

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

● Reviews findings of the annual independent loan review of borrowing relationships of $1,000,000 and greater as well as a sample of commercial relationships with exposures below $1.0 million prepared by an independent loan review company engaged by the Bank

● Receives information from management detailing all new committed borrowing relationships exceeding $3,000,000 and is informed during the year if a borrowing relationship exceeds $2,500,000

Investment Policies and Procedures

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

The Bank’s specific investment objectives are as follows:

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

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

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

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

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

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

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

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

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Human Capital Management

              At December 31, 2020, the Company employed 290 full-time employees and 27 part-time employees, which equated to 307 full-time equivalent employees. We are not a party to any collective bargaining agreements, and we consider our employee relations to be good.

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

Our Core Values

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Employees – We are informed, encouraged, and committed

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Integrity – We are fair and truthful

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Exceptional Customer Service – We surpass our customers’ expectation

●

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

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Progressive and Positive – We see change as an opportunity

●

Our brand story

Our Bank Promise, Vision, and Mission

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

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

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

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

             We also seek to design careers with our organization that are fulfilling ones, with competitive compensation and benefits alongside a positive work-life balance. We dedicate resources to fostering professional and personal growth with continuing education, on-the-job training and development programs. We have worked closely with our employees during the COVID-19 pandemic to ensure their safety and their ability to take care of their family. Health safety protocols were established, remote work arrangements were facilitated and considerations were provided for family needs, such as child care, all without any employee layoffs or furloughs.

 

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

●

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

●

increased capital and liquidity requirements;

●

increased regulatory examination fees; and

●

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

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

 

The Economic Growth Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and provides for an alternative capital rule which financial institutions and their holding companies with total consolidated assets of less than $10 billion may elect to utilize. The Economic Growth Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10%, 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 (see discussion on Basel III standards under the heading “Capital Adequacy” below.

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

Capital Adequacy. At December 31, 2020, the Bank exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 10.04%, common equity Tier 1 risk-based capital ratio of 14.85%, Tier 1 risk-based capital ratio of 14.85% and total risk-based capital ratio of 15.85%. At December 31, 2020, the Company also exceeded each of its capital requirements with a Tier 1 leverage capital ratio of 10.24%, common equity Tier 1 risk-based capital ratio of 13.56%, Tier 1 risk-based capital ratio of 15.07% and total risk-based capital ratio of 16.07%.

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:

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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;

●

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

●

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%.

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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.

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  We recognized approximately $263,000, $119,000, and $328,000 in FDIC insurance expense in 2020, 2019, and 2018, respectively. In November 2018, the FDIC announced that the Deposit Insurance Fund (“DIF”) reserve ratio exceeded the statutory minimum of 1.35% as of September 30, 2018. Among other things, this resulted in the FDIC awarding assessment credits for banks with less than $10 billion in total assets that had contributed to the DIF in prior years. We were notified in January 2019 that we had received approximately $272,000 in credits that would be available to offset deposit insurance assessments once the DIF reached 1.38%. The DIF reached 1.38% as of June 30, 2019 and therefore, the FDIC began to apply the Bank’s credits to our quarterly deposit insurance assessments beginning with the second quarter of 2019. The Bank’s credits were fully utilized in the first quarter of 2020.

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

 

Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% (or 20 basis points) of the Bank’s total assets at the end of each calendar year, plus 4.25% of its outstanding advances (borrowings) from the FHLB of Atlanta under the new activity-based stock ownership requirement. On December 31, 2020, the Bank was in compliance with this requirement.

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

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

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

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

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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, 2020, this limit was $23.6 million. This limit is increased by an additional 10% of the Bank’s total equity capital, or $39.3 million as of December 31, 2020, for loans and extensions of credit that are fully secured by readily marketable collateral.

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

 

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

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

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

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

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

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

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

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

●The creation of an independent accounting oversight board;

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Available Information

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

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

ITEM 1A.  RISK FACTORS

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

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RISK FACTORS RELATED TO OUR BUSINESS

Our operations, business, and financial condition have been and may continue to be impacted by the COVID-19 pandemic.

The COVID-19 outbreak which evolved into a worldwide pandemic has had a myriad of adverse impacts upon society as a whole. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, Federal, State and Local governments have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forgo their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. The initial restrictions and other consequences of the pandemic resulted in significant adverse effects for many different types of businesses, including, among others, those in the retail sales, travel, hospitality and food and beverage industries, and resulted in a significant number of layoffs and furloughs of employees nationwide and in the markets in which we operate. Restrictions have been at least partially lifted nationally and within the Company's operating footprint with some level of economic recovery resulting. While progress towards vaccination has been made, an increase in virus spread or infection rates, or the emergence of new variants of the virus could result in restrictions being re-implemented with further negative impact to economic activity.

 

The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, Federal Reserve action to lower the Federal Funds rate, may negatively affect our interest income and, therefore, earnings, financial condition and results of operations. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

●employees contracting COVID-19;

●unavailability of key personnel necessary to conduct our business activities;

●disruption resulting from having a significant percentage of employees work remotely;

●declines in demand for loans and other banking services;

●reduced consumer spending due to job losses or other impacts of the virus;

●adverse conditions in financial markets may have a negative impact on our investment portfolio;

●decline in credit quality of our loan portfolio leading to increased provisions for loan losses;

●declines in the value of loan collateral, including residential and commercial real estate;

●decline in the liquidity of borrowers and guarantors impairing their ability to honor financial commitments; and

●actions of governmental entities to limit business activities.

Furthermore, we rely upon our third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide us with these services, it could negatively impact our ability to serve our customers.

Unfavorable economic conditions could adversely affect our business.

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

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

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

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

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

 

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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, 2020, commercial real estate loans comprised approximately 35% 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, 2020, commercial loans comprised approximately 17% of the Bank’s total loan portfolio, including $75.8 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.

●

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, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

●

Single-family residential loans. Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of December 31, 2020, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 3% of the Bank’s total loan portfolio.

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.

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

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

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

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

 

In addition, the measure of our allowance for loan losses is dependent on the adoption of new accounting standards. The FASB issued an Accounting Standards Update related to CECL, the new credit impairment model, which 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.

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.

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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).

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

 The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $122.0 million at December 31, 2020. These balances represent 9.78% of total deposits and securities sold under agreements to repurchase combined at December 31, 2020. Total deposits for the five largest relationships referenced above amounted to $108.9 million, or 8.92% of total deposits at December 31, 2020. Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $13.1 million, or 49.86% of total securities sold under agreements to repurchase at December 31, 2020. Loss of one or more of these deposit relationships could have a negative impact on the Bank’s liquidity position.

 

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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.

21

The soundness of other financial institutions could adversely affect us.

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

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

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

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

We may be adversely impacted by the transition from LIBOR as a reference rate.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

 

We have a significant number of loans and borrowings with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk. Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

●the ability to expand our market position;

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

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

●customer satisfaction with our level of service; and

●industry and general economic trends.

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

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

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

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

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

 

Negative publicity could damage our reputation.

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

Loss of key personnel could adversely impact results. The success of the Bank has been and will continue to be greatly influenced by the ability to retain the services of existing senior management. The Bank has benefited from consistency within its senior management team, with two of its top three executives averaging more than 20 years of service with the Bank. The unexpected loss of the services of any of the key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on the business and financial results of the Bank.

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

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

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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 28. 

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

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

From time to time the 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.

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

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

●            

general or local economic conditions;

●            

environmental cleanup liability;

●            

neighborhood values;

●            

interest rates;

●            

real estate tax rates;

●            

operating expenses of the mortgaged properties;

●            

supply of and demand for rental units or properties;

●            

ability to obtain and maintain adequate occupancy of the properties;

●            

zoning laws;

●            

governmental rules, regulations and fiscal policies; and

●            

acts of God.

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

 

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

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

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

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.

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

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

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

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

RISKS RELATED TO THE COMPANY’S STOCK

Our stock price can be volatile.

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

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

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

Our common stock is not FDIC insured.

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

We may reduce or eliminate dividends on our common stock.

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

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

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

26

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

At December 31, 2020, the Company and the Bank conducted their business from the headquarters office in Newton, North Carolina and its 18 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 and Denver North Carolina. The following table sets forth certain information regarding the Bank’s properties at December 31, 2020.

Owned Corporate Office 518 West C Street Newton, North Carolina 28658 420 West A Street Newton, North Carolina 28658 213 1st Street, West Conover, North Carolina 28613 3261 East Main Street Claremont, North Carolina 28610 6125 Highway 16 South Denver, North Carolina 28037 5153 N.C. Highway 90E Hiddenite, North Carolina 28636 200 Island Ford Road Maiden, North Carolina 28650 3310 Springs Road NE Hickory, North Carolina 28601 142 South Highway 16 Denver, North Carolina 28037 106 North Main Street Catawba, North Carolina 28609 2050 Catawba Valley Boulevard Hickory, North Carolina 28601 1074 River Highway Mooresville, North Carolina 28117 1910 East Main Street Lincolnton, North Carolina 28092 760 Highway 27 West Lincolnton, North Carolina 28092 Leased 1333 2nd Street NE Hickory, North Carolina 28601 6350 South Boulevard Charlotte, North Carolina 28217 3752/3754 Highway 16 North Denver, North Carolina 28037 9624-I Bailey Road Cornelius, North Carolina 28031 4000 Westchase Boulevard Suite 100 Raleigh, North Carolina 27607 1117 Parkside Main Street Cary, North Carolina 27519 13840 Ballantyne Corporate Place Suite 150 Charlotte, North Carolina 28277

27

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 5, 2021, the Company had 675 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 $26.69 on March 5, 2021.

28

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, 2020.

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	12/31/15	12/31/16	12/31/17	12/31/18	12/31/19	12/31/20
Peoples Bancorp of North Carolina, Inc.	100.00	132.06	180.73	146.57	201.50	146.15
NASDAQ Composite Index	100.00	108.87	141.13	137.12	187.44	271.64
SNL Southeast Bank Index	100.00	132.75	164.21	135.67	191.06	172.07

Source: S&P Global Market Intelligence

© 2021

29

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, 2020	1,010	$28.62	-	$3,000,000
February 1 - 29, 2020	262	28.39	126,800	$3,000,000
March 1 - 31, 2020	1,126	24.82	-	$1,178
April 1 - 30, 2020	1,608	18.97	-	$1,178
May 1 - 31, 2020	423	17.41	-	$1,178
June 1 - 30, 2020	561	18.08	-	$1,178
July 1 - 31, 2020	1,796	17.66	-	$1,178
August 1 - 31, 2020	420	16.90	-	$1,178
September 1 - 30, 2020	481	17.14	-	$1,178
October 1 - 31, 2020	1,717	18.62	-	$1,178
November 1 - 30, 2020	408	18.92	-	$1,178
December 1 - 31, 2020	338	25.70	-	$1,178
Total	10,150(1)	$20.46	126,800

(1) The Company purchased 10,150 shares on the open market in the year ended December 31, 2020 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 January 2020.

The above table excludes 2,088 shares of  common stock purchased by the Bank in the open market (at an average price of $24.88 per share) and awarded to employees in the fiscal year ended December 31, 2020 pursuant to the Service Recognition Program.  

RECENT SALES OF UNREGISTERED SECURITIES

On May 7, 2020, the Company awarded 7,635 non-transferable restricted stock units to employees pursuant to the 2020 Omnibus Stock Ownership and Long Term Incentive Plan; each restricted stock unit is subject to time-based vesting restrictions and once vested will be convertible  into one share of the Company's common stock. On February 18, 2020, the Company issued an aggregate of 2,004 shares of common stock to employees upon the vesting of restricted stock units previously awarded under the 2009 Omnibus Stock Ownership and Long Term Incentive Plan. On December 23, 2020, the Bank awarded an aggregate of 2,088 shares of common stock to employees pursuant to the Service Recognition Plan. The awards and stock issuances were compensatory in nature without the cost to the employees and were made pursuant to exemptions from registration under the Securities Act of 1933, including Regulation D.

30

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.

 

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-24 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-26 through A-71 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-26 through A-71 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, 2020 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

31

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.

 

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, 2020. 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, 2020.

 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, 2020, and audited the Company’s effectiveness of internal control over financial reporting as of December 31, 2020, 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.

32

ITEM 12.

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

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

The following table presents the number of shares of Company common stock to be issued upon the exercise of outstanding options, warrants and rights; the weighted-average price of the outstanding options, warrants and rights and the number of options, warrants and rights remaining that may be issued under the Company’s Omnibus Stock and Long Term Incentive Plans. The Company's 2020 Omnibus Stock Ownership and Long Term Incentive Plan is 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), (5)	Weighted-average exercise price of outstanding options, warrants and rights (6)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)	(c)
Equity compensation plans approved by security holders	25,868	$-	292,365
Equity compensation plans not approved by security holders	-	-	-
Total	25,868	$-	292,365

(1) Includes 5,104 restricted stock units granted on February 18, 2016 (adjusted for the 10% stock dividend paid December 15, 2017) under the 2009 Omnibus and Long Term Incentive Plan. These restricted stock grants vested on February 18, 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 2009 Omnibus and Long Term Incentive Plan . These restricted stock grants vested on March 1, 2021.

(3) Includes 3,725 restricted stock units granted on January 24, 2018 under the 2009 Omnibus and Long Term Incentive Plan . These restricted stock grants vest on January 24, 2022.

(4) Includes 5,290 restricted stock units granted on February 21, 2019 under the  2009 Omnibus and Long Term Incentive Plan . These restricted stock grants vest on February 21, 2023.

(5) Includes 7,635 restricted stock units granted on May 7, 2020 under the  2020 Omnibus and Long Term Incentive Plan . These restricted stock grants vest on May 7, 2024.

(6) Grants of restricted stock units under the 2009 and 2020 Omnibus and Long Term Incentive Plan do not have an exercise price.

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

See the section captioned “Proposal 3 - Ratification of Selection of Independent Registered Public Accounting Firm” contained in the Proxy Statement, which section is incorporated herein by reference.

33

PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a)1. 

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

(a) 

Reports of Independent Registered Public Accounting Firm

(b) 

Consolidated Balance Sheets as of December 31, 2020 and 2019

(c) 

Consolidated Statements of Earnings for the Years Ended December 31, 2020, 2019 and 2018

(d) 

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018

(e) 

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018

(f) 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018

(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 Exchange Act of 1934, incorporated by reference to Exhibit 4(ii) to the Form 10-K/A filed with the Securities and Exchange Commission on March 16, 2020

34

Exhibit (10)(i)

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

Exhibit (10)(ii)

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

Exhibit (10)(iii)

Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated December 18, 2008, incorporated by reference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

Exhibit (10)(iv)

Employment Agreement dated January 22, 2015 between the Registrant and William D. Cable, Sr., incorporated by reference to Exhibit (10)(c) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015

Exhibit (10)(v)

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

Exhibit (10)(vi)

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

Exhibit (10)(vii)

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

Exhibit (10)(viii)

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

Exhibit (10)(ix)

Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit (10)(h) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002

Exhibit (10)(x)

Rabbi Trust for the Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit (10)(i) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002

Exhibit (10)(xi)

Description of Service Recognition Program maintained by Peoples Bank, incorporated by reference to Exhibit (10)(i) to the Form 10-K filed with the Securities and Exchange Commission on March 27, 2003

Exhibit (10)(xii)

Capital Securities Purchase Agreement dated as of June 26, 2006, by and among the Registrant, PEBK Capital Trust II and Bear, Sterns Securities Corp., incorporated by reference to Exhibit (10)(j) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006

35

Exhibit (10)(xiii)

Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of June 28, 2006, incorporated by reference to Exhibit (10)(k) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006

Exhibit (10)(xiv)

Guarantee Agreement of the Registrant dated as of June 28, 2006, incorporated by reference to Exhibit (10)(l) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006

Exhibit (10)(xv)

Indenture, dated as of June 28, 2006, by and between the Registrant and LaSalle Bank National Association, as Trustee, relating to Junior Subordinated Debt Securities Due September 15, 2036, incorporated by reference to Exhibit (10)(m) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006

Exhibit (10)(xvi)

Form of Amended and Restated Director Supplemental Retirement Agreement between Peoples Bank and Directors Robert C. Abernethy, James S. Abernethy, Douglas S. Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman, Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit (10)(n) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008

Exhibit (10)(xvii)

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

Exhibit (10)(xviii)

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

Exhibit (10)(xix)

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

Exhibit (10)(xx)

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

Exhibit (10)(xxi)

2020 Omnibus Stock Ownership and Long Term Incentive Plan

Exhibit (13)

2020 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

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

36

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, 2020, 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.

37

SIGNATURES

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

PEOPLES BANCORP OF NORTH CAROLINA, INC.
(Registrant)
By:	/s/ Lance A. Sellers
Lance A. Sellers
President and Chief Executive Officer
Date: March 19, 2021

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 19, 2021
Lance A. Sellers	(Principal Executive Officer)
/s/ James S. Abernethy	Director	March 19, 2021
James S. Abernethy
/s/ Robert C. Abernethy	Chairman of the Board and Director	March 19, 2021
Robert C. Abernethy
/s/ Douglas S. Howard	Director	March 19, 2021
Douglas S. Howard
/s/ Jeffrey N. Hooper	Executive Vice President and Chief	March 19, 2021
Jeffrey N. Hooper	Financial Officer (Principal Financial
	and Principal Accounting Officer)
/s/ John W. Lineberger, Jr.	Director	March 19, 2021
John W. Lineberger, Jr.
/s/ Gary E. Matthews	Director	March 19, 2021
Gary E. Matthews
/s/ Billy L. Price, Jr., M.D.	Director	March 19, 2021
Billy L. Price, Jr., M.D.
/s/ Larry E. Robinson	Director	March 19, 2021
Larry E. Robinson
/s/ William Gregory Terry	Director	March 19, 2021
William Gregory Terry
/s/ Dan Ray Timmerman, Sr.	Director	March 19, 2021
Dan Ray Timmerman, Sr.
/s/ Benjamin I. Zachary	Director	March 19, 2021
Benjamin I. Zachary

38

EX-10.XXI

EXHIBIT (10)(xxi)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

2020 OMNIBUS STOCK OWNERSHIP AND

LONG TERM INCENTIVE PLAN

May 7, 2020

THIS IS THE 2020 OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN (“Plan”) of Peoples Bancorp of North Carolina, Inc. (the “Company”), a North Carolina corporation with its principal office in Newton, Catawba County, North Carolina, under which Incentive Stock Options and Non-Qualified Options to acquire Shares of Common Stock, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, and/or Performance Units may be granted from time to time to Eligible Directors and Eligible Employees of the Company and of any of its Subsidiaries, subject to the following provisions.

ARTICLE I

DEFINITIONS

The following terms shall have the meanings set forth below. Additional terms defined in this Plan shall have the meanings ascribed to them when first used herein.

Award. An award, grant or issuance of any of the Rights available under this Plan.

Award Agreement. The written agreement between the Company and/or the Bank and the Grantee that evidences and sets out the terms and conditions of an Award, subject to the provisions of this Plan.

Bank. Peoples Bank, Newton, North Carolina.

Board. The Board of Directors of Peoples Bancorp of North Carolina, Inc.

Change in Control. Any one of the following corporate events: (i) a Change of Ownership; (ii) a Change in Effective Control; or (iii) a Change of Asset Ownership; in each case, as defined herein and as further defined and interpreted in Section 409A.

(i) “Change of Ownership” shall mean the date one person (or group) acquires ownership of stock of the Company that, together with stock previously held, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; provided that such person (or group) did not previously own 50% or more of the value or voting power of the stock of the Company.

(ii) “Change in Effective Control” means the date either (A) one person (or group) acquires (or has acquired during the preceding 12 months ending on the date of the most recent acquisition) ownership of stock of the Company possessing 30% or more of the total voting power of the Company stock or (B) a majority of the board of directors of the Company is replaced during any 12 month period by directors whose election is not endorsed by a majority of the members of the board of directors of the Company prior to the date of such appointment or election.

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(iii) “Change of Asset Ownership” means the date one person (or group) acquires (or has acquired during the preceding 12 months ending on the date of the most recent acquisition) assets from the Company that have a total gross fair market value that is equal to or exceeds 40% of the total gross fair market value of all the Company’s assets immediately prior to such acquisition.

(iv) For purposes of determining whether the Company has undergone a Change in Control under the Plan, the term “Company” shall include any corporation that is a majority shareholder of the Company within the meaning of Section 409A (i.e., owning more than 50% of the total fair market value and total voting power of the Company).

Code. The Internal Revenue Code of 1986, as amended. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.

Committee. The Compensation Committee of the Board, which shall be composed solely of two or more members of the Board who are “non-employee directors” as described in Rule 16(b)(3) of the Rules and Regulations under the Securities Exchange Act of 1934, as amended.

Common Stock. The Common Stock, no par value, of the Company.

Corporate Transaction. Any one or more of the following transactions:

(i) 

a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii)

the sale, transfer, or other disposition of all or substantially all of the assets of the Company (including without limitation the capital stock of the Company’s Subsidiaries);

(iii)

approval by the Company’s shareholders of any plan or proposal for the complete liquidation or dissolution of the Company;

(iv)

any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty (50%) percent of the total combined voting power of the Company’s outstanding securities are transferred to a person or entity or persons or entities different from those that held such securities immediately prior to such merger; or

(v)

acquisition by any person or entity or related group of persons or entities (other than the Company or a Company-sponsored employee benefit plan) of beneficiary ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty (50%) percent of the total combined voting power of the Company’s outstanding securities (whether or not in a transaction also constituting a Change in Control).

Death. The date and time of death of an Eligible Director or Eligible Employee who has received Rights, as established by the relevant death certificate.

Disability. The date on which an Eligible Director or Eligible Employee who has received Rights is:

(i) 

unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or

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(ii) 

by reason of any medically determinable physical or mental impairment (which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months), receiving income replacement benefits for a period of 3 or more months under an accident and health plan covering employees of the Company and/or the Bank, or

(iii) 

determined to be disabled by the Social Security Administration.

Effective Date. Pursuant to the action of the Board adopting the Plan, the date as of which this Plan is effective is the date it is approved by the Company’s shareholders.

Eligible Directors. Those individuals who are duly elected directors of the Company or any Subsidiary who are serving in such capacity and who have been selected by the Committee as a person to whom a Right or Rights shall be granted under the Plan.

Eligible Employees. Those individuals who meet the following eligibility requirements:

(i) 

Such individual must be a full time employee of the Company or a Subsidiary. For this purpose, an individual shall be considered to be an “employee” only if there exists between the Company or a Subsidiary and the individual the legal and bona fide relationship of employer and employee. In determining whether such relationship exists, the regulations of the United States Treasury Department relating to the determination of such relationship for the purpose of collection of income tax at the source on wages shall be applied. Notwithstanding the foregoing, for purposes of determining eligibility to receive ISOs, an Eligible Employee shall mean a full time employee of the Company or a parent or subsidiary corporation within the meaning of Section 424 of the Code.

(ii) 

If the Registration shall not have occurred, such individual must have such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the investment involved in the receipt and/or exercise of a Right.

(iii) 

Such individual, being otherwise an Eligible Employee under the foregoing items, shall have been selected by the Committee as a person to whom a Right or Rights shall be granted under the Plan.

Fair Market Value. With respect to the Company’s Common Stock, the market price per share of such Common Stock determined by the Committee, consistent with the requirements of Sections 409A and 422 of the Code and to the extent consistent therewith, determined as follows, as of the date specified in the context within which such term is used:

(i) 

When there is a public market for the Common Stock, the Fair Market Value shall be determined by (A) the closing price for a share on the market trading day on the date of the determination (and if a closing price was not reported on that date, then the arithmetic mean of the closing bid and asked prices at the close of the market on that date, and if these prices were not reported on that date, then the closing price on the last trading date on which a closing price was reported) on the stock exchange or national market system that is the primary market for the Shares; and (B) if the shares are not traded on such stock exchange or national market system, the arithmetic mean of the closing bid and asked prices for a share on the Nasdaq Stock Market for the day prior to the date of the determination (and if these prices were not reported on that date, then on the last date on which these prices were reported), in each case as reported in The Wall Street Journal or such other source that the Committee considers reliable in its exclusive discretion.

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(ii) 

If the Committee, in its exclusive discretion, determines that the foregoing methods do not apply or produce a reasonable valuation, then Fair Market Value shall be determined by an independent appraisal that satisfies the requirements of Code Section 401(a)(28)(C) as of a date within twelve (12) months before the date of the transaction for which the appraisal is used, e.g., the date of grant of an Award (the “Appraisal”). If the Committee, in its exclusive discretion, determines that the Appraisal does not reflect information available after the date of the Appraisal that may materially affect the value of the shares, then Fair Market Value shall be determined by a new Appraisal.

(iii) 

The Committee shall maintain a written record of its method of determining Fair Market Value.

Grantee. A person who receives or holds an Award under the Plan.

ISO. An “incentive stock option” as defined in Section 422 of the Code.

Non-Qualified Option. Any Option granted under Article III whether designated by the Committee as a Non-Qualified Option or otherwise, other than an Option designated by the Committee as an ISO, or any Option so designated but which, for any reason, fails to qualify as an ISO pursuant to Section 422 of the Code and the rules and regulations thereunder.

Option Agreement. The agreement between the Company and a Grantee with respect to Options granted to such Grantee, including such terms and provisions as are necessary or appropriate under Article III.

Options. ISOs and Non-Qualified Options are collectively referred to herein as “Options;” provided, however, whenever reference is specifically made only to ISOs or Non-Qualified Options, such reference shall be deemed to be made to the exclusion of the other.

Parent. A corporation, other than the Company, in an unbroken chain of corporations ending with the Company, if on the date of grant of an Award each corporation, other than the Company, owns stock possessing at least fifty (50%) percent of the total combined voting power of all classes of stock in one of the other corporations in the chain.

Performance Units. The Right of a Grantee to receive a combination of cash and Shares under such terms and conditions as described in Article V.

Performance Unit Agreement. The agreement between the Company and a Grantee with respect to the award of Performance Units to the Grantee, including such terms and conditions as are necessary or appropriate under Article V.

Plan Pool. A total of 300,000 shares of authorized but unissued Common Stock, as such number may be adjusted from time to time in accordance with the provisions of the Plan.

Registration. The registration by the Company under the 1933 Act and applicable state “Blue Sky” and securities laws of this Plan, the offering of Rights under this Plan, the offering of Shares under this Plan, and/or the Shares acquirable under this Plan.

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Related Entity. A corporation or other entity, other than the Company, to which the Grantee primarily provides services on the date of grant of an Award, and any corporation or other entity, other than the Company, in an unbroken chain of corporations or other entities beginning with the Company in which each corporation or other entity has a controlling interest in another corporation or other entity in the chain, ending with the corporation or other entity that has a controlling interest in the corporation or other entity to which the Grantee primarily provides services on the date of grant of an Award. For a corporation, a controlling interest means ownership of stock possessing at least fifty (50%) percent of total combined voting power of all classes of stock, or at least fifty (50%) percent of the total value of all classes of stock. For a partnership or limited liability company, a controlling interest means ownership of at least fifty (50%) percent of the profits interest or capital interest of the entity. In determining ownership, the rules of Treasury Regulation §§1.414(c)-3 and 1.414(c)-4 apply.

Related Entity Disposition. The sale, distribution, or other disposition by the Company, Parent, or a Subsidiary of all or substantially all of the interests of the Company, Parent, or a Subsidiary in any Related Entity effected by a sale, merger, consolidation, or other transaction involving that Related Entity, or the sale of all or substantially all of the assets of that Related Entity, other than any Related Entity Disposition to the Company, Parent, or a Subsidiary.

Restricted Stock. The Shares which a Grantee shall be entitled to receive under such terms and conditions as described in Article IV.

Restricted Stock Agreement. The agreement between the Company and a Grantee with respect to Rights to receive Restricted Stock, including such terms and provisions as are necessary or appropriate under Article IV.

Restricted Stock Units. The Right of a Grantee to receive cash and/or Shares under such terms and conditions as described in Article IV.

Restricted Stock Unit Agreement. The agreement between the Company and a Grantee with respect to Rights to receive the value of Shares, either in the form of cash or Shares, including such terms and provisions as are necessary or appropriate under Article IV.

Rights. The rights to exercise, purchase or receive the Options, Restricted Stock, Restricted Stock Units, Performance Units, and SARs described herein.

SAR. The Right of a Grantee to receive cash under such terms and conditions as described in Article VI.

SAR Agreement. The agreement between the Company and a Grantee with respect to the SAR awarded to the Grantee, including such terms and conditions as are necessary or appropriate under Article VI.

SEC. The Securities and Exchange Commission.

Section 409A. Internal Revenue Code Section 409A, including guidance and regulations issued thereunder.

Section 424 Corporate Transaction. The occurrence, in a single transaction or a series of related transactions, of any one or more of the following: (i) a sale or disposition of all or substantially all of the assets of the Company and its Subsidiaries; (ii) a sale or other disposition of more than fifty (50%) percent of the outstanding stock of the Company; (iii) the consummation of a merger, consolidation, or similar transaction after which the Company is not the surviving corporation; (iv) the consummation of a merger, consolidation, or similar transaction after which the Company is the surviving corporation but the shares outstanding immediately preceding the merger, consolidation, or similar transaction are converted or exchanged by reason of the transaction into other stock, property, or cash; or (v) a distribution by the Company (excluding an ordinary dividend or a stock split or stock dividend described in Treasury Regulation §1.424-1(e)(4)(v)).

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Separation from Service. When an employee, director, and contractor to the Company, Bank, and all Parents and Related Entities has a “separation from service” within the meaning of Section 409A, including when the Grantee dies, retires or has a termination of service in as explained in the following provisions:

(i) 

The employment relationship is treated as continuing intact while the Grantee is on military leave, sick leave, or other bona fide leave of absence, if the period of leave does not exceed six (6) months or, if longer, as long as the employee’s right to reemployment with the Company, Bank, a Parent or a Related Entity is provided by statute or contract. A leave of absence is bona fide only if there is a reasonable expectation that the employee will return to perform services for the Company, Bank, Parent, or Related Entity. If the period of leave exceeds six (6) months and the Grantee’s right to reemployment is not provided by statute or contract, the employment relationship is deemed to terminate on the first day immediately following the six (6) month period.

(ii) 

A director or contractor has a separation from service upon the expiration of the contract, and if there is more than one contract, all contracts, under which the director or contractor performs services as long as the expiration is a good faith and complete termination of the contractual relationship.

(iii) 

If a Grantee performs services in more than one capacity, the Grantee must separate from service in all capacities as an employee, director, and contractor. Notwithstanding the foregoing, if a Grantee provides services both as an employee and a director, the services provided as a director are not taken into account in determining whether the Grantee has a separation from service as an employee under a nonqualified deferred compensation plan in which the Grantee participates as an employee and that is not aggregated under Section 409A with any plan in which the Grantee participates as a director. In addition, if a Grantee provides services both as an employee and a director, the services provided as an employee are not taken into account in determining whether the Grantee has a separation from service as a director under a nonqualified deferred compensation plan in which the Grantee participates as a director and that is not aggregated under Section 409A with any plan in which the Grantee participates as an employee.

Share. A share of Common Stock.

Specified Employee. A “specified employee” as defined by Section 409A. As of the date of the adoption of this amended and restated Plan, Section 409A provides that if the Company’s Common Stock is publicly traded on an established securities market or otherwise, then “specified employee” means senior officers who make $185,000 or more annually (indexed) (limited to the top 3 such officers or, if greater (up to a maximum of 50), the top 10%)); 1% owners whose compensation is $150,000 or more annually; and 5% owners regardless of their compensation).

Subsidiary. A subsidiary corporation, whether now or hereafter existing, under Code Section 424(f).

Tax Withholding Liability. All federal and state income taxes, social security tax, and any other taxes applicable to the compensation income arising from the transaction required by applicable law to be withheld by the Company.

Termination of Employment. In this Plan, all references to termination of employment mean that the Eligible Employee or Eligible Director has had a Separation from Service.

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Transfer. The sale, assignment, transfer, conveyance, pledge, hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for the benefit of creditors, by operation of law (by will or descent and distribution), transfer by a qualified domestic relations order, a property settlement or maintenance agreement, transfer by result of the bankruptcy laws or otherwise of a Share or of a Right.

1933 Act. The Securities Act of 1933, as amended.

1934 Act. The Securities Exchange Act of 1934, as amended.

ARTICLE II

GENERAL

Section 2.1. Purpose. The purposes of this Plan are to encourage and motivate directors and key employees to contribute to the successful performance of the Company and its Subsidiaries and the growth of the market value of the Common Stock; to achieve a unity of purpose among such directors, key employees and the Company’s shareholders by providing ownership opportunities, and a unity of interest among such parties in the achievement of the Company’s primary long term performance objectives; and to retain key employees by rewarding them with potentially tax-advantageous future compensation. These objectives will be promoted through the granting of Rights to designated Eligible Directors and Eligible Employees pursuant to the terms of this Plan.

Section 2.2. Administration.

(a) The Plan shall be administered by the Committee which meets, and shall continue to meet, the standards of Rule 16b-3(d)(1) promulgated by the SEC under the 1934 Act. Subject to the provisions of SEC Rule 16b-3(d)(1), the Committee may designate any officers or employees of the Company or any Subsidiary to assist in the administration of the Plan, to execute documents on behalf of the Committee and to perform such other ministerial duties as may be delegated to them by the Committee.

(b) Subject to the provisions of the Plan, the determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive upon all persons affected thereby. By way of illustration and not of limitation, the Committee shall have the discretion (a) to construe and interpret the Plan and all Rights granted hereunder and to determine the terms and provisions (and amendments thereof) of the Rights granted under the Plan (which need not be identical); (b) to define the terms used in the Plan and in the Rights granted hereunder; (c) to prescribe, amend and rescind the rules and regulations relating to the Plan; (d) to determine the Eligible Employees to whom and the time or times at which such Rights shall be granted, the number of Shares, as and when applicable, to be subject to each Right, the exercise, other relevant purchase price or value pertaining to a Right, and the determination of leaves of absence which may be granted to Eligible Employees without constituting a termination of their employment for the purposes of the Plan, provided that the determination must be in compliance with Section 409A if Section 409A applies to the Rights; and (e) to make all other determinations necessary or advisable for the administration of the Plan. Provided, however, that the Committee shall administer and interpret the Plan in a manner so as to comply with Section 409A to the extent that Section 409A applies to any portion(s) of the Plan. Only the full Board has the discretion to determine the Eligible Directors to whom and the time or times at which such Rights shall be granted, the number of Shares, as and when applicable, to be subject to each Right, the exercise, and other relevant purchase price or value pertaining to a Right. References to the Committee contained in this Agreement will also mean the Board wherever Rights of Eligible Directors are addressed.

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(c) It shall be in the discretion of the Committee to grant Options to purchase Shares which qualify as ISOs under the Code or which will be given tax treatment as Non-Qualified Options. Any Options granted which fail to satisfy the requirements for ISOs shall become Non-Qualified Options.

(d) The intent of the Company is to register the (i) offering of Shares pertaining to or underlying the Rights and the offering of Rights pursuant to this Plan, (ii) this Plan and (iii) the Rights, to the extent required, under the 1933 Act and applicable state securities and “Blue Sky” laws. In such event, the Company shall make available to Eligible Directors and Eligible Employees receiving Rights, and/or Shares in connection therewith, all disclosure documents required under such federal and state laws. If such Registration shall not occur, the Committee shall be responsible for supplying the recipient of a Right, and/or Shares in connection therewith, with such information about the Company as is contemplated by the federal and state securities laws in connection with exemptions from the registration requirements of such laws, as well as providing the recipient of a Right with the opportunity to ask questions and receive answers concerning the Company and the terms and conditions of the Rights granted under this Plan. In addition, if such Registration shall not occur, the Committee shall be responsible for determining the maximum number of Eligible Directors and Eligible Employees and the suitability of particular persons to be Eligible Directors and Eligible Employees in order to comply with applicable federal and state securities statutes and regulations governing such exemptions.

(e) In determining the Eligible Directors and Eligible Employees to whom Rights shall be granted and the number of Shares to be covered by each Right, the Committee shall take into account the nature of the services rendered by such Eligible Directors and Eligible Employees, their present and potential contributions to the success of the Company and/or the Subsidiaries and such other factors as the Committee shall deem relevant. An Eligible Director or Eligible Employee who has been granted a Right under the Plan may be granted additional Rights under the Plan if the Committee shall so determine.

If, pursuant to the terms of the Plan, or otherwise in connection with the Plan, it is necessary that the percentage of stock ownership of an Eligible Director or Eligible Employee be determined, the ownership attribution provisions set forth in Section 424(d) of the Code shall be controlling.

(f) The granting of Rights pursuant to this Plan is in the exclusive discretion of the Committee, and until the Committee acts, no individual shall have any rights under this Plan. The terms of this Plan shall be interpreted in accordance with this intent.

Section 2.3. Stock Matters.

(a) Shares Available for Rights. Shares shall be subject to, or underlying, grants of Options, Restricted Stock, Restricted Stock Units, SARs, Performance Units and Book Value Shares under this Plan. The total number of Shares for which, or with respect to which, Rights may be granted (including the number of Shares in respect of which Restricted Stock, Restricted Stock Units, SARs, Performance Units and Book Value Shares may be granted) under this Plan shall be those designated in the Plan Pool. In the event that a Right granted under the Plan to any Eligible Director or Eligible Employee expires or is terminated unexercised as to any Shares covered thereby, such Shares thereafter shall be deemed available in the Plan Pool for the granting of Rights under this Plan; provided, however, if the expiration or termination date of a Right is beyond the term of the Plan as described in Section 7.3, then any Shares covered by unexercised or terminated Rights shall not reactivate the existence of this Plan and therefore shall not be available for additional grants of Rights under this Plan.

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(b) Adjustments upon Changes in Capitalization. In the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of any stock or extraordinary cash dividend, stock split, reverse stock split, an extraordinary corporate transaction such as any recapitalization, reorganization, merger, consolidation, combination, exchange, or other relevant change in capitalization occurring after the grant date of any Award, Awards granted under the Plan and any Award Agreements, the exercise price of Options and SARs, the performance goals to which Performance Units are subject, the maximum number of shares of Common Stock in the Plan Pool subject to all Awards will be equitably adjusted or substituted, as to the number, price or kind of a share of Common Stock or other consideration subject to such Awards to the extent necessary to preserve the economic intent of such Award. In the case of adjustments made pursuant to this Section 2.3(b), unless the Committee specifically determines that such adjustment is in the best interests of the Company or its affiliates, the Committee shall, in the case of ISOs, ensure that any adjustments under this Section 2.3(b) will not constitute a modification, extension or renewal of the ISOs within the meaning of Section 424(h)(3) of the Code and in the case of Non-qualified Options, ensure that any adjustments under this Section 2.3(b) will not constitute a modification of such Non-qualified Options within the meaning of Section 409A. Any adjustments made under this Section 2.3(b) shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the 1934 Act. The Company shall give each affected Grantee notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes.

(c) Corporate Transactions/Changes in Control/Related Entity Dispositions. Except as otherwise provided in an Award Agreement:

(i) 

On the specified effective date of a Corporate Transaction or Change in Control, each Award that is at the time outstanding automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to ISOs) and repurchase or forfeiture rights, immediately prior to the specified effective date of such Corporate Transaction or Change in Control, for all the Shares at the time represented by such Award (except to the extent that such acceleration of exercisability would result in an “excess parachute payment” within the meaning of Section 280G of the Code). Notwithstanding the foregoing provisions, the Committee may, in its exclusive discretion, provide as part of a Section 424 Corporate Transaction that any one or more of the foregoing provisions shall not apply.

(ii) 

On the specified effective date of a Related Entity Disposition, for each Grantee who on such specified effective date is engaged primarily in service to the Related Entity that is the subject of the Related Entity Disposition, each Award that is at the time outstanding automatically shall become fully vested and exercisable and be released from any restrictions on transfer (other than transfer restrictions applicable to ISOs) and repurchase and forfeiture rights, immediately prior to the specified effective date of such Related Entity Disposition, for all the Shares at the time represented by such Award. Notwithstanding the foregoing provisions, the Committee may, in its exclusive discretion, provide as part of a Section 424 Corporate Transaction that any one or more of the foregoing provisions shall not apply.

(iii) 

The Committee may provide in any Award, Award Agreement, or as part of a Section 424 Corporate Transaction, that if the requirements of Treas. Reg. §1.424-1 (without regard to the requirement described in Treas. Reg. §1.424-1(a)(2) that an eligible corporation be the employer of the optionee) would be met if the stock right were an ISO, the substitution of a new stock right pursuant to a Section 424 Corporate Transaction for an outstanding stock right or the assumption of an outstanding stock right pursuant to a Section 424 Corporate Transaction shall not be treated as the grant of a new stock right or a change in the form of payment. The requirement of Treas. Reg. §1.424-1(a)(5)(iii) is deemed satisfied if the ratio of the exercise price to the Fair Market Value of the Shares immediately after the substitution or assumption is not greater than the ratio of the exercise price to the Fair Market Value of the Shares immediately before the substitution or assumption. In the case of a transaction described in Code Section 355 in which the stock of the distributing corporation and the stock distributed in the transaction are both readily tradable on an established securities market immediately after the transaction, the requirements of Treas. Reg. §1.424-1(a)(5) may be satisfied by:

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(1)

using the last sale before or the first sale after the specified date as of which such valuation is being made, the closing price on the last trading day before or the trading day of a specified date, the arithmetic mean of the high and low prices on the last trading day before or the trading day of such specified date, or any other reasonable method using actual transactions in such stock as reported by such market on a specified date, for the stock of the distributing corporation and the stock distributed in the transaction, provided the specified date is designated before such specified date, and such specified date is not more than sixty (60) days after the transaction;

(2)

using the arithmetic mean of such market price on trading days during a specified period designated before the beginning of such specified period, when such specified period is not longer than thirty (30) days and ends no later than sixty (60) days after the transaction; or

(3)

using an average of such prices during such prespecified period weighted based on the volume of trading of such stock on each trading day during such prespecified period.

(d) No Limitations on Power of Company. The grant of a Right pursuant to this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassification, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.

(e) No fractional Shares shall be issued under this Plan for any adjustment under Section 2.3(b).

(f) In the event of a Change in Control or pending Change in Control, the Committee may in its discretion and upon at least 10 days' advance notice to the affected persons, cancel any outstanding Awards and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such Awards based upon the price per share of Common Stock received or to be received by other shareholders of the Company in the event. In the case of any Option or SAR with an exercise price (or SAR Exercise Price in the case of a SAR) that equals or exceeds the price paid for a share of Common Stock in connection with the Change in Control, the Committee may cancel the Option or SAR without the payment of consideration therefor.

Section 2.4. Section 409A Matters. The Plan and the Awards issued hereunder are intended to fall within available exemptions from the application of Section 409A of the Code (the incentive stock option exemption, the exemption for certain nonqualified stock options and stock appreciation rights issued at Fair Market Value, the restricted property exemption, and/or the short-term deferral exemption). Thus, it is intended that the Awards fall outside the scope of Section 409A and are not required to comply with the Section 409A requirements. The Plan and the Awards will be administered and interpreted in a manner consistent with the intent set forth herein. Notwithstanding anything to the contrary in this Plan or in any Award Agreement, (i) this Plan and each Award Agreement may be amended from time to time as the Committee may determine to be necessary or appropriate in order to avoid any grant of any Rights, this Plan, or any Award Agreement from resulting in the inclusion of any compensation in the gross income of any Grantee under Section 409A as amended from time to time, and (ii) if any provision of this Plan or of any Award Agreement would otherwise result in the inclusion of any compensation in the gross income of any Grantee under Section 409A as amended from time to time, then such provision shall not apply as to such Grantee and the Committee, in its discretion, may apply in lieu thereof another provision that (in the judgment of the Committee) accomplishes the intent of this Plan or such Award Agreement without resulting in such inclusion so long as such action by the Committee does not violate Section 409A. The Company makes no representation or warranty regarding the treatment of this Plan or the benefits payable under this Plan or any Award Agreement under federal, state or local income tax laws, including Section 409A.

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Section 2.5. Amendment and Discontinuance. The Board may at any time alter, suspend, terminate or discontinue the Plan, subject to Section 409A, and subject to any applicable regulatory requirements and any required shareholder approval or any shareholder approval which the Board may deem advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying applicable stock exchange or quotation system listing requirements. The Board may not, without the consent of the Grantee of an Award previously granted, make any alteration which would deprive the Grantee of his rights with respect thereto, except to the extent an amendment is required in order for the Award to comply with Section 409A, if applicable to the Award, or to fall within an exemption from Section 409A.

Section 2.6. Compliance with Rule 16b-3. It is the intent of the Company that the Plan satisfy, and be interpreted in a manner that satisfies, the applicable requirements of Rule 16b-3 as promulgated under Section 16 of the 1934 Act so that Grantees will be entitled to the benefit of Rule 16b-3, or any other rule promulgated under Section 16 of the 1934 Act, and will not be subject to short-swing liability under Section 16 of the 1934 Act. Accordingly, if the operation of any provision of the Plan would conflict with the intent expressed in this Section 2.6, such provision to the extent possible shall be interpreted and/or deemed amended so as to avoid such conflict.

Section 2.7. Term and Termination of Awards other than Performance Units.

(a) The Committee shall determine, and each Award Agreement shall state, the expiration date or dates of each Award, but such expiration date shall be not later than ten (10) years after the date such Award is granted (the “Award Period”). In the event an ISO is granted to a shareholder who owns more than 10% of the total combined voting power of the Company, its Parent, or its Subsidiary (a “10% Shareholder”), the expiration date or dates of each Award Period shall be not later than five (5) years after the date such ISO is granted. The Committee, in its discretion, may extend the expiration date or dates of an Award Period after such date was originally set; provided, however, such expiration date may not exceed the maximum expiration date described in this Section 2.7(a). Provided further that no extension will be granted if it would violate Section 409A to the extent that Section 409A applies to the Award.

(b) To the extent not previously exercised, each Award will terminate upon the expiration of the Award Period specified in the Award Agreement; provided, however, that each such Award will terminate immediately as of the date that the Grantee ceases to be an Eligible Director or Eligible Employee for any reason other than Death or Disability. In the event the Grantee ceases to be an Eligible Director or Eligible Employee by reason of Death or Disability, each Award will terminate upon the earlier of: (i) twelve (12) months after the date that the Grantee ceases to be an Eligible Director or Eligible Employee by reason of Death or Disability; or (ii) the expiration of the Award Period specified in the Award Agreement. Any portions of Awards not exercised within the foregoing periods shall terminate.

(c) This Section 2.7 applies to all Awards other than Performance Units.

Section 2.8. Delay of Certain Payments upon Termination of Employment. Notwithstanding anything in the Plan to the contrary, to the extent any Right is subject to Section 409A, and payment or exercise of such Right is on account of a Termination of Employment, such payment or exercise shall only be effectuated if the Grantee incurs a Separation from Service. Payment will occur on the 60th day after the Separation from Service. Provided, however, that if the Grantee is a Specified Employee, payment or exercise shall be effectuated on the first day of the seventh month following the Separation from Service.

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ARTICLE III

OPTIONS

Section 3.1. Grant of Options.

(a) The Company may grant Options to Eligible Directors and Eligible Employees as provided in this Article III. Options will be deemed granted pursuant to this Article III only upon (i) authorization by the Committee, and (ii) the execution and delivery of an Option Agreement by the Grantee and a duly authorized officer of the Company. Options will not be deemed granted hereunder merely upon authorization of such grant by the Committee. The aggregate number of Shares potentially acquirable under all Options granted shall not exceed the total number of Shares in the Plan Pool, less all Shares potentially acquired under, or underlying, all other Rights outstanding under this Plan.

(b) The Committee shall designate Options at the time a grant is authorized as either ISOs or Non-Qualified Options. The aggregate Fair Market Value (determined as of the time an ISO is granted) of the Shares as to which an ISO may first become exercisable by a Grantee in a particular calendar year (pursuant to Article III and all other plans of the Company and/or its Subsidiaries) may not exceed $100,000 (the “$100,000 Limitation”). If a Grantee is granted Options in excess of the $100,000 Limitation, or if such Options otherwise become exercisable with respect to the number of Shares which would exceed the $100,000 Limitation, such excess Options shall be Non-Qualified Options.

Section 3.2. Exercise Price. The exercise price of each Option granted under the Plan (the “Exercise Price”) shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of grant of the Option. In the case of ISOs granted to a shareholder who owns capital stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of the capital stock of the Company (a “10% Shareholder”), the Exercise Price of each Option granted under the Plan to such 10% Shareholder shall not be less than one hundred and ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant of the Option.

Section 3.3. Terms and Conditions of Options.

(a) All Options must be granted within ten (10) years of the Effective Date.

(b) The Committee may grant ISOs and Non-Qualified Options, either separately or jointly, to an Eligible Employee. The Committee may grant Non-Qualified Options to an Eligible Director but may not grant ISOs to an Eligible Director.

(c) The grant of Options shall be evidenced by an Option Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article III, and the Option Agreement will fix the number of Shares subject to the Option.

(d) At the discretion of the Committee, a Grantee, as a condition to the granting of the Option, must execute and deliver to the Company a confidential information agreement approved by the Committee.

(e) Nothing contained in Article III, any Option Agreement or in any other agreement executed in connection with the granting of an Option under this Article III will confer upon any Grantee any right with respect to the continuation of his or her status as an employee or director of the Company or any of its Subsidiaries.

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(f) Except as otherwise provided herein, each Option Agreement may specify the period or periods of time within which each Option or portion thereof will first become exercisable (the “Vesting Period”) with respect to the total number of Shares acquirable thereunder. Such Vesting Periods will be fixed by the Committee in its discretion, and may be accelerated or shortened by the Committee in its discretion.

(g) Not less than one hundred (100) Shares may be purchased at any one time through the exercise of an Option unless the number purchased is the total number at that time purchasable under all Options granted to the Grantee. No Option may be exercised for a fraction of a share of Common Stock.

(h) A Grantee shall have no rights as a shareholder of the Company with respect to any Shares underlying such Option until payment in full of the Exercise Price by such Grantee for the stock being purchased. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such Shares is fully paid for, except as provided in Sections 2.3(b) and 2.3(c).

(i) All Shares obtained pursuant to an Option which is designated and qualifies as an ISO shall be held in escrow for a period which ends on the later of (i) two (2) years from the date of the granting of the ISO or (ii) one (1) year after the issuance of such Shares pursuant to the exercise of the ISO. Such Shares shall be held by the Company or its designee. The Grantee who has exercised the ISO shall have all rights of a shareholder, including, but not limited, to the rights to vote, receive dividends and sell such shares. The sole purpose of the escrow is to inform the Company of a disqualifying disposition of the Shares acquired within the meaning of Section 422 of the Code, and it shall be administered solely for this purpose.

(j) When Non-Qualified Options are transferred or exercised, the transfer or exercise shall be subject to taxation under Code Section 83 and Treasury Regulation §1.83-7. No Non-Qualified Option awarded hereunder shall contain any feature for the deferral of compensation other than the deferral of recognition of income until the later of exercise or disposition of the Option under Treasury Regulation §1.83-7 or the time the stock acquired pursuant to the exercise of the option first becomes substantially vested as defined in Treasury Regulation §1.83-3(b). Further, each Non-Qualified Option will comply with any other applicable Section 409A requirement in order to maintain the status of the Non-Qualified Option as exempt from the requirements of Section 409A.

Section 3.4. Exercise of Options.

(a) A Grantee must at all times be an Eligible Director or Eligible Employee from the date of grant until the exercise of the Options granted, except as provided in Section 2.7(b).

(b) An Option may be exercised to the extent exercisable (i) by giving written notice of exercise to the Company, specifying the number of Shares to be purchased and, if applicable, accompanied by full payment of the Exercise Price thereof and the amount of withholding taxes pursuant to Section 3.4(c) below; and (ii) by giving assurances satisfactory to the Company that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to resale in connection with any distribution of such Shares in violation of the 1933 Act; provided, however, that in the event of the prior occurrence of the Registration or in the event resale of such Shares without such Registration would otherwise be permissible, the second condition will be inoperative if, in the opinion of counsel for the Company, such condition is not required under the 1933 Act or any other applicable law, regulation or rule of any governmental agency.

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(c) As a condition to the issuance of the Shares upon full or partial exercise of a Non-Qualified Option, the Grantee will pay to the Company in cash, or in such other form as the Committee may determine in its discretion, the amount of the Company’s Tax Withholding Liability required in connection with such exercise.

(d) The Exercise Price of an Option shall be payable to the Company either (i) in United States dollars, in cash or by check, bank draft or money order payable to the order of the Company, or (ii) at the discretion of the Committee, through the delivery of outstanding shares of the Common Stock owned by the Grantee with a Fair Market Value at the date of delivery equal to the aggregate Exercise Price of the Option(s) being exercised, or (iii) at the discretion of the Committee by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such Option with a Fair Market Value at the date of delivery equal to the aggregate Exercise Price of the Option(s) being exercised, or (iv) at the discretion of the Committee by a combination of (i), (ii) or (iii) above. No Shares shall be delivered until full payment has been made. Except as provided in Sections 2.3(b) and 2.3(c), the Committee may not approve a reduction of such Exercise Price in any such Option, or the cancellation of any such Options and the regranting thereof to the same Grantee at a lower Exercise Price, at a time when the Fair Market Value of the Common Stock is lower than it was when such Option was granted. Notwithstanding the foregoing, during any period for which the Common Stock is publicly traded (i.e., the Common Stock is listed on any established stock exchange or a national market system) an exercise by a Director or Officer that involves or may involve a direct or indirect extension of credit or arrangement of an extension of credit by the Company, directly or indirectly, in violation of Section 402(a) of the Sarbanes-Oxley Act of 2002 shall be prohibited with respect to any Award under this Plan.

Section 3.5. Restrictions on Transfer. An Option granted under Article III may not be Transferred except by will or the laws of descent and distribution and, during the lifetime of the Grantee to whom it was granted, may be exercised only by such Grantee.

Section 3.6. Stock Certificates. Certificates representing the Shares issued pursuant to the exercise of Options will bear all legends required by law and necessary to effectuate the provisions hereof. The Company may place a “stop transfer” order against such Shares until all restrictions and conditions set forth in this Article III, the applicable Option Agreement, and in the legends referred to in this Section 3.6 have been complied with.

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ARTICLE IV

RESTRICTED STOCK AND RESTRICTED STOCK UNIT GRANTS

Section 4.1. Grants of Restricted Stock.

(a) The Company may grant Restricted Stock or Restricted Stock Units to Eligible Directors and Eligible Employees as provided in this Article IV. Shares of Restricted Stock or Restricted Stock Units will be deemed granted only upon (i) authorization by the Committee and (ii) the execution and delivery of a Restricted Stock Agreement or Restricted Stock Unit Agreement, as applicable, by the Grantee and a duly authorized officer of the Company. Restricted Stock and Restricted Stock Units will not be deemed to have been granted merely upon authorization by the Committee. The aggregate number of Shares potentially acquirable under all Restricted Stock Agreements and all Restricted Stock Unit Agreements shall not exceed the total number of Shares in the Plan Pool, less all Shares potentially acquirable under, or underlying, all other Rights outstanding under this Plan.

(b) Each grant of Restricted Stock or Restricted Stock Units pursuant to this Article IV will be evidenced by a Restricted Stock Agreement or Restricted Stock Unit Agreement, as applicable, between the Company and the Grantee in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article IV. Each Restricted Stock Agreement and Restricted Stock Unit Agreement will specify the purchase price per share (the “Purchase Price”), if any, with respect to the Restricted Stock or Restricted Stock Units to be issued to the Grantee thereunder. The Purchase Price will be fixed by the Committee in its exclusive discretion. The Purchase Price will be payable to the Company in United States dollars in cash or by check or such other legal consideration as may be approved by the Committee, in its exclusive discretion.

(c) Without limiting the foregoing, each Restricted Stock Agreement and Restricted Stock Unit Agreement shall include the following terms and conditions:

(i)

Nothing contained in this Article IV, any Restricted Stock Agreement, any Restricted Stock Unit Agreement, or in any other agreement executed in connection with the issuance of Restricted Stock or Restricted Stock Units under this Article IV will confer upon any Grantee any right with respect to the continuation of his or her status as an employee or director of the Company or any of its Subsidiaries.

(ii)

Except as otherwise provided herein, each Restricted Stock Agreement and each Restricted Stock Unit Agreement shall specify the period or periods of time within which each share of Restricted Stock or Restricted Stock Unit or portion thereof will first become exercisable (the "Vesting Period") with respect to the total number of shares of Restricted Stock acquirable thereunder. Such Vesting Period will be fixed by the Committee in its discretion, but generally shall be at least two (2) years and one day of continued service with the Company. The Committee may, in its discretion, establish a shorter Vesting Period by specifically providing for such shorter period in the Restricted Stock Agreement; provided, however, that the Vesting Period shall not be less than one (1) year and one day of continued service with the Company after the date on which the Restricted Stock Right is granted.

(iii)

Each Restricted Stock Unit Agreement shall specify whether the distribution will be in the form of cash, shares or a combination of cash and shares.

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(iv)

Upon satisfaction of the Vesting Period and any other applicable restrictions, terms and conditions, the Grantee shall be entitled to receive his Restricted Stock or payment of his Restricted Stock Unit(s) on or before the sixtieth (60th) day following satisfaction of the Vesting Period as provided in the Restricted Stock Agreement or Restricted Stock Unit Agreement, as applicable.

Section 4.2. Restrictions on Transfer of Restricted Stock and Restricted Stock Units.

(a) Restricted Stock Units may not be Transferred, and shares of Restricted Stock acquired by a Grantee may be Transferred only in accordance with the specific limitations on the Transfer of Restricted Stock imposed by applicable state or federal securities laws and set forth below, and subject to certain undertakings of the transferee set forth in Section 4.2(c). All Transfers of Restricted Stock not meeting the conditions set forth in this Section 4.2(a) are expressly prohibited.

(b) Any Transfer of Restricted Stock Units and any prohibited Transfer of Restricted Stock is void and of no effect. Should such a Transfer purport to occur, the Company may refuse to carry out the Transfer on its books, attempt to set aside the Transfer, enforce any undertaking or right under this Section 4.2, or exercise any other legal or equitable remedy.

(c) Any Transfer of Restricted Stock that would otherwise be permitted under the terms of this Plan is prohibited unless the transferee executes such documents as the Company may reasonably require to ensure the Company’s rights under a Restricted Stock Agreement and this Article IV are adequately protected with respect to the Restricted Stock so Transferred. Such documents may include, without limitation, an agreement by the transferee to be bound by all of the terms of this Plan applicable to Restricted Stock, and of the applicable Restricted Stock Agreement, as if the transferee were the original Grantee of such Restricted Stock.

(d) To facilitate the enforcement of the restrictions on Transfer set forth in this Article IV, the Committee may, at its discretion, require the Grantee of shares of Restricted Stock to deliver the certificate(s) for such shares with a stock power executed in blank by the Grantee and the Grantee’s spouse, to the Secretary of the Company or his or her designee, to hold said certificate(s) and stock power(s) in escrow and to take all such actions and to effectuate all such Transfers and/or releases as are in accordance with the terms of this Plan and the Restricted Stock Agreement. The certificates may be held in escrow so long as the shares of Restricted Stock whose ownership they evidence are subject to any restriction on Transfer under this Article IV or under a Restricted Stock Agreement. Each Grantee acknowledges that the Secretary of the Company (or his or her designee) is so appointed as the escrow holder with the foregoing authorities as a material inducement to the issuance of shares of Restricted Stock under this Article IV, that the appointment is coupled with an interest, and that it accordingly will be irrevocable. The escrow holder will not be liable to any party to a Restricted Stock Agreement (or to any other party) for any actions or omissions unless the escrow holder is grossly negligent relative thereto. The escrow holder may rely upon any letter, notice or other document executed by any signature purported to be genuine.

Section 4.3. Compliance with Law. Notwithstanding any other provision of this Article IV, Restricted Stock and Restricted Stock Units may be issued pursuant to this Article IV only after there has been compliance with all applicable federal and state securities laws, and such issuance will be subject to this overriding condition. The Company may include shares of Restricted Stock and Restricted Stock Units in a Registration, but will not be required to register or qualify Restricted Stock or Restricted Stock Units with the SEC or any state agency, except that the Company will register with, or as required by local law, file for and secure an exemption from such registration requirements from, the applicable securities administrator and other officials of each jurisdiction in which an Eligible Director or Eligible Employee would be issued Restricted Stock or Restricted Stock Units hereunder prior to such issuance.

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Section 4.4. Stock Certificates. Certificates representing the Restricted Stock issued pursuant to this Article IV will bear all legends required by law and necessary to effectuate the provisions hereof. The Company may place a “stop transfer” order against shares of Restricted Stock until all restrictions and conditions set forth in this Article IV, the applicable Restricted Stock Agreement and in the legends referred to in this Section 4.4, have been complied with.

Section 4.5. Market Standoff. To the extent requested by the Company and any underwriter of securities of the Company in connection with a firm commitment underwriting, no Grantee of any shares of Restricted Stock will sell or otherwise Transfer any such shares not included in such underwriting, or not previously registered in a Registration, during the one hundred twenty (120) day period following the effective date of the registration statement filed with the SEC in connection with such offering.

Section 4.6. Rights of Grantees of Restricted Stock or Restricted Stock Units.

(a) A Grantee shall have no rights as a stockholder of the Company unless and until he receives Restricted Shares at the conclusion of the Vesting Period.

(b) A Grantee shall have no rights other than those of a general creditor of the Company. Restricted Stock and Restricted Stock Units represent an unfunded and unsecured obligation of the Company.

(c) Unless the Committee otherwise provides in a dividend agreement awarded to the Grantee at the time of the Award Agreement, the Grantee shall have no rights to dividends, whether cash or stock, until the Restricted Stock and/or Restricted Stock Units vest and Shares are delivered to the Grantee except as provided in Sections 2.3(b) and 2.3(c).

ARTICLE V

PERFORMANCE UNITS

Section 5.1. Awards of Performance Units.

(a) The Committee may grant awards of Performance Units to Eligible Directors and Eligible Employees as provided in this Article V. Performance Units will be deemed granted only upon (i) authorization by the Committee and (ii) the execution and delivery of a Performance Unit Agreement by the Grantee and an authorized officer of the Company. Performance Units will not be deemed granted merely upon authorization by the Committee. Performance Units may be granted in such amounts and to such Grantees as the Committee may determine in its sole discretion subject to the limitation in Section 5.2 below.

(b) Each grant of Performance Units pursuant to this Article V will be evidenced by a Performance Unit Agreement between the Company and the Grantee in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article V.

(c) Except as otherwise provided herein, Performance Units will be distributed only after the end of a performance period of two or more years (“Performance Period”) beginning with the year in which such Performance Units were awarded. The Performance Period shall be set by the Committee for each year’s awards.

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(d) The percentage of the Performance Units awarded under this Section 5.1 that will be distributed to Grantees shall depend on the levels of financial performance and other performance objectives achieved during each year of the Performance Period; provided, however, that the Committee may adopt one or more performance categories or eliminate all performance categories other than financial performance. Financial performance shall be based on the consolidated results of the Company and its Subsidiaries prepared on the same basis as the financial statements published for financial reporting purposes and determined in accordance with Section 5.1(e) below. Other performance categories adopted by the Committee shall be based on measurements of performance as the Committee shall deem appropriate.

(e) Distributions of Performance Units awarded will be based on the Company’s financial performance with results from other performance categories applied as a factor, not exceeding one, against financial results. The annual financial and other performance results will be averaged over the Performance Period and translated into percentage factors according to graduated criteria established by the Committee for the entire Performance Period. The resulting percentage factors shall determine the percentage of Units to be distributed.

No distributions of Performance Units, based on financial performance and other performance, shall be made if a minimum average percentage of the applicable measurement of performance, to be established by the Committee, is not achieved for the Performance Period. The performance levels achieved for each Performance Period and percentage of Performance Units to be distributed shall be conclusively determined by the Committee.

(f) The percentage of Performance Units awarded and which Grantees become entitled to receive based on the levels of performance will be determined as soon as practicable after each Performance Period and are called “Retained Performance Units.”

(g) On or before the 60th day after determination of the number of Retained Performance Units, such Retained Performance Units shall be distributed in the form of a combination of shares and cash. The Committee, in its sole discretion, will determine how much of the Retained Performance Unit will be distributed in cash and how much will be distributed in Shares. The Performance Units awarded, but which Grantees do not become entitled to receive, shall be cancelled.

(h) Notwithstanding any other provision in this Article V, the Committee, if it determines in its sole discretion that it is necessary or advisable under the circumstances, may adopt rules pursuant to which Eligible Employees by virtue of hire, or promotion or upgrade to a higher employee grade classification, or special individual circumstances, may be granted the total award of Performance Units or any portion thereof, with respect to one or more Performance Periods that began in prior years and at the time of the awards have not yet been completed.

Section 5.2. Limitations. The aggregate number of Shares potentially distributable under all Units granted shall not exceed the total number of Shares in the Plan Pool, less all Shares potentially acquirable under, or underlying, all other Rights outstanding under this Plan.

Section 5.3. Terms and Conditions.

(a) All awards of Performance Units must be made within ten (10) years of the original Effective Date.

(b) The award of Performance Units shall be evidenced by a Performance Unit Agreement in form and substance satisfactory to the Committee in its discretion, consistent with the provisions of this Article V.

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(c) Nothing contained in this Article V, any Performance Unit Agreement or in any other agreement executed in connection with the award of Performance Units under this Article V will confer upon any Grantee any right with respect to the continuation of his or her status as an employee or director of the Company or any of its Subsidiaries.

Section 5.4. Special Distribution Rules.

(a) Except as otherwise provided in this Section 5.4, a Grantee must be an Eligible Director or Eligible Employee from the date a Unit is awarded to him or her continuously through and including the date of distribution of such Unit.

(b) In case of the Death or Disability of a Grantee prior to the end of any Performance Period, whether before or after any event set forth in Section 2.3(c), the number of Performance Units awarded to the Grantee for such Performance Period shall be reduced pro rata based on the number of months remaining in the Performance Period after the month of Death or Disability. The remaining Performance Units, reduced in the discretion of the Committee to the percentage indicated by the levels of performance achieved prior to the date of Death or Disability, if any, shall be distributed within a reasonable time after Death or Disability, but in no event later than March 15 of the year following the year of the Grantee’s Death or Disability. All other Units awarded to the Grantee for such Performance Period shall be cancelled.

(c) In case of the termination of the Grantee’s status as an Eligible Director or Eligible Employee prior to the end of any Performance Period for any reason other than Death or Disability, all Performance Units awarded to the Grantee with respect to any such Performance Period shall be immediately forfeited and cancelled.

(d) Upon a Grantee’s promotion to a higher employee grade classification, the Committee may award to the Grantee the total Performance Units, or any portion thereof, which are associated with the higher employee grade classification for the current Performance Period.

Notwithstanding any other provision of the Plan, the Committee may reduce or eliminate awards to a Grantee who has been demoted to a lower employee grade classification, and where circumstances warrant, may permit continued participation, proration, or a combination thereof, of awards which would otherwise be cancelled.

Section 5.5. Rights of Grantees of Performance Units.

(a) A Grantee shall have no rights as a stockholder of the Company unless and until he receives Shares, if any.

(b) A Grantee shall have no rights other than those of a general creditor of the Company. Performance Units represent an unfunded and unsecured obligation of the Company.

(c) Unless the Committee otherwise provides in a dividend agreement awarded to the Grantee at the time of the Performance Unit Agreement, the Grantee shall have no rights to dividends, whether cash or stock, unless and until Shares are delivered to the Grantee except as provided in Sections 2.3(b) and 2.3(c).

Section 5.6. Extraordinary Adjustment. In addition to the provisions of Section 2.3(b), if an extraordinary change occurs during a Performance Period which significantly alters the basis upon which the performance levels were established under Section 5.1 for that Performance Period, to avoid distortion in the operation of this Article V, but subject to Section 5.2, the Committee may make adjustments in such performance levels to preserve the incentive features of this Article V, whether before or after the end of the Performance Period, to the extent it deems appropriate in its sole discretion, which adjustments shall be conclusive and binding upon all parties concerned. Provided, however, that such adjustment must comply with Section 409A. Such changes may include, without limitation, adoption of, or changes in, accounting practices, tax laws and regulatory or other laws or regulations; economic changes not in the ordinary course of business cycles; or compliance with judicial decrees or other legal authorities. In addition, in the event of a Change in Control, the Committee may reduce the number of outstanding Units as it deems appropriate in its sole discretion to reflect a shorter Performance Period, to the extent permitted by Section 409A.

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Section 5.7. Other Conditions.

(a) No person shall have any claim to be granted an award of Performance Units under this Article V and there is no obligation for uniformity of treatment of Eligible Directors, Eligible Employees or Grantees under this Article V. Performance Units under this Article V may not be Transferred.

(b) The Company shall have the right to deduct from any distribution or payment in cash under this Article V, and the Grantee or other person receiving Shares under this Article V shall be required to pay to the Company, any Tax Withholding Liability. The number of Shares to be distributed to any individual Grantee may be reduced by the number of Shares, the Fair Market Value on the Distribution Date (as defined in Section 5.7(d) below) of which is equivalent to the cash necessary to pay any Tax Withholding Liability, where the cash to be distributed is not sufficient to pay such Tax Withholding Liability or the Grantee may deliver to the Company cash sufficient to pay such Tax Withholding Liability.

(c) Any distribution of Shares under this Article V may be delayed until the requirements of any applicable laws or regulations, and any stock exchange or Nasdaq National Market requirements, are satisfied. The Shares distributed under this Article V shall be subject to such restrictions and conditions on disposition as counsel for the Company shall determine to be desirable or necessary under applicable law.

(d) For the purpose of distribution of Performance Units in cash, the value of a Performance Unit shall be the Fair Market Value on the Distribution Date. The “Distribution Date” shall be the first business day of April in the year of distribution, except that in the case of special distributions the Distribution Date shall be the first business day of the month following the month in which the Committee determines the distribution.

(e) Notwithstanding any other provision of this Article V and subject also to Section 5.5(c), no dividends shall accrue and no distributions of Performance Units shall be made if at the time a dividend would otherwise have accrued or distribution would otherwise have been made:

(i)

the regular quarterly dividend on the Common Stock has been omitted and not subsequently paid or there exists any default in payment of dividends on any such outstanding shares of capital stock of the Company;

(ii)

the rate of dividends on the Common Stock is lower than at the time the Performance Units to which the accrued dividend relates were awarded, adjusted for any change of the type referred to in Section 2.3(b);

(iii)

estimated consolidated net income of the Company for the twelve-month period preceding the month the dividend would otherwise have accrued and distribution would otherwise have been made is less than the sum of the amount of the accrued dividends and Performance Units eligible for distribution under this Article V in that month plus all dividends applicable to such period on an accrual basis, either paid, declared or accrued at the most recently paid rate, on all outstanding shares of Common Stock; or

(iv)

the dividend accrual or distribution would result in a default in any agreement by which the Company is bound.

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(f) In the event net income available under Section 5.7(e) above for accrued dividends and awards eligible for distribution under this Article V is sufficient to cover part but not all of such amounts, the following order shall be applied in making payments: (i) accrued dividends, and (ii) Performance Units eligible for distribution under this Article V.

Section 5.8. Restrictions on Transfer. Performance Units granted under Article V may not be Transferred except by will or the laws of descent and distribution or as otherwise provided in Section 5.9, and during the lifetime of the Grantee to whom it was awarded, cash and Shares receivable with respect to Performance Units may be received only by such Grantee.

Section 5.9. Designation of Beneficiaries. A Grantee may designate a beneficiary or beneficiaries to receive all or part of the Shares and/or cash to be distributed to the Grantee under this Article V in case of Death, and such designation will revoke all prior designations by the same Grantee. A designation of beneficiary may be replaced by a new designation or may be revoked by the Grantee at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the Grantee and delivered to the Company prior to the Grantee’s Death. In case of the Grantee’s Death, the amounts to be distributed to the Grantee under this Article V with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article V to the designated beneficiary or beneficiaries. The amount distributable to a Grantee upon Death and not subject to such a designation shall be distributed to the Grantee’s estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article V, the amount in question may be paid to the estate of the Grantee, in which event the Company shall have no further liability to anyone with respect to such amount.

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ARTICLE VI

STOCK APPRECIATION RIGHTS

Section 6.1. Grants of SARs.

(a) The Company may grant SARs to Eligible Directors and Eligible Employees under this Article VI. SARs will be deemed granted only upon (i) authorization by the Committee and (ii) the execution and delivery of a SAR Agreement by the Grantee and a duly authorized officer of the Company. SARs will not be deemed granted merely upon authorization by the Committee. The aggregate number of Shares which shall underlie SARs granted hereunder shall not exceed the total number of Shares in the Plan Pool, less all Shares potentially acquirable under, or underlying, all other Rights outstanding under this Plan.

(b) Each grant of SARs pursuant to this Article VI shall be evidenced by a SAR Agreement between the Company and the Grantee, in form and substance satisfactory to the Committee in its sole discretion, consistent with this Article VI.

Section 6.2. Terms and Conditions of SARs.

(a) All SARs must be granted within ten (10) years of the Effective Date.

(b) Each SAR issued pursuant to this Article VI shall have an initial base value (the “Base Value”) equal to the Fair Market Value of a share of Common Stock on the date of issuance of the SAR (the “SAR Issuance Date”).

(c) Nothing contained in this Article VI, any SAR Agreement or in any other agreement executed in connection with the granting of a SAR under this Article VI will confer upon any Grantee any right with respect to the continuation of his or her status as an employee or director of the Company or any of its Subsidiaries.

(d) Except as otherwise provided herein, each SAR Agreement shall specify the number of Shares covered by the SAR and the period or periods of time within which each SAR or portion thereof will first become exercisable (the “SAR Vesting Period”) with respect to the total Cash Payment (as defined in Section 6.4(b)) receivable thereunder. Such SAR Vesting Period will be fixed by the Committee in its discretion, and may be accelerated or shortened by the Committee in its discretion.

(e) SARs relating to no less than one hundred (100) Shares may be exercised at any one time unless the number exercised is the total number at that time exercisable under all SARs granted to the Grantee. No SAR may be exercised for a fraction of a share of Common Stock.

(f) A Grantee shall have no rights as a shareholder of the Company with respect to any Shares covered by such SAR. No adjustment shall be made to a SAR for dividends (ordinary or extraordinary, whether in cash, securities or other property).

(g) Notwithstanding anything in the Plan to the contrary, no SAR shall contain any feature for the deferral of compensation other than the right to receive compensation equal to the difference between the Base Value on the date of grant and the Fair Market Value of the Share on the date of Exercise.

Section 6.3. Restrictions on Transfer of SARs. Each SAR granted under this Article VI may not be Transferred except by will or the laws of descent and distribution or as otherwise provided in Section 6.5, and during the lifetime of the Grantee to whom it was granted, may be exercised only by such Grantee.

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Section 6.4. Exercise of SARs.

(a) A Grantee, or his or her executors or administrators, or heirs or legatees, shall exercise a SAR of the Grantee by giving written notice of such exercise to the Company (the “SAR Exercise Date”). SARs may be exercised only upon the completion of the SAR Vesting Period applicable to such SAR.

(b) Within ten (10) days of the SAR Exercise Date applicable to a SAR exercised in accordance with Section 6.4(a), the Grantee shall be paid in cash the difference between the Base Value of such SAR and the Fair Market Value of the Common Stock as of the SAR Exercise Date (the “Cash Payment”), reduced by the Tax Withholding Liability arising from such exercise.

Section 6.5. Designation of Beneficiaries. A Grantee may designate a beneficiary or beneficiaries to receive all or part of the cash to be paid to the Grantee under this Article VI in case of Death, and such designation will revoke all prior designations by the same Grantee. A designation of beneficiary may be replaced by a new designation or may be revoked by the Grantee at any time. A designation or revocation shall be on a form to be provided for that purpose and shall be signed by the Grantee and delivered to the Company prior to the Grantee’s Death. In case of the Grantee’s Death, the amounts to be distributed to the Grantee under this Article VI with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with this Article VI to the designated beneficiary or beneficiaries. The amount distributable to a Grantee upon Death and not subject to such a designation shall be distributed to the Grantee’s estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under this Article VI, the amount in question may be paid to the estate of the Grantee, in which event the Company shall have no further liability to anyone with respect to such amount.

ARTICLE VII

MISCELLANEOUS

Section 7.1. Application of Funds. The proceeds received by the Company from the sale of Shares pursuant to the exercise of Rights will be used for general corporate purposes.

Section 7.2. No Obligation to Exercise Right. The granting of a Right shall impose no obligation upon the recipient to exercise such Right.

Section 7.3. Term of Plan. Except as otherwise specifically provided herein, Rights may be granted pursuant to this Plan from time to time within ten (10) years from the Effective Date.

Section 7.4. Captions and Headings; Gender and Number. Captions and paragraph headings used herein are for convenience only, do not modify or affect the meaning of any provision herein, are not a part, and shall not serve as a basis for interpretation or construction of this Plan. As used herein, the masculine gender shall include the feminine and neuter, and the singular number shall include the plural, and vice versa, whenever such meanings are appropriate.

Section 7.5. Expenses of Administration of Plan. All costs and expenses incurred in the operation and administration of this Plan shall be borne by the Company or by one or more Subsidiaries. The Company shall indemnify, defend and hold each member of the Committee harmless against all claims, expenses and liabilities arising out of or related to the exercise of the Committee’s powers and the discharge of the Committee’s duties hereunder.

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Section 7.6. Transfer; Approved Leave of Absence. For purposes of the Plan, no termination of employment by an Eligible Employee shall be deemed to result from either (a) a transfer of employment to the Company from an affiliate of the Company, or from the Company to an affiliate, or from one affiliate to another, or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the Eligible Employee's right to reemployment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing, in either case, except to the extent inconsistent with Section 409A if the applicable Award is subject thereto.

Section 7.7. Clawback. Notwithstanding any other provisions in this Plan, the Company may cancel any Award, require reimbursement of any Award by a Participant, and effect any other right of recoupment of equity or other compensation provided under the Plan in accordance with any Company policies that may be adopted and/or modified from time to time ("Clawback Policy"). In addition, a Participant may be required to repay to the Company previously paid compensation, whether provided pursuant to the Plan or an Award Agreement, in accordance with the Clawback Policy. By accepting an Award, the Participant is agreeing to be bound by the Clawback Policy, as in effect or as may be adopted and/or modified from time to time by the Company in its discretion (including, without limitation, to comply with applicable law or stock exchange listing requirements).

Section 7.8. No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Committee shall determine whether cash, additional Awards or other securities or property shall be issued or paid in lieu of fractional shares of Common Stock or whether any fractional shares should be rounded, forfeited or otherwise eliminated.

Section 7.9. Non-Uniform Treatment. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who are eligible to receive, or actually receive, Awards. Without limiting the generality of the foregoing, the Committee shall be entitled to make non-uniform and selective determinations, amendments and adjustments, and to enter into non-uniform and selective Award Agreements.

Section 7.10. Governing Law. Without regard to the principles of conflicts of laws, the laws of the State of North Carolina shall govern and control the validity, interpretation, performance, and enforcement of this Plan.

Section 7.11. Inspection of Plan. A copy of this Plan, and any amendments thereto, shall be maintained by the Secretary of the Company and shall be shown to any proper person making inquiry about it.

Section 7.12. Severable Provisions. The Company intends that the provisions of Articles III, IV, V and VI, in each case together with Articles I, II and VII, shall each be deemed to be effective on an independent basis, and that if one or more of such Articles, or the operative provisions thereof, shall be deemed invalid, void or voidable, the remainder of such Articles shall continue in full force and effect.

As Adopted by the Company’s Board of Directors on January 16, 2020.

As Approved by the Company’s Shareholders on May 7, 2020.

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EX-13

 

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”, “we”, “our” or “us” in this Annual Report. Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620.

The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 18 banking offices, as of December 31, 2020, 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 and Denver North Carolina. The Company’s fiscal year ends December 31. At December 31, 2020, the Company had total assets of $1.4 billion, net loans of $938.7 million, deposits of $1.2 billion, total securities of $249.4 million, and shareholders’ equity of $139.9 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 through 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-25 of the Annual Report.

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, 2020, the Company employed 290 full-time employees and 27 part-time employees, which equated to 307 full-time equivalent employees.

Subsidiaries

The Bank is a subsidiary of the Company. At December 31, 2020, 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

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junior subordinated debentures of the Company, which pay a floating rateequal 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, awholly 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 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 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.

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SELECTED FINANCIAL DATA

Dollars in Thousands Except Per Share Amounts

	2020	2019	2018	2017	2016
Summary of Operations
Interest income	$47,958	49,601	45,350	41,949	39,809
Interest expense	3,836	3,757	2,146	2,377	3,271
Net interest income	44,122	45,844	43,204	39,572	36,538
Provision for (reduction of) loan losses	4,259	863	790	(507)	(1,206)
Net interest income after provision
for loan losses	39,863	44,981	42,414	40,079	37,744
Non-interest income (1)	22,914	17,739	16,166	15,364	16,236
Non-interest expense (1)	48,931	45,517	42,574	41,228	42,242
Earnings before income taxes	13,846	17,203	16,006	14,215	11,738
Income tax expense	2,489	3,136	2,624	3,947	2,561
Net earnings	$11,357	14,067	13,382	10,268	9,177
Selected Year-End Balances
Assets	$1,414,855	1,154,882	1,093,251	1,092,166	1,087,991
Investment securities available for sale	245,249	195,746	194,578	229,321	249,946
Net loans	938,731	843,194	797,578	753,398	716,261
Mortgage loans held for sale	9,139	4,417	680	857	5,709
Interest-earning assets	1,326,489	1,058,937	1,007,078	996,509	999,201
Deposits	1,221,086	966,517	877,213	906,952	892,918
Interest-bearing liabilities	805,771	668,353	657,110	679,922	698,120
Shareholders' equity	$139,899	134,120	123,617	115,975	107,428
Shares outstanding	5,787,504	5,912,300	5,995,256	5,995,256	5,417,800
Selected Average Balances
Assets	$1,365,642	1,143,338	1,094,707	1,098,992	1,076,604
Investment securities available for sale	200,821	185,302	209,742	234,278	252,725
Loans	935,970	834,517	777,098	741,655	703,484
Interest-earning assets	1,271,764	1,055,730	1,007,484	998,821	985,236
Deposits	1,115,019	932,647	903,120	895,129	856,313
Interest-bearing liabilities	793,188	675,992	665,165	700,559	705,291
Shareholders' equity	$141,287	134,670	123,797	116,883	113,196
Shares outstanding (2)	5,808,121	5,941,873	5,995,256	5,988,183	6,024,970
Profitability Ratios
Return on average total assets	0.83%	1.23%	1.22%	0.93%	0.85%
Return on average shareholders' equity	8.04%	10.45%	10.81%	8.78%	8.11%
Dividend payout ratio	38.67%	28.00%	23.41%	25.67%	22.95%
Liquidity and Capital Ratios (averages)
Loan to deposit	83.94%	89.48%	86.05%	82.85%	82.15%
Shareholders' equity to total assets	10.35%	11.78%	11.31%	10.64%	10.51%
Per share of Common Stock (2)
Basic net earnings	$1.95	2.37	2.23	1.71	1.53
Diluted net earnings	$1.95	2.36	2.22	1.69	1.50
Cash dividends	$0.75	0.66	0.52	0.44	0.35
Book value	$24.17	22.68	20.62	19.34	18.03

(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.

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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-26 through A-71.

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, 2020, 2019 and 2018. 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 and Wake 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.

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

               Although we are unable to control the external factors that influence our business, by maintaining high levels 

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of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends. 

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

The Company does not have specific plans for additional offices in 2021 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.

COVID 19 Impact

Overview. The COVID-19 pandemic has caused and continues to cause significant, unprecedented disruption that affects daily living and negatively impacts the global economy, the banking industry and the Company. While we are unable to estimate the magnitude, we expect the COVID-19 pandemic and related global economic crisis will adversely affect our future operating results. As such, the impact of the COVID-19 pandemic on future fiscal periods is subject to a high degree of uncertainty.

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

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

●

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

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructured (“TDR”) loans for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of December 31, 2020.

●

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the financial statements for additional disclosure of loan modifications as of December 31, 2020.

●

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which established two new loan facilities intended

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

●

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopens and expands the PPP loan program through March 31, 2021. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans.

●

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

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

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

●

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

●

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

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●

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

●

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities.

●

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

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 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 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.

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

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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, 2020 or 2019.

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 $11.4 million or $1.95 basic and diluted net earnings per share for the year ended December 31, 2020, as compared to $14.1 million or $2.37 basic net earnings per share and $2.36 diluted net earnings per share for the same period one year ago. The decrease in year-to-date net earnings is primarily attributable to a decrease in net interest income, an increase in the provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income, as discussed below.

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.

The return on average assets in 2020 was 0.83%, as compared to 1.23% in 2019 and 1.22% in 2018. The return on average shareholders’ equity was 8.04% in 2020, as compared to 10.45% in 2019 and 10.81% in 2018.

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 2020 was $44.1 million, as compared to $45.8 million in 2019. The decrease in net interest income was primarily due to a $1.6 million decrease in interest income and a $79,000 increase in interest expense. The decrease in interest income was primarily due to a $987,000 decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. The increase in interest expense was primarily due to an increase in average outstanding balances of interest-bearing liabilities, which was partially offset by a decrease in rates paid on interest-bearing liabilities. Net interest income increased to $45.8 million in 2019 from $43.2 million in 2018.

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, 2020, 2019 and 2018. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported.The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

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Table 1- Average Balance Table

	December 31, 2020			December 31, 2019			December 31, 2018
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans	$935,970	42,314	4.52%	834,517	43,301	5.19%	777,098	38,654	4.97%
Investments - taxable	132,468	2,299	1.74%	77,945	2,254	2.89%	71,093	1,936	2.72%
Investments - nontaxable*	75,609	3,634	4.81%	113,117	4,293	3.80%	142,832	5,508	3.86%
Federal funds sold	91,166	204	0.22%	19,078	331	1.73%	-	-	0.00%
Other	36,551	127	0.35%	11,073	213	1.92%	16,461	304	1.85%
Total interest-earning assets	1,271,764	48,578	3.82%	1,055,730	50,392	4.77%	1,007,484	46,402	4.61%
Cash and due from banks	34,569			36,227			41,840
Other assets	67,742			57,880			51,704
Allowance for loan losses	(8,433)			(6,499)			(6,321)
Total assets	$1,365,642			1,143,338			1,094,707
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$584,177	1,962	0.34%	495,509	1,596	0.32%	484,180	769	0.16%
Time deposits	103,694	947	0.91%	105,458	909	0.86%	112,398	472	0.42%
FHLB borrowings	60,820	357	0.59%	19,625	205	1.04%	-	-	0.00%
Trust preferred securities	15,478	370	2.39%	20,619	844	4.09%	20,619	790	3.83%
Other	29,019	200	0.69%	34,781	203	0.58%	47,968	115	0.24%
Total interest-bearing liabilities	793,188	3,836	0.48%	675,992	3,757	0.56%	665,165	2,146	0.32%
Demand deposits	427,148			331,680			306,544
Other liabilities	4,019			996			(799)
Shareholders' equity	141,287			134,670			123,797
Total liabilities and shareholder's equity	$1,365,642			1,143,338			1,094,707
Net interest spread		$44,742	3.34%		$46,635	4.21%		$44,256	4.29%
Net yield on interest-earning assets			3.52%			4.42%			4.39%
Taxable equivalent adjustment
Investment securities		$620			$791			$1,052
Net interest income		$44,122			$45,844			$43,204

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $19.2 million in 2020, $32.0 million in 2019 and $38.0 million in 2018. A tax rate of 2.50% was used to calculate the tax equivalent yields on these securities in 2020, 2019 and 2018.

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, 2020			December 31, 2019
(Dollars in thousands)	Changes in average volume	Changes in average rates	Total Increase (Decrease)	Changes in average volume	Changes in average rates	Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$4,925	(5,912)	(987)	$2,918	1,729	4,647
Investments - taxable	1,261	(1,216)	45	192	126	318
Investments - nontaxable	(1,613)	954	(659)	(1,137)	(78)	(1,215)
Federal funds sold	706	(833)	(127)	166	165	331
Other	290	(376)	(86)	(102)	12	(90)
Total interest income	5,569	(7,383)	(1,814)	2,037	1,954	3,991
Interest expense:
NOW, MMDA & savings deposits	292	74	366	27	800	827
Time deposits	(16)	54	38	(44)	481	437
FHLB borrowings	336	(184)	152	103	102	205
Trust preferred securities	(167)	(307)	(474)	-	54	54
Other	(37)	34	(3)	(54)	142	88
Total interest expense	408	(329)	79	32	1,579	1,611
Net interest income	$5,161	(7,054)	(1,893)	$2,005	375	2,380

Net interest income on a tax equivalent basis totaled $44.7 million in 2020, as compared to $46.6 million in 2019. The net interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 3.34% in 2020, as compared to a net interest rate spread of 4.21% in 2019. The net yield on interest-earning assets was 3.52% in 2020 and 4.42% in 2019.

Tax equivalent interest income decreased $1.8 million in 2020 primarily due toa decrease in rates on interest earning assets. The yield on interest-earning assets was 3.82% in 2020, as compared to 4.77% in 2019.

Interest expense increased $79,000 in 2020, as compared to 2019. The increase in interest expense was primarily due to an increase in average outstanding balances of interest-bearing liabilities, which was partially offset by a decrease in rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased by $117.2 million to $793.2 million in 2020, as compared to $676.0 million in 2019. The cost of funds decreased to 0.48% in 2020 from 0.56% in 2019.

In 2019, net interest income on a tax equivalent basis was $46.6 million, as compared to $44.3 million in 2018. The net interest spread was 4.21% in 2019, as compared to 4.29% in 2018. The net yield on interest-earning assets was 4.42% in 2019, as compared to 4.39% in 2018.

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, 2020 was $4.3 million, compared to $863,000 for the year ended December 31, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model due to the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk,

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and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.

Table 3 presents a summary of net charge off activity for the years ended December 31, 2020, 2019, 2018, 2017 and 2016.

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)	2020	2019	2018	2017	2016	2020	2019	2018	2017	2016
Real estate loans
Construction and land development	$(31)	(24)	43	(14)	(3)	-0.03%	-0.03%	0.05%	-0.02%	-0.01%
Single-family residential	(5)	(24)	10	164	220	0.00%	-0.01%	0.00%	0.07%	0.09%
Single-family residential -
Banco de la Gente non-traditional	-	-	-	-	-	0.00%	0.00%	0.00%	0.00%	0.00%
Commercial	(63)	(48)	348	(21)	299	-0.02%	-0.02%	0.13%	-0.01%	0.12%
Multifamily and farmland	-	-	4	66	-	0.00%	0.00%	0.01%	0.23%	0.00%
Total real estate loans	(99)	(96)	405	195	516	-0.01%	-0.01%	0.06%	0.03%	0.09%
Loans not secured by real estate
Commercial loans	869	306	22	163	(25)	0.54%	0.31%	0.02%	0.19%	-0.03%
Farm loans	-	-	-	-	-	0.00%	0.00%	0.00%	0.00%	0.00%
Consumer loans (1)	254	418	284	319	342	3.57%	4.95%	3.11%	3.10%	3.38%
All other loans	7	-	-	-	-	0.20%	0.00%	0.00%	0.00%	0.00%
Total loans	$1,031	628	711	677	833	0.11%	0.07%	0.09%	0.09%	0.12%
Provision for (reduction of) loan losses
for the period	$4,259	863	790	(507)	(1,206)
Allowance for loan losses at end of period	$9,908	6,680	6,445	6,366	7,550
Total loans at end of period	$948,639	849,874	804,023	759,764	723,811
Non-accrual loans at end of period	$3,758	3,553	3,314	3,711	3,825
Allowance for loan losses as a percent of
total loans outstanding at end of period	1.04%	0.79%	0.80%	0.84%	1.04%
Non-accrual loans as a percent of
total loans outstanding at end of period	0.40%	0.42%	0.41%	0.49%	0.53%

(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 $22.9 million for the year ended December 31, 2020, compared to $17.7 million for the year ended December 31, 2019. The increase in non-interest income is primarily attributable to a $2.4 million increase in gains on sale of securities, a $2.3 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $1.2 million increase in mortgage banking income due to increased mortgage loan volume, which were partially offset by a $1.0 million decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.

Non-interest income was $17.7 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.

 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 2020, 2019 or 2018.

                Table 4 presents a summary of non-interest income for the years ended December 31, 2020, 2019 and 2018.

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Table 4 - Non-Interest Income

(Dollars in thousands)	2020	2019	2018
Service charges	$3,528	4,576	4,355
Other service charges and fees	742	714	705
Gain on sale of securities	2,639	226	15
Mortgage banking income	2,469	1,264	851
Insurance and brokerage commissions	897	877	824
Gain/(loss) on sale and write-down of other real estate	(47)	(11)	17
Visa debit card income	4,237	4,145	3,911
Appraisal management fee income	6,754	4,484	3,206
Miscellaneous	1,695	1,464	2,282
Total non-interest income	$22,914	17,739	16,166

Non-Interest Expense. Non-interest expense was $48.9 million for the year ended December 31, 2020, compared to $45.5 million for the year ended December 31, 2019. The increase in non-interest expense was primarily attributable to a $1.9 million increase in appraisal management fee expense due to an increase in the volume of appraisals and a $570,000 increase in other non-interest expense. The increase in other non-interest expense is primarily due to a $1.1 million FHLB borrowings prepayment penalty in December 2020.

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.

Table 5 presents a summary of non-interest expense for the years ended December 31, 2020, 2019 and 2018.

Table 5 - Non-Interest Expense

(Dollars in thousands)	2020	2019	2018
Salaries and employee benefits	$23,538	23,238	21,530
Occupancy expense	7,933	7,364	7,170
Office supplies	528	467	503
FDIC deposit insurance	263	119	328
Visa debit card expense	1,012	890	994
Professional services	502	517	513
Postage	190	294	249
Telephone	794	802	678
Director fees and expense	360	394	312
Advertising	787	1,021	922
Consulting fees	1,078	972	1,012
Taxes and licenses	295	287	288
Foreclosure/OREO expense	20	28	58
Internet banking expense	729	681	603
FHLB advance prepayment penalty	1,100	-	-
Appraisal management fee expense	5,274	3,421	2,460
Other operating expense	4,528	5,022	4,954
Total non-interest expense	$48,931	45,517	42,574

Income Taxes. The Company reported income tax expense of $2.5 million, $3.1 million and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company’s effective tax rates were 17.98%, 18.23% and 16.39% in 2020, 2019 and 2018, respectively.

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,

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

                The Company uses several 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, 2020, the Company’s core deposits totaled $1.2 billion, or 98% of total deposits.

The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $122.0 million and $121.9 million at December 31, 2020 and 2019, respectively. These balances represent 9.78% of total deposits and securities sold under agreements to repurchase combined at December 31, 2020, as compared to 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 $108.9 million, or 8.92% of total deposits at December 31, 2020, as compared 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 $13.1 million, or 49.86% of total securities sold under agreements to repurchase at December 31, 2020, as compared to $14.2 million, or 58.76% of total securities sold under agreements to repurchase at December 31, 2019.

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 0.88% as of December 31, 2020.

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, 2020. At December 31, 2020, the carrying value of loans pledged as collateral totaled approximately $165.1 million. The remaining availability under the line of credit with the FHLB was $111.4 million at December 31, 2020. The Bank had no borrowings from the FRB at December 31, 2020. 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, 2020, the carrying value of loans pledged as collateral to the FRB totaled approximately $469.5 million. Availability under the line of credit with the FRB was $340.0 million at December 31, 2020.

The Bank also had the ability to borrow up to $100.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2020.

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 28.12%, 18.20% and 16.09% at December 31, 2020, 2019 and 2018, 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, 2020, 2019 and 2018.

As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $9.2 million during 2020. Net cash used in investing activities was $149.0 million during 2020 and net cash provided by financing activities was $249.0 million during 2020.

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, 2020.

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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	$255,956	8,929	19	264,904	683,735	948,639
Mortgage loans held for sale	9,139	-	-	9,139	-	9,139
Investment securities available for sale	-	3,302	7,403	10,705	234,544	245,249
Interest-bearing deposit accounts	118,843	-	-	118,843	-	118,843
Other interest-earning assets	-	-	-	-	4,619	4,619
Total interest-earning assets	383,938	12,231	7,422	403,591	922,898	1,326,489
Interest-bearing liabilities:
NOW, savings, and money market deposits	657,834	-	-	657,834	-	657,834
Time deposits	9,805	10,104	37,565	57,474	48,798	106,272
Securities sold under
agreement to repurchase	26,201	-	-	26,201	-	26,201
Trust preferred securities	-	15,464	-	15,464	-	15,464
Total interest-bearing liabilities	693,840	25,568	37,565	756,973	48,798	805,771
Interest-sensitive gap	$(309,902)	(13,337)	(30,143)	(353,382)	874,100	520,718
Cumulative interest-sensitive gap	$(309,902)	(323,239)	(353,382)	(353,382)	520,718
	55.34%	47.84%	19.76%	53.32%	1891.26%

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, 2020, rate sensitive assets and rate sensitive liabilities totaled $1.3 billion and $793.2 million, respectively.

Included in the rate sensitive assets are $232.7 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, 2020, the Bank had $144.0 million in loans with interest rate floors. The floors were in effect on $117.4 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.83% 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.

All of the Company’s investment securities are held in the AFS category. At December 31, 2020 the market value of AFS securities totaled $245.2 million, as compared to $195.7 million and $194.6 million at December 31, 2019 and 2018, respectively. Table 7 presents the fair value of the AFS securities held at December 31, 2020, 2019 and 2018.

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Table 7 - Summary of Investment Portfolio

(Dollars in thousands)	2020	2019	2018
U. S. Government sponsored enterprises	$7,507	28,397	34,634
State and political subdivisions	92,428	88,143	107,591
Mortgage-backed securities	145,314	78,956	52,103
Trust preferred securities	-	250	250
Total securities	$245,249	195,746	194,578

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 $200.8 million in 2020, $185.3 million in 2019 and $209.7 million in 2018. Table 8 presents the book value of AFS securities held by the Company by maturity category at December 31, 2020. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields are calculated on a tax equivalent basis. Yields and interest income on tax-exempt investments have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities.

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	$-	-	3,314	3.02%	1,110	0.89%	3,083	1.99%	7,507	2.50%
State and political subdivisions	10,704	3.38%	12,684	2.40%	64,716	2.46%	4,324	3.52%	92,428	2.56%
Mortgage-backed securities	-	-	-	-	14,442	1.77%	130,872	2.05%	145,314	2.01%
Total securities	$10,704	3.38%	15,998	2.95%	80,268	1.87%	138,279	2.44%	245,249	2.06%

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, 2020, the Company had $104.2 million in residential mortgage loans, $96.6 million in home equity loans and $476.7 million in commercial mortgage loans, which include $375.0 million secured by commercial property and $101.7 million secured by residential property. Residential mortgage loans include $26.9 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

At December 31, 2020, the Bank had $94.1 million in construction and land development loans. Table 9 presents a breakout of these loans.

Table 9 - Construction and Land Development Loans

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

  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.

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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
	2020		2019		2018		2017		2016
(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	$94,124	9.92%	92,596	10.90%	94,178	11.71%	84,987	11.19%	61,749	8.53%
Single-family residential	272,325	28.71%	269,475	31.71%	252,983	31.47%	246,703	32.47%	240,700	33.25%
Single-family residential- Banco de la
Gente non-traditional	26,883	2.83%	30,793	3.62%	34,261	4.26%	37,249	4.90%	40,189	5.55%
Commercial	332,971	35.10%	291,255	34.27%	270,055	33.59%	248,637	32.73%	247,521	34.20%
Multifamily and farmland	48,880	5.15%	48,090	5.66%	33,163	4.12%	28,937	3.81%	21,047	2.91%
Total real estate loans	775,183	81.72%	732,209	86.16%	684,640	85.15%	646,513	85.10%	611,206	84.44%
Loans not secured by real estate
Commercial loans	161,740	17.05%	100,263	11.80%	97,465	12.12%	89,022	11.71%	87,596	12.11%
Farm loans	855	0.09%	1,033	0.12%	926	0.12%	1,204	0.16%	-	0.00%
Consumer loans	7,113	0.75%	8,432	0.99%	9,165	1.14%	9,888	1.30%	9,832	1.36%
All other loans	3,748	0.40%	7,937	0.93%	11,827	1.47%	13,137	1.73%	15,177	2.10%
Total loans	948,639	100.00%	849,874	100.00%	804,023	100.00%	759,764	100.00%	723,811	100.00%
Less: Allowance for loan losses	9,908		6,680		6,445		6,366		7,550
Net loans	$938,731		843,194		797,578		753,398		716,261

As of December 31, 2020, gross loans outstanding were $948.6 million, as compared to $849.9 million at December 31, 2019. Average loans represented 74% and 79% of average total earning assets for the years ended December 31, 2020 and 2019, respectively. The Bank had $9.1 million and $4.4 million in mortgage loans held for sale as of December 31, 2020 and 2019, respectively.

TDR loans modified in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8 million and $4.3 million at December 31, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at December 31, 2020 and December 31, 2019.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of December 31, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of December 31, 2020 amounted to $99.0 million. PPP loans outstanding amounted to $75.8 million at December 31, 2020. PPP loans are reported in Commercial loans not secured by real estate in Table 10 above. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of December 31, 2020. The Bank has recognized $1.4 million PPP loan fee income as of December 31, 2020. PPP loan fee income is reported in interest and fees on loans in the Consolidated Statements of Earnings on page A-31.

The Bank has continued to modify payments on loans due to the COVID-19 pandemic. At September 30, 2020, loans totaling $119.7 million had payment modifications due to the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. Payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

Table 11 identifies the maturities of all loans as of December 31, 2020 and addresses the sensitivity of these loans to changes in interest rates.

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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	$34,977	23,058	36,089	94,124
Single-family residential	120,291	78,787	73,247	272,325
Single-family residential- Banco de la Gente
stated income	12,497	-	14,386	26,883
Commercial	70,231	158,119	104,621	332,971
Multifamily and farmland	10,289	22,011	16,580	48,880
Total real estate loans	248,285	281,975	244,923	775,183
Loans not secured by real estate
Commercial loans	36,055	105,289	20,396	161,740
Farm loans	776	79	-	855
Consumer loans	3,776	2,638	699	7,113
All other loans	1,947	1,369	432	3,748
Total loans	$290,839	391,350	266,450	948,639
Total fixed rate loans	$25,935	357,413	266,450	649,798
Total floating rate loans	264,904	33,937	-	298,841
Total loans	$290,839	391,350	266,450	948,639

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, 2020, outstanding loan commitments totaled $299.0 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 (including those arising out of the COVID-19 pandemic); and

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

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

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

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

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

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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.

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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.

Net charge-offs for 2020, 2019 and 2018 were $1.0 million, $628,000 and $711,000, respectively. The ratio of net charge-offs to average total loans was 0.11%in 2020, 0.07% in 2018 and 0.09% in 2018. The years ended December 31, 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 not remain near these historical lows. The allowance for loan losses was $9.9 million or 1.04% of total loans outstanding at December 31, 2020. For December 31, 2019 and 2018, the allowance for loan losses amounted to $6.7 million or 0.79% of total loans outstanding and $6.4 million, or 0.80% of total loans outstanding, respectively.

Table 12 presents the percentage of loans assigned to each risk grade at December 31, 2020 and 2019.

Table 12 - Loan Risk Grade Analysis
	Percentage of Loans
	By Risk Grade
Risk Grade	2020	2019
Risk Grade 1 (Excellent Quality)	1.18%	1.16%
Risk Grade 2 (High Quality)	20.45%	24.46%
Risk Grade 3 (Good Quality)	65.70%	62.15%
Risk Grade 4 (Management Attention)	9.75%	10.02%
Risk Grade 5 (Watch)	2.20%	1.45%
Risk Grade 6 (Substandard)	0.72%	0.76%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

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)	2020	2019	2018	2017	2016
Allowance for loan losses at beginning	$6,680	6,445	6,366	7,550	9,589
Loans charged off:
Commercial	903	389	54	194	146
Real estate - mortgage	72	43	574	315	593
Real estate - construction	5	21	53	-	7
Consumer	434	623	452	473	492
Total loans charged off	1,414	1,076	1,133	982	1,238
Recoveries of losses previously charged off:
Commercial	34	83	32	31	170
Real estate - mortgage	141	115	212	106	74
Real estate - construction	36	45	10	14	10
Consumer	172	205	168	154	151
Total recoveries	383	448	422	305	405
Net loans charged off	1,031	628	711	677	833
Provision for loan losses	4,259	863	790	(507)	(1,206)
Allowance for loan losses at end of year	$9,908	6,680	6,445	6,366	7,550
Loans charged off net of recoveries, as
a percent of average loans outstanding	0.11%	0.07%	0.09%	0.09%	0.12%
Allowance for loan losses as a percent
of total loans outstanding at end of year	1.04%	0.79%	0.80%	0.84%	1.04%

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Non-performing Assets. Non-performing assets were $3.9 million or 0.27% of total assets at December 31, 2020, compared to $3.6 million or 0.31% of total assets at December 31, 2019. Non-performing assets include $3.5 million in commercial and residential mortgage loans, $226,000 in other loans and $128,000 in other real estate owned at December 31, 2020, compared to $3.4 million in commercial and residential mortgage loans and $154,000 in other loans at December 31, 2019. Other real estate owned totaled $128,000 at December 31, 2020. The Bank had no other real estate owned at December 31, 2019. The Bank had no repossessed assets as of December 31, 2020 and 2019.

At December 31, 2020, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $3.8 million or 0.40% of total loans. Non-performing loans at December 31, 2019 were $3.6 million or 0.42% 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, 2020 and 2019.

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)	2020	2019	2018	2017	2016
Non-accrual loans	$3,758	3,553	3,314	3,711	3,825
Loans 90 days or more past due and still accruing	-	-	-	-	-
Total non-performing loans	3,758	3,553	3,314	3,711	3,825
All other real estate owned	128	-	27	118	283
Repossessed assets	-	-	-	-	-
Total non-performing assets	$3,886	3,553	3,341	3,829	4,108
TDR loans not included in above,
(not 90 days past due or on nonaccrual)	$1,610	2,533	3,173	2,543	3,337
As a percent of total loans at year end
Non-accrual loans	0.40%	0.42%	0.41%	0.49%	0.53%
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	0.27%	0.31%	0.31%	0.35%	0.38%
Total non-performing loans
as a percent of total loans at year-end	0.40%	0.42%	0.41%	0.49%	0.53%

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, 2020, total deposits were $1.2 billion, as compared to $966.5 million at December 31, 2019. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.2 billion at December 31, 2020, as compared to $932.2 million at December 31, 2019.

Time deposits in amounts of $250,000 or more totaled $25.8 million and $34.3 million at December 31, 2020 and 2019, respectively. At December 31, 2020, brokered deposits amounted to $12.4 million, as compared to $22.3 million at December 31, 2019. Certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) included in brokered deposits amounted to $4.3 million and $3.1 million as of December 31, 2020 and 2019, 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, 2020 have a weighted average rate of 1.43% with a weighted average original term of 32 months.

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Table 15 is a summary of the maturity distribution of time deposits in amounts of $250,000 or more as of December 31, 2020.

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

(Dollars in thousands)	2020
Three months or less	$3,658
Over three months through six months	3,297
Over six months through twelve months	3,871
Over twelve months	14,945
Total	$25,771

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, 2020 and 2019. Average FHLB borrowings for 2020 and 2019 were $60.8 million and $19.6 million, respectively. The maximum amount of outstanding FHLB borrowings was $70.0 million in 2020.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, 2020 and 2019. 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, 2020, the carrying value of loans pledged as collateral totaled approximately $469.5 million.

Securities sold under agreements to repurchase were $26.2 million at December 31, 2020, as compared to $24.2 million at December 31, 2019.

Junior subordinated debentures were $15.5 million and $15.6 million as of December 31, 2020 and 2019, respectively.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of December 31, 2020 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	$-	-	-	15,464	15,464
Operating lease obligations	601	842	629	1,011	3,083
Total	$601	842	629	16,475	18,547
Other Commitments
Commitments to extend credit	$117,428	31,300	15,293	135,018	299,039
Standby letters of credit
and financial guarantees written	4,745	-	-	-	4,745
Income tax credits	54	74	12	44	184
Total	$122,227	31,374	15,305	135,062	303,968

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

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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, 2020 or 2019.  

Capital Resources. Shareholders’ equity was $139.9 million, or 9.89% of total assets, as of December 31, 2020, as compared to $134.1 million, or 11.61% of total assets, as of December 31, 2019.

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 9.89%, 11.61% and 11.31% for 2020, 2019 and 2018, respectively. The return on average shareholders’ equity was 8.04% at December 31, 2020, as compared to 10.45% and 10.81% at December 31, 2019 and December 31, 2018, respectively. Total cash dividends paid on common stock were $4.4 million, $3.9 million and $3.1 million during 2020, 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.

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 2020, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3 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 $3.0 million, or 126,800 shares of its common stock, under this stock repurchase program as of December 31, 2020.

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

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million in trust preferred securities at December 31, 2020 and 2019. The Company’s Tier 1 capital ratio was 15.07% and 15.37% at December 31, 2020 and December 31, 2019, 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 16.07% and 16.08% at December 31, 2020 and December 31, 2019, 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 13.56% and 13.79% at December 31, 2020 and December 31, 2019, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total

A-22

average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.24% and 11.91% at December 31, 2020 and December 31, 2019, respectively.

The Bank’s Tier 1 risk-based capital ratio was 14.85% and 15.09% at December 31, 2020 and December 31, 2019, respectively. The total risk-based capital ratio for the Bank was 15.85% and 15.79% at December 31, 2020 and December 31, 2019, respectively. The Bank’s common equity Tier 1 capital ratio was 14.85% and 15.09% at December 31, 2020 and December 31, 2019, respectively. The Bank’s Tier 1 leverage capital ratio was 10.04% and 11.61% at December 31, 2020 and December 31, 2019, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at December 31, 2020.

              The Company’s key equity ratios as of December 31, 2020, 2019 and 2018 are presented in Table 17.

Table 17 - Equity Ratios

	2020	2019	2018
Return on average assets	0.83%	1.23%	1.22%
Return on average equity	8.04%	10.45%	10.81%
Dividend payout ratio	38.67%	28.00%	23.41%
Average equity to average assets	10.35%	11.78%	11.31%

Quarterly Financial Data. The Company’s consolidated quarterly operating results for the years ended December 31, 2020 and 2019 are presented in Table 18.

Table 18

(Dollars in thousands, except per share amounts)	First	Second	Third	Fourth	First	Second	Third	Fourth
Total interest income	$12,250	11,638	11,868	12,202	$12,183	12,375	12,430	12,613
Total interest expense	1,041	912	942	941	757	781	994	1,225
Net interest income	11,209	10,726	10,926	11,261	11,426	11,594	11,436	11,388
Provision for loan losses	1,521	1,417	522	799	178	77	422	186
Other income	4,595	5,239	7,132	5,948	4,120	4,385	4,708	4,526
Other expense	11,449	11,452	11,914	14,116	10,916	11,244	11,267	12,090
Income before income taxes	2,834	3,096	5,622	2,294	4,452	4,658	4,455	3,638
Income tax expense	467	535	1,113	374	785	845	834	672
Net earnings	2,367	2,561	4,509	1,920	3,667	3,813	3,621	2,966
Basic net earnings per share	$0.40	0.44	0.78	0.33	$0.61	0.64	0.62	0.50
Diluted net earnings per share	$0.40	0.44	0.78	0.33	$0.61	0.64	0.61	0.50

A-23

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, 2020, 2019 and 2018, 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, 2020. 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, 2020. 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	2021	2022	2023	2024	2025	Thereafter	Total	Fair Value
Fixed rate	$38,515	125,843	62,042	81,749	87,779	273,142	669,070	655,184
Average interest rate	4.69%	2.53%	5.18%	4.93%	4.37%	4.29%
Variable rate	$57,892	20,336	22,247	14,608	15,784	157,841	288,708	288,708
Average interest rate	3.92%	4.34%	4.13%	4.04%	4.00%	4.26%
Total							957,778	943,892
Investment Securities
Interest bearing deposits	$118,843	-	-	-	-	-	118,843	118,843
Average interest rate	0.11%	-	-	-	-	-
Securities available for sale	$9,977	7,391	3,347	632	1,062	222,840	245,249	245,249
Average interest rate	4.42%	4.35%	4.08%	2.63%	3.03%	3.24%
Nonmarketable equity securities	$-	-	-	-	-	4,155	4,155	4,155
Average interest rate	-	-	-	-	-	3.42%
Debt Obligations
Deposits	$57,902	19,395	14,815	10,926	3,821	1,114,227	1,221,086	1,216,503
Average interest rate	0.29%	0.60%	0.76%	1.15%	0.93%	0.05%
Securities sold under agreement
to repurchase	$26,201	-	-	-	-	-	26,201	26,201
Average interest rate	0.39%	-	-	-	-	-
Junior subordinated debentures	$-	-	-	-	-	15,464	15,464	15,464
Average interest rate	-	-	-	-	-	1.85%

A-24

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%	$44,228	4.08%
+2%	$43,925	3.37%
+1%	$43,302	1.90%
0%	$42,494	0.00%
-1%	$42,159	-0.79%
-2%	$42,107	-0.91%
-3%	$42,105	-0.92%

	Estimated Resulting Theoretical Market Value of Equity
Hypothetical rate change (immediate shock)	Amount	% Change
+3%	$179,805	37.72%
+2%	$176,642	35.30%
+1%	$160,149	22.67%
0%	$130,555	0.00%
-1%	$88,296	-32.37%
-2%	$83,689	-35.90%
-3%	$86,198	-33.98%

A-25

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Financial Statements

December 31, 2020, 2019 and 2018

INDEX

	PAGE(S)
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements	A-27- A-28
Financial Statements
Consolidated Balance Sheets at December 31, 2020 and 2019	A-29
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018	A-30
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018	A-31
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 and 2018	A-32
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018	A-33 - A-34
Notes to Consolidated Financial Statements	A-35 - A-71

A-26

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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

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

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

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

Critical Audit Matter

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

elliottdavis.com

A-27

Allowance for Loan Losses - Qualitative Factors

As discussed in Note 3 to the Company’s financial statements, the Company had a gross loan portfolio of approximately $948.6 million and associated allowance for loan losses of approximately $9.9 million as of December 31, 2020. As described by the Company in Note 1, the allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of the Company’s historical loan loss experience, the amount of past due and non-performing loans, specific known risks, underlying estimated values of collateral securing loans, current and anticipated economic conditions, and other factors which management believes represents the best estimate of the allowance for loan losses.

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

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

●

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

●

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

●

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

/s/ Elliott Davis, PLLC

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

Charlotte, North Carolina

March 19, 2021

A-28

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

December 31, 2020 and December 31, 2019

(Dollars in thousands)

	December 31,	December 31,
Assets	2020	2019
	(Audited)	(Audited)
Cash and due from banks, including reserve requirements
of $0 at 12/31/20 and $13,210 at 12/31/19	$42,737	48,337
Interest-bearing deposits	118,843	720
Federal funds sold	-	3,330
Cash and cash equivalents	161,580	52,387
Investment securities available for sale	245,249	195,746
Other investments	4,155	4,231
Total securities	249,404	199,977
Mortgage loans held for sale	9,139	4,417
Loans	948,639	849,874
Less allowance for loan losses	(9,908)	(6,680)
Net loans	938,731	843,194
Premises and equipment, net	18,600	18,604
Cash surrender value of life insurance	16,968	16,319
Other real estate	128	-
Right of use lease asset	3,423	3,622
Accrued interest receivable and other assets	16,882	16,362
Total assets	$1,414,855	1,154,882
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$456,980	338,004
NOW, MMDA & savings	657,834	516,757
Time, $250,000 or more	25,771	34,269
Other time	80,501	77,487
Total deposits	1,221,086	966,517
Securities sold under agreements to repurchase	26,201	24,221
Junior subordinated debentures	15,464	15,619
Lease liability	3,471	3,647
Accrued interest payable and other liabilities	8,734	10,758
Total liabilities	1,274,956	1,020,762
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued and outstanding	-	-
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,787,504 shares
at December 31, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
Retained earnings	77,628	70,663
Accumulated other comprehensive income	5,400	3,644
Total shareholders' equity	139,899	134,120
Total liabilities and shareholders' equity	$1,414,855	1,154,882

See accompanying Notes to Consolidated Financial Statements.

A-29

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands, except per share amounts)

	2020	2019	2018
Interest income:
Interest and fees on loans	$42,314	43,301	38,654
Interest on due from banks	127	213	304
Interest on federal funds sold	204	331	-
Interest on investment securities:
U.S. Government sponsored enterprises	2,361	2,670	2,333
States and political subdivisions	2,691	2,915	3,877
Other	261	171	182
Total interest income	47,958	49,601	45,350
Interest expense:
NOW, MMDA & savings deposits	1,962	1,596	769
Time deposits	947	909	472
FHLB borrowings	357	205	-
Junior subordinated debentures	370	844	790
Other	200	203	115
Total interest expense	3,836	3,757	2,146
Net interest income	44,122	45,844	43,204
Provision for loan losses	4,259	863	790
Net interest income after provision for loan losses	39,863	44,981	42,414
Non-interest income:
Service charges	3,528	4,576	4,355
Other service charges and fees	742	714	705
Gain on sale of securities	2,639	226	15
Mortgage banking income	2,469	1,264	851
Insurance and brokerage commissions	897	877	824
Appraisal management fee income	6,754	4,484	3,206
Gain (loss) on sales and write-downs of
other real estate, net	(47)	(11)	17
Miscellaneous	5,932	5,609	6,193
Total non-interest income	22,914	17,739	16,166
Non-interest expense:
Salaries and employee benefits	23,538	23,238	21,530
Occupancy	7,933	7,364	7,170
Professional fees	1,580	1,490	1,525
Advertising	787	1,021	922
Debit card expense	1,012	890	994
FDIC insurance	263	119	328
Appraisal management fee expense	5,274	3,421	2,460
Other	8,544	7,974	7,645
Total non-interest expense	48,931	45,517	42,574
Earnings before income taxes	13,846	17,203	16,006
Income tax expense	2,489	3,136	2,624
Net earnings	$11,357	14,067	13,382
Basic net earnings per share	$1.95	2.37	2.23
Diluted net earnings per share	$1.95	2.36	2.22
Cash dividends declared per share	$0.75	0.66	0.52

See accompanying Notes to Consolidated Financial Statements.

A-30

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

	2020	2019	2018
Net earnings	$11,357	14,067	13,382
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities
available for sale	4,919	3,677	(3,370)
Reclassification adjustment for gains on
securities available for sale
included in net earnings	(2,639)	(226)	(15)
Total other comprehensive gain (loss),
before income taxes	2,280	3,451	(3,385)
Income tax expense (benefit) related to other
comprehensive gain (loss):
Unrealized holding gain (losses) on securities
available for sale	1,130	845	(774)
Reclassification adjustment for gains on
securities available for sale
included in net earnings	(606)	(52)	(4)
Total income tax expense (benefit) related to
other comprehensive gain (loss)	524	793	(778)
Total other comprehensive gain (loss),
net of tax	1,756	2,658	(2,607)
Total comprehensive income	$13,113	16,725	10,775

See accompanying Notes to Consolidated Financial Statements.

A-31

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

				Accumulated
	Common	Common		Other
	Stock	Stock	Retained	Comprehensive
	Shares	Amount	Earnings	Income	Total
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	-	-	-	(2,607)	(2,607)
comprehensive income due to
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
Common stock repurchase	(126,800)	(2,999)	-	-	(2,999)
Cash dividends declared on
common stock	-	-	(4,392)	-	(4,392)
Restricted stock units exercised	2,004	57			57
Net earnings	-	-	11,357	-	11,357
Change in accumulated other
comprehensive income,
net of tax	-	-	-	1,756	1,756
Balance, December 31, 2020	5,787,504	$56,871	77,628	5,400	139,899

See accompanying Notes to Consolidated Financial Statements.

A-32

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

	2020	2019	2018
Cash flows from operating activities:
Net earnings	$11,357	14,067	13,382
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion	4,183	3,964	4,571
Provision for loan losses	4,259	863	790
Deferred income taxes	(560)	164	78
Gain on sale of investment securities	(2,639)	(226)	(15)
Gain on sale of other real estate	-	(6)	(17)
Write-down of other real estate	47	17	-
(Gain) loss on sale and writedowns of premises and equipment	-	239	(544)
Restricted stock expense	27	270	85
Proceeds from sales of loans held for sale	112,426	56,364	35,922
Origination of loans held for sale	(117,148)	(60,101)	(35,745)
Change in:
Cash surrender value of life insurance	(380)	(383)	(384)
Right of use lease asset	199	787	-
Other assets	(382)	952	(3,695)
Lease liability	(176)	(762)	-
Other liabilities	(2,051)	(3,012)	2,759
Net cash provided by operating activities	9,162	13,197	17,187
Cash flows from investing activities:
Purchases of investment securities available for sale	(127,893)	(54,212)	(34,692)
Proceeds from sales, calls and maturities of investment securities
available for sale	62,408	40,561	48,241
Proceeds from paydowns of investment securities available for sale	19,169	14,489	15,556
Purchases of other investments	(45)	(45)	(2,611)
Proceeds from paydowns of other investment securities	176	176	117
Net change in FHLB stock	(55)	(1)	(4)
Net change in loans	(99,971)	(46,505)	(45,094)
Purchases of premises and equipment	(2,492)	(2,835)	(1,742)
Purchases of bank owned life insurance	(269)	-	-
Proceeds from sale of premises and equipment	-	149	1,410
Proceeds from sale of other real estate and repossessions	-	42	232
Net cash used by investing activities	(148,972)	(48,181)	(18,587)
Cash flows from financing activities:
Net change in deposits	254,569	89,304	(29,739)
Net change in securities sold under agreement to repurchase	1,980	(33,874)	20,338
Proceeds from FHLB borrowings	70,000	184,500	-
Repayments of FHLB borrowings	(70,000)	(184,500)	-
Proceeds from FRB borrowings	1	1	1
Repayments of FRB borrowings	(1)	(1)	(1)
Proceeds from Fed Funds Purchased	7,011	100,252	4,277
Repayments of Fed Funds Purchased	(7,011)	(100,252)	(4,277)
Repayments of Junior Subordinated Debentures	(155)	(5,000)	-
Common stock repurchased	(2,999)	(2,490)	-
Cash dividends paid on common stock	(4,392)	(3,939)	(3,133)
Net cash (used) provided by financing activities	249,003	44,001	(12,534)
Net change in cash and cash equivalents	109,193	9,017	(13,934)
Cash and cash equivalents at beginning of period	52,387	43,370	57,304
Cash and cash equivalents at end of period	$161,580	52,387	43,370

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PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

	2020	2019	2018
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$3,856	3,750	2,128
Income taxes	$2,781	3,206	1,163
Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net	$1,756	2,658	(2,607)
Transfer of loans to other real estate	$175	26	124
Issuance of accrued restricted stock units	$57	207	-
Recognition of lease right of use asset and lease liability	$942	4,401	-

See accompanying Notes to Consolidated Financial Statements.

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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 and Wake counties in North Carolina.

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

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

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

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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, 2020 and 2019, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are 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.

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

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regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The Bank’s Board of Directors reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

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

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

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

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020 as compared to the year ended

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               December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates. 

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

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

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance 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 income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $578,000, $729,000 and $866,000 at December 31, 2020, 2019 and 2018, 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.

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.

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

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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 the 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.

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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 “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of December 31, 2020, there were no outstanding shares under the 2009 Plan.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $89,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $146,000.

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $27,000 for the year ended December 31, 2020. The Company recognized compensation expense for restricted stock units granted under the 2009 Plan of $270,000 and $85,000 for the years ended December 31, 2019 and 2018, 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, 2020, 2019 and 2018 are as follows:

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For the year ended December 31, 2020

	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$11,357	5,808,121	$1.95
Effect of dilutive securities:
Restricted stock units	-	14,203
Diluted earnings per share	$11,357	5,822,324	$1.95

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

Revenue Recognition

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.

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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 $896,000, $876,000 and $823,000 for the years ended December 31, 2020, 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 $4.2 million, $4.1 million and $3.9 million for the years ended December 31, 2020, 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 $828,000, $692,000 and $597,000 for the years ended December 31, 2020, 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 $6.8 million, $4.5 million and $3.2 millionfor the years ended December 31, 2020, 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 year ended December 31, 2020 derived from contracts in which services are transferred at a point in time was approximately $8.1 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

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

ASU 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.

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

Topic 842 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, 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 previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2020, which may impact the Company’s financial statements.

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Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
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	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, 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.

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ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity	Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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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 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 presentation.

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Investment Securities

Investment securities available for sale at December 31, 2020 and 2019 are as follows:

(Dollars in thousands)

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

(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

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2020 and 2019 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, 2020
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$80,827	565	4,762	28	85,589	593
U.S. Government
sponsored enterprises	-	-	4,193	208	4,193	208
State and political subdivisions	7,126	87	-	-	7,126	87
Total	$87,953	652	8,955	236	96,908	888

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(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

At December 31, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $888,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2020 tables above, six out of 86 securities issued by state and political subdivisions contained unrealized losses and 29 out of 68 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 2020, 2019 or 2018.

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2020, 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, 2020
(Dollars in thousands)
	Amortized Cost	Estimated Fair Value
Due within one year	$10,576	10,705
Due from one to five years	15,236	15,997
Due from five to ten years	62,014	65,826
Due after ten years	7,315	7,407
Mortgage-backed securities	143,095	145,314
Total	$238,236	245,249

During 2020, proceeds from sales of securities available for sale were $56.3 million and resulted in net gains of $2.6 million. 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.

Securities with a fair value of approximately $77.3 million and $66.0 million at December 31, 2020 and 2019, 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, 2020 and 2019.

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(Dollars in thousands)

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

(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

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, 2020.

(Dollars in thousands)

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

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Loans

Major classifications of loans at December 31, 2020 and 2019 are summarized as follows:

(Dollars in thousands)

	December 31, 2020	December 31, 2019
Real estate loans:
Construction and land development	$94,124	92,596
Single-family residential	272,325	269,475
Single-family residential -
Banco de la Gente non-traditional	26,883	30,793
Commercial	332,971	291,255
Multifamily and farmland	48,880	48,090
Total real estate loans	775,183	732,209
Loans not secured by real estate:
Commercial loans	161,740	100,263
Farm loans	855	1,033
Consumer loans	7,113	8,432
All other loans	3,748	7,937
Total loans	948,639	849,874
Less allowance for loan losses	9,908	6,680
Total net loans	$938,731	843,194

The above table includes deferred fees, net of deferred costs, totaling $1.4 million at December 31, 2020 including $2.6 million in deferred PPP loan fees. The above table includes deferred costs, net of deferred fees, totaling $1.5 million at December 31, 2019.

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 and Wake 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, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

●

Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of December 31, 2020, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 3% of the Bank’s total loan portfolio.

●

Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of December 31, 2020, commercial real estate loans comprised approximately 35% 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, 2020, commercial loans comprised approximately 17% of the Bank’s total loan portfolio, including $75.8 million in PPP loans.

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.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of December 31, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of December 31, 2020 amounted to $99.0 million. PPP loans outstanding amounted to $75.8 million at December 31, 2021. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of December 31, 2020. The Bank has recognized $1.4 million PPP loan fee income as of December 31, 2020.

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

December 31, 2020

(Dollars in thousands)

	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$298	-	298	93,826	94,124	-
Single-family residential	3,660	270	3,930	268,395	272,325	-
Single-family residential -
Banco de la Gente non-traditional	3,566	105	3,671	23,212	26,883	-
Commercial	36	-	36	332,935	332,971	-
Multifamily and farmland	-	-	-	48,880	48,880	-
Total real estate loans	7,560	375	7,935	767,248	775,183	-
Loans not secured by real estate:
Commercial loans	-	-	-	161,740	161,740	-
Farm loans	-	-	-	855	855	-
Consumer loans	45	2	47	7,066	7,113	-
All other loans	-	-	-	3,748	3,748	-
Total loans	$7,605	377	7,982	940,657	948,639	-

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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	-

The following table presents the Bank’s non-accrual loans as of December 31, 2020 and 2019:

(Dollars in thousands)

	December 31, 2020	December 31, 2019
Real estate loans:
Construction and land development	$-	-
Single-family residential	1,266	1,378
Single-family residential -
Banco de la Gente non-traditional	1,709	1,764
Commercial	440	256
Multifamily and farmland	117	-
Total real estate loans	3,532	3,398
Loans not secured by real estate:
Commercial loans	212	122
Consumer loans	14	33
Total	$3,758	3,553

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 TDR loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans collectively evaluated for impairment totaled $5.8 million and $5.3 million at December 31, 2020 and 2019, respectively. Accruing impaired loans were $21.3 million at December 31, 2020 and December 31, 2019. Interest income recognized on accruing impaired loans was $1.2 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

A-52

The following tables present the Bank’s impaired loans as of December 31, 2020, 2019 and 2018:

December 31, 2020

(Dollars in thousands)

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

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

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2020 and 2019 are presented below. The Company’s valuation methodology is discussed in Note 16.

A-53

(Dollars in thousands)

	Fair Value Measurements December 31, 2020	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$9,139	-	-	9,139
Impaired loans	$20,369	-	-	20,369
Other real estate	$128	-	-	128

(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 December 31, 2020	Fair Value December 31, 2019	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$9,139	4,417	Rate lock commitment	N/A	N/A
Impaired loans	$20,369	20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%
Other real estate	$128	-	Appraised value	Discounts to reflect current market conditions and estimated costs to sell	0 - 25%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2020. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA.

 A-54

(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	$694	1,274	1,073	1,305	120	688	-	138	1,388	6,680
Charge-offs	(5)	(65)	-	(7)	-	(903)	-	(434)	-	(1,414)
Recoveries	36	70	-	70	-	34	-	173	-	383
Provision	471	564	(21)	844	2	1,526	-	251	622	4,259
Ending balance	$1,196	1,843	1,052	2,212	122	1,345	-	128	2,010	9,908
Ending balance: individually
evaluated for impairment	$1	4	844	8	-	-	-	-	-	857
Ending balance: collectively
evaluated for impairment	1,195	1,839	208	2,204	122	1,345	-	128	2,010	9,051
Ending balance	$1,196	1,843	1,052	2,212	122	1,345	-	128	2,010	9,908
Loans:
Ending balance	$94,124	272,325	26,883	332,971	48,880	161,740	855	10,861	-	948,639
Ending balance: individually
evaluated for impairment	$7	1,558	11,353	2,118	-	212	-	-	-	15,248
Ending balance: collectively
evaluated for impairment	$94,117	270,767	15,530	330,853	48,880	161,528	855	10,861	-	933,391

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:

 A-55

(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

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.

A-56

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2020 and 2019.

December 31, 2020
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$228	9,867	-	-	-	406	-	678	-	11,179
2- High Quality	9,092	121,331	-	40,569	22	19,187	-	2,237	1,563	194,001
3- Good Quality	76,897	115,109	10,170	241,273	44,890	128,727	832	3,826	1,477	623,201
4- Management Attention	4,917	20,012	12,312	39,370	3,274	11,571	23	336	708	92,523
5- Watch	2,906	2,947	1,901	10,871	694	1,583	-	6	-	20,908
6- Substandard	84	3,059	2,500	888	-	266	-	30	-	6,827
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$94,124	272,325	26,883	332,971	48,880	161,740	855	7,113	3,748	948,639

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

TDR loans modified in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8 million and $4.3 million at December 31, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at December 31, 2020 and December 31, 2019.

There were no new TDR modifications during the years ended December 31, 2020 and 2019.

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, 2020 and 2019. TDR loans are deemed to be in default if they become past due by 90 days or more.

At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million, the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified. These payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

A-57

(4)

Premises and Equipment

Major classifications of premises and equipment at December 31, 2020 and 2019 are summarized as follows:

(Dollars in thousands)
	2020	2019
Land	$3,970	3,690
Buildings and improvements	18,804	18,034
Furniture and equipment	26,565	24,743
Construction in process	10	395
Total premises and equipment	49,349	46,862
Less accumulated depreciation	30,749	28,258
Total net premises and equipment	$18,600	18,604

The Company recognized depreciation expense totaling $2.5 million for the year ended December 31, 2020 and $2.3 million for the years ended December 31, 2019 and 2018.

The Company had no gains or losses on the sale of or write-downs on premises and equipment for the year ended December 31, 2020. The Company has $239,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2019.

(5)

Leases

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

Total rent expense was approximately $880,000, $949,000 and $785,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, the Company had operating ROU assets of $3.4 million and operating lease liabilities of $3.5 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, 2020.

(Dollars in thousands)
	December 31, 2020
Operating lease cost $	855
Other information:
Cash paid for amounts included in the measurement of lease liabilities	833
Operating cash flows from operating leases	-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	942
Weighted-average remaining lease term - operating leases	6.95
Weighted-average discount rate - operating leases	2.69%

A-58

The following table presents lease maturities as of December 31, 2020.

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2020
2021	$754
2022	588
2023	567
2024	489
2025	433
Thereafter	1,041
Total	3,872
Less: Imputed Interest	(401)
Operating Lease Liability	$3,471

(6)

Time Deposits

At December 31, 2020, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)
2021	$57,475
2022	19,235
2023	14,815
2024	10,926
2025 and thereafter	3,821
Total	$106,272

At December 31, 2020 and 2019, the Bank had approximately $12.4 million and $22.3 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 $4.3 million and $3.1 million as of December 31, 2020 and 2019, respectively. The weighted average rate of brokered deposits as of December 31, 2020 and 2019 was 1.43% and 1.96%, respectively.

(7)

Federal Home Loan Bank and Federal Reserve Bank Borrowings

The Bank had no borrowings from the FHLB at December 31, 2020 and 2019. 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, 2020, the carrying value of loans pledged as collateral totaled approximately $165.1 million. The remaining availability under the line of credit with the FHLB was $111.4 million at December 31, 2020. The Bank incurred a $1.1 million prepayment penalty on the prepayment of a $70.0 million FHLB advance in 2020.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $1.0 million and $983,000 of FHLB stock, included in other investments, at December 31, 2020 and 2019, respectively.

As of December 31, 2020 and 2019, 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, 2020, the carrying value of loans pledged as collateral totaled approximately $469.5 million. Availability under the line of credit with the FRB was $340.0 million at December 31, 2020.

A-59

(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

The provision for income taxes is summarized as follows:

(Dollars in thousands)
	2020	2019	2018
Current expense	$3,049	2,972	2,546
Deferred income tax expense	(560)	164	78
Total income tax	$2,489	3,136	2,624

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)
	2020	2019	2018
Tax expense at statutory rate	$2,908	3,613	3,361
State income tax, net of federal income tax effect	261	351	358
Tax-exempt interest income	(649)	(802)	(990)
Increase in cash surrender value of life insurance	(80)	(81)	(81)
Nondeductible interest and other expense	46	40	23
Other	3	15	(47)
Total	$2,489	3,136	2,624

               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, 2020 and 2019. 

A-60

(Dollars in thousands)
	2020	2019
Deferred tax assets:
Allowance for loan losses	$2,276	1,535
Accrued retirement expense	1,190	1,150
Restricted stock	190	217
Accrued bonuses	-	265
Interest income on nonaccrual loans	1	2
Lease liability	798	838
Total gross deferred tax assets	4,455	4,007
Deferred tax liabilities:
Deferred loan fees	284	343
Accumulated depreciation	873	873
Prepaid expenses	5	7
ROU Asset	787	832
Other	41	47
Unrealized gain on available for sale securities	1,611	1,087
Total gross deferred tax liabilities	3,601	3,189
Net deferred tax asset	$854	818

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 2017 through 2020 were at year end 2020 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, 2018 and 2019 are open to audit under the statutes of limitations by the North Carolina Department of Revenue.

(10)

Related Party Transactions

The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. 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 2020 and 2019:

(Dollars in thousands)
	2020	2019
Beginning balance	$3,472	3,192
New loans	4,189	5,716
Repayments	(5,809)	(5,436)
Ending balance	$1,852	3,472

At December 31, 2020 and 2019, the Company had deposit relationships with related parties of approximately $44.5 million and $30.4 million, respectively.

A director of the Company has a membership interest in a company that previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, 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.

A-61

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
	2020	2019
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$299,039	276,338
Standby letters of credit and financial guarantees written	$4,745	3,558

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 $303.8 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 $110.5 million available for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2020.

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 $2.8 million of this commitment at December 31, 2020.

(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 2018, 2019 and 2020. The Company’s contribution pursuant to this formula was approximately $692,000, $691,000 and $670,000 for the years ended December 31, 2020, 2019 and 2018, 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 $388,000, $361,000 and $423,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company is currently paying medical benefits for certain retired employees. The Company did not incur any postretirement medical benefits expense in 2020, 2019 and 2018 due to an excess accrual balance.

A-62

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)
	2020	2019
Benefit obligation at beginning of period	$4,700	4,566
Service cost	323	299
Interest cost	63	58
Benefits paid	(216)	(223)
Benefit obligation at end of period	$4,870	4,700

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2020 and 2019 are shown in the following two tables:

(Dollars in thousands)
	2020	2019
Benefit obligation $	4,870	4,700
Fair value of plan assets	-	-

(Dollars in thousands)
	2020	2019
Funded status	$(4,870)	(4,700)
Unrecognized prior service cost/benefit	-	-
Unrecognized net actuarial loss	-	-
Net amount recognized	$(4,870)	(4,700)
Unfunded accrued liability	$(4,870)	(4,700)
Intangible assets	-	-
Net amount recognized	$(4,870)	(4,700)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2020, 2019 and 2018 consisted of the following:

(Dollars in thousands)
	2020	2019	2018
Service cost	$323	299	362
Interest cost	63	58	70
Net periodic cost	$386	357	432
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 $216,000 and $223,000 during the years ended December 31, 2020 and 2019, respectively. Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:

A-63

(Dollars in thousands)
Year ending December 31,
2021	$353
2022	$342
2023	$342
2024	$354
2025	$370
Thereafter	$8,345

(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, 2020, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2020, 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:

A-64

(Dollars in thousands)
	Actual		Minimum Regulatory Capital Ratio		Minimum Ratio plus Capital Conservation Buffer
	Amount	Ratio	Amount	Ratio	Amount	Ratio
As of December 31, 2020:
Total Capital (to Risk-Weighted Assets)
Consolidated	$159,407	16.07%	79,372	8.00%	N/A	N/A
Bank	$157,106	15.85%	79,283	8.00%	104,059	10.50%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$149,499	15.07%	59,529	6.00%	N/A	N/A
Bank	$147,198	14.85%	59,462	6.00%	84,238	8.50%
Tier 1 Capital (to Average Assets)
Consolidated	$149,499	10.24%	58,378	4.00%	N/A	N/A
Bank	$147,198	10.04%	58,662	4.00%	58,662	4.00%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$134,499	13.56%	44,647	4.50%	N/A	N/A
Bank	$147,198	14.85%	44,597	4.50%	69,373	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, 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%

(14)

Shareholders’ Equity

Shareholders’ equity was $139.9 million, or 9.89% of total assets, at December 31, 2020, compared to 134.1 million, or 11.61% of total assets, at December 31, 2019. 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, 2020 was 8.01% compared to 10.45% for the year ended December 31, 2019. Total cash dividends paid on common stock were $4.4 million and $3.9 million for the years ended December 31, 2020 and 2019, respectively.

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

A-65

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 2020, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3 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 $3.0 million, or 126,800 shares of its common stock, under this stock repurchase program as of December 31, 2020.

(15)

Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020	2019	2018
Visa debit card income	$4,237	4,145	3,911
Bank owned life insurance income	380	383	384
Gain (loss) on sale of premises and equipment	-	(239)	544
Other	1,315	1,320	1,354
	$5,932	5,609	6,193

Other non-interest expense for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020	2019	2018
ATM expense	$567	579	542
Consulting	1,078	972	1,012
Data processing	635	616	466
Deposit program expense	426	515	586
Dues and subscriptions	538	421	421
FHLB advance prepayment penalty	1,100	-	-
Internet banking expense	729	681	603
Office supplies	538	467	503
Telephone	794	802	678
Other	2,139	2,921	2,834
	$8,544	7,974	7,645

(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.

A-66

●

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.

A-67

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, 2020 and 2019. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2020 and 2019. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2020 and 2019 are as follows:

(Dollars in thousands)
		Fair Value Measurements at December 31, 2020
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$161,580	161,580	-	-	161,580
Investment securities available for sale	$245,249	-	245,249	-	245,249
Other investments	$4,155	-	-	4,155	4,155
Mortgage loans held for sale	$9,139	-	-	9,139	9,139
Loans, net	$938,731	-	-	924,845	924,845
Cash surrender value of life insurance	$16,968	-	16,968	-	16,968
Liabilities:
Deposits	$1,221,086	-	-	1,216,503	1,216,503
Securities sold under agreements
to repurchase	$26,201	-	26,201	-	26,201
Junior subordinated debentures	$15,464	-	15,464	-	15,464

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

A-68

(17)

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

Balance Sheets

December 31, 2020 and 2019

(Dollars in thousands)

Assets	2020	2019
Cash	$664	1,187
Interest-bearing time deposit	1,000	1,000
Investment in subsidiaries	152,598	146,230
Investment in PEBK Capital Trust II	464	619
Investment securities available for sale	-	250
Other assets	650	476
Total assets	$155,376	149,762
Liabilities and Shareholders' Equity
Junior subordinated debentures	$15,464	15,619
Liabilities	13	23
Shareholders' equity	139,899	134,120
Total liabilities and shareholders' equity	$155,376	149,762

Statements of Earnings

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

Revenues:	2020	2019	2018
Interest and dividend income	$7,539	12,850	4,544
Total revenues	7,539	12,850	4,544
Expenses:
Interest	370	844	790
Other operating expenses	625	629	678
Total expenses	995	1,473	1,468
Income before income tax benefit and equity in
undistributed earnings of subsidiaries	6,544	11,377	3,076
Income tax benefit	201	299	299
Income before equity in undistributed
earnings of subsidiaries	6,745	11,676	3,375
Equity in undistributed earnings of subsidiaries	4,612	2,391	10,007
Net earnings	$11,357	14,067	13,382

A-69

Statements of Cash Flows

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

	2020	2019	2018
Cash flows from operating activities:
Net earnings	$11,357	14,067	13,382
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries	(4,612)	(2,391)	(10,007)
Change in:
Other assets	(19)	57	13
Other liabilities	(10)	(13)	6
Net cash provided by operating activities	6,716	11,720	3,394
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities
available for sale	250	-	-
Net cash provided by investing activities	250	-	-
Cash flows from financing activities:
Repayment of junior subordinated debentures	(155)	(5,000)	-
Cash dividends paid on common stock	(4,392)	(3,939)	(3,133)
Stock repurchase	(2,999)	(2,490)	-
Proceeds from exercise of restricted stock units	57	207	-
Net cash used by financing activities	(7,489)	(11,222)	(3,133)
Net change in cash	(523)	498	261
Cash at beginning of year	1,187	689	428
Cash at end of year	$664	1,187	689
Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net	$1,756	2,658	(2,607)

(18)

Quarterly Data

	2020				2019
(Dollars in thousands, except per share amounts)	First	Second	Third	Fourth	First	Second	Third	Fourth
Total interest income	$12,250	11,638	11,868	12,202	$12,183	12,375	12,430	12,613
Total interest expense	1,041	912	942	941	757	781	994	1,225
Net interest income	11,209	10,726	10,926	11,261	11,426	11,594	11,436	11,388
Provision for loan losses	1,521	1,417	522	799	178	77	422	186
Other income	4,595	5,239	7,132	5,948	4,120	4,385	4,708	4,526
Other expense	11,449	11,452	11,914	14,116	10,916	11,244	11,267	12,090
Income before income taxes	2,834	3,096	5,622	2,294	4,452	4,658	4,455	3,638
Income tax expense	467	535	1,113	374	785	845	834	672
Net earnings	2,367	2,561	4,509	1,920	3,667	3,813	3,621	2,966
Basic net earnings per share	$0.40	0.44	0.78	0.33	$0.61	0.64	0.62	0.50
Diluted net earnings per share	$0.40	0.44	0.78	0.33	$0.61	0.64	0.61	0.50

A-70

(19)

Subsequent Events

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

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopened and expanded the PPP loan program through March 31, 2021. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans.  As of March 12, 2021, the Bank had originated $17.9 million in PPP loans under the expanded PPP loan program.  The Bank expects to receive approximately $967,000 in fees from the SBA for PPP loans originated under the expanded PPP loan program as of March 12, 2021.

The outstanding balance of PPP loans originated in 2020 was $55.7 million at March 12, 2021, as compared to $75.8 million at December 31, 2020.  The decrease from December 31, 2020 to March 12, 2021 was primarily due to PPP loans being forgiven by the SBA.

A-71

DIRECTORS AND OFFICERS OF THE COMPANY

DIRECTORS

Robert C. Abernethy – Chairman

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

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

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

James S. Abernethy

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

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

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

Douglas S. Howard

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

John W. Lineberger, Jr.

President, Lincoln Bonded Warehouse Company (commercial warehousing facility)

Gary E. Matthews

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

Billy L. Price, Jr. MD

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

Larry E. Robinson

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

Director and member of the Board of Directors, United Beverages of North Carolina, LLC (beer distributor)

William Gregory (Greg) Terry

President, Hole-In-One Advantage, LLC

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

Dan Ray Timmerman, Sr.

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

Benjamin I. Zachary

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

OFFICERS

Lance A. Sellers

President and Chief Executive Officer

Jeffrey N. Hooper

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

William D. Cable, Sr.

Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer

A-72

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 report dated March 19, 2021, relating to the consolidated financial statements, appearing in this Annual Report on Form 10-K of Peoples Bancorp of North Carolina, Inc. for the year ended December 31, 2020.

/s/ Elliott Davis, PLLC

Charlotte, North Carolina

March 19, 2021

EX-31.I

EXHIBIT (31)(i)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.

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

2.

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

3.

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

4.

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

a)

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

b)

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

c)

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

d)

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

5.

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

a)

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

b)

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

March 19, 2021	By:	/s/ Lance A. Sellers
Date		Lance A. Sellers
		President and Chief Executive Officer (Principal Executive Officer)

EX-31.II

EXHIBIT (31)(ii)

CERTIFICATIONS

I, Jeffrey N. Hooper, certify that:

1.

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

2.

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

3.

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

4.

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

a)

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

b)

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

c)

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

d)

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

5.

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

a)

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

b)

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

March 19, 2021	By:	/s/  Jeffrey N. Hooper
Date		Jeffrey N. Hooper
		Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

EX-32

EXHIBIT (32)

CERTIFICATION PURSUANT TO

18 U.S.C. § 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Peoples Bancorp of North Carolina, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best knowledge of the undersigned:

(1)

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

(2)

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

March 19, 2021	By:	/s/ Lance A. Sellers
Date		Lance A. Sellers
		Chief Executive Officer

March 19, 2021	By:	/s/  Jeffrey N. Hooper
Date		Jeffrey N. Hooper
		Chief Financial Officer

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2020	Feb. 28, 2021	Jun. 30, 2020
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, 2020
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	Non-accelerated Filer
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Shell Company	false
Entity Public Float			$ 77,592,691
Entity Common Stock, Shares Outstanding		5,787,504
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2020
Entity Interactive Data Current	Yes
Entity Incorporation, State or Country Code	NC
Entity File Number	000-27205

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Assets
Cash and due from banks, including reserve requirements of $0 at 12/31/20 and $13,210 at 12/31/19	$ 42,737	$ 48,337
Interest-bearing deposits	118,843	720
Federal funds sold	0	3,330
Cash and cash equivalents	161,580	52,387
Investment securities available for sale	245,249	195,746
Other investments	4,155	4,231
Total securities	249,404	199,977
Mortgage loans held for sale	9,139	4,417
Loans	948,639	849,874
Less allowance for loan losses	(9,908)	(6,680)
Net loans	938,731	843,194
Premises and equipment, net	18,600	18,604
Cash surrender value of life insurance	16,968	16,319
Other real estate	128	0
Right of use lease asset	3,423	3,622
Accrued interest receivable and other assets	16,882	16,362
Total assets	1,414,855	1,154,882
Deposits:
Non-interest bearing demand	456,980	338,004
NOW, MMDA & savings	657,834	516,757
Time, $250,000 or more	25,771	34,269
Other time	80,501	77,487
Total deposits	1,221,086	966,517
Securities sold under agreements to repurchase	26,201	24,221
Junior subordinated debentures	15,464	15,619
Lease liability	3,471	3,647
Accrued interest payable and other liabilities	8,734	10,758
Total liabilities	1,274,956	1,020,762
Commitments (Note 10)
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding	0	0
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,787,504 shares at December 31, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
Retained earnings	77,628	70,663
Accumulated other comprehensive income	5,400	3,644
Total shareholders' equity	139,899	134,120
Total liabilities and shareholders' equity	$ 1,414,855	$ 1,154,882

XML

Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Assets
Cash and due from banks, reserve requirements	$ 0	$ 13,210
Shareholders' equity:
Preferred stock, stated value (in dollars per share)	$ 0	$ 0
Preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	20,000,000	20,000,000
Common stock, shares issued (in shares)	5,787,504	5,912,300
Common stock, shares outstanding (in shares)	5,787,504	5,912,300

XML

Consolidated Statements of Earnings - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Interest income:
Interest and fees on loans	$ 42,314	$ 43,301	$ 38,654
Interest on due from banks	127	213	304
Interest on federal funds sold	204	331	0
Interest on investment securities:
U.S. Government sponsored enterprises	2,361	2,670	2,333
States and political subdivisions	2,691	2,915	3,877
Other	261	171	182
Total interest income	47,958	49,601	45,350
Interest expense:
NOW, MMDA & savings deposits	1,962	1,596	769
Time deposits	947	909	472
FHLB borrowings	357	205	0
Junior subordinated debentures	370	844	790
Other	200	203	115
Total interest expense	3,836	3,757	2,146
Net interest income	44,122	45,844	43,204
Provision for (reduction of) loan losses	4,259	863	790
Net interest income after provision for loan losses	39,863	44,981	42,414
Non-interest income:
Service charges	3,528	4,576	4,355
Other service charges and fees	742	714	705
Gain on sale of securities	2,639	226	15
Mortgage banking income	2,469	1,264	851
Insurance and brokerage commissions	897	877	824
Appraisal management fee income	6,754	4,484	3,206
Gain (loss) on sales and write-downs of other real estate	(47)	(11)	17
Miscellaneous	5,932	5,609	6,193
Total non-interest income	22,914	17,739	16,166
Non-interest expense:
Salaries and employee benefits	23,538	23,238	21,530
Occupancy	7,933	7,364	7,170
Professional fees	1,580	1,490	1,525
Advertising	787	1,021	922
Debit card expense	1,012	890	994
FDIC insurance	263	119	328
Appraisal management fee expense	5,274	3,421	2,460
Other	8,544	7,974	7,645
Total non-interest expense	48,931	45,517	42,574
Earnings before income taxes	13,846	17,203	16,006
Income tax expense	2,489	3,136	2,624
Net earnings	$ 11,357	$ 14,067	$ 13,382
Basic net earnings per share	$ 1.95	$ 2.37	$ 2.23
Diluted net earnings per share	1.95	2.36	2.22
Cash dividends declared per share	$ 0.75	$ 0.66	$ 0.52

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Statement of Comprehensive Income [Abstract]
Net earnings	$ 11,357	$ 14,067	$ 13,382
Other comprehensive income (loss):
Unrealized holding losses on securities available for sale	4,919	3,677	(3,370)
Reclassification adjustment for gains on securities available for sale included in net earnings	(2,639)	(226)	(15)
Total other comprehensive loss, before income taxes	2,280	3,451	(3,385)
Income tax benefit related to other comprehensive loss:
Unrealized holding losses on securities available for sale	1,130	845	(774)
Reclassification adjustment for gains on securities available for sale included in net earnings	(606)	(52)	(4)
Total income tax benefit related to other comprehensive loss	524	793	(778)
Total other comprehensive loss, net of tax	1,756	2,658	(2,607)
Total comprehensive income	$ 13,113	$ 16,725	$ 10,775

XML

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, 2017	5,995,256
Beginning 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
Common stock repurchase, Shares	(126,800)
Common stock repurchase, Amount	$ (2,999)			(2,999)
Cash dividends declared on common stock		(4,392)		(4,392)
Restricted stock units exercised, Shares	2,004
Restricted stock units exercised, Amount	$ 57			57
Net earnings		11,357		11,357
Change in accumulated other comprehensive income, net of tax			1,756	1,756
Ending Balance, Shares at Dec. 31, 2020	5,787,504
Ending Balance, Amount at Dec. 31, 2020	$ 56,871	$ 77,628	$ 5,400	$ 139,899

XML

Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Cash flows from operating activities:
Net earnings	$ 11,357	$ 14,067	$ 13,382
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	4,183	3,964	4,571
Provision for loan losses	4,259	863	790
Deferred income taxes	(560)	164	78
Gain on sale of investment securities	(2,639)	(226)	(15)
Gain on sale of other real estate	0	(6)	(17)
Write-down of other real estate	47	17	0
(Gain) loss on sale of premises and equipment	0	239	(544)
Restricted stock expense	27	270	85
Proceeds from sales of loans held for sale	112,426	56,364	35,922
Origination of loans held for sale	(117,148)	(60,101)	(35,745)
Change in:
Cash surrender value of life insurance	(380)	(383)	(384)
Right of use lease asset	199	787	0
Other assets	(382)	952	(3,695)
Lease liability	(176)	(762)	0
Other liabilities	(2,051)	(3,012)	2,759
Net cash provided by operating activities	9,162	13,197	17,187
Cash flows from investing activities:
Purchases of investment securities available for sale	(127,893)	(54,212)	(34,692)
Proceeds from sales, calls and maturities of investment securities available for sale	62,408	40,561	48,241
Proceeds from paydowns of investment securities available for sale	19,169	14,489	15,556
Purchases of other investments	(45)	(45)	(2,611)
Proceeds from paydowns of other investment securities	176	176	117
Net change in FHLB stock	(55)	(1)	(4)
Net change in loans	(99,971)	(46,505)	(45,094)
Purchases of premises and equipment	(2,492)	(2,835)	(1,742)
Purchases of bank owned life insurance	(269)	0	0
Proceeds from sale of premises and equipment	0	149	1,410
Proceeds from sale of other real estate and repossessions	0	42	232
Net cash used by investing activities	(148,972)	(48,181)	(18,587)
Cash flows from financing activities:
Net change in deposits	254,569	89,304	(29,739)
Net change in securities sold under agreement to repurchase	1,980	(33,874)	20,338
Proceeds from FHLB borrowings	70,000	184,500	0
Repayments of FHLB borrowings	(70,000)	(184,500)	0
Proceeds from FRB borrowings	1	1	1
Repayments of FRB borrowings	(1)	(1)	(1)
Proceeds from Fed Funds Purchased	7,011	100,252	4,277
Repayments of Fed Funds Purchased	(7,011)	(100,252)	(4,277)
Repayments of Junior Subordinated Debentures	(155)	(5,000)	0
Common stock repurchased	(2,999)	(2,490)	0
Cash dividends paid on common stock	(4,392)	(3,939)	(3,133)
Net cash (used) provided by financing activities	249,003	44,001	(12,534)
Net change in cash and cash equivalents	109,193	9,017	(13,934)
Cash and cash equivalents at beginning of period	52,387	43,370	57,304
Cash and cash equivalents at end of period	161,580	52,387	43,370
Cash paid during the year for:
Interest	3,856	3,750	2,128
Income taxes	2,781	3,206	1,163
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	1,756	2,658	(2,607)
Transfer of loans to other real estate	175	26	124
Issuance of accrued restricted stock units	57	207	0
Recognition of right of use lease asset and lease liability	$ 942	$ 4,401	$ 0

XML

1. Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2020

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 and Wake counties in North Carolina.

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

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

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company launched 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, PIS, 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, 2020 and 2019, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are 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.

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 or equal to $1.0 million as well as a sample of commercial relationships with exposures below $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank’s Board of Directors.

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

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

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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

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

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance 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 income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $578,000, $729,000 and $866,000 at December 31, 2020, 2019 and 2018, 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.

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.

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 the 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 “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of December 31, 2020, there were no outstanding shares under the 2009 Plan.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $89,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $146,000.

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $27,000 for the year ended December 31, 2020. The Company recognized compensation expense for restricted stock units granted under the 2009 Plan of $270,000 and $85,000 for the years ended December 31, 2019 and 2018, 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, 2020, 2019 and 2018 are as follows:

For the year ended December 31, 2020

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,808,121	$	1.95
Effect of dilutive securities:
Restricted stock units		-		14,203
Diluted earnings per share	$	11,357		5,822,324	$	1.95

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

Revenue Recognition

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 $896,000, $876,000 and $823,000 for the years ended December 31, 2020, 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 $4.2 million, $4.1 million and $3.9 million for the years ended December 31, 2020, 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 $828,000, $692,000 and $597,000 for the years ended December 31, 2020, 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 $6.8 million, $4.5 million and $3.2 million for the years ended December 31, 2020, 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 year ended December 31, 2020 derived from contracts in which services are transferred at a point in time was approximately $8.1 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

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

ASU 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 has applied this standard to all existing leases as of the adoption date of January 1, 2019, recording a ROU asset and a lease liability and a cumulative-effect adjustment to the opening balance of retained earnings (if applicable) in the period of adoption. With this transition method, comparative prior period disclosures will be under the previous accounting guidance for leases (Topic 840). This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

Topic 842 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 previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2020, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
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	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, 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.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity	Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 presentation.

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2. Investment Securities

12 Months Ended

Dec. 31, 2020

Investments, Debt and Equity Securities [Abstract]

Investment Securities

Investment securities available for sale at December 31, 2020 and 2019 are as follows:

(Dollars in thousands)

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

(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

The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at December 31, 2020 and 2019 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, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	80,827		565		4,762		28		85,589		593
U.S. Government
sponsored enterprises		-		-		4,193		208		4,193		208
State and political subdivisions		7,126		87		-		-		7,126		87
Total	$	87,953		652		8,955		236		96,908		888

(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

At December 31, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $888,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2020 tables above, six out of 86 securities issued by state and political subdivisions contained unrealized losses and 29 out of 68 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 2020, 2019 or 2018.

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2020, 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, 2020
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	10,576		10,705
Due from one to five years		15,236		15,997
Due from five to ten years		62,014		65,826
Due after ten years		7,315		7,407
Mortgage-backed securities		143,095		145,314
Total	$	238,236		245,249

During 2020, proceeds from sales of securities available for sale were $56.3 million and resulted in net gains of $2.6 million. 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.

Securities with a fair value of approximately $77.3 million and $66.0 million at December 31, 2020 and 2019, 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, 2020 and 2019.

(Dollars in thousands)

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

(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

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, 2020.

(Dollars in thousands)

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

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3. Loans

12 Months Ended

Dec. 31, 2020

Receivables [Abstract]

Loans

Major classifications of loans at December 31, 2020 and 2019 are summarized as follows:

(Dollars in thousands)

	December 31, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	94,124		92,596
Single-family residential		272,325		269,475
Single-family residential -
Banco de la Gente non-traditional		26,883		30,793
Commercial		332,971		291,255
Multifamily and farmland		48,880		48,090
Total real estate loans		775,183		732,209
Loans not secured by real estate:
Commercial loans		161,740		100,263
Farm loans		855		1,033
Consumer loans		7,113		8,432
All other loans		3,748		7,937
Total loans		948,639		849,874
Less allowance for loan losses		9,908		6,680
Total net loans	$	938,731		843,194

The above table includes deferred fees, net of deferred costs, totaling $1.4 million at December 31, 2020 including $2.6 million in deferred PPP loan fees. The above table includes deferred costs, net of deferred fees, totaling $1.5 million at December 31, 2019.

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 and Wake 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, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.

● Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of December 31, 2020, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional loans which were approximately 3% of the Bank’s total loan portfolio.

● Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of December 31, 2020, commercial real estate loans comprised approximately 35% 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, 2020, commercial loans comprised approximately 17% of the Bank’s total loan portfolio, including $75.8 million in PPP loans.

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.

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of December 31, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of December 31, 2020 amounted to $99.0 million. PPP loans outstanding amounted to $75.8 million at December 31, 2021. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of December 31, 2020. The Bank has recognized $1.4 million PPP loan fee income as of December 31, 2020.

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

December 31, 2020

(Dollars in thousands)

	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	298		-		298		93,826		94,124		-
Single-family residential		3,660		270		3,930		268,395		272,325		-
Single-family residential -
Banco de la Gente non-traditional		3,566		105		3,671		23,212		26,883		-
Commercial		36		-		36		332,935		332,971		-
Multifamily and farmland		-		-		-		48,880		48,880		-
Total real estate loans		7,560		375		7,935		767,248		775,183		-
Loans not secured by real estate:
Commercial loans		-		-		-		161,740		161,740		-
Farm loans		-		-		-		855		855		-
Consumer loans		45		2		47		7,066		7,113		-
All other loans		-		-		-		3,748		3,748		-
Total loans	$	7,605		377		7,982		940,657		948,639		-

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		-

The following table presents the Bank’s non-accrual loans as of December 31, 2020 and 2019:

(Dollars in thousands)

	December 31, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	-		-
Single-family residential		1,266		1,378
Single-family residential -
Banco de la Gente non-traditional		1,709		1,764
Commercial		440		256
Multifamily and farmland		117		-
Total real estate loans		3,532		3,398
Loans not secured by real estate:
Commercial loans		212		122
Consumer loans		14		33
Total	$	3,758		3,553

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 TDR loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans collectively evaluated for impairment totaled $5.8 million and $5.3 million at December 31, 2020 and 2019, respectively. Accruing impaired loans were $21.3 million at December 31, 2020 and December 31, 2019. Interest income recognized on accruing impaired loans was $1.2 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Bank’s impaired loans as of December 31, 2020, 2019 and 2018:

December 31, 2020

(Dollars in thousands)

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

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

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2020 and 2019 are presented below. The Company’s valuation methodology is discussed in Note 16.

(Dollars in thousands)

	Fair Value Measurements December 31, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	9,139		-		-		9,139
Impaired loans	$	20,369		-		-		20,369
Other real estate	$	128		-		-		128

(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 December 31, 2020		Fair Value December 31, 2019		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,139		4,417	Rate lock commitment	N/A		N/A
Impaired loans	$	20,369		20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability		0 - 25	%
Other real estate	$	128		-	Appraised value	Discounts to reflect current market conditions and estimated costs to sell		0 - 25	%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2020. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA.

(Dollars in thousands)

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

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

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, 2020 and 2019.

December 31, 2020
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	228		9,867		-		-		-		406		-		678		-		11,179
2- High Quality		9,092		121,331		-		40,569		22		19,187		-		2,237		1,563		194,001
3- Good Quality		76,897		115,109		10,170		241,273		44,890		128,727		832		3,826		1,477		623,201
4- Management Attention		4,917		20,012		12,312		39,370		3,274		11,571		23		336		708		92,523
5- Watch		2,906		2,947		1,901		10,871		694		1,583		-		6		-		20,908
6- Substandard		84		3,059		2,500		888		-		266		-		30		-		6,827
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	94,124		272,325		26,883		332,971		48,880		161,740		855		7,113		3,748		948,639

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

TDR loans modified in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8 million and $4.3 million at December 31, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at December 31, 2020 and December 31, 2019.

There were no new TDR modifications during the years ended December 31, 2020 and 2019.

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, 2020 and 2019. TDR loans are deemed to be in default if they become past due by 90 days or more.

At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million, the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified. These payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

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4. Premises and Equipment

12 Months Ended

Dec. 31, 2020

Property, Plant and Equipment [Abstract]

Premises and Equipment

Major classifications of premises and equipment at December 31, 2020 and 2019 are summarized as follows:

(Dollars in thousands)
	2020		2019
Land	$	3,970		3,690
Buildings and improvements		18,804		18,034
Furniture and equipment		26,565		24,743
Construction in process		10		395
Total premises and equipment		49,349		46,862
Less accumulated depreciation		30,749		28,258
Total net premises and equipment	$	18,600		18,604

The Company recognized depreciation expense totaling $2.5 million for the year ended December 31, 2020 and $2.3 million for the years ended December 31, 2019 and 2018.

The Company had no gains or losses on the sale of or write-downs on premises and equipment for the year ended December 31, 2020. The Company has $239,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2019.

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5. Leases

12 Months Ended

Dec. 31, 2020

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 $880,000, $949,000 and $785,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020, the Company had operating ROU assets of $3.4 million and operating lease liabilities of $3.5 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, 2020.

(Dollars in thousands)
	December 31, 2020
Operating lease cost $		855
Other information:
Cash paid for amounts included in the measurement of lease liabilities		833
Operating cash flows from operating leases		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		942
Weighted-average remaining lease term - operating leases		6.95
Weighted-average discount rate - operating leases		2.69	%

The following table presents lease maturities as of December 31, 2020.

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2020
2021	$	754
2022		588
2023		567
2024		489
2025		433
Thereafter		1,041
Total		3,872
Less: Imputed Interest		(401	)
Operating Lease Liability	$	3,471

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6. Time Deposits

12 Months Ended

Dec. 31, 2020

Time Deposits [Line Items]

Time Deposits

At December 31, 2020, the scheduled maturities of time deposits are as follows:

(Dollars in thousands)
2021	$	57,475
2022		19,235
2023		14,815
2024		10,926
2025 and thereafter		3,821
Total	$	106,272

At December 31, 2020 and 2019, the Bank had approximately $12.4 million and $22.3 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 $4.3 million and $3.1 million as of December 31, 2020 and 2019, respectively. The weighted average rate of brokered deposits as of December 31, 2020 and 2019 was 1.43% and 1.96%, respectively.

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7. Federal Home Loan Bank and Federal Reserve Bank Borrowings

12 Months Ended

Dec. 31, 2020

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, 2020 and 2019. 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, 2020, the carrying value of loans pledged as collateral totaled approximately $165.1 million. The remaining availability under the line of credit with the FHLB was $111.4 million at December 31, 2020. The Bank incurred a $1.1 million prepayment penalty on the prepayment of a $70.0 million FHLB advance in 2020.

The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $1.0 million and $983,000 of FHLB stock, included in other investments, at December 31, 2020 and 2019, respectively.

As of December 31, 2020 and 2019, 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, 2020, the carrying value of loans pledged as collateral totaled approximately $469.5 million. Availability under the line of credit with the FRB was $340.0 million at December 31, 2020.

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8. Junior Subordinated Debentures

12 Months Ended

Dec. 31, 2020

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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9. Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

The provision for income taxes is summarized as follows:

(Dollars in thousands)
	2020			2019		2018
Current expense	$	3,049			2,972		2,546
Deferred income tax expense		(560	)		164		78
Total income tax	$	2,489			3,136		2,624

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)
	2020			2019			2018
Tax expense at statutory rate	$	2,908			3,613			3,361
State income tax, net of federal income tax effect		261			351			358
Tax-exempt interest income		(649	)		(802	)		(990	)
Increase in cash surrender value of life insurance		(80	)		(81	)		(81	)
Nondeductible interest and other expense		46			40			23
Other		3			15			(47	)
Total	$	2,489			3,136			2,624

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, 2020 and 2019.

(Dollars in thousands)
	2020		2019
Deferred tax assets:
Allowance for loan losses	$	2,276		1,535
Accrued retirement expense		1,190		1,150
Restricted stock		190		217
Accrued bonuses		-		265
Interest income on nonaccrual loans		1		2
Lease liability		798		838
Total gross deferred tax assets		4,455		4,007
Deferred tax liabilities:
Deferred loan fees		284		343
Accumulated depreciation		873		873
Prepaid expenses		5		7
ROU Asset		787		832
Other		41		47
Unrealized gain on available for sale securities		1,611		1,087
Total gross deferred tax liabilities		3,601		3,189
Net deferred tax asset	$	854		818

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 2017 through 2020 were at year end 2020 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, 2018 and 2019 are open to audit under the statutes of limitations by the North Carolina Department of Revenue.

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10. Related Party Transactions

12 Months Ended

Dec. 31, 2020

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 2020 and 2019:

(Dollars in thousands)
	2020			2019
Beginning balance	$	3,472			3,192
New loans		4,189			5,716
Repayments		(5,809	)		(5,436	)
Ending balance	$	1,852			3,472

At December 31, 2020 and 2019, the Company had deposit relationships with related parties of approximately $44.5 million and $30.4 million, respectively.

A director of the Company has a membership interest in a company that previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.

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11. Commitments and Contingencies

12 Months Ended

Dec. 31, 2020

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
	2020		2019
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	299,039		276,338
Standby letters of credit and financial guarantees written	$	4,745		3,558

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 $303.8 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 $110.5 million available for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2020.

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 $2.8 million of this commitment at December 31, 2020.

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12. Employee and Director Benefit Programs

12 Months Ended

Dec. 31, 2020

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 2018, 2019 and 2020. The Company’s contribution pursuant to this formula was approximately $692,000, $691,000 and $670,000 for the years ended December 31, 2020, 2019 and 2018, 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 $388,000, $361,000 and $423,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

The Company is currently paying medical benefits for certain retired employees. The Company did not incur any postretirement medical benefits expense in 2020, 2019 and 2018 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)
	2020			2019
Benefit obligation at beginning of period	$	4,700			4,566
Service cost		323			299
Interest cost		63			58
Benefits paid		(216	)		(223	)
Benefit obligation at end of period	$	4,870			4,700

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2020 and 2019 are shown in the following two tables:

(Dollars in thousands)
	2020		2019
Benefit obligation $		4,870		4,700
Fair value of plan assets		-		-

(Dollars in thousands)
	2020			2019
Funded status	$	(4,870	)		(4,700	)
Unrecognized prior service cost/benefit		-			-
Unrecognized net actuarial loss		-			-
Net amount recognized	$	(4,870	)		(4,700	)
Unfunded accrued liability	$	(4,870	)		(4,700	)
Intangible assets		-			-
Net amount recognized	$	(4,870	)		(4,700	)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2020, 2019 and 2018 consisted of the following:

(Dollars in thousands)
	2020			2019			2018
Service cost	$	323			299			362
Interest cost		63			58			70
Net periodic cost	$	386			357			432
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 $216,000 and $223,000 during the years ended December 31, 2020 and 2019, 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,
2021	$	353
2022	$	342
2023	$	342
2024	$	354
2025	$	370
Thereafter	$	8,345

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13. Regulatory Matters

12 Months Ended

Dec. 31, 2020

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, 2020, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2020, 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, 2020:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	159,407		16.07	%		79,372		8.00	%		N/A		N/A
Bank	$	157,106		15.85	%		79,283		8.00	%		104,059		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	149,499		15.07	%		59,529		6.00	%		N/A		N/A
Bank	$	147,198		14.85	%		59,462		6.00	%		84,238		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	149,499		10.24	%		58,378		4.00	%		N/A		N/A
Bank	$	147,198		10.04	%		58,662		4.00	%		58,662		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	134,499		13.56	%		44,647		4.50	%		N/A		N/A
Bank	$	147,198		14.85	%		44,597		4.50	%		69,373		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, 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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14. Shareholders' Equity

12 Months Ended

Dec. 31, 2020

Equity [Abstract]

Shareholders' Equity

Shareholders’ equity was $139.9 million, or 9.89% of total assets, at December 31, 2020, compared to 134.1 million, or 11.61% of total assets, at December 31, 2019. 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, 2020 was 8.01% compared to 10.45% for the year ended December 31, 2019. Total cash dividends paid on common stock were $4.4 million and $3.9 million for the years ended December 31, 2020 and 2019, respectively.

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

In 2020, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3 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 $3.0 million, or 126,800 shares of its common stock, under this stock repurchase program as of December 31, 2020.

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15. Other Operating Income and Expense

12 Months Ended

Dec. 31, 2020

Other Income and Expenses [Abstract]

Other Operating Income and Expense

Miscellaneous non-interest income for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020		2019			2018
Visa debit card income	$	4,237		4,145			3,911
Bank owned life insurance income		380		383			384
Gain (loss) on sale of premises and equipment		-		(239	)		544
Other		1,315		1,320			1,354
	$	5,932		5,609			6,193

Other non-interest expense for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020		2019		2018
ATM expense	$	567		579		542
Consulting		1,078		972		1,012
Data processing		635		616		466
Deposit program expense		426		515		586
Dues and subscriptions		538		421		421
FHLB advance prepayment penalty		1,100		-		-
Internet banking expense		729		681		603
Office supplies		538		467		503
Telephone		794		802		678
Other		2,139		2,921		2,834
	$	8,544		7,974		7,645

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16. Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

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, 2020 and 2019. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2020 and 2019. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2020 and 2019 are as follows:

(Dollars in thousands)
			Fair Value Measurements at December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		-		-		161,580
Investment securities available for sale	$	245,249		-		245,249		-		245,249
Other investments	$	4,155		-		-		4,155		4,155
Mortgage loans held for sale	$	9,139		-		-		9,139		9,139
Loans, net	$	938,731		-		-		924,845		924,845
Cash surrender value of life insurance	$	16,968		-		16,968		-		16,968
Liabilities:
Deposits	$	1,221,086		-		-		1,216,503		1,216,503
Securities sold under agreements
to repurchase	$	26,201		-		26,201		-		26,201
Junior subordinated debentures	$	15,464		-		15,464		-		15,464

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

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

12 Months Ended

Dec. 31, 2020

Condensed Financial Information Disclosure [Abstract]

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

Balance Sheets

December 31, 2020 and 2019

(Dollars in thousands)

Assets	2020		2019
Cash	$	664		1,187
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		152,598		146,230
Investment in PEBK Capital Trust II		464		619
Investment securities available for sale		—		250
Other assets		650		476
Total assets	$	155,376		149,762
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,464		15,619
Liabilities		13		23
Shareholders' equity		139,899		134,120
Total liabilities and shareholders' equity	$	155,376		149,762

Statements of Earnings

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

Revenues:	2020		2019		2018
Interest and dividend income	$	7,539		12,850		4,544
Total revenues		7,539		12,850		4,544
Expenses:
Interest		370		844		790
Other operating expenses		625		629		678
Total expenses		995		1,473		1,468
Income before income tax benefit and equity in
undistributed earnings of subsidiaries		6,544		11,377		3,076
Income tax benefit		201		299		299
Income before equity in undistributed
earnings of subsidiaries		6,745		11,676		3,375
Equity in undistributed earnings of subsidiaries		4,612		2,391		10,007
Net earnings	$	11,357		14,067		13,382

Statements of Cash Flows

For the Years Ended December 31, 2020, 2019 and 2018

(Dollars in thousands)

	2020			2019			2018
Cash flows from operating activities:
Net earnings	$	11,357			14,067			13,382
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(4,612	)		(2,391	)		(10,007	)
Change in:
Other assets		(19	)		57			13
Other liabilities		(10	)		(13	)		6
Net cash provided by operating activities		6,716			11,720			3,394
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities
available for sale		250			-			-
Net cash provided by investing activities		250			-			-
Cash flows from financing activities:
Repayment of junior subordinated debentures		(155	)		(5,000	)		-
Cash dividends paid on common stock		(4,392	)		(3,939	)		(3,133	)
Stock repurchase		(2,999	)		(2,490	)		-
Proceeds from exercise of restricted stock units		57			207			-
Net cash used by financing activities		(7,489	)		(11,222	)		(3,133	)
Net change in cash		(523	)		498			261
Cash at beginning of year		1,187			689			428
Cash at end of year	$	664			1,187			689
Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net	$	1,756			2,658			(2,607	)

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18. Quarterly Data

12 Months Ended

Dec. 31, 2020

Quarterly Financial Information Disclosure [Abstract]

Quarterly Data

	2020								2019
(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First		Second		Third		Fourth
Total interest income	$	12,250		11,638		11,868		12,202	$	12,183		12,375		12,430		12,613
Total interest expense		1,041		912		942		941		757		781		994		1,225
Net interest income		11,209		10,726		10,926		11,261		11,426		11,594		11,436		11,388
Provision for loan losses		1,521		1,417		522		799		178		77		422		186
Other income		4,595		5,239		7,132		5,948		4,120		4,385		4,708		4,526
Other expense		11,449		11,452		11,914		14,116		10,916		11,244		11,267		12,090
Income before income taxes		2,834		3,096		5,622		2,294		4,452		4,658		4,455		3,638
Income tax expense		467		535		1,113		374		785		845		834		672
Net earnings		2,367		2,561		4,509		1,920		3,667		3,813		3,621		2,966
Basic net earnings per share	$	0.40		0.44		0.78		0.33	$	0.61		0.64		0.62		0.50
Diluted net earnings per share	$	0.40		0.44		0.78		0.33	$	0.61		0.64		0.61		0.50

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19. Subsequent Events

12 Months Ended

Dec. 31, 2020

Subsequent Events [Abstract]

Subsequent Events

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

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopened and expanded the PPP loan program through March 31, 2021. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans.  As of March 12, 2021, the Bank had originated $17.9 million in PPP loans under the expanded PPP loan program.  The Bank expects to receive approximately $967,000 in fees from the SBA for PPP loans originated under the expanded PPP loan program as of March 12, 2021.

The outstanding balance of PPP loans originated in 2020 was $55.7 million at March 12, 2021, as compared to $75.8 million at December 31, 2020.  The decrease from December 31, 2020 to March 12, 2021 was primarily due to PPP loans being forgiven by the SBA.

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1. Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2020

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 and Wake counties in North Carolina.

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

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

Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company launched 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, PIS, 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, 2020 and 2019, the Company classified all of its investment securities as available for sale.

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

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

Premiums and discounts are 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.

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 or equal to $1.0 million as well as a sample of commercial relationships with exposures below $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank’s Board of Directors.

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

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

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

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

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

Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance 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 income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.

Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $578,000, $729,000 and $866,000 at December 31, 2020, 2019 and 2018, 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.

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.

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 the 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 “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of December 31, 2020, there were no outstanding shares under the 2009 Plan.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $89,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $146,000.

The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $27,000 for the year ended December 31, 2020. The Company recognized compensation expense for restricted stock units granted under the 2009 Plan of $270,000 and $85,000 for the years ended December 31, 2019 and 2018, 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, 2020, 2019 and 2018 are as follows:

For the year ended December 31, 2020

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,808,121	$	1.95
Effect of dilutive securities:
Restricted stock units		-		14,203
Diluted earnings per share	$	11,357		5,822,324	$	1.95

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

Revenue Recognition

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 $896,000, $876,000 and $823,000 for the years ended December 31, 2020, 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 $4.2 million, $4.1 million and $3.9 million for the years ended December 31, 2020, 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 $828,000, $692,000 and $597,000 for the years ended December 31, 2020, 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 $6.8 million, $4.5 million and $3.2 million for the years ended December 31, 2020, 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 year ended December 31, 2020 derived from contracts in which services are transferred at a point in time was approximately $8.1 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

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

ASU 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 has applied this standard to all existing leases as of the adoption date of January 1, 2019, recording a ROU asset and a lease liability and a cumulative-effect adjustment to the opening balance of retained earnings (if applicable) in the period of adoption. With this transition method, comparative prior period disclosures will be under the previous accounting guidance for leases (Topic 840). This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.

Topic 842 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 previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.

The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2020, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
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	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, 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.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity	Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 presentation.

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1. Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2020

Accounting Policies [Abstract]

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

For the year ended December 31, 2020

	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	11,357		5,808,121	$	1.95
Effect of dilutive securities:
Restricted stock units		-		14,203
Diluted earnings per share	$	11,357		5,822,324	$	1.95

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

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2. Investment Securities (Tables)

12 Months Ended

Dec. 31, 2020

Investments, Debt and Equity Securities [Abstract]

Investment securities available for sale

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

	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

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

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

	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

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

December 31, 2020
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	10,576		10,705
Due from one to five years		15,236		15,997
Due from five to ten years		62,014		65,826
Due after ten years		7,315		7,407
Mortgage-backed securities		143,095		145,314
Total	$	238,236		245,249

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

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

	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

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

	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)		(250	)
Transfers in and/or (out) of Level 3		-
Balance, end of period	$	-
Change in unrealized gain/(loss) for assets still held in Level 3	$	-

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3. Loans (Tables)

12 Months Ended

Dec. 31, 2020

Receivables [Abstract]

Major classifications of loans

	December 31, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	94,124		92,596
Single-family residential		272,325		269,475
Single-family residential -
Banco de la Gente non-traditional		26,883		30,793
Commercial		332,971		291,255
Multifamily and farmland		48,880		48,090
Total real estate loans		775,183		732,209
Loans not secured by real estate:
Commercial loans		161,740		100,263
Farm loans		855		1,033
Consumer loans		7,113		8,432
All other loans		3,748		7,937
Total loans		948,639		849,874
Less allowance for loan losses		9,908		6,680
Total net loans	$	938,731		843,194

Age analysis of past due loans, by loan type

December 31, 2020

(Dollars in thousands)

	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	298		-		298		93,826		94,124		-
Single-family residential		3,660		270		3,930		268,395		272,325		-
Single-family residential -
Banco de la Gente non-traditional		3,566		105		3,671		23,212		26,883		-
Commercial		36		-		36		332,935		332,971		-
Multifamily and farmland		-		-		-		48,880		48,880		-
Total real estate loans		7,560		375		7,935		767,248		775,183		-
Loans not secured by real estate:
Commercial loans		-		-		-		161,740		161,740		-
Farm loans		-		-		-		855		855		-
Consumer loans		45		2		47		7,066		7,113		-
All other loans		-		-		-		3,748		3,748		-
Total loans	$	7,605		377		7,982		940,657		948,639		-

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		-

Non-accrual loans

	December 31, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	-		-
Single-family residential		1,266		1,378
Single-family residential -
Banco de la Gente non-traditional		1,709		1,764
Commercial		440		256
Multifamily and farmland		117		-
Total real estate loans		3,532		3,398
Loans not secured by real estate:
Commercial loans		212		122
Consumer loans		14		33
Total	$	3,758		3,553

Impaired loans

December 31, 2020

(Dollars in thousands)

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

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

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, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	9,139		-		-		9,139
Impaired loans	$	20,369		-		-		20,369
Other real estate	$	128		-		-		128

	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	$	-		-		-		-

	Fair Value December 31, 2020		Fair Value December 31, 2019		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,139		4,417	Rate lock commitment	N/A		N/A
Impaired loans	$	20,369		20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability		0 - 25	%
Other real estate	$	128		-	Appraised value	Discounts to reflect current market conditions and estimated costs to sell		0 - 25	%

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	$	694			1,274			1,073			1,305			120		688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-		(903	)		-		(434	)		-		(1,414	)
Recoveries		36			70			-			70			-		34			-		173			-		383
Provision		471			564			(21	)		844			2		1,526			-		251			622		4,259
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Ending balance: individually
evaluated for impairment	$	1			4			844			8			-		-			-		-			-		857
Ending balance: collectively
evaluated for impairment		1,195			1,839			208			2,204			122		1,345			-		128			2,010		9,051
Ending balance	$	1,196			1,843			1,052			2,212			122		1,345			-		128			2,010		9,908
Loans:
Ending balance	$	94,124			272,325			26,883			332,971			48,880		161,740			855		10,861			-		948,639
Ending balance: individually
evaluated for impairment	$	7			1,558			11,353			2,118			-		212			-		-			-		15,248
Ending balance: collectively
evaluated for impairment	$	94,117			270,767			15,530			330,853			48,880		161,528			855		10,861			-		933,391

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

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

December 31, 2020
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	228		9,867		-		-		-		406		-		678		-		11,179
2- High Quality		9,092		121,331		-		40,569		22		19,187		-		2,237		1,563		194,001
3- Good Quality		76,897		115,109		10,170		241,273		44,890		128,727		832		3,826		1,477		623,201
4- Management Attention		4,917		20,012		12,312		39,370		3,274		11,571		23		336		708		92,523
5- Watch		2,906		2,947		1,901		10,871		694		1,583		-		6		-		20,908
6- Substandard		84		3,059		2,500		888		-		266		-		30		-		6,827
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	94,124		272,325		26,883		332,971		48,880		161,740		855		7,113		3,748		948,639

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

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4. Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2020

Property, Plant and Equipment [Abstract]

Summary of premises and equipment

(Dollars in thousands)
	2020		2019
Land	$	3,970		3,690
Buildings and improvements		18,804		18,034
Furniture and equipment		26,565		24,743
Construction in process		10		395
Total premises and equipment		49,349		46,862
Less accumulated depreciation		30,749		28,258
Total net premises and equipment	$	18,600		18,604

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5. Leases (Tables)

12 Months Ended

Dec. 31, 2020

Leases [Abstract]

Lease expense

(Dollars in thousands)
	December 31, 2020
Operating lease cost $		855
Other information:
Cash paid for amounts included in the measurement of lease liabilities		833
Operating cash flows from operating leases		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		942
Weighted-average remaining lease term - operating leases		6.95
Weighted-average discount rate - operating leases		2.69	%

Maturity analysis of operating lease liabilities

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	December 31, 2020
2021	$	754
2022		588
2023		567
2024		489
2025		433
Thereafter		1,041
Total		3,872
Less: Imputed Interest		(401	)
Operating Lease Liability	$	3,471

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6. Time Deposits (Tables)

12 Months Ended

Dec. 31, 2020

Time Deposits [Line Items]

Scheduled maturities of time deposits

(Dollars in thousands)
2021	$	57,475
2022		19,235
2023		14,815
2024		10,926
2025 and thereafter		3,821
Total	$	106,272

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9. Income Taxes (Tables)

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Components of income tax expense (benefit)

(Dollars in thousands)
	2020			2019		2018
Current expense	$	3,049			2,972		2,546
Deferred income tax expense		(560	)		164		78
Total income tax	$	2,489			3,136		2,624

Schedule of effective income Tax rate reconciliation

(Dollars in thousands)
	2020			2019			2018
Tax expense at statutory rate	$	2,908			3,613			3,361
State income tax, net of federal income tax effect		261			351			358
Tax-exempt interest income		(649	)		(802	)		(990	)
Increase in cash surrender value of life insurance		(80	)		(81	)		(81	)
Nondeductible interest and other expense		46			40			23
Other		3			15			(47	)
Total	$	2,489			3,136			2,624

Schedule of deferred tax assets and liabilities

(Dollars in thousands)
	2020		2019
Deferred tax assets:
Allowance for loan losses	$	2,276		1,535
Accrued retirement expense		1,190		1,150
Restricted stock		190		217
Accrued bonuses		-		265
Interest income on nonaccrual loans		1		2
Lease liability		798		838
Total gross deferred tax assets		4,455		4,007
Deferred tax liabilities:
Deferred loan fees		284		343
Accumulated depreciation		873		873
Prepaid expenses		5		7
ROU Asset		787		832
Other		41		47
Unrealized gain on available for sale securities		1,611		1,087
Total gross deferred tax liabilities		3,601		3,189
Net deferred tax asset	$	854		818

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10. Related Party Transactions (Tables)

12 Months Ended

Dec. 31, 2020

Related Party Transactions [Abstract]

Summary of activity for related party loans

(Dollars in thousands)
	2020			2019
Beginning balance	$	3,472			3,192
New loans		4,189			5,716
Repayments		(5,809	)		(5,436	)
Ending balance	$	1,852			3,472

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11. Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2020

Commitments and Contingencies Disclosure [Abstract]

Financial instruments with credit risk

(Dollars in thousands)
	Contractual Amount
	2020		2019
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit	$	299,039		276,338
Standby letters of credit and financial guarantees written	$	4,745		3,558

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12. Employee and Director Benefit Programs (Tables)

12 Months Ended

Dec. 31, 2020

Retirement Benefits [Abstract]

Change in accumulated benefit obligation

(Dollars in thousands)
	2020			2019
Benefit obligation at beginning of period	$	4,700			4,566
Service cost		323			299
Interest cost		63			58
Benefits paid		(216	)		(223	)
Benefit obligation at end of period	$	4,870			4,700

Amounts recognized in the Consolidated Balance Sheet

(Dollars in thousands)
	2020		2019
Benefit obligation $		4,870		4,700
Fair value of plan assets		-		-

(Dollars in thousands)
	2020			2019
Funded status	$	(4,870	)		(4,700	)
Unrecognized prior service cost/benefit		-			-
Unrecognized net actuarial loss		-			-
Net amount recognized	$	(4,870	)		(4,700	)
Unfunded accrued liability	$	(4,870	)		(4,700	)
Intangible assets		-			-
Net amount recognized	$	(4,870	)		(4,700	)

Schedule of net benefit costs

(Dollars in thousands)
	2020			2019			2018
Service cost	$	323			299			362
Interest cost		63			58			70
Net periodic cost	$	386			357			432
Weighted average discount rate assumption
used to determine benefit obligation		5.49	%		5.49	%		5.49	%

Schedule of expected benefit payments

(Dollars in thousands)
Year ending December 31,
2021	$	353
2022	$	342
2023	$	342
2024	$	354
2025	$	370
Thereafter	$	8,345

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13. Regulatory Matters (Tables)

12 Months Ended

Dec. 31, 2020

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, 2020:
Total Capital (to Risk-Weighted Assets)
Consolidated	$	159,407		16.07	%		79,372		8.00	%		N/A		N/A
Bank	$	157,106		15.85	%		79,283		8.00	%		104,059		10.50	%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	149,499		15.07	%		59,529		6.00	%		N/A		N/A
Bank	$	147,198		14.85	%		59,462		6.00	%		84,238		8.50	%
Tier 1 Capital (to Average Assets)
Consolidated	$	149,499		10.24	%		58,378		4.00	%		N/A		N/A
Bank	$	147,198		10.04	%		58,662		4.00	%		58,662		4.00	%
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	134,499		13.56	%		44,647		4.50	%		N/A		N/A
Bank	$	147,198		14.85	%		44,597		4.50	%		69,373		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, 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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15. Other Operating Income and Expense (Tables)

12 Months Ended

Dec. 31, 2020

Other Income and Expenses [Abstract]

Other operating income and expense

Miscellaneous non-interest income for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020		2019			2018
Visa debit card income	$	4,237		4,145			3,911
Bank owned life insurance income		380		383			384
Gain (loss) on sale of premises and equipment		-		(239	)		544
Other		1,315		1,320			1,354
	$	5,932		5,609			6,193

Other non-interest expense for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands)
	2020		2019		2018
ATM expense	$	567		579		542
Consulting		1,078		972		1,012
Data processing		635		616		466
Deposit program expense		426		515		586
Dues and subscriptions		538		421		421
FHLB advance prepayment penalty		1,100		-		-
Internet banking expense		729		681		603
Office supplies		538		467		503
Telephone		794		802		678
Other		2,139		2,921		2,834
	$	8,544		7,974		7,645

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16. Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2020

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, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		-		-		161,580
Investment securities available for sale	$	245,249		-		245,249		-		245,249
Other investments	$	4,155		-		-		4,155		4,155
Mortgage loans held for sale	$	9,139		-		-		9,139		9,139
Loans, net	$	938,731		-		-		924,845		924,845
Cash surrender value of life insurance	$	16,968		-		16,968		-		16,968
Liabilities:
Deposits	$	1,221,086		-		-		1,216,503		1,216,503
Securities sold under agreements
to repurchase	$	26,201		-		26,201		-		26,201
Junior subordinated debentures	$	15,464		-		15,464		-		15,464

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

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

12 Months Ended

Dec. 31, 2020

Condensed Financial Information Disclosure [Abstract]

Balance Sheets

Assets	2020		2019
Cash	$	664		1,187
Interest-bearing time deposit		1,000		1,000
Investment in subsidiaries		152,598		146,230
Investment in PEBK Capital Trust II		464		619
Investment securities available for sale		-		250
Other assets		650		476
Total assets	$	155,376		149,762
Liabilities and Shareholders' Equity
Junior subordinated debentures	$	15,464		15,619
Liabilities		13		23
Shareholders' equity		139,899		134,120
Total liabilities and shareholders' equity	$	155,376		149,762

Statements of Earnings

Revenues:	2020		2019		2018
Interest and dividend income	$	7,539		12,850		4,544
Total revenues		7,539		12,850		4,544
Expenses:
Interest		370		844		790
Other operating expenses		625		629		678
Total expenses		995		1,473		1,468
Income before income tax benefit and equity in
undistributed earnings of subsidiaries		6,544		11,377		3,076
Income tax benefit		201		299		299
Income before equity in undistributed
earnings of subsidiaries		6,745		11,676		3,375
Equity in undistributed earnings of subsidiaries		4,612		2,391		10,007
Net earnings	$	11,357		14,067		13,382

Statements of Cash Flows

	2020			2019			2018
Cash flows from operating activities:
Net earnings	$	11,357			14,067			13,382
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries		(4,612	)		(2,391	)		(10,007	)
Change in:
Other assets		(19	)		57			13
Other liabilities		(10	)		(13	)		6
Net cash provided by operating activities		6,716			11,720			3,394
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities
available for sale		250			-			-
Net cash provided by investing activities		250			-			-
Cash flows from financing activities:
Repayment of junior subordinated debentures		(155	)		(5,000	)		-
Cash dividends paid on common stock		(4,392	)		(3,939	)		(3,133	)
Stock repurchase		(2,999	)		(2,490	)		-
Proceeds from exercise of restricted stock units		57			207			-
Net cash used by financing activities		(7,489	)		(11,222	)		(3,133	)
Net change in cash		(523	)		498			261
Cash at beginning of year		1,187			689			428
Cash at end of year	$	664			1,187			689
Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net	$	1,756			2,658			(2,607	)

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18. Quarterly Data (Tables)

12 Months Ended

Dec. 31, 2020

Quarterly Financial Information Disclosure [Abstract]

Schedule of quarterly financial information

	2020								2019
(Dollars in thousands, except per share amounts)	First		Second		Third		Fourth		First		Second		Third		Fourth
Total interest income	$	12,250		11,638		11,868		12,202	$	12,183		12,375		12,430		12,613
Total interest expense		1,041		912		942		941		757		781		994		1,225
Net interest income		11,209		10,726		10,926		11,261		11,426		11,594		11,436		11,388
Provision for loan losses		1,521		1,417		522		799		178		77		422		186
Other income		4,595		5,239		7,132		5,948		4,120		4,385		4,708		4,526
Other expense		11,449		11,452		11,914		14,116		10,916		11,244		11,267		12,090
Income before income taxes		2,834		3,096		5,622		2,294		4,452		4,658		4,455		3,638
Income tax expense		467		535		1,113		374		785		845		834		672
Net earnings		2,367		2,561		4,509		1,920		3,667		3,813		3,621		2,966
Basic net earnings per share	$	0.40		0.44		0.78		0.33	$	0.61		0.64		0.62		0.50
Diluted net earnings per share	$	0.40		0.44		0.78		0.33	$	0.61		0.64		0.61		0.50

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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, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Net Earnings Available to Common Shareholders
Basic earnings per common share									$ 11,357	$ 14,067	$ 13,382
Effect of dilutive securities: Restricted stock units									0	0	0
Diluted earnings per common share									$ 11,357	$ 14,067	$ 13,382
Common Shares
Basic earnings per common share (in shares)									5,808,121	5,941,873	5,995,256
Effect of dilutive securities: Restricted stock units (in shares)									14,203	25,438	20,240
Diluted earnings per common share (in shares)									5,822,324	5,967,311	6,015,496
Per Share Amount
Basic earnings per common share (in dollars per share)	$ 0.33	$ 0.78	$ 0.44	$ 0.4	$ 0.5	$ 0.62	$ 0.64	$ 0.61	$ 1.95	$ 2.37	$ 2.23
Diluted earnings per common share (in dollars per share)	$ 0.33	$ 0.78	$ 0.44	$ 0.4	$ 0.5	$ 0.61	$ 0.64	$ 0.61	$ 1.95	$ 2.36	$ 2.22

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1. Summary of Significant Accounting Policies (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Unpaid principal balances of mortgage loans serviced for others	$ 578	$ 729	$ 866
Compensation expense for restricted stock units	$ 27	$ 270	$ 85
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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2. Investment Securities (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Investment securities available for sale
Amortized cost	$ 238,236
Estimated fair value	245,249	$ 195,746
Mortgage-backed securities
Investment securities available for sale
Amortized cost	143,095	77,812
Gross unrealized gains	2,812	1,371
Gross unrealized losses	593	227
Estimated fair value	145,314	78,956
U.S. Government sponsored enterprises
Investment securities available for sale
Amortized cost	7,384	28,265
Gross unrealized gains	331	443
Gross unrealized losses	208	311
Estimated fair value	7,507	28,397
State and political subdivisions
Investment securities available for sale
Amortized cost	87,757	84,686
Gross unrealized gains	4,758	3,657
Gross unrealized losses	87	200
Estimated fair value	92,428	88,143
Trust preferred securities
Investment securities available for sale
Amortized cost	0	250
Gross unrealized gains	0	0
Gross unrealized losses	0	0
Estimated fair value	0	250
Total
Investment securities available for sale
Amortized cost	238,236	191,013
Gross unrealized gains	7,901	5,471
Gross unrealized losses	888	738
Estimated fair value	$ 245,249	$ 195,746

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2. Investment Securities (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	$ 87,953	$ 38,661
Less than 12 months, unrealized losses	652	387
12 months or more, fair value	8,955	12,502
12 months or more, unrealized losses	236	351
Total, fair value	96,908	51,163
Total, unrealized losses	888	738
Mortgage-backed securities
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	80,827	28,395
Less than 12 months, unrealized losses	565	177
12 months or more, fair value	4,762	6,351
12 months or more, unrealized losses	28	50
Total, fair value	85,589	34,746
Total, unrealized losses	593	227
U.S. Government sponsored enterprises
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	0	2,899
Less than 12 months, unrealized losses	0	10
12 months or more, fair value	4,193	6,151
12 months or more, unrealized losses	208	301
Total, fair value	4,193	9,050
Total, unrealized losses	208	311
State and political subdivisions
Investment securities with continuous unrealized loss position
Less than 12 months, fair value	7,126	7,367
Less than 12 months, unrealized losses	87	200
12 months or more, fair value	0	0
12 months or more, unrealized losses	0	0
Total, fair value	7,126	7,367
Total, unrealized losses	$ 87	$ 200

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2. Investment Securities (Details 2) $ in Thousands	Dec. 31, 2020 USD ($)
Amortized Cost
Due within one year	$ 10,576
Due from one to five years	15,236
Due from five to ten years	62,014
Due after ten years	7,315
Mortgage-backed securities	143,095
Total	238,236
Estimated Fair Value
Due within one year	10,705
Due from one to five years	15,997
Due from five to ten years	65,826
Due after ten years	7,407
Mortgage-backed securities	145,314
Total	$ 245,249

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2. Investment Securities (Details 3) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Estimated fair value	$ 245,249	$ 195,746
Mortgage-backed securities
Estimated fair value	145,314	78,956
Level 1 valuation	0	0
Level 2 valuation	145,314	78,956
Level 3 valuation	0	0
U.S. Government sponsored enterprises
Estimated fair value	7,507	28,397
Level 1 valuation	0	0
Level 2 valuation	7,507	28,397
Level 3 valuation	0	0
State and political subdivisions
Estimated fair value	92,428	88,143
Level 1 valuation	0	0
Level 2 valuation	92,248	88,143
Level 3 valuation	0	0
Trust preferred securities
Estimated fair value	0	250
Level 1 valuation	0	0
Level 2 valuation	0	250
Level 3 valuation	$ 0	$ 0

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2. Investment Securities (Details 4) $ in Thousands	12 Months Ended
	Dec. 31, 2020 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)	(250)
Transfers in and/or (out) of Level 3	0
Balance, end of period	0
Change in unrealized gain/(loss) for assets still held in Level 3	$ 0

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2. Investment Securities (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Investments, Debt and Equity Securities [Abstract]
Unrealized losses in the investment securites portfolio relating to debt securities	$ 888	$ 738	$ 1,400
Proceeds from sales of investment securities available for sale	56,300	20,700	36,000
Gains on sales of available for sale securities	2,600	226	15
Securities pledged to secure public deposits	$ 77,300	$ 66,000	$ 93,000

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3. Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Major classifications
Total loans	$ 948,639	$ 849,874	$ 804,023
Less allowance for loan losses	9,908	6,680	6,445	$ 6,366
Net loans	938,731	843,194
Construction and land development
Major classifications
Total loans	94,124	92,596	94,178
Less allowance for loan losses	1,196	694	813	804
Single-family residential
Major classifications
Total loans	272,325	269,475	252,983
Less allowance for loan losses	1,843	1,274	1,325	1,812
Single-family residential - Banco de la Gente Non-traditional
Major classifications
Total loans	26,883	30,793	34,261
Less allowance for loan losses	1,052	1,073	1,177	1,280
Commercial
Major classifications
Total loans	332,971	291,255	270,055
Less allowance for loan losses	2,212	1,305	1,278	1,193
Multifamily and Farmland
Major classifications
Total loans	48,880	48,090	33,163
Less allowance for loan losses	122	120	83	72
Total real estate loans
Major classifications
Total loans	775,183	732,209
Commercial loans (not secured by real estate)
Major classifications
Total loans	161,740	100,263	97,465
Less allowance for loan losses	1,345	688	626	574
Farm loans (not secured by real estate)
Major classifications
Total loans	855	1,033	926
Less allowance for loan losses	0	0	$ 0	$ 0
Consumer loans (not secured by real estate)
Major classifications
Total loans	7,113	8,432
All other loans (not secured by real estate)
Major classifications
Total loans	$ 3,748	$ 7,937

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3. Loans (Details 1) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Past due loans
Loans 30-89 days past due	$ 7,605	$ 9,743
Loans 90 or more days past due	377	737
Total past due loans	7,982	10,480
Total current loans	940,657	839,394
Total loans	948,639	849,874	$ 804,023
Accruing loans 90 or more days past due	0	0
Construction and land development
Past due loans
Loans 30-89 days past due	298	803
Loans 90 or more days past due	0	0
Total past due loans	298	803
Total current loans	93,826	91,793
Total loans	94,124	92,596
Accruing loans 90 or more days past due	0	0
Single-family residential
Past due loans
Loans 30-89 days past due	3,660	3,000
Loans 90 or more days past due	270	126
Total past due loans	3,930	3,126
Total current loans	268,395	266,349
Total loans	272,325	269,475
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	3,566	4,834
Loans 90 or more days past due	105	413
Total past due loans	3,671	5,247
Total current loans	23,212	25,546
Total loans	26,883	30,793
Accruing loans 90 or more days past due	0	0
Commercial
Past due loans
Loans 30-89 days past due	36	504
Loans 90 or more days past due	0	176
Total past due loans	36	680
Total current loans	332,935	290,575
Total loans	332,971	291,255
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	48,880	48,090
Total loans	48,880	48,090
Accruing loans 90 or more days past due	0	0
Total real estate loans
Past due loans
Loans 30-89 days past due	7,560	9,141
Loans 90 or more days past due	375	715
Total past due loans	7,935	9,856
Total current loans	767,248	722,353
Total loans	775,183	732,209
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	0	432
Loans 90 or more days past due	0	0
Total past due loans	0	432
Total current loans	161,740	99,831
Total loans	161,740	100,263
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	855	1,033
Total loans	855	1,033
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	45	170
Loans 90 or more days past due	2	22
Total past due loans	47	192
Total current loans	7,066	8,240
Total loans	7,113	8,432
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	3,748	7,937
Total loans	3,748	7,937
Accruing loans 90 or more days past due	$ 0	$ 0

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3. Loans (Details 2) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Non-accrual loans
Non-accrual loans	$ 3,758	$ 3,553
Construction and land development
Non-accrual loans
Non-accrual loans	0	0
Single-family residential
Non-accrual loans
Non-accrual loans	1,266	1,378
Single-family residential - Banco de la Gente Non-traditional
Non-accrual loans
Non-accrual loans	1,709	1,764
Commercial
Non-accrual loans
Non-accrual loans	440	256
Multifamily and Farmland
Non-accrual loans
Non-accrual loans	117	0
Total real estate loans
Non-accrual loans
Non-accrual loans	3,532	3,398
Commercial loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	212	122
Consumer loans (not secured by real estate)
Non-accrual loans
Non-accrual loans	$ 14	$ 33

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3. Loans (Details 3) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Impaired loans
Unpaid contractual principal balance	$ 22,501	$ 22,659	$ 24,126
Recorded investment with no allowance	1,672	495	511
Recorded investment with allowance	19,616	20,848	22,282
Recorded investment in impaired loans	21,288	21,343	22,793
Related allowance	919	996	1,098
Average outstanding impaired loans	21,848	21,895	23,621
Year-to-date interest income recognized	1,250	1,344	1,342
Construction and land development
Impaired loans
Unpaid contractual principal balance	108	183	281
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	108	183	279
Recorded investment in impaired loans	108	183	279
Related allowance	4	7	5
Average outstanding impaired loans	134	231	327
Year-to-date interest income recognized	8	12	19
Single-family residential
Impaired loans
Unpaid contractual principal balance	5,302	5,152	5,059
Recorded investment with no allowance	379	403	422
Recorded investment with allowance	4,466	4,243	4,188
Recorded investment in impaired loans	4,845	4,646	4,610
Related allowance	33	36	32
Average outstanding impaired loans	4,741	4,678	6,271
Year-to-date interest income recognized	262	269	261
Single-family residential - Banco de la Gente Non-traditional
Impaired loans
Unpaid contractual principal balance	13,417	15,165	16,424
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	12,753	14,371	15,776
Recorded investment in impaired loans	12,753	14,371	15,776
Related allowance	862	944	1,042
Average outstanding impaired loans	13,380	14,925	14,619
Year-to-date interest income recognized	798	956	944
Commercial
Impaired loans
Unpaid contractual principal balance	2,999	1,879	1,995
Recorded investment with no allowance	1,082	0	0
Recorded investment with allowance	1,891	1,871	1,925
Recorded investment in impaired loans	2,973	1,871	1,925
Related allowance	14	7	17
Average outstanding impaired loans	2,940	1,822	2,171
Year-to-date interest income recognized	139	91	111
Multifamily and Farmland
Impaired loans
Unpaid contractual principal balance	119	0
Recorded investment with no allowance	0	0
Recorded investment with allowance	117	0
Recorded investment in impaired loans	117	0
Related allowance	0	0
Average outstanding impaired loans	29	0
Year-to-date interest income recognized	6	0
Total real estate loans
Impaired loans
Unpaid contractual principal balance	21,945	22,379	23,759
Recorded investment with no allowance	1,461	403	422
Recorded investment with allowance	19,335	20,668	22,168
Recorded investment in impaired loans	20,796	21,071	22,590
Related allowance	913	994	1,096
Average outstanding impaired loans	21,224	21,656	23,388
Year-to-date interest income recognized	1,213	1,328	1,335
Commercial loans (not secured by real estate)
Impaired loans
Unpaid contractual principal balance	515	180	251
Recorded investment with no allowance	211	92	89
Recorded investment with allowance	244	84	1
Recorded investment in impaired loans	455	176	90
Related allowance	5	0	0
Average outstanding impaired loans	564	134	96
Year-to-date interest income recognized	32	9	0
Consumer loans (not secured by real estate)
Impaired loans
Unpaid contractual principal balance	41	100	116
Recorded investment with no allowance	0	0	0
Recorded investment with allowance	37	96	113
Recorded investment in impaired loans	37	96	113
Related allowance	1	2	2
Average outstanding impaired loans	60	105	137
Year-to-date interest income recognized	$ 5	$ 7	$ 7

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3. Loans (Details 4) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Mortgage loans held for sale	$ 9,139	$ 4,417
Impaired loans	20,369	20,347
Other real estate	128	0
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	9,139	4,417
Impaired loans	20,369	20,347
Other real estate	$ 128	$ 0

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3. Loans (Details 5) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Mortgage loans held for sale	$ 9,139	$ 4,417
Impaired loans	20,369	20,347
Other real estate	$ 128	$ 0
Mortgage loans held for sale
Valuation Technique	Rate lock commitment
Significant unobservable inputs	N/A
Mortgage loans held for sale | Minimum
Significant unobservable input value range
Mortgage loans held for sale | Maximum
Significant unobservable input value range
Impaired Loans
Valuation Technique	Appraised value and discounted cash flows
Significant unobservable inputs	Discounts to reflect current market conditions and ultimate collectability
Impaired Loans | Minimum
Significant unobservable input value range	0.00%
Impaired Loans | Maximum
Significant unobservable input value range	25.00%
Other real estate
Valuation Technique	Appraised value
Significant unobservable inputs	Discounts to reflect current market conditions and estimated costs to sell
Other real estate | Minimum
Significant unobservable input value range	0.00%
Other real estate | Maximum
Significant unobservable input value range	25.00%

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3. Loans (Details 6) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Allowance for loan losses
Beginning balance	$ 6,680	$ 6,445	$ 6,366
Charge-offs	(1,414)	(1,076)	(1,133)
Recoveries	383	448	422
Provision	4,259	863	790
Ending balance	9,908	6,680	6,445
Ending balance: individually evaluated for impairments	857	937	1,038
Ending balance: collectively evaluated for impairments	9,051	5,743	5,407
Ending balance	9,908	6,680	6,445
Loans
Ending balance	948,639	849,874	804,023
Ending balance: individually evaluated for impairment	15,248	16,063	17,947
Ending balance: collectively evaluated for impairment	933,391	833,811	786,076
Construction and land development
Allowance for loan losses
Beginning balance	694	813	804
Charge-offs	(5)	(21)	(53)
Recoveries	36	45	10
Provision	471	(143)	52
Ending balance	1,196	694	813
Ending balance: individually evaluated for impairments	1	2	0
Ending balance: collectively evaluated for impairments	1,195	692	813
Ending balance	1,196	694	813
Loans
Ending balance	94,124	92,596	94,178
Ending balance: individually evaluated for impairment	7	10	96
Ending balance: collectively evaluated for impairment	94,117	92,586	94,082
Single-family residential
Allowance for loan losses
Beginning balance	1,274	1,325	1,812
Charge-offs	(65)	(42)	(116)
Recoveries	70	66	106
Provision	564	(75)	(477)
Ending balance	1,843	1,274	1,325
Ending balance: individually evaluated for impairments	4	6	0
Ending balance: collectively evaluated for impairments	1,839	1,268	1,325
Ending balance	1,843	1,274	1,325
Loans
Ending balance	272,325	269,475	252,983
Ending balance: individually evaluated for impairment	1,558	1,697	1,779
Ending balance: collectively evaluated for impairment	270,767	267,778	251,204
Single-family residential - Banco de la Gente Non-traditional
Allowance for loan losses
Beginning balance	1,073	1,177	1,280
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	(21)	(104)	(103)
Ending balance	1,052	1,073	1,177
Ending balance: individually evaluated for impairments	844	925	1,023
Ending balance: collectively evaluated for impairments	208	148	154
Ending balance	1,052	1,073	1,177
Loans
Ending balance	26,883	30,793	34,261
Ending balance: individually evaluated for impairment	11,353	12,899	14,310
Ending balance: collectively evaluated for impairment	15,530	17,894	19,951
Commercial
Allowance for loan losses
Beginning balance	1,305	1,278	1,193
Charge-offs	(7)	(1)	(453)
Recoveries	70	49	105
Provision	844	(21)	433
Ending balance	2,212	1,305	1,278
Ending balance: individually evaluated for impairments	8	4	15
Ending balance: collectively evaluated for impairments	2,204	1,301	1,263
Ending balance	2,212	1,305	1,278
Loans
Ending balance	332,971	291,255	270,055
Ending balance: individually evaluated for impairment	2,118	1,365	1,673
Ending balance: collectively evaluated for impairment	330,853	289,890	268,382
Multifamily and Farmland
Allowance for loan losses
Beginning balance	120	83	72
Charge-offs	0	0	(5)
Recoveries	0	0	1
Provision	2	37	15
Ending balance	122	120	83
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	122	120	83
Ending balance	122	120	83
Loans
Ending balance	48,880	48,090	33,163
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	48,880	48,090	33,163
Commercial loans (not secured by real estate)
Allowance for loan losses
Beginning balance	688	626	574
Charge-offs	(903)	(389)	(54)
Recoveries	34	83	32
Provision	1,526	368	74
Ending balance	1,345	688	626
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	1,345	688	626
Ending balance	1,345	688	626
Loans
Ending balance	161,740	100,263	97,465
Ending balance: individually evaluated for impairment	212	92	89
Ending balance: collectively evaluated for impairment	161,528	100,171	97,376
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	855	1,033	926
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	855	1,033	926
Consumer And All Other Loans
Allowance for loan losses
Beginning balance	138	161	155
Charge-offs	(434)	(623)	(452)
Recoveries	173	205	168
Provision	251	395	290
Ending balance	128	138	161
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	128	138	161
Ending balance	128	138	161
Loans
Ending balance		16,369	20,992
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	10,861	16,369	20,992
Unallocated
Allowance for loan losses
Beginning balance	1,388	982	476
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	622	406	506
Ending balance	2,010	1,388	982
Ending balance: individually evaluated for impairments	0	0	0
Ending balance: collectively evaluated for impairments	2,010	1,388	982
Ending balance	2,010	1,388	982
Loans
Ending balance		0	0
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0

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3. Loans (Details 7) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Credit risk profile
Total loans	$ 948,639	$ 849,874	$ 804,023
Excellent Quality
Credit risk profile
Total loans	11,179	9,842
High Quality
Credit risk profile
Total loans	194,001	207,919
Good Quality
Credit risk profile
Total loans	623,201	528,122
Management Attention
Credit risk profile
Total loans	92,523	85,180
Watch
Credit risk profile
Total loans	20,908	12,345
Substandard
Credit risk profile
Total loans	6,827	6,466
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	94,124	92,596
Single-family residential
Credit risk profile
Total loans	272,325	269,475
Single-family residential - Banco de la Gente Non-traditional
Credit risk profile
Total loans	26,883	30,793
Commercial
Credit risk profile
Total loans	332,971	291,255
Multifamily and Farmland
Credit risk profile
Total loans	48,880	48,090
Commercial loans (not secured by real estate)
Credit risk profile
Total loans	161,740	100,263
Farm loans (not secured by real estate)
Credit risk profile
Total loans	855	1,033
Consumer loans (not secured by real estate)
Credit risk profile
Total loans	7,113	8,432
All other loans (not secured by real estate)
Credit risk profile
Total loans	3,748	7,937
Construction and land development
Credit risk profile
Total loans	94,124	92,596	94,178
Construction and land development | Excellent Quality
Credit risk profile
Total loans	228	0
Construction and land development | High Quality
Credit risk profile
Total loans	9,092	32,029
Construction and land development | Good Quality
Credit risk profile
Total loans	76,897	52,009
Construction and land development | Management Attention
Credit risk profile
Total loans	4,917	5,487
Construction and land development | Watch
Credit risk profile
Total loans	2,906	3,007
Construction and land development | Substandard
Credit risk profile
Total loans	84	64
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	272,325	269,475	252,983
Single-family residential | Excellent Quality
Credit risk profile
Total loans	9,867	8,819
Single-family residential | High Quality
Credit risk profile
Total loans	121,331	128,757
Single-family residential | Good Quality
Credit risk profile
Total loans	115,109	107,246
Single-family residential | Management Attention
Credit risk profile
Total loans	20,012	18,409
Single-family residential | Watch
Credit risk profile
Total loans	2,947	3,196
Single-family residential | Substandard
Credit risk profile
Total loans	3,059	3,048
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	26,883	30,793	34,261
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	10,170	12,103
Single-family residential - Banco de la Gente Non-traditional | Management Attention
Credit risk profile
Total loans	12,312	13,737
Single-family residential - Banco de la Gente Non-traditional | Watch
Credit risk profile
Total loans	1,901	2,027
Single-family residential - Banco de la Gente Non-traditional | Substandard
Credit risk profile
Total loans	2,500	2,926
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	332,971	291,255	270,055
Commercial | Excellent Quality
Credit risk profile
Total loans	0	0
Commercial | High Quality
Credit risk profile
Total loans	40,569	21,829
Commercial | Good Quality
Credit risk profile
Total loans	241,273	231,003
Commercial | Management Attention
Credit risk profile
Total loans	39,370	35,095
Commercial | Watch
Credit risk profile
Total loans	10,871	3,072
Commercial | Substandard
Credit risk profile
Total loans	888	256
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	48,880	48,090	33,163
Multifamily and Farmland | Excellent Quality
Credit risk profile
Total loans	0	0
Multifamily and Farmland | High Quality
Credit risk profile
Total loans	22	256
Multifamily and Farmland | Good Quality
Credit risk profile
Total loans	44,890	42,527
Multifamily and Farmland | Management Attention
Credit risk profile
Total loans	3,274	4,764
Multifamily and Farmland | Watch
Credit risk profile
Total loans	694	543
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	161,740	100,263	97,465
Commercial loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total loans	406	330
Commercial loans (not secured by real estate) | High Quality
Credit risk profile
Total loans	19,187	20,480
Commercial loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	128,727	72,417
Commercial loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	11,571	6,420
Commercial loans (not secured by real estate) | Watch
Credit risk profile
Total loans	1,583	492
Commercial loans (not secured by real estate) | Substandard
Credit risk profile
Total loans	266	124
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	855	1,033	$ 926
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	832	948
Farm loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	23	85
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	7,113	8,432
Consumer loans (not secured by real estate) | Excellent Quality
Credit risk profile
Total loans	678	693
Consumer loans (not secured by real estate) | High Quality
Credit risk profile
Total loans	2,237	2,708
Consumer loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	3,826	4,517
Consumer loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	336	458
Consumer loans (not secured by real estate) | Watch
Credit risk profile
Total loans	6	8
Consumer loans (not secured by real estate) | Substandard
Credit risk profile
Total loans	30	48
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	3,748	7,937
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	1,563	1,860
All other loans (not secured by real estate) | Good Quality
Credit risk profile
Total loans	1,477	5,352
All other loans (not secured by real estate) | Management Attention
Credit risk profile
Total loans	708	725
All other loans (not secured by real estate) | Watch
Credit risk profile
Total loans	0	0
All other loans (not secured by real estate) | Substandard
Credit risk profile
Total loans	0	0
All other loans (not secured by real estate) | Doubtful
Credit risk profile
Total loans	0	0
All other loans (not secured by real estate) | Loss
Credit risk profile
Total loans	$ 0	$ 0

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3. Loans (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Receivables [Abstract]
Percentage of construction and land development loans in Bank's loan portfolio	10.00%	11.00%
Percentage of single-family residential loans in Bank's loan portfolio	32.00%	35.00%
Percentage of Single-family residential - Banco de la Gente Non-traditional loans in the Bank's loan portfolio	3.00%	4.00%
Percentage of commercial real estate loans in Bank's loan portfolio	35.00%	34.00%
Percentage of commercial loans in Bank's loan portfolio	35.00%	12.00%
Deferred costs	$ 1,400	$ 1,500
Accruing impaired loans	21,300	21,300
Interest income recognized on accruing impaired loans	1,200	1,300
TDR loan amounts	3,800	4,300
Amount of performing TDR loans included	$ 0	$ 0

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4. Premises and Equipment (Details) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Property, Plant and Equipment [Abstract]
Land	$ 3,970	$ 2,793
Buildings and improvements	18,804	18,931
Furniture and equipment	26,565	24,743
Construction in process	10	395
Total premises and equipment	49,349	46,862
Less accumulated depreciation	30,749	28,258
Total net premises and equipment	$ 18,600	$ 18,604

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4. Premises and Equipment (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 2,500	$ 2,300	$ 2,300
Net losses on the sale of and write-downs on premises and equipment	$ 0	$ 239	$ (544)

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5. Leases (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2020 USD ($)
Leases [Abstract]
Operating lease cost	$ 855
Cash paid for amounts included in the measurement of lease liabilities	833
Operating cash flows from operating leases	0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$ 942
Weighted-average remaining lease term - operating leases	6 years 11 months 12 days
Weighted-average discount rate - operating leases	2.69%

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5. Leases (Details 1) $ in Thousands	Dec. 31, 2020 USD ($)
Leases [Abstract]
2021	$ 754
2022	588
2023	567
2024	489
2025	433
Thereafter	1,041
Total	3,872
Less: imputed interest	(401)
Operating lease liability	$ 3,471

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5. Leases (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Leases [Abstract]
Operating ROU assets	$ 3,423	$ 3,622	$ 0
Operating lease liabilities	3,471	3,647	0
Rent expense	$ 880	$ 949	$ 785

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6. Time Deposits (Details) $ in Thousands	Dec. 31, 2020 USD ($)
Time Deposits [Line Items]
2021	$ 57,475
2022	19,235
2023	14,815
2024	10,926
2025 and thereafter	3,821
Total	$ 106,272

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6. Time Deposits (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
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	$ 12,400	$ 22,300
CDARS balances	$ 4,300	$ 3,100
Weighted average rate of brokered deposits	1.43%	1.96%

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7. Federal Home Loan Bank and Federal Reserve Bank Borrowings (Details Narrative) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Federal Home Loan Banks [Abstract]
Loans pledged as collateral to the FHLB	$ 165,100	$ 139,400
FHLB stock owned	1,000	983
Carrying value of loans pledged as collateral to the FHLB	469,500	0
Availability under the line of credit with the FRB	$ 340,000	$ 344,700

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9. Income Taxes (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Income Tax Disclosure [Abstract]
Current expense									$ 3,049	$ 2,960	$ 2,546
Deferred income tax expense									(560)	176	78
Total income tax	$ 374	$ 1,113	$ 535	$ 467	$ 672	$ 834	$ 845	$ 785	$ 2,489	$ 3,136	$ 2,624

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9. Income Taxes (Details 1) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Income Tax Disclosure [Abstract]
Tax expense at statutory rate									$ 2,908	$ 3,613	$ 3,361
Differences:
State income tax, net of federal income tax effect									261	327	358
Tax exempt interest income									(649)	(802)	(990)
Increase in cash surrender value of life insurance									(80)	(81)	(81)
Nondeductible interest and other expense									46	40	23
Other									3	39	(47)
Total income tax	$ 374	$ 1,113	$ 535	$ 467	$ 672	$ 834	$ 845	$ 785	$ 2,489	$ 3,136	$ 2,624

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9. Income Taxes (Details 2) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Deferred tax assets:
Allowance for loan losses	$ 2,276	$ 1,535
Accrued retirement expense	1,190	1,150
Restricted stock	190	217
Accrued bonuses	0	265
Interest income on nonaccrual loans	1	2
Lease liability	798	838
Total gross deferred tax assets	4,455	4,007
Deferred tax liabilities:
Deferred loan fees	284	343
Accumulated depreciation	873	873
Prepaid expenses	5	7
ROU Asset	787	832
Other	41	47
Unrealized gain on available for sale securities	1,611	1,087
Total gross deferred tax liabilities	3,601	3,189
Net deferred tax asset	$ 854	$ 818

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10. Related Party Transactions (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Related Party Transactions [Abstract]
Beginning balance	$ 3,472	$ 3,192
New loans	4,189	5,716
Repayments	(5,809)	(5,436)
Ending balance	$ 1,852	$ 3,472

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10. Related Party Transactions (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Related Party Transactions [Abstract]
Related party deposits	$ 44,500	$ 30,400
Lease payments	$ 173	$ 231

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11. Commitments and Contingencies (Details) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Commitments and contingencies
Commitments to extend credit
Commitments and contingencies	299,039	276,338
Standby letters of credit and financial guarantees written
Commitments and contingencies	$ 4,745	$ 3,558

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11. Commitments and Contingencies (Details Narrative) $ in Thousands	Dec. 31, 2020 USD ($)
Commitments and Contingencies Disclosure [Abstract]
Overnight federal funds	$ 110,500

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12. Employee and Director Benefit Programs (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Retirement Benefits [Abstract]
Benefit obligation at beginning of period	$ 4,700	$ 4,566
Service cost	323	299	$ 362
Interest cost	63	58	70
Benefits paid	(216)	(223)
Benefit obligation at end of period	$ 4,870	$ 4,700	$ 4,566

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12. Employee and Director Benefit Programs (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Retirement Benefits [Abstract]
Benefit obligation	$ 4,870	$ 4,700	$ 4,566
Fair value of plan assets	0	0
Funded status	(4,870)	(4,700)
Unrecognized prior service cost/benefit	0	0
Unrecognized net actuarial loss	0	0
Net amount recognized	(4,870)	(4,700)
Unfunded accrued liability	(4,870)	(4,700)
Intangible assets	0	0
Net amounts recognized	$ (4,870)	$ (4,700)

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12. Employee and Director Benefit Programs (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Retirement Benefits [Abstract]
Service cost	$ 323	$ 299	$ 362
Interest cost	63	58	70
Net periodic cost	$ 386	$ 357	$ 432
Weighted average discount rate assumption used to determine benefit obligation	5.49%	5.49%	5.49%

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12. Employee and Director Benefit Programs (Details 3) $ in Thousands	Dec. 31, 2020 USD ($)
Retirement Benefits [Abstract]
2021	$ 353
2022	342
2023	342
2024	354
2025	370
Thereafter	$ 8,345

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12. Employee and Director Benefit Programs (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Retirement Benefits [Abstract]
Matching of employee contributions, percentage	4.00%	4.00%	4.00%
Defined Benefit Plan, Contributions by Employer	$ 692	$ 691	$ 670
Expenses incurred for benefits relating to the postretirement benefit plan	388	361	423
Postretirement Benefits paid	$ 216	$ 223	$ 227

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13. Regulatory Matters (Details) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Total capital (to Risk-Weighted Assets) | Consolidated
Actual, amount	$ 159,407	$ 152,156
Actual, ratio	16.07%	16.08%
For capital adequacy purposes, amount	$ 79,372	$ 75,710
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	$ 157,106	$ 149,266
Actual, ratio	15.85%	15.79%
For capital adequacy purposes, amount	$ 79,283	$ 75,602
For capital adequacy purposes, ratio	8.00%	8.00%
To be well capitalized under prompt corrective action provisions, amount	$ 104,059	$ 99,228
To be well capitalized under prompt corrective action provisions, ratio	10.50%	10.50%
Tier 1 Capital (to Risk- Weighted Assets) | Consolidated
Actual, amount	$ 149,499	$ 145,476
Actual, ratio	15.07%	15.37%
For capital adequacy purposes, amount	$ 59,529	$ 56,783
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	$ 147,198	$ 142,586
Actual, ratio	14.85%	15.09%
For capital adequacy purposes, amount	$ 59,462	$ 56,702
For capital adequacy purposes, ratio	6.00%	6.00%
To be well capitalized under prompt corrective action provisions, amount	$ 84,238	$ 80,328
To be well capitalized under prompt corrective action provisions, ratio	8.50%	8.50%
Tier 1 Capital (Average Assets) | Consolidated
Actual, amount	$ 149,499	$ 145,476
Actual, ratio	10.24%	11.91%
For capital adequacy purposes, amount	$ 58,378	$ 48,872
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	$ 147,198	$ 142,586
Actual, ratio	10.04%	11.61%
For capital adequacy purposes, amount	$ 58,662	$ 49,106
For capital adequacy purposes, ratio	4.00%	4.00%
To be well capitalized under prompt corrective action provisions, amount	$ 58,662	$ 49,106
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	$ 134,499	$ 130,476
Actual, ratio	13.56%	13.79%
For capital adequacy purposes, amount	$ 44,647	$ 42,587
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	$ 147,198	$ 142,586
Actual, ratio	14.85%	15.09%
For capital adequacy purposes, amount	$ 44,597	$ 42,526
For capital adequacy purposes, ratio	4.50%	4.50%
To be well capitalized under prompt corrective action provisions, amount	$ 69,373	$ 66,152
To be well capitalized under prompt corrective action provisions, ratio	7.00%	7.00%

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15. Other Operating Income and Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Other Income and Expenses [Abstract]
Visa debit card income	$ 4,237	$ 4,145	$ 3,911
Bank owned life insurance income	380	383	384
Gain (loss) on sale of premises and equipment	0	(239)	544
Other	1,315	1,320	1,354
Miscellaneous non-interest income	5,932	5,609	6,193
ATM expense	567	579	542
Consulting	1,078	972	1,012
Data processing	635	616	466
Deposit program expense	426	515	586
Dues and subscriptions	538	421	421
FHLB advance prepayment penalty	1,100	0	0
Internet banking expense	729	681	603
Office supplies	538	467	503
Telephone	794	802	678
Other	2,139	2,921	2,834
Other non-interest expense	$ 8,544	$ 7,974	$ 7,645

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16. Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Assets:
Investment securities available for sale	$ 245,249	$ 195,746
Mortgage loans held for sale	9,139	4,417
Carrying Amount
Assets:
Cash and cash equivalents	161,580	52,387
Investment securities available for sale	245,249	195,746
Other investments	4,155	4,231
Mortgage loans held for sale	9,139	4,417
Loans, net	938,731	843,194
Cash surrender value of life insurance	16,968	16,319
Liabilities:
Deposits	1,221,086	966,517
Securities sold under agreements to repurchase	26,201	24,221
Junior subordinated debentures	15,464	15,619
Level 1
Assets:
Cash and cash equivalents	161,580	52,387
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	245,249	195,496
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	16,968	16,319
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	26,201	24,221
Junior subordinated debentures	15,464	15,619
Level 3
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	0	250
Other investments	4,155	4,231
Mortgage loans held for sale	9,139	4,417
Loans, net	924,845	819,397
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	1,216,503	955,766
Securities sold under agreements to repurchase	0	0
Junior subordinated debentures	0	0
Estimated Fair Value
Assets:
Cash and cash equivalents	161,580	52,387
Investment securities available for sale	245,249	195,746
Other investments	4,155	4,231
Mortgage loans held for sale	9,139	4,417
Loans, net	924,845	819,397
Cash surrender value of life insurance	16,968	16,319
Liabilities:
Deposits	1,216,503	955,766
Securities sold under agreements to repurchase	26,201	24,221
Junior subordinated debentures	$ 15,464	$ 15,619

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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, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2020	Dec. 31, 2019
Assets
Interest-bearing time deposit												$ 118,843	$ 720
Investment securities available for sale												245,249	195,746
Total assets												1,414,855	1,154,882
Liabilities and Shareholders' Equity
Junior subordinated debentures												15,464	15,619
Liabilities												1,274,956	1,020,762
Shareholders' equity												139,899	134,120
Total liabilities and shareholders' equity												1,414,855	1,154,882
Revenues:
Interest and dividend income	$ 12,202	$ 11,868	$ 11,638	$ 12,250	$ 12,613	$ 12,430	$ 12,375	$ 12,183	$ 47,958	$ 49,601	$ 45,350
Expenses:
Interest	941	942	912	1,041	1,225	994	781	757	3,836	3,757	2,146
Income before income tax benefit and equity in undistributed earnings of subsidiaries	2,294	5,622	3,096	2,834	3,638	4,455	4,658	4,452	13,846	17,203	16,006
Income tax benefit	374	1,113	535	467	672	834	845	785	2,489	3,136	2,624
Net earnings	1,920	4,509	2,561	2,367	2,966	3,621	3,813	3,667	11,357	14,067	13,382
Cash flows from operating activities:
Net earnings	1,920	$ 4,509	$ 2,561	2,367	2,966	$ 3,621	$ 3,813	3,667	11,357	14,067	13,382
Change in:
Other assets									(382)	952	(3,695)
Net cash provided by operating activities									9,162	13,197	17,187
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale									62,408	40,561	48,241
Net cash provided by investing activities									(148,972)	(48,181)	(18,587)
Cash flows from financing activities:
Repayment of junior subordinated debenture									155	5,000	0
Net cash used by financing activities									249,003	44,001	(12,534)
Net change in cash									109,193	9,017	(13,934)
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net									1,756	2,658	(2,607)
Parent Company
Assets
Cash	664			1,187	1,187			689	664	689	428	664	1,187
Interest-bearing time deposit												1,000	1,000
Investment in subsidiaries												152,598	146,230
Investment in PEBK Capital Trust II												464	619
Investment securities available for sale												0	250
Other assets												650	476
Total assets												155,376	149,762
Liabilities and Shareholders' Equity
Junior subordinated debentures												15,464	15,619
Liabilities												13	23
Shareholders' equity												139,899	134,120
Total liabilities and shareholders' equity												$ 155,376	$ 149,762
Revenues:
Interest and dividend income									7,539	12,850	4,544
Total revenues									7,539	12,850	4,544
Expenses:
Interest									370	844	790
Other operating expenses									625	629	678
Total expenses									995	1,473	1,468
Income before income tax benefit and equity in undistributed earnings of subsidiaries									6,544	11,377	3,076
Income tax benefit									201	299	299
Income before equity in undistributed earnings of subsidiaries									6,745	11,676	3,375
Equity in undistributed earnings of subsidiaries									4,612	2,391	10,007
Net earnings									11,357	14,067	13,382
Cash flows from operating activities:
Net earnings									11,357	14,067	13,382
Adjustments to reconcile net earnings to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries									(4,612)	(2,391)	(10,007)
Change in:
Other assets									(19)	57	13
Other liabilities									(10)	(13)	6
Net cash provided by operating activities									6,716	11,720	3,394
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities available for sale									250	0	0
Net cash provided by investing activities									250	0	0
Cash flows from financing activities:
Repayment of junior subordinated debenture									(155)	(5,000)	0
Cash dividends paid on common stock									(4,392)	(3,939)	(3,133)
Stock repurchase									(2,999)	(2,490)	0
Proceeds from exercise of restricted stock units									57	207	0
Net cash used by financing activities									(7,489)	(11,222)	(3,133)
Net change in cash									(523)	498	261
Cash at beginning of year				$ 1,187				$ 689	1,187	689	428
Cash at end of year	$ 664				$ 1,187				664	1,187	689
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net									$ 1,756	$ 2,658	$ (2,607)

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17. Quarterly Data (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2020	Sep. 30, 2020	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Quarterly Financial Information Disclosure [Abstract]
Total interest income	$ 12,202	$ 11,868	$ 11,638	$ 12,250	$ 12,613	$ 12,430	$ 12,375	$ 12,183	$ 47,958	$ 49,601	$ 45,350
Total interest expense	941	942	912	1,041	1,225	994	781	757	3,836	3,757	2,146
Net interest income	11,261	10,926	10,726	11,209	11,388	11,436	11,594	11,426	44,122	45,844	43,204
Provision for loan losses	799	522	1,417	1,521	186	422	77	178	4,259	863	790
Other income	5,948	7,132	5,239	4,595	4,526	4,708	4,385	4,120	22,914	17,739	16,166
Other expense	14,116	11,914	11,452	11,449	12,090	11,267	11,244	10,916	48,931	45,517	42,574
Income before income taxes	2,294	5,622	3,096	2,834	3,638	4,455	4,658	4,452	13,846	17,203	16,006
Income tax expense	374	1,113	535	467	672	834	845	785	2,489	3,136	2,624
Net earnings	$ 1,920	$ 4,509	$ 2,561	$ 2,367	$ 2,966	$ 3,621	$ 3,813	$ 3,667	$ 11,357	$ 14,067	$ 13,382
Basic net earnings per share	$ 0.33	$ 0.78	$ 0.44	$ 0.4	$ 0.5	$ 0.62	$ 0.64	$ 0.61	$ 1.95	$ 2.37	$ 2.23
Diluted net earnings per share	$ 0.33	$ 0.78	$ 0.44	$ 0.4	$ 0.5	$ 0.61	$ 0.64	$ 0.61	$ 1.95	$ 2.36	$ 2.22