10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2021

OR

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

For the transition period from __________ to __________

000-27205

(Commission File No.)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

North Carolina	56-2132396
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
518 West C Street, Newton, North Carolina	28658
(Address of principal executive offices)	(Zip Code)

(828) 464-5620

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐      No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 5,661,569 shares of common stock, outstanding at October 31, 2021.

INDEX

		PAGE(S)
PART I.    FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets at September 30, 2021 (Unaudited) and December 31, 2020 (Audited)	3
	Consolidated Statements of Earnings for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	6
	Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2021 and 2020 (Unaudited)	7-8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	45
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults upon Senior Securities	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signatures		49
Certifications

Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by the registrant and its subsidiaries, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2020. 

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
September 30, 2021 and December 31, 2020
(Dollars in thousands)
	September 30,			December 31,
Assets	2021			2020
	(Unaudited)			(Audited)
Cash and due from banks, including reserve requirements of $0 at both September 30, 2021 and December 31, 2020	$	42,098			42,737
Interest-bearing deposits		221,210			118,843
Cash and cash equivalents		263,308			161,580
Investment securities available for sale		402,905			245,249
Other investments		3,725			4,155
Total securities		406,630			249,404
Mortgage loans held for sale		9,086			9,139
Loans		891,005			948,639
Less allowance for loan losses		(8,963	)		(9,908	)
Net loans		882,042			938,731
Premises and equipment, net		16,625			18,600
Cash surrender value of life insurance		17,265			16,968
Other real estate		-			128
Right of use lease asset		2,861			3,423
Accrued interest receivable and other assets		18,434			18,202
Total assets	$	1,616,251			1,416,175
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	529,118			456,980
Interest-bearing demand, MMDA & savings		777,721			657,834
Time, $250,000 or more		26,357			25,771
Other time		76,769			80,501
Total deposits		1,409,965			1,221,086
Securities sold under agreements to repurchase		32,332			26,201
Junior subordinated debentures		15,464			15,464
Lease liability		2,922			3,471
Accrued interest payable and other liabilities		12,026			10,054
Total liabilities		1,472,709			1,276,276
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued and outstanding		-			-
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,661,569 shares
at September 30, 2021 and 5,787,504 shares at December 31, 2020		53,305			56,871
Common stock held by deferred compensation trust, at cost; 160,611
shares at September 30, 2021 and 155,469 shares at December 31, 2020		(1,946	)		(1,796	)
Deferred compensation		1,946			1,796
Retained earnings		86,927			77,628
Accumulated other comprehensive income		3,310			5,400
Total shareholders' equity		143,542			139,899
Total liabilities and shareholders' equity	$	1,616,251			1,416,175

See accompanying Notes to Consolidated Financial Statements.

3

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
Three and Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands, except per share amounts)
	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest income:
Interest and fees on loans	$	9,807			10,507			31,474			31,367
Interest on due from banks		89			19			172			103
Interest on federal funds sold		-			33			-			178
Interest on investment securities:
U.S. Government sponsored enterprises		679			528			1,899			1,864
State and political subdivisions		825			717			2,222			2,042
Other		21			64			93			202
Total interest income		11,421			11,868			35,860			35,756
Interest expense:
Interest-bearing demand, MMDA & savings		577			482			1,617			1,455
Time deposits		181			224			584			725
FHLB borrowings		-			103			-			269
Junior subordinated debentures		69			76			211			296
Other		34			57			106			150
Total interest expense		861			942			2,518			2,895
Net interest income		10,560			10,926			33,342			32,861
Provision for (recovery of) loan losses		(182	)		522			(863	)		3,460
Net interest income after provision for loan losses		10,742			10,404			34,205			29,401
Non-interest income:
Service charges		1,023			809			2,859			2,635
Other service charges and fees		187			188			570			543
Gain on sale of investment securities		-			1,688			-			2,145
Mortgage banking income		516			750			2,109			1,635
Insurance and brokerage commissions		266			200			764			647
Appraisal management fee income		1,954			1,871			5,775			4,955
Gain on sale of other assets		104			-			104			-
Gain (loss) on sale of other real estate		-			(47	)		21			(47	)
Miscellaneous		1,990			1,673			5,855			4,453
Total non-interest income		6,040			7,132			17,953			16,966
Non-interest expense:
Salaries and employee benefits		6,054			5,737			17,903			16,996
Occupancy		1,999			1,943			5,891			5,725
Professional fees		582			374			1,354			1,121
Advertising		91			152			388			566
Debit card expense		244			278			740			766
FDIC Insurance		108			81			304			169
Appraisal management fee expense		1,556			1,478			4,646			3,845
Other		1,934			1,871			5,742			5,627
Total non-interest expense		12,568			11,914			36,968			34,815
Earnings before income taxes		4,214			5,622			15,190			11,552
Income tax expense		824			1,113			3,064			2,115
Net earnings	$	3,390			4,509			12,126			9,437
Basic net earnings per share	$	0.61			0.80			2.16			1.67
Diluted net earnings per share	$	0.59			0.78			2.10			1.62
Cash dividends declared per share	$	0.17			0.15			0.49			0.60

 See accompanying Notes to Consolidated Financial Statements.

4

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands)
	Three months ended						Nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net earnings	$	3,390			4,509			12,126			9,437
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale		(844	)		93			(2,714	)		5,204
Reclassification adjustment for gains on securities available for sale included in net earnings		-			(1,688	)		-			(2,145	)
Total other comprehensive  income (loss), before income taxes		(844	)		(1,595	)		(2,714	)		3,059
Income tax expense (benefit) related to other
comprehensive income:
Unrealized holding gains (losses) on securities available for sale		(194	)		21			(624	)		1,196
Reclassification adjustment for gains on securities available for sale included in net earnings		-			(388	)		-			(493	)
Total income tax expense (benefit) related to other comprehensive income		(194	)		(367	)		(624	)		703
Total other comprehensive income (loss), net of tax		(650	)		(1,228	)		(2,090	)		2,356
Total comprehensive income	$	2,740			3,281			10,036			11,793

See accompanying Notes to Consolidated Financial Statements.

5

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
Three and Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands)
												Common Stock
												Held By			Accumulated
												Deferred			Other
	Common Stock						Retained			Deferred		Compensation			Comprehensive
	Shares			Amount			Earnings			Compensation		Trust			Income			Total
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)
Balance, December 31, 2020		5,787,504		$	56,871			77,628			1,796		(1,796	)		5,400			139,899
Cash dividends declared on common stock		-			-			(930	)		-		-			-			(930	)
Restricted stock units exercised		1,662			39			-			-		-			-			39
Equity incentive plan, net		-			-			-			53		(53	)		-			-
Net earnings		-			-			4,121			-		-			-			4,121
Change in accumulated other comprehensive loss, net of tax		-			-			-			-		-			(3,100	)		(3,100	)
Balance, March 31, 2021		5,789,166		$	56,910			80,819			1,849		(1,849	)		2,300			140,029
Cash dividends declared on common stock		-			-			(930	)		-		-			-			(930	)
Equity incentive plan, net		-			-			-			52		(52	)		-			-
Net earnings		-			-			4,615			-		-			-			4,615
Change in accumulated other comprehensive income, net of tax		-			-			-			-		-			1,660			1,660
Balance, June 30, 2021		5,789,166		$	56,910			84,504			1,901		(1,901	)		3,960			145,374
Common stock repurchase		(127,597	)		(3,605	)		-			-		-			-			(3,605	)
Cash dividends declared on common stock		-			-			(967	)		-		-			-			(967	)
Equity incentive plan, net		-			-			-			45		(45	)		-			-
Net earnings		-			-			3,390			-		-			-			3,390
Change in accumulated other comprehensive loss, net of tax		-			-			-			-		-			(650	)		(650	)
Balance, September 30, 2021		5,661,569		$	53,305			86,927			1,946		(1,946	)		3,310			143,542
Balance, December 31, 2019		5,912,300		$	59,813			70,663			1,588		(1,588	)		3,644			134,120
Common stock repurchase		(126,800	)		(2,999	)		-			-		-			-			(2,999	)
Cash dividends declared on common stock		-			-			(1,779	)		-		-			-			(1,779	)
Restricted stock units exercised		2,004			57			-			-		-			-			57
Equity incentive plan, net		-			-			-			64		(64	)		-			-
Net earnings		-			-			2,367			-		-			-			2,367
Change in accumulated other comprehensive income, net of tax		-			-			-			-		-			2,090			2,090
Balance, March 31, 2020		5,787,504		$	56,871			71,251			1,652		(1,652	)		5,734			133,856
Cash dividends declared on common stock		-			-			(870	)		-		-			-			(870	)
Equity incentive plan, net		-			-			-			48		(48	)		-			-
Net earnings		-			-			2,561			-		-			-			2,561
Change in accumulated other comprehensive income, net of tax		-			-			-			-		-			1,494			1,494
Balance, June 30, 2020		5,787,504		$	56,871			72,942			1,700		(1,700	)		7,228			137,041
Cash dividends declared on common stock		-			-			(871	)		-		-			-			(871	)
Equity incentive plan, net		-			-			-			47		(47	)		-			-
Net earnings		-			-			4,509			-		-			-			4,509
Change in accumulated other comprehensive loss, net of tax		-			-			-			-		-			(1,228	)		(1,228	)
Balance, September 30, 2020		5,787,504		$	56,871			76,580			1,747		(1,747	)		6,000			139,451

See accompanying Notes to Consolidated Financial Statements.

6

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands)
	2021			2020
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net earnings	$	12,126			9,437
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion		3,991			3,080
Provision for (recovery of) loan losses		(863	)		3,460
Deferred income taxes		(27	)		(25	)
Gain on sale of investment securities		-			(2,145	)
Gain on sale of other real estate		(21	)		-
Write-down of other real estate		-			47
Gain on sale of other assets		(104	)		-
Restricted stock expense		(166	)		(73	)
Proceeds from sales of mortgage loans held for sale		76,086			78,526
Origination of mortgage loans held for sale		(76,033	)		(83,069	)
Change in:
Cash surrender value of life insurance		(297	)		(283	)
Right of use lease asset		562			525
Other assets		416			(219	)
Lease liability		(549	)		(508	)
Other liabilities		2,138			(677	)
Net cash provided by operating activities		17,259			8,076
Cash flows from investing activities:
Purchases of investment securities available for sale		(186,793	)		(90,233	)
Proceeds from sales, calls and maturities of investment securities available for sale		6,010			52,289
Proceeds from paydowns of investment securities available for sale		18,335			14,635
Proceeds from paydowns on other investments		132			132
Redemptions (purchases) of FHLB stock		331			(3,031	)
Net change in loans		57,552			(120,781	)
Purchases of premises and equipment		(379	)		(2,298	)
Purchases of bank owned life insurance		-			(140	)
Proceeds from sale of other assets		515			-
Proceeds from sale of other real estate and repossessions		149			-
Net cash used by investing activities		(104,148	)		(149,427	)
Cash flows from financing activities:
Net change in deposits		188,879			219,879
Net change in securities sold under agreement to repurchase		6,131			9,930
Proceeds from FHLB borrowings		-			70,000
Repayment of Junior Subordinated Debt		-			(155	)
Proceeds from Fed Funds purchased		-			(6,935	)
Repayments of Fed Funds purchased		-			6,935
Restricted stock units exercised		39			57
Common stock repurchased		(3,605	)		(2,999	)
Cash dividends paid on common stock		(2,827	)		(3,520	)
Net cash provided by financing activities		188,617			293,192
Net change in cash and cash equivalents		101,728			151,841
Cash and cash equivalents at beginning of period		161,580			52,387
Cash and cash equivalents at end of period	$	263,308			204,228

7

PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
Nine Months Ended September 30, 2021 and 2020
(Dollars in thousands)
	2021			2020
	(Unaudited)			(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,658			1,908
Income taxes	$	3,221			1,651
Noncash investing and financing activities:
Change in unrealized gain on investment securities  available for sale, net	$	(2,090	)		2,356
Issuance of accrued restricted stock units	$	39			57
Transfers of loans to other real estate and repossessions	$	-			175
Transfers of premises and equipment to other assets held for sale	$	408			-

See accompanying Notes to Consolidated Financial Statements.

8

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements (Unaudited)

(1)

Summary of Significant Accounting Policies

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank formerly operated three banking offices focused on the Latino population that were operated as a division of the Bank under the name Banco de la Gente (“Banco”). Two of these offices remain open as Bank branches that offer the same banking services offered in the Bank’s other branches such as the taking of deposits and the making of loans. The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals other than Correction of an Error noted below) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders. Correction of an Error Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the trust should be recorded on the Company’s financial statements along with a corresponding liability. For balances related to mutual fund investments held in the rabbi trust, the accrued interest receivable and other assets, accrued interest payable and other liabilities, total assets, and total liabilities line items on the Consolidated Balance Sheets were adjusted as of December 31, 2020 to reflect the asset and corresponding liability associated with the portion of the rabbi trust held in mutual fund investments. This resulted in an increase to these line items of $1.3 million. Additionally, an adjustment to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets has been made to disclose the number of shares of Company stock held by the rabbi trust and the cost basis for those shares, as well as a corresponding liability for the deferred compensation as of December 31, 2020. On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.78 to $0.80 for the three months ended September 30, 2020 and from $1.62 to $1.67 for the nine months ended September 30, 2020. The impact of the changes in the fair value of the mutual funds held in the rabbi trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements below. In addition to the adjustments to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets, the Company adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the rabbi trust, as well as the corresponding deferred compensation associated with these shares.

9

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

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

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

10

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2021-06: Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)	Amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

11

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

Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations.  The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized.  The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

12

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 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.
ASU 2021-05:         Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate	Updated guidance that requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if certain conditions are met	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

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

(2)	Investment Securities
	Investment securities available for sale at September 30, 2021 and December 31, 2020 are as follows:

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

13

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

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

(Dollars in thousands)
	September 30, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	4,994		12		-		-		4,994		12
U.S. Government
sponsored enterprises		5,386		5		3,442		173		8,828		178
Mortgage-backed securities		114,889		1,505		5,897		143		120,786		1,648
State and political subdivisions		37,729		800		3,757		145		41,486		945
Total	$	162,998		2,322		13,096		461		176,094		2,783

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

At September 30, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $2.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2021 tables above, one out of two U.S. Treasury securities, 35 out of 145 securities issued by state and political subdivisions and 43 out of 97 securities issued by U.S. Government sponsored enterprises contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The amortized cost and estimated fair value of investment securities available for sale at September 30, 2021, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

14

September 30, 2021
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	11,591		11,689
Due from one to five years		10,143		10,763
Due from five to ten years		136,387		139,315
Due after ten years		17,959		17,833
Mortgage-backed securities		222,526		223,305
Total	$	398,606		402,905

No securities available for sale were sold during the three and nine months ended September 30, 2021. Proceeds from sales of securities available for sale during the three months ended September 30, 2020 were $29.2 million and resulted in net gains of $1.7 million. Proceeds from sales of securities available for sale during the nine months ended September 30, 2020 were $46.1 million and resulted in net gains of $2.1 million.

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

(3)	Loans
	Major classifications of loans at September 30, 2021 and December 31, 2020 are summarized as follows:

(Dollars in thousands)
	September 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	80,009			94,124
Single-family residential		258,403			272,325
Single-family residential -
Banco de la Gente non-traditional		24,043			26,883
Commercial		363,174			332,971
Multifamily and farmland		58,856			48,880
Total real estate loans		784,485			775,183
Loans not secured by real estate:
Commercial loans		94,376			161,740
Farm loans		633			855
Consumer loans		6,321			7,113
All other loans		5,190			3,748
Total loans		891,005			948,639
Less allowance for loan losses		(8,963	)		(9,908	)
Total net loans	$	882,042			938,731

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

·

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of September 30, 2021, construction and land development loans comprised approximately9% of the Bank’s total loan portfolio.

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·	Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2021, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.
·	Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of September 30, 2021, commercial real estate loans comprised approximately 41% of the Bank’s total loan portfolio.
·	Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2021, commercial loans comprised approximately 11% of the Bank’s total loan portfolio, including $25.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $75.8 million in PPP loans at December 31, 2020.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following tables present an age analysis of past due loans, by loan type, as of September 30, 2021 and December 31, 2020:

September 30, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	6		-		6		80,003		80,009		-
Single-family residential		850		230		1,080		257,323		258,403		-
Single-family residential -
Banco de la Gente non-traditional		450		39		489		23,554		24,043		-
Commercial		28		37		65		363,109		363,174		-
Multifamily and farmland		-		-		-		58,856		58,856		-
Total real estate loans		1,334		306		1,640		782,845		784,485		-
Loans not secured by real estate:
Commercial loans		176		-		176		94,200		94,376		-
Farm loans		-		-		-		633		633		-
Consumer loans		66		1		67		6,254		6,321		-
All other loans		8		-		8		5,182		5,190		-
Total loans	$	1,584		307		1,891		889,114		891,005		-

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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		-

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

(Dollars in thousands)
	September 30, 2021		December 31, 2020
Real estate loans:
Single-family residential	$	1,020		1,266
Single-family residential -
Banco de la Gente non-traditional		1,244		1,709
Commercial		271		440
Multifamily and farmland		109		117
Total real estate loans		2,644		3,532
Loans not secured by real estate:
Commercial loans		54		212
Consumer loans		6		14
Total	$	2,704		3,758

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $18.2 million, $21.3 million and $21.0 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $754,000, $1.2 million, and $934,000 for the nine months ended September 30, 2021, the year ended December 31, 2020 and the nine months ended September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $217,000 and $299,000 for the three months ended September 30, 2021 and 2020, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

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

September 30, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	75		-		75		75		3
Single-family residential		4,506		275		4,021		4,296		80
Single-family residential -
Banco de la Gente non-traditional		12,269		-		11,383		11,383		724
Commercial		2,229		439		1,692		2,131		12
Multifamily and farmland		115		-		109		109		-
Total impaired real estate loans		19,194		714		17,280		17,994		819
Loans not secured by real estate:
Commercial loans		299		54		183		237		3
Consumer loans		12		-		8		8		-
Total impaired loans	$	19,505		768		17,471		18,239		822

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

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	76		1		153		-		91		5		123		7
Single-family residential		5,875		49		5,107		63		5,683		166		4,451		181
Single-family residential -
Banco de la Gente stated income		10,349		140		13,402		197		11,090		477		13,785		617
Commercial		2,280		20		2,665		31		2,617		85		2,772		103
Multifamily and farmland		110		2		-		-		113		4		-		-
Total impaired real estate loans		18,690		212		21,327		291		19,594		737		21,131		908
Loans not secured by real estate:
Commercial loans		248		5		494		7		330		16		553		22
Consumer loans		9		-		74		1		19		1		57		4
Total impaired loans	$	18,947		217		21,895		299		19,943		754		21,741		934

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The following table presents impaired loans as of and for the year ended December 31, 2020:

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		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

Impaired loans collectively evaluated for impairment totaled $5.1 million and $5.8 million at September 30, 2021 and December 31, 2020, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $45,000 and $61,000 at September 30, 2021 and December 31, 2020, respectively.

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

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated			Total
Nine months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212		122			1,345			-		128			2,010			9,908
Charge-offs		-			-			-			-		-			(293	)		-		(249	)		-			(542	)
Recoveries		121			165			-			50		3			7			-		114			-			460
Provision		(421	)		(306	)		(162	)		46		22			(153	)		-		98			13			(863	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Three months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,038			1,723			980			2,180		148			996			-		89			2,133			9,287
Charge-offs		-			-			-			-		-			(215	)		-		(91	)		-			(306	)
Recoveries		31			86			-			2		4			1			-		40			-			164
Provision		(173	)		(107	)		(90	)		126		(5	)		124			-		53			(110	)		(182	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Allowance for loan losses at September 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			58			710			7		-			-			-		-			-			776
Ending balance: collectively
evaluated for impairment		895			1,644			180			2,301		147			906			-		91			2,023			8,187
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Loans at September 30, 2021:
Ending balance	$	80,009			258,403			24,043			363,174		58,856			94,376			633		11,511			-			891,005
Ending balance: individually
evaluated for impairment	$	6			1,398			10,236			1,450		-			54			-		-			-			13,144
Ending balance: collectively
evaluated for impairment	$	80,003			257,005			13,807			361,724		58,856			94,322			633		11,511			-			877,861

19

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120			688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-			(109	)		-		(343	)		-		(529	)
Recoveries		2			59			-			45			-			27			-		148			-		281
Provision		573			482			(11	)		751			(4	)		355			-		254			1,060		3,460
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Three months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,531			1,813			1,114			2,051			115			980			-		162			1,667		9,433
Charge-offs		-			(65	)		-			-			-			-			-		(87	)		-		(152	)
Recoveries		-			34			-			11			-			2			-		42			-		89
Provision		(267	)		(32	)		(52	)		32			1			(21	)		-		80			781		522
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Allowance for loan losses at September 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			4			859			11			-			-			-		-			-		876
Ending balance: collectively
evaluated for impairment		1,262			1,746			203			2,083			116			961			-		197			2,448		9,016
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Loans at September 30, 2020:
Ending balance	$	96,866			272,246			28,099			318,596			49,584			182,862			851		21,128			-		970,232
Ending balance: individually
evaluated for impairment	$	8			1,582			11,630			1,685			-			255			-		-			-		15,160
Ending balance: collectively
evaluated for impairment	$	96,858			270,664			16,469			316,911			49,584			182,607			851		21,128			-		955,072

The provision for loan losses for the three months ended September 30, 2021 was a recovery of $182,000, compared to a provision of $522,000 for the three months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $119.6 million. The $18.7 million decrease from December 31, 2020 to September 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the nine months ended September 30, 2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

The provision for loan losses for the nine months ended September 30, 2021 was a recovery of $863,000, compared to a provision of $3.5 million for the nine months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

20

The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:
·	Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
·	Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
·	Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
·	Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
·	Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.
·	Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
·	Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·	Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2021 and December 31, 2020:

September 30, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		7,380		-		-		-		382		-		613		-		8,375
2- High Quality		8,982		104,288		-		35,384		19		17,846		-		1,979		1,413		169,911
3- Good Quality		67,245		124,534		9,028		283,657		55,335		69,324		621		3,415		3,777		616,936
4- Management Attention		3,626		16,239		10,878		33,620		2,841		5,122		12		290		-		72,628
5- Watch		82		2,904		1,722		9,802		552		1,644		-		1		-		16,707
6- Substandard		74		3,058		2,415		711		109		58		-		23		-		6,448
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	80,009		258,403		24,043		363,174		58,856		94,376		633		6,321		5,190		891,005

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

21

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

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

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

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP. Total PPP loans originated as of September 30, 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $25.6 million and $75.8 million at September 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million in fees from the SBA for PPP loans originated as of September 30, 2021. The Bank recognized $3.0 million and $1.4 million PPP loan fee income for the nine months ended September 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended September 30, 2021 was $489,000. PPP loan fee income recognized for the three and nine months ended September 30, 2020 was $361,000.

(4)

Net Earnings Per Share

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares. The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and nine months ended September 30, 2021 and 2020 is as follows:

For the three months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,390		5,544,596	$	0.61
Effect of dilutive securities:
Restricted stock units		-		14,690
Shares held in deferred comp plan				159,797
Diluted earnings per share	$	3,390		5,719,083	$	0.59

For the nine months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	12,126		5,601,879	$	2.16
Effect of dilutive securities:
Restricted stock units		-		13,190
Shares held in deferred comp plan				158,039
Diluted earnings per share	$	12,126		5,773,108	$	2.10

22

For the three months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,509		5,634,964	$	0.80
Effect of dilutive securities:
Restricted stock units		-		15,299
Shares held in deferred comp plan		-		151,658
Diluted earnings per share	$	4,509		5,801,921	$	0.78

For the nine months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	9,437		5,665,294	$	1.67
Effect of dilutive securities:
Restricted stock units		-		13,960
Shares held in deferred comp plan		-		149,163
Diluted earnings per share	$	9,437		5,828,417	$	1.62

(5)	Stock-Based Compensation
	The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of September 30, 2021, there were no outstanding shares reserved for possible issuance under the 2009 Plan. The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of September 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $57,000. The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted. As of September 30, 2021, a total of 285,075 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date). The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company granted 7,290 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 and 2021 grants). As of September 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $312,000.
	The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $166,000 for the nine months ended September 30, 2021. The Company recognized a $73,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the nine months ended September 30, 2020 due to a reduction in the Company’s stock price from $32.85 per share at December 31, 2019, compared to $15.43 per share at September 30, 2020.

23

(6)

Fair Value

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

·	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
·	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
·	Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
	Cash and Cash Equivalents For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category. Investment Securities Available for Sale Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category. Other Investments For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category. Loans In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

24

Mutual Funds

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The tables below present the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2021 and December 31, 2020.

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,990		-	$	7,990		-
U.S. Government
sponsored enterprises		14,677		-		14,677		-
Mortgage-backed securities		223,305		-		223,305		-
State and political subdivisions		156,933		-		156,933		-

25

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

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

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,514		-		1,514		-

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

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

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

(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

26

(Dollars in thousands)
	Fair Value September 30, 2021		Fair Value December 31, 2020		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,086		9,139	Rate lock commitment		N/A		N/A
Impaired loans		17,417		20,369	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0-25	%
Other real estate		-		128	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0-25	%

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

(Dollars in thousands)
			Fair Value Measurements at September 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	263,308		263,308		-		-		263,308
Investment securities available for sale		402,905		-		402,905		-		402,905
Other investments		3,725		-		-		3,725		3,725
Mortgage loans held for sale		9,086		-		-		9,086		9,086
Loans, net		882,042		-		-		862,462		862,462
Mutual funds held in deferred
compensation trust		1,514		-		1,514		-		1,514
Liabilities:
Deposits	$	1,409,965		-		-		1,407,770		1,407,770
Securities sold under agreements
to repurchase		32,332		-		32,332		-		32,332
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		-		-		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
Mutual funds held in deferred
compensation trust		1,320		-		1,320		-		1,320
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

27

(7)

Leases

As of September 30, 2021, the Company had operating right of use assets and operating lease liabilities of $2.9 million. The Company maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. As allowed by ASU 2016-02, leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term. The following table presents lease cost and other lease information as of September 30, 2021 and 2020.

(Dollars in thousands)
	September 30, 2021			September 30, 2020
Operating lease cost	$	538		$	675
Other information:
Cash paid for amounts included in the measurement of lease liabilities		520			659
Operating cash flows from operating leases		-			-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		952			450
Weighted-average remaining lease term - operating leases		6.72			7.36
Weighted-average discount rate - operating leases		2.71	%		2.97	%

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

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	September 30, 2021			December 31, 2020
2021	$	181		$	754
2022		555			588
2023		544			567
2024		489			489
2025		433			433
Thereafter		1,041			1,041
Total		3,243			3,872
Less: Imputed Interest		(321	)		(401	)
Operating Lease Liability	$	2,922		$	3,471

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

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

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors and the Company’s Consolidated Financial Statements and Notes thereto on pages A-26 through A-71 of 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.

Introduction

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

Overview

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

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

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

Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends.

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

COVID 19 Impact

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

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the remainder of the 2019-2020 academic year, businesses were ordered to temporarily close or reduce their business operations to accommodate social distancing and shelter in place requirements, non-critical healthcare services were significantly curtailed and unemployment levels rose. Since the initial shut down in March 2020, phased reopening plans began in mid-May of 2020 and continued through mid-May of 2021 subject to public health guidelines, restrictions and limitations on capacity. In mid-May 2021, as the number of COVID-19 cases decreased and COVID-19 vaccinations increased and new guidance was issued by the Center for Disease Control for fully vaccinated individuals, the COVID-19 restrictions were primarily lifted in North Carolina allowing businesses to operate in a manner in which they operated prior to the COVID-19 pandemic. In mid-July 2021, despite vaccinations being readily available to all individuals living in North Carolina over the age of 12, COVID-19 vaccinations rates slowed and the number of COVID-19 cases started to rise and continued to rise through September 2021. During that time frame, several local communities re-instated mask requirements and strongly encouraged North Carolinians to get vaccinated, while some companies and government agencies adopted policies and procedures regarding vaccination and regular COVID-19 testing. Since mid-October 2021, COVID-19 cases have started to decrease. We are unable to predict if COVID-19 cases will continue to decrease, if additional policies, procedures, restrictions, limitations and mandates will be implemented requiring employees to be vaccinated and/or be subject to regular COVID-19 testing and the impact that the foregoing will have on businesses, including the business of the Company and its customers.

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

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

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

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

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

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

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

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

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

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

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

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

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

Summary of Significant Accounting Policies

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

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

Results of Operations

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

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

Year-to-date net earnings as of September 30, 2021 were $12.1 million or $2.16 basic net earnings per share and $2.10 diluted net earnings per share for the nine months ended September 30, 2021, as compared to $9.4 million or $1.67 basic net earnings per share and $1.62 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, a decrease in the provision for loan losses and an increase in non-interest income, which were partially offset by an increase in non-interest expense during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, as discussed below.

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

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Net Interest Income. Net interest income, the major component of the Company’s net earnings, was $10.6 million for the three months ended September 30, 2021, compared to $10.9 million for the three months ended September 30, 2020. The decrease in net interest income is due to a $447,000 decrease in interest income, which was partially offset by a $81,000 decrease in interest expense. The decrease in interest income is primarily due to a $700,000 decrease in interest income and fees on loans, which was partially offset by an increase in interest income on investment securities. The decrease in interest income and fees on loans is primarily due to a decrease in total loans. The increase in interest income on investment securities is primarily due to additional securities purchases due to an increase in excess cash. The decrease in interest expense is primarily due to a decrease in Federal Home Loan Bank (“FHLB”) borrowings and a reduction in rates paid on time deposits, partially offset by an increase in interest bearing demand, Money Market and savings deposits.

Interest income was $11.4 million for the three months ended September 30, 2021, compared to $11.9 million for the three months ended September 30, 2020. The decrease in interest income is primarily due to a $700,000 decrease in interest income and fees on loans, which was partially offset by an increase in interest income on investment securities. The decrease in interest income and fees on loans is primarily due to a decrease in total loans. During the three months ended September 30, 2021, average loans decreased $81.0 million to $889.5 million from $970.5 million for the three months ended September 30, 2020. During the three months ended September 30, 2021, average investment securities available for sale increased $178.7 million to $378.8 million from $200.1 million for the three months ended September 30, 2020. The average yield on loans for the three months ended September 30, 2021 and 2020 was 4.37% and 4.31%, respectively. The average yield on investment securities available for sale was 1.70% and 2.82% for the three months ended September 30, 2021 and 2020, respectively. The average yield on earning assets was 2.98% and 3.56% for the three months ended September 30, 2021 and 2020, respectively.

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

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

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	Three months ended								Three months ended
	September 30, 2021								September 30, 2020
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:
Loans receivable	$	889,455			9,807		4.37	%	$	970,529			10,507		4.31	%
Investments - taxable		227,026			657		1.15	%		88,823			484		2.17	%
Investments - nontaxable*		155,986			972		2.47	%		118,920			985		3.30	%
Federal funds sold		-			-		0.00	%		135,548			33		0.10	%
Other		262,205			89		0.13	%		29,503			21		0.28	%
Total interest-earning assets		1,534,672			11,525		2.98	%		1,343,323			12,030		3.56	%
Non-interest earning assets:
Cash and due from banks		29,644								34,906
Allowance for loan losses		(9,313	)							(9,399	)
Other assets		64,439								69,408
Total assets	$	1,619,442							$	1,438,238
Interest-bearing liabilities:
Interest-bearing demand, MMDA & savings deposits	$	787,985			577		0.29	%	$	607,111			482		0.32	%
Time deposits		103,828			181		0.69	%		102,900			223		0.86	%
FHLB borrowings		-			-		0.00	%		70,000			103		0.59	%
Trust preferred securities		15,464			69		1.77	%		15,464			76		1.96	%
Other		29,595			34		0.46	%		32,440			58		0.71	%
Total interest-bearing liabilities		936,872			861		0.36	%		827,915			942		0.45	%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits		528,481								460,615
Other liabilities		9,439								9,701
Shareholders' equity		144,650								140,007
Total liabilities and shareholders' equity	$	1,619,442							$	1,438,238
Net interest spread				$	10,664		2.62	%				$	11,088		3.11	%
Net yield on interest-earning assets							2.76	%							3.28	%
Taxable equivalent adjustment
Investment securities				$	104							$	162
Net interest income				$	10,560							$	10,926

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

34

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

Interest income was $35.9 million for the nine months ended September 30, 2021, compared to $35.8 million for the nine months ended September 30, 2020. The increase in interest income was primarily due to a $107,000 increase in interest income and fees on loans, which was primarily due to an increase in fee income on SBA PPP loans, which was partially offset by a decrease in interest income on loans primarily due to a decrease in total loans. During the nine months ended September 30, 2021, average loans increased $9.2 million to $917.5 million from $926.7 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, average investment securities available for sale increased $135.3 million to $330.0 million from $194.7 million for the nine months ended September 30, 2020. The average yield on loans for the nine months ended September 30, 2021 and 2020 was 4.59% and 4.52%, respectively. The average yield on investment securities available for sale was 1.81% and 3.02% for the nine months ended September 30, 2021 and 2020, respectively. The average yield on earning assets was 3.31% and 3.92% for the nine months ended September 30, 2021 and 2020, respectively.

Interest expense was $2.5 million for the nine months ended September 30, 2021, compared to $2.9 million for the nine months ended September 30, 2020. The decrease in interest expense was primarily due to a decrease in rates paid on interest-bearing liabilities and a decrease in FHLB borrowings. During the nine months ended September 30, 2021, average interest-bearing non-maturity deposits increased $165.7 million to $732.0 million from $556.3 million for the nine months ended September 30, 2020. During the nine months ended September 30, 2021, average certificates of deposit increased $3.2 million to $106.2 million from $103.0 million for the nine months ended September 30, 2020. Average FHLB borrowings decreased $61.3 million to zero for the nine months ended September 30, 2021 from $61.3 million for the nine months ended September 30, 2020. The average rate paid on interest-bearing checking and savings accounts was 0.30% and 0.34% for the nine months ended September 30, 2021 and 2020, respectively. The average rate paid on certificates of deposit was 0.74% for the nine months ended September 30, 2021, compared to 0.94% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.38% for the nine months ended September 30, 2021, compared to 0.50% for the same period one year ago.

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

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	Nine months ended								Nine months ended
	September 30, 2021								September 30, 2020
(Dollars in thousands)	Average Balance			Interest		Yield / Rate			Average Balance			Interest		Yield / Rate
Interest-earning assets:
Loans receivable	$	917,473			31,474		4.59	%	$	926,663			31,367		4.52	%
Investments - taxable		199,395			1,847		1.24	%		85,887			1,664		2.59	%
Investments - nontaxable*		134,893			2,714		2.69	%		116,113			2,930		3.37	%
Federal funds sold		-			-		0.00	%		80,379			178		0.30	%
Other		210,855			172		0.11	%		26,618			103		0.52	%
Total interest-earning assets		1,462,616			36,207		3.31	%		1,235,660			36,242		3.92	%
Non-interest earning assets:
Cash and due from banks		30,652								36,372
Allowance for loan losses		(9,602	)							(8,059	)
Other assets		63,739								68,276
Total assets	$	1,547,405							$	1,332,249
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$	732,045			1,617		0.30	%	$	566,348			1,455		0.34	%
Time deposits		106,158			584		0.74	%		103,047			725		0.94	%
FHLB borrowings		-			-		0.00	%		61,314			270		0.59	%
Trust preferred securities		15,464			211		1.82	%		15,483			296		2.55	%
Other		29,095			106		0.49	%		28,086			149		0.71	%
Total interest-bearing liabilities		882,762			2,518		0.38	%		774,278			2,895		0.50	%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits		515,433								413,693
Other liabilities		2,298								4,087
Shareholders' equity		146,912								140,191
Total liabilities and shareholders' equity	$	1,547,405							$	1,332,249
Net interest spread				$	33,689		2.93	%				$	33,347		3.42	%
Net yield on interest-earning assets							3.08	%							3.60	%
Taxable equivalent adjustment
Investment securities				$	347							$	486
Net interest income				$	33,342							$	32,861

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

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

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	Three months ended September 30, 2021 compared to three months ended September 30, 2020									Nine months ended September 30, 2021 compared to nine months ended September 30, 2020
(Dollars in thousands)	Changes in average volume			Changes in average rates			Total Increase (Decrease)			Changes in average volume			Changes in average rates			Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$	(886	)		186			(700	)		(313	)		420			107
Investments - taxable		577			(404	)		173			1,625			(1,442	)		183
Investments - nontaxable		269			(282	)		(13	)		426			(642	)		(216	)
Federal funds sold		(16	)		(17	)		(33	)		(89	)		(89	)		(178	)
Other		122			(54	)		68			436			(367	)		69
Total interest income		66			(571	)		(505	)		2,085			(2,120	)		(35	)
Interest expense:
Interest-bearing demand, MMDA
& savings deposits		138			(43	)		95			396			(234	)		162
Time deposits		2			(44	)		(42	)		20			(161	)		(141	)
FHLB borrowings		(51	)		(52	)		(103	)		(135	)		(135	)		(270	)
Trust preferred securities		-			(7	)		(7	)		-			(85	)		(85	)
Other		(4	)		(20	)		(24	)		5			(48	)		(43	)
Total interest expense		85			(166	)		(81	)		286			(663	)		(377	)
Net interest income	$	(19	)		(405	)		(424	)		1,799			(1,457	)		342

Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2021 was a recovery of $182,000, compared to a provision of $522,000 for the three months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $119.6 million. The $18.7 million decrease from December 31, 2020 to September 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the nine months ended September 30, 2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

The provision for loan losses for the nine months ended September 30, 2021 was a recovery of $863,000, compared to a provision of $3.5 million for the nine months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

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

Non-interest income was $18.0 million for the nine months ended September 30, 2021, compared to $17.0 million for the nine months ended September 30, 2020. The increase in non-interest income is primarily attributable to a $474,000 increase in mortgage banking income due to an increase in mortgage loan volume, a $820,000 increase in appraisal management fee income due to an increase in the volume of appraisals and a $1.4 million increase in miscellaneous non-interest income primarily due to an increase in debit card income resulting from increased debit card activity and an increase in income on Small Business Investment Company (“SBIC”) investments. These increases in non-interest income were partially offset by a $2.1 million decrease in gains on sale of securities.

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

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

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

Analysis of Financial Condition

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

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

The Company had $9.1 million in mortgage loans held for sale as of September 30, 2021 and December 31, 2020.

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

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

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

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

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

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

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.

As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third-party reviews and evaluates loan relationships greater than $1.0 million 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.

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Bank’s ALLL model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications as a result of the COVID-19 pandemic. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that were once modified.

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

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

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

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

40

	Percentage of Loans
	By Risk Grade
Risk Grade	9/30/2021			9/30/2020
Risk Grade 1 (Excellent Quality)		0.94	%		1.12	%
Risk Grade 2 (High Quality)		19.07	%		20.96	%
Risk Grade 3 (Good Quality)		69.24	%		65.36	%
Risk Grade 4 (Management Attention)		8.15	%		9.93	%
Risk Grade 5 (Watch)		1.88	%		1.91	%
Risk Grade 6 (Substandard)		0.72	%		0.72	%
Risk Grade 7 (Doubtful)		0.00	%		0.00	%
Risk Grade 8 (Loss)		0.00	%		0.00	%

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

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

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

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

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

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

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

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

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

The Company has no financial instruments tied to LIBOR other than the trust preferred securities issued by PEBK Trust II, which are tied to three-month LIBOR. The one-week and two-month U.S. dollar-denominated (USD) LIBOR rates will retire on December 31, 2021. The overnight, one-month, three-month, nine-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023.

41

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

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the nine months ended September 30, 2021 totaled $1.5 billion, exceeding average rate sensitive liabilities of $936.9 million by $597.8 million.

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of September 30, 2021.

Included in the rate sensitive assets are $203.1 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At September 30, 2021, the Company had $126.9 million in loans with interest rate floors. The floors were in effect on $100.9 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.81% higher than the indexed rate on the promissory notes without interest rate floors.

Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of September 30, 2021, such unfunded commitments to extend credit were $300.0 million, while commitments in the form of standby letters of credit totaled $5.1 million. As of December 31, 2020, such unfunded commitments to extend credit were $299.0 million, while commitments in the form of standby letters of credit totaled $4.7 million.

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

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

42

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

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

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 42.42% at September 30, 2021 and 28.12% at December 31, 2020. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2021 and December 31, 2020.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of September 30, 2021 and December 31, 2020 are summarized in the table below. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit. Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.

(Dollars in thousands)
	September 30, 2021		December 31, 2020
Contractual Cash Obligations
Junior subordinated debentures	$	15,464		15,464
Operating lease obligations		2,997		3,083
Total	$	18,461		18,547
Other Commitments
Commitments to extend credit	$	299,972		299,039
Standby letters of credit and financial guarantees written		5,055		4,745
SBIC investments		2,472		2,658
Income tax credits		101		184
Total	$	307,600		306,626

The Company enters into derivative contracts from time to time to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk. Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management”.

Capital Resources. Shareholders’ equity was $143.5 million, or 8.88% of total assets, at September 30, 2021, compared to $139.9 million, or 9.88% of total assets, at December 31, 2020.

Annualized return on average equity for the nine months ended September 30, 2021 was 9.30%, compared to 12.81% for the nine months ended September 30, 2020. Total cash dividends paid on common stock were $2.8 million and $3.5 million for the nine months ended September 30, 2021 and 2020, respectively.

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

In February of 2021, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $4.0 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $3.6 million, or 127,597 shares of its common stock, under this stock repurchase program as of September 30, 2021.

43

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

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

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

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

44

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Part 7A. of Part II of the Company’s Form 10-K, filed with the SEC on March 19, 2021, which is accessible on the SEC’s website at www.sec.gov.

Item 4. Controls and Procedures

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

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

45

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)
July 1 - 31, 2021		1,144		$	27.85		-	$	4,000,000
August 1 - 31, 2021		201			27.87		127,597	$	394,344
September 1 - 30, 2021		281			28.16		-	$	394,344
Total		1,626	(1)	$	27.86		127,597

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

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

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

Item 3. Defaults Upon Senior Securities

Not applicable

Item 5. Other Information

Not applicable

46

Item 6. Exhibits

Exhibit (3)(i)(a)	Articles of Incorporation of the Registrant, incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (3)(i)(b)	Articles of Amendment dated December 19, 2008, regarding the Series A Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (3)(i)(c)	Articles of Amendment dated February 26, 2010, incorporated by reference to Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010
Exhibit (3)(i)(d)	Articles of Amendment dated May 6, 2021, incorporated by reference to Exhibit (3)(i)(d) to the Form 8-K filed with the Securities and Exchange Commission on May 10, 2021
Exhibit (3)(ii)	Second Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and Exchange Commission on June 24, 2015
Exhibit (4)(i)	Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (4)(ii)	Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, incorporated by reference to Exhibit 4(ii) to the Form 10-K/A filed with the Securities and Exchange Commission on March 16, 2020
Exhibit (10)(i)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Tony W. Wolfe dated December 18, 2008, incorporated by reference to Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(ii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Joseph F. Beaman, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(iii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated December 18, 2008, incorporated by reference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(iv)	Employment Agreement dated January 22, 2015 between the Registrant and William D. Cable, Sr., incorporated by reference to Exhibit (10)(c) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(v)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated December 18, 2008, incorporated by reference to Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(vi)	Employment Agreement dated January 22, 2015 between the Registrant and Lance A. Sellers, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(vii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(viii)	Employment Agreement dated January 22, 2015 between the Registrant and A. Joseph Lampron, Jr., incorporated by reference to Exhibit (10)(b) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015

47

Exhibit (10)(ix)	Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(h) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(x)	Rabbi Trust for the Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(xi)	Description of Service Recognition Program maintained by Peoples Bank, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 27, 2003
Exhibit (10)(xii)	Capital Securities Purchase Agreement dated as of June 26, 2006, by and among the Registrant, PEBK Capital Trust II and Bear, Sterns Securities Corp., incorporated by reference to Exhibit 10(j) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xiii)	Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of June 28, 2006, incorporated by reference to Exhibit 10(k) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xiv)	Guarantee Agreement of the Registrant dated as of June 28, 2006, incorporated by reference to Exhibit 10(l) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xv)	Indenture, dated as of June 28, 2006, by and between the Registrant and LaSalle Bank National Association, as Trustee, relating to Junior Subordinated Debt Securities Due September 15, 2036, incorporated by reference to Exhibit 10(m) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xvi)	Form of Amended and Restated Director Supplemental Retirement Agreement between Peoples Bank and Directors Robert C. Abernethy, James S. Abernethy, Douglas S. Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L. Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman, Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit (10)(n) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(xvii)	2009 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(o) to the Form 10-K filed with the Securities and Exchange Commission on March 20, 2009
Exhibit (10)(xviii)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated February 16, 2018, incorporated by reference to Exhibit (10)(xx) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xix)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxi) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xx)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxii) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xxi)	2020 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(xii) to the Form 10-K filed with the Securities and Exchange Commission on March 19, 2021
Exhibit (10)(xxii)	Employment Agreement dated August 19, 2021 between the Registrant and Jeffrey N. Hooper, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on August 20, 2021
Exhibit (31)(a)	Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31)(b)	Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit (101)	The following materials from the Company’s 10-Q Report for the quarterly period ended June 30, 2021, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*

*Furnished, not filed.

48

SIGNATURES

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

Peoples Bancorp of North Carolina, Inc.

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

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

49

EX-31.A

EXHIBIT (31)(a)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

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

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

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

EX-31.B

EXHIBIT (31)(b)

CERTIFICATIONS

I, Jeffrey N. Hooper, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

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

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 4, 2021	/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)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Peoples Bancorp of North Carolina, Inc. (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2021 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 4, 2021	/s/ Lance A. Sellers
Date	Lance A. Sellers Chief Executive Officer

November 4, 2021	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper Chief Financial Officer

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

XML

Cover - shares	9 Months Ended
	Sep. 30, 2021	Oct. 31, 2021
Cover [Abstract]
Entity Registrant Name	PEOPLES BANCORP OF NORTH CAROLINA, INC.
Entity Central Index Key	0001093672
Document Type	10-Q
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Small Business	true
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Current Reporting Status	Yes
Document Period End Date	Sep. 30, 2021
Entity Filer Category	Non-accelerated Filer
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2021
Entity Common Stock Shares Outstanding		5,661,569
Document Quarterly Report	true
Document Transition Report	false
Entity File Number	000-27205
Entity Incorporation State Country Code	NC
Entity Tax Identification Number	56-2132396
Entity Address Address Line 1	518 West C Street
Entity Address City Or Town	Newton
Entity Address State Or Province	NC
Entity Address Postal Zip Code	28658
City Area Code	828
Local Phone Number	464-5620
Entity Interactive Data Current	Yes

XML

Consolidated Balance Sheets - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Assets
Cash and due from banks, including reserve requirements of $0 at both September 30, 2021 and December 31, 2020	$ 42,098,000	$ 42,737,000
Interest-bearing deposits	221,210,000	118,843,000
Cash and cash equivalents	263,308,000	161,580,000
Investment securities available for sale	402,905,000	245,249,000
Other investments	3,725,000	4,155,000
Total securities	406,630,000	249,404,000
Mortgage loans held for sale	9,086,000	9,139,000
Loans	891,005,000	948,639,000
Less allowance for loan losses	(8,963,000)	(9,908,000)
Net loans	882,042,000	938,731,000
Premises and equipment, net	16,625,000	18,600,000
Cash surrender value of life insurance	17,265,000	16,968,000
Other real estate	0	128,000
Right of use lease asset	2,861,000	3,423,000
Accrued interest receivable and other assets	18,434,000	18,202,000
Total assets	1,616,251,000	1,416,175,000
Liabilities and Shareholders' Equity
Noninterest-bearing demand	529,118,000	456,980,000
Interest-bearing demand, MMDA & savings	777,721,000	657,834,000
Time, $250,000 or more	26,357,000	25,771,000
Other time	76,769,000	80,501,000
Total deposits	1,409,965,000	1,221,086,000
Securities sold under agreements to repurchase	32,332,000	26,201,000
Junior subordinated debentures	15,464,000	15,464,000
Lease liability	2,922,000	3,471,000
Accrued interest payable and other liabilities	12,026,000	10,054,000
Total liabilities	1,472,709,000	1,276,276,000
Shareholders' equity:
Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding	0	0
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,661,569 shares at September 30, 2021 and 5,787,504 shares at December 31, 2020	53,305,000	56,871,000
Common stock held by deferred compensation trust, at cost; 160,611 shares at September 30, 2021 and 155,469 shares at December 31, 2020	(1,946,000)	(1,796,000)
Deferred compensation	1,946,000	1,796,000
Retained earnings	86,927,000	77,628,000
Accumulated other comprehensive income	3,310,000	5,400,000
Total shareholders' equity	143,542,000	139,899,000
Total liabilities and shareholders' equity	$ 1,616,251,000	$ 1,416,175,000

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Consolidated Balance Sheets (Parenthetical) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Assets
Cash and due from banks, reserve requirements	$ 0	$ 0
Time	$ 250,000	$ 250,000
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)	5,661,569	5,787,504
Common stock, shares outstanding (in shares)	5,661,569	5,787,504
Common stock held by deferred compensation trust, shares	160,611	155,469

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Consolidated Statements of Earnings (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Interest income:
Interest and fees on loans	$ 9,807,000	$ 10,507,000	$ 31,474,000	$ 31,367,000
Interest on due from banks	89,000	19,000	172,000	103,000
Interest on federal funds sold	0	33,000	0	178,000
Interest on investment securities:
U.S. Government sponsored enterprises	679,000	528,000	1,899,000	1,864,000
State and political subdivisions	825,000	717,000	2,222,000	2,042,000
Other	21,000	64,000	93,000	202,000
Total interest income	11,421,000	11,868,000	35,860,000	35,756,000
Interest expense:
Interest-bearing demand, MMDA & savings	577,000	482,000	1,617,000	1,455,000
Time deposits	181,000	224,000	584,000	725,000
FHLB borrowings	0	103,000	0	269,000
Junior subordinated debentures	69,000	76,000	211,000	296,000
Other	34,000	57,000	106,000	150,000
Total interest expense	861,000	942,000	2,518,000	2,895,000
Net interest income	10,560,000	10,926,000	33,342,000	32,861,000
Provision for (recovery of) loan losses	(182,000)	522,000	(863,000)	3,460,000
Net interest income after provision for loan losses	10,742,000	10,404,000	34,205,000	29,401,000
Non-interest income:
Service charges	1,023,000	809,000	2,859,000	2,635,000
Other service charges and fees	187,000	188,000	570,000	543,000
Gain on sale of investment securities	0	1,688,000	0	2,145,000
Mortgage banking income	516,000	750,000	2,109,000	1,635,000
Insurance and brokerage commissions	266,000	200,000	764,000	647,000
Appraisal management fee income	1,954,000	1,871,000	5,775,000	4,955,000
Gain on sale of other assets	104,000	0	104,000	0
Gain (loss) on sale of other real estate	0	(47,000)	21,000	(47,000)
Miscellaneous	1,990,000	1,673,000	5,855,000	4,453,000
Total non-interest income	6,040,000	7,132,000	17,953,000	16,966,000
Non-interest expense:
Salaries and employee benefits	6,054,000	5,737,000	17,903,000	16,996,000
Occupancy	1,999,000	1,943,000	5,891,000	5,725,000
Professional fees	582,000	374,000	1,354,000	1,121,000
Advertising	91,000	152,000	388,000	566,000
Debit card expense	244,000	278,000	740,000	766,000
FDIC Insurance	108,000	81,000	304,000	169,000
Appraisal management fee expense	1,556,000	1,478,000	4,646,000	3,845,000
Other expense	1,934,000	1,871,000	5,742,000	5,627,000
Total non-interest expense	12,568,000	11,914,000	36,968,000	34,815,000
Earnings before income taxes	4,214,000	5,622,000	15,190,000	11,552,000
Income tax expense	824,000	1,113,000	3,064,000	2,115,000
Net earnings	$ 3,390,000	$ 4,509,000	$ 12,126,000	$ 9,437,000
Basic net earnings per share	$ 0.61	$ 0.80	$ 2.16	$ 1.67
Diluted net earnings per share	0.59	0.78	2.10	1.62
Cash dividends declared per share	$ 0.17	$ 0.15	$ 0.49	$ 0.60

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Consolidated Statements of Comprehensive Income (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Consolidated Statements of Comprehensive Income (Unaudited)
Net earnings	$ 3,390,000	$ 4,509,000	$ 12,126,000	$ 9,437,000
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	(844,000)	93,000	(2,714,000)	5,204,000
Reclassification adjustment for gains on securities available for sale included in net earnings	0	(1,688,000)	0	(2,145,000)
Total other comprehensive income (loss), before income taxes	(844,000)	(1,595,000)	(2,714,000)	3,059,000
comprehensive income:
Unrealized holding gains (losses) on securities available for sale	(194,000)	21,000	(624,000)	1,196,000
Reclassification adjustment for gains on securities available for sale included in net earnings	0	(388,000)	0	(493,000)
Total income tax expense (benefit) related to other comprehensive income	(194,000)	(367,000)	(624,000)	703,000
Total other comprehensive income (loss), net of tax	(650,000)	(1,228,000)	(2,090,000)	2,356,000
Total comprehensive income	$ 2,740,000	$ 3,281,000	$ 10,036,000	$ 11,793,000

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Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - USD ($) shares in Thousands	Total	Common Stock	Retained Earnings (Accumulated Deficit)	Deferred Compensation	Common Stock Held By Deferred Compensation Trust	Accumulated other comprehensive loss
Balance, shares at Dec. 31, 2019		5,912,300
Balance, amount at Dec. 31, 2019	$ 134,120,000	$ 59,813,000	$ 70,663,000	$ 1,588,000	$ (1,588,000)	$ 3,644,000
Common stock repurchase, shares		(126,800)
Common stock repurchase, amount	(2,999,000)	$ (2,999,000)	0	0	0	0
Cash dividends declared on common stock	(1,779,000)	$ 0	(1,779,000)	0	0	0
Restricted stock units exercised, shares		2,004
Restricted stock units exercised, amount	57,000	$ 57,000	0	0	0	0
Equity incentive plan, net	0	0	0	64,000	(64,000)	0
Net earnings	2,367,000	0	2,367,000	0	0	0
Change in accumulated other comprehensive income, net of tax	2,090,000	$ 0	0	0	0	2,090,000
Balance, shares at Mar. 31, 2020		5,787,504
Balance, amount at Mar. 31, 2020	133,856,000	$ 56,871,000	71,251,000	1,652,000	(1,652,000)	5,734,000
Balance, shares at Dec. 31, 2019		5,912,300
Balance, amount at Dec. 31, 2019	134,120,000	$ 59,813,000	70,663,000	1,588,000	(1,588,000)	3,644,000
Net earnings	9,437,000
Balance, shares at Sep. 30, 2020		5,787,504
Balance, amount at Sep. 30, 2020	139,451,000	$ 56,871,000	76,580,000	1,747,000	(1,747,000)	6,000,000
Balance, shares at Mar. 31, 2020		5,787,504
Balance, amount at Mar. 31, 2020	133,856,000	$ 56,871,000	71,251,000	1,652,000	(1,652,000)	5,734,000
Cash dividends declared on common stock	(870,000)	0	(870,000)	0	0	0
Equity incentive plan, net	0	0	0	48,000	(48,000)	0
Net earnings	2,561,000	0	2,561,000	0	0	0
Change in accumulated other comprehensive income, net of tax	1,494,000	$ 0	0	0	0	1,494,000
Balance, shares at Jun. 30, 2020		5,787,504
Balance, amount at Jun. 30, 2020	137,041,000	$ 56,871,000	72,942,000	1,700,000	(1,700,000)	7,228,000
Cash dividends declared on common stock	(871,000)	0	(871,000)	0	0	0
Equity incentive plan, net	0	0	0	47,000	(47,000)	0
Net earnings	4,509,000	0	4,509,000	0	0	0
Change in accumulated other comprehensive income, net of tax	(1,228,000)	$ 0	0	0	0	(1,228,000)
Balance, shares at Sep. 30, 2020		5,787,504
Balance, amount at Sep. 30, 2020	139,451,000	$ 56,871,000	76,580,000	1,747,000	(1,747,000)	6,000,000
Balance, shares at Dec. 31, 2020		5,787,504
Balance, amount at Dec. 31, 2020	139,899,000	$ 56,871,000	77,628,000	1,796,000	(1,796,000)	5,400,000
Cash dividends declared on common stock	(930,000)	$ 0	(930,000)	0	0	0
Restricted stock units exercised, shares		1,662
Restricted stock units exercised, amount	39,000	$ 39,000	0	0	0	0
Equity incentive plan, net	0	0	0	53,000	(53,000)	0
Net earnings	4,121,000	0	4,121,000	0	0	0
Change in accumulated other comprehensive income, net of tax	(3,100,000)	$ 0	0	0	0	(3,100,000)
Balance, shares at Mar. 31, 2021		5,789,166
Balance, amount at Mar. 31, 2021	140,029,000	$ 56,910,000	80,819,000	1,849,000	(1,849,000)	2,300,000
Balance, shares at Dec. 31, 2020		5,787,504
Balance, amount at Dec. 31, 2020	139,899,000	$ 56,871,000	77,628,000	1,796,000	(1,796,000)	5,400,000
Net earnings	12,126,000
Balance, shares at Sep. 30, 2021		5,661,569
Balance, amount at Sep. 30, 2021	143,542,000	$ 53,305,000	86,927,000	1,946,000	(1,946,000)	3,310,000
Balance, shares at Mar. 31, 2021		5,789,166
Balance, amount at Mar. 31, 2021	140,029,000	$ 56,910,000	80,819,000	1,849,000	(1,849,000)	2,300,000
Cash dividends declared on common stock	(930,000)	0	(930,000)	0	0	0
Equity incentive plan, net	0	0	0	52,000	(52,000)	0
Net earnings	4,615,000	0	4,615,000	0	0	0
Change in accumulated other comprehensive income, net of tax	1,660,000	$ 0	0	0	0	1,660,000
Balance, shares at Jun. 30, 2021		5,789,166
Balance, amount at Jun. 30, 2021	145,374,000	$ 56,910,000	84,504,000	1,901,000	(1,901,000)	3,960,000
Common stock repurchase, shares		(127,597)
Common stock repurchase, amount	(3,605,000)	$ (3,605,000)	0	0	0	0
Cash dividends declared on common stock	(967,000)	0	(967,000)	0	0	0
Equity incentive plan, net	0	0	0	45,000	(45,000)	0
Net earnings	3,390,000	0	3,390,000	0	0	0
Change in accumulated other comprehensive income, net of tax	(650,000)	$ 0	0	0	0	(650,000)
Balance, shares at Sep. 30, 2021		5,661,569
Balance, amount at Sep. 30, 2021	$ 143,542,000	$ 53,305,000	$ 86,927,000	$ 1,946,000	$ (1,946,000)	$ 3,310,000

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Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
Cash flows from operating activities:
Net earnings	$ 12,126,000	$ 9,437,000
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	3,991,000	3,080,000
Provision for (recovery of) loan losses	(863,000)	3,460,000
Deferred income taxes	(27,000)	(25,000)
Gain on sale of investment securities	0	(2,145,000)
Gain on sale of other real estate	(21,000)	0
Write-down of other real estate	0	47,000
Gain on sale of other assets	(104,000)	0
Restricted stock expense	(166,000)	(73,000)
Proceeds from sales of mortgage loans held for sale	76,086,000	78,526,000
Origination of mortgage loans held for sale	(76,033,000)	(83,069,000)
Change in:
Cash surrender value of life insurance	(297,000)	(283,000)
Right of use lease asset	562,000	525,000
Other assets	416,000	(219,000)
Lease liability	(549,000)	(508,000)
Other liabilities	2,138,000	(677,000)
Net cash provided by operating activities	17,259,000	8,076,000
Cash flows from investing activities:
Purchases of investment securities available for sale	(186,793,000)	(90,233,000)
Proceeds from sales, calls and maturities of investment securities available for sale	6,010,000	52,289,000
Proceeds from paydowns of investment securities available for sale	18,335,000	14,635,000
Proceeds from paydowns on other investments	132,000	132,000
Redemptions (purchases) of FHLB stock	331,000	(3,031,000)
Net change in loans	57,552,000	(120,781,000)
Purchases of premises and equipment	(379,000)	(2,298,000)
Purchases of bank owned life insurance	0	(140,000)
Proceeds from sale of other assets	515,000	0
Proceeds from sale of other real estate and repossessions	149,000	0
Net cash used by investing activities	(104,148,000)	(149,427,000)
Cash flows from financing activities:
Net change in deposits	188,879,000	219,879,000
Net change in securities sold under agreement to repurchase	6,131,000	9,930,000
Proceeds from FHLB borrowings	0	70,000,000
Repayment of Junior Subordinated Debt	0	(155,000)
Proceeds from Fed Funds purchased	0	(6,935,000)
Repayments of Fed Funds purchased	0	6,935,000
Restricted stock units exercised	39,000	57,000
Common stock repurchased	(3,605,000)	(2,999,000)
Cash dividends paid on common stock	(2,827,000)	(3,520,000)
Net cash provided by financing activities	188,617,000	293,192,000
Net change in cash and cash equivalents	101,728,000	151,841,000
Cash and cash equivalents at beginning of period	161,580,000	52,387,000
Cash and cash equivalents at end of period	263,308,000	204,228,000
Cash paid during the period for:
Interest	1,658,000	1,908,000
Income taxes	3,221,000	1,651,000
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	(2,090,000)	2,356,000
Issuance of accrued restricted stock units	39,000	57,000
Transfers of loans to other real estate and repossessions	0	175,000
Transfers of premises and equipment to other assets held for sale	$ 408,000	$ 0

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2021

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

(1)

Summary of Significant Accounting Policies

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank formerly operated three banking offices focused on the Latino population that were operated as a division of the Bank under the name Banco de la Gente (“Banco”). Two of these offices remain open as Bank branches that offer the same banking services offered in the Bank’s other branches such as the taking of deposits and the making of loans. The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals other than Correction of an Error noted below) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders. Correction of an Error Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the trust should be recorded on the Company’s financial statements along with a corresponding liability. For balances related to mutual fund investments held in the rabbi trust, the accrued interest receivable and other assets, accrued interest payable and other liabilities, total assets, and total liabilities line items on the Consolidated Balance Sheets were adjusted as of December 31, 2020 to reflect the asset and corresponding liability associated with the portion of the rabbi trust held in mutual fund investments. This resulted in an increase to these line items of $1.3 million. Additionally, an adjustment to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets has been made to disclose the number of shares of Company stock held by the rabbi trust and the cost basis for those shares, as well as a corresponding liability for the deferred compensation as of December 31, 2020. On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.78 to $0.80 for the three months ended September 30, 2020 and from $1.62 to $1.67 for the nine months ended September 30, 2020. The impact of the changes in the fair value of the mutual funds held in the rabbi trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements below. In addition to the adjustments to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets, the Company adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the rabbi trust, as well as the corresponding deferred compensation associated with these shares.

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

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

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2021-06: Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)	Amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

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

Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations.  The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized.  The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 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.
ASU 2021-05:         Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate	Updated guidance that requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if certain conditions are met	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

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

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Investment Securities

9 Months Ended

Sep. 30, 2021

Investment Securities

2. Investment Securities

(2)	Investment Securities
	Investment securities available for sale at September 30, 2021 and December 31, 2020 are as follows:

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

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

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

(Dollars in thousands)
	September 30, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	4,994		12		-		-		4,994		12
U.S. Government
sponsored enterprises		5,386		5		3,442		173		8,828		178
Mortgage-backed securities		114,889		1,505		5,897		143		120,786		1,648
State and political subdivisions		37,729		800		3,757		145		41,486		945
Total	$	162,998		2,322		13,096		461		176,094		2,783

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

At September 30, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $2.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2021 tables above, one out of two U.S. Treasury securities, 35 out of 145 securities issued by state and political subdivisions and 43 out of 97 securities issued by U.S. Government sponsored enterprises contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The amortized cost and estimated fair value of investment securities available for sale at September 30, 2021, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2021
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	11,591		11,689
Due from one to five years		10,143		10,763
Due from five to ten years		136,387		139,315
Due after ten years		17,959		17,833
Mortgage-backed securities		222,526		223,305
Total	$	398,606		402,905

No securities available for sale were sold during the three and nine months ended September 30, 2021. Proceeds from sales of securities available for sale during the three months ended September 30, 2020 were $29.2 million and resulted in net gains of $1.7 million. Proceeds from sales of securities available for sale during the nine months ended September 30, 2020 were $46.1 million and resulted in net gains of $2.1 million.

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

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Loans

9 Months Ended

Sep. 30, 2021

Loans

3. Loans

(3)	Loans
	Major classifications of loans at September 30, 2021 and December 31, 2020 are summarized as follows:

(Dollars in thousands)
	September 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	80,009			94,124
Single-family residential		258,403			272,325
Single-family residential -
Banco de la Gente non-traditional		24,043			26,883
Commercial		363,174			332,971
Multifamily and farmland		58,856			48,880
Total real estate loans		784,485			775,183
Loans not secured by real estate:
Commercial loans		94,376			161,740
Farm loans		633			855
Consumer loans		6,321			7,113
All other loans		5,190			3,748
Total loans		891,005			948,639
Less allowance for loan losses		(8,963	)		(9,908	)
Total net loans	$	882,042			938,731

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

·

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of September 30, 2021, construction and land development loans comprised approximately9% of the Bank’s total loan portfolio.

·	Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2021, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.
·	Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of September 30, 2021, commercial real estate loans comprised approximately 41% of the Bank’s total loan portfolio.
·	Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2021, commercial loans comprised approximately 11% of the Bank’s total loan portfolio, including $25.6 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $75.8 million in PPP loans at December 31, 2020.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The following tables present an age analysis of past due loans, by loan type, as of September 30, 2021 and December 31, 2020:

September 30, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	6		-		6		80,003		80,009		-
Single-family residential		850		230		1,080		257,323		258,403		-
Single-family residential -
Banco de la Gente non-traditional		450		39		489		23,554		24,043		-
Commercial		28		37		65		363,109		363,174		-
Multifamily and farmland		-		-		-		58,856		58,856		-
Total real estate loans		1,334		306		1,640		782,845		784,485		-
Loans not secured by real estate:
Commercial loans		176		-		176		94,200		94,376		-
Farm loans		-		-		-		633		633		-
Consumer loans		66		1		67		6,254		6,321		-
All other loans		8		-		8		5,182		5,190		-
Total loans	$	1,584		307		1,891		889,114		891,005		-

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		-

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

(Dollars in thousands)
	September 30, 2021		December 31, 2020
Real estate loans:
Single-family residential	$	1,020		1,266
Single-family residential -
Banco de la Gente non-traditional		1,244		1,709
Commercial		271		440
Multifamily and farmland		109		117
Total real estate loans		2,644		3,532
Loans not secured by real estate:
Commercial loans		54		212
Consumer loans		6		14
Total	$	2,704		3,758

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $18.2 million, $21.3 million and $21.0 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $754,000, $1.2 million, and $934,000 for the nine months ended September 30, 2021, the year ended December 31, 2020 and the nine months ended September 30, 2020, respectively. Interest income recognized on accruing impaired loans was $217,000 and $299,000 for the three months ended September 30, 2021 and 2020, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

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

September 30, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	75		-		75		75		3
Single-family residential		4,506		275		4,021		4,296		80
Single-family residential -
Banco de la Gente non-traditional		12,269		-		11,383		11,383		724
Commercial		2,229		439		1,692		2,131		12
Multifamily and farmland		115		-		109		109		-
Total impaired real estate loans		19,194		714		17,280		17,994		819
Loans not secured by real estate:
Commercial loans		299		54		183		237		3
Consumer loans		12		-		8		8		-
Total impaired loans	$	19,505		768		17,471		18,239		822

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

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	76		1		153		-		91		5		123		7
Single-family residential		5,875		49		5,107		63		5,683		166		4,451		181
Single-family residential -
Banco de la Gente stated income		10,349		140		13,402		197		11,090		477		13,785		617
Commercial		2,280		20		2,665		31		2,617		85		2,772		103
Multifamily and farmland		110		2		-		-		113		4		-		-
Total impaired real estate loans		18,690		212		21,327		291		19,594		737		21,131		908
Loans not secured by real estate:
Commercial loans		248		5		494		7		330		16		553		22
Consumer loans		9		-		74		1		19		1		57		4
Total impaired loans	$	18,947		217		21,895		299		19,943		754		21,741		934

The following table presents impaired loans as of and for the year ended December 31, 2020:

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		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

Impaired loans collectively evaluated for impairment totaled $5.1 million and $5.8 million at September 30, 2021 and December 31, 2020, respectively and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $45,000 and $61,000 at September 30, 2021 and December 31, 2020, respectively.

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

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated			Total
Nine months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212		122			1,345			-		128			2,010			9,908
Charge-offs		-			-			-			-		-			(293	)		-		(249	)		-			(542	)
Recoveries		121			165			-			50		3			7			-		114			-			460
Provision		(421	)		(306	)		(162	)		46		22			(153	)		-		98			13			(863	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Three months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,038			1,723			980			2,180		148			996			-		89			2,133			9,287
Charge-offs		-			-			-			-		-			(215	)		-		(91	)		-			(306	)
Recoveries		31			86			-			2		4			1			-		40			-			164
Provision		(173	)		(107	)		(90	)		126		(5	)		124			-		53			(110	)		(182	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Allowance for loan losses at September 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			58			710			7		-			-			-		-			-			776
Ending balance: collectively
evaluated for impairment		895			1,644			180			2,301		147			906			-		91			2,023			8,187
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Loans at September 30, 2021:
Ending balance	$	80,009			258,403			24,043			363,174		58,856			94,376			633		11,511			-			891,005
Ending balance: individually
evaluated for impairment	$	6			1,398			10,236			1,450		-			54			-		-			-			13,144
Ending balance: collectively
evaluated for impairment	$	80,003			257,005			13,807			361,724		58,856			94,322			633		11,511			-			877,861

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120			688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-			(109	)		-		(343	)		-		(529	)
Recoveries		2			59			-			45			-			27			-		148			-		281
Provision		573			482			(11	)		751			(4	)		355			-		254			1,060		3,460
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Three months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,531			1,813			1,114			2,051			115			980			-		162			1,667		9,433
Charge-offs		-			(65	)		-			-			-			-			-		(87	)		-		(152	)
Recoveries		-			34			-			11			-			2			-		42			-		89
Provision		(267	)		(32	)		(52	)		32			1			(21	)		-		80			781		522
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Allowance for loan losses at September 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			4			859			11			-			-			-		-			-		876
Ending balance: collectively
evaluated for impairment		1,262			1,746			203			2,083			116			961			-		197			2,448		9,016
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Loans at September 30, 2020:
Ending balance	$	96,866			272,246			28,099			318,596			49,584			182,862			851		21,128			-		970,232
Ending balance: individually
evaluated for impairment	$	8			1,582			11,630			1,685			-			255			-		-			-		15,160
Ending balance: collectively
evaluated for impairment	$	96,858			270,664			16,469			316,911			49,584			182,607			851		21,128			-		955,072

The provision for loan losses for the three months ended September 30, 2021 was a recovery of $182,000, compared to a provision of $522,000 for the three months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves in the general reserve pool. At September 30, 2021, there were no loans with existing modifications as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. All loans modified as a result of the COVID-19 pandemic, totaling $100.9 million at September 30, 2021, have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $119.6 million. The $18.7 million decrease from December 31, 2020 to September 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the nine months ended September 30, 2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

The provision for loan losses for the nine months ended September 30, 2021 was a recovery of $863,000, compared to a provision of $3.5 million for the nine months ended September 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool.

The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:
·	Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
·	Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
·	Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
·	Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
·	Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.
·	Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
·	Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·	Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2021 and December 31, 2020:

September 30, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		7,380		-		-		-		382		-		613		-		8,375
2- High Quality		8,982		104,288		-		35,384		19		17,846		-		1,979		1,413		169,911
3- Good Quality		67,245		124,534		9,028		283,657		55,335		69,324		621		3,415		3,777		616,936
4- Management Attention		3,626		16,239		10,878		33,620		2,841		5,122		12		290		-		72,628
5- Watch		82		2,904		1,722		9,802		552		1,644		-		1		-		16,707
6- Substandard		74		3,058		2,415		711		109		58		-		23		-		6,448
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	80,009		258,403		24,043		363,174		58,856		94,376		633		6,321		5,190		891,005

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

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

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

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

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP. Total PPP loans originated as of September 30, 2021 amounted to $128.1 million. The outstanding balance of PPP loans was $25.6 million and $75.8 million at September 30, 2021 and December 31, 2020, respectively. The Bank has received $5.7 million in fees from the SBA for PPP loans originated as of September 30, 2021. The Bank recognized $3.0 million and $1.4 million PPP loan fee income for the nine months ended September 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended September 30, 2021 was $489,000. PPP loan fee income recognized for the three and nine months ended September 30, 2020 was $361,000.

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Net Earnings Per Share

9 Months Ended

Sep. 30, 2021

Net Earnings Per Share

4. Net Earnings Per Share

(4)

Net Earnings Per Share

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares. The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and nine months ended September 30, 2021 and 2020 is as follows:

For the three months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,390		5,544,596	$	0.61
Effect of dilutive securities:
Restricted stock units		-		14,690
Shares held in deferred comp plan				159,797
Diluted earnings per share	$	3,390		5,719,083	$	0.59

For the nine months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	12,126		5,601,879	$	2.16
Effect of dilutive securities:
Restricted stock units		-		13,190
Shares held in deferred comp plan				158,039
Diluted earnings per share	$	12,126		5,773,108	$	2.10

For the three months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,509		5,634,964	$	0.80
Effect of dilutive securities:
Restricted stock units		-		15,299
Shares held in deferred comp plan		-		151,658
Diluted earnings per share	$	4,509		5,801,921	$	0.78

For the nine months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	9,437		5,665,294	$	1.67
Effect of dilutive securities:
Restricted stock units		-		13,960
Shares held in deferred comp plan		-		149,163
Diluted earnings per share	$	9,437		5,828,417	$	1.62

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StockBased Compensation

9 Months Ended

Sep. 30, 2021

StockBased Compensation

5. Stock-Based Compensation

(5)	Stock-Based Compensation
	The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of September 30, 2021, there were no outstanding shares reserved for possible issuance under the 2009 Plan. The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of September 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $57,000. The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted. As of September 30, 2021, a total of 285,075 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date). The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company granted 7,290 restricted stock units under the 2020 Plan at a grant date fair value of $22.04 per share during the first quarter of 2021. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 and 2021 grants). As of September 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $312,000.
	The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $166,000 for the nine months ended September 30, 2021. The Company recognized a $73,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the nine months ended September 30, 2020 due to a reduction in the Company’s stock price from $32.85 per share at December 31, 2019, compared to $15.43 per share at September 30, 2020.

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Fair Value

9 Months Ended

Sep. 30, 2021

Fair Value

6. Fair Value

(6)

Fair Value

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

·	Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
·	Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
·	Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
	Cash and Cash Equivalents For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category. Investment Securities Available for Sale Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category. Other Investments For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category. Loans In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Mutual Funds

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The tables below present the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2021 and December 31, 2020.

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,990		-	$	7,990		-
U.S. Government
sponsored enterprises		14,677		-		14,677		-
Mortgage-backed securities		223,305		-		223,305		-
State and political subdivisions		156,933		-		156,933		-

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

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

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,514		-		1,514		-

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

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

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

(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 September 30, 2021		Fair Value December 31, 2020		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,086		9,139	Rate lock commitment		N/A		N/A
Impaired loans		17,417		20,369	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0-25	%
Other real estate		-		128	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0-25	%

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

(Dollars in thousands)
			Fair Value Measurements at September 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	263,308		263,308		-		-		263,308
Investment securities available for sale		402,905		-		402,905		-		402,905
Other investments		3,725		-		-		3,725		3,725
Mortgage loans held for sale		9,086		-		-		9,086		9,086
Loans, net		882,042		-		-		862,462		862,462
Mutual funds held in deferred
compensation trust		1,514		-		1,514		-		1,514
Liabilities:
Deposits	$	1,409,965		-		-		1,407,770		1,407,770
Securities sold under agreements
to repurchase		32,332		-		32,332		-		32,332
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		-		-		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
Mutual funds held in deferred
compensation trust		1,320		-		1,320		-		1,320
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

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Leases

9 Months Ended

Sep. 30, 2021

Leases

7. Leases

(7)

Leases

As of September 30, 2021, the Company had operating right of use assets and operating lease liabilities of $2.9 million. The Company maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. As allowed by ASU 2016-02, leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term. The following table presents lease cost and other lease information as of September 30, 2021 and 2020.

(Dollars in thousands)
	September 30, 2021			September 30, 2020
Operating lease cost	$	538		$	675
Other information:
Cash paid for amounts included in the measurement of lease liabilities		520			659
Operating cash flows from operating leases		-			-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		952			450
Weighted-average remaining lease term - operating leases		6.72			7.36
Weighted-average discount rate - operating leases		2.71	%		2.97	%

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

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	September 30, 2021			December 31, 2020
2021	$	181		$	754
2022		555			588
2023		544			567
2024		489			489
2025		433			433
Thereafter		1,041			1,041
Total		3,243			3,872
Less: Imputed Interest		(321	)		(401	)
Operating Lease Liability	$	2,922		$	3,471

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Subsequent Events

9 Months Ended

Sep. 30, 2021

Subsequent Events

8. Subsequent Events

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

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2021

Summary of Significant Accounting Policies

Correction of an Error

Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the trust should be recorded on the Company’s financial statements along with a corresponding liability.

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

On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.78 to $0.80 for the three months ended September 30, 2020 and from $1.62 to $1.67 for the nine months ended September 30, 2020. The impact of the changes in the fair value of the mutual funds held in the rabbi trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements below.

In addition to the adjustments to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets, the Company adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the rabbi trust, as well as the corresponding deferred compensation associated with these shares.

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

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

Recent Accounting Pronouncements

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

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

Recent Accounting Pronouncements

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

Recently Adopted Accounting Guidance

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force)	Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815.	January 1, 2021	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2021-06: Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)	Amends SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

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

Recently Issued Accounting Guidance Not Yet Adopted

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.  The Company is still evaluating the impact of this guidance on its consolidated financial statements.  The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations.  The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations.  The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized.  The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.  See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 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.
ASU 2021-05:         Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments, which requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate	Updated guidance that requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate as an operating lease at lease commencement if certain conditions are met	January 1, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

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

Reclassification

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

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2021

Investment Securities

Investment securities available for sale

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

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

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

(Dollars in thousands)
	September 30, 2021
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	4,994		12		-		-		4,994		12
U.S. Government
sponsored enterprises		5,386		5		3,442		173		8,828		178
Mortgage-backed securities		114,889		1,505		5,897		143		120,786		1,648
State and political subdivisions		37,729		800		3,757		145		41,486		945
Total	$	162,998		2,322		13,096		461		176,094		2,783

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

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

September 30, 2021
(Dollars in thousands)
	Amortized Cost		Fair Value
Due within one year	$	11,591		11,689
Due from one to five years		10,143		10,763
Due from five to ten years		136,387		139,315
Due after ten years		17,959		17,833
Mortgage-backed securities		222,526		223,305
Total	$	398,606		402,905

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Loans (Tables)

9 Months Ended

Sep. 30, 2021

Loans

Major classifications of loans

(Dollars in thousands)
	September 30, 2021			December 31, 2020
Real estate loans:
Construction and land development	$	80,009			94,124
Single-family residential		258,403			272,325
Single-family residential -
Banco de la Gente non-traditional		24,043			26,883
Commercial		363,174			332,971
Multifamily and farmland		58,856			48,880
Total real estate loans		784,485			775,183
Loans not secured by real estate:
Commercial loans		94,376			161,740
Farm loans		633			855
Consumer loans		6,321			7,113
All other loans		5,190			3,748
Total loans		891,005			948,639
Less allowance for loan losses		(8,963	)		(9,908	)
Total net loans	$	882,042			938,731

Summary of Age analysis of past due loans

September 30, 2021
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	6		-		6		80,003		80,009		-
Single-family residential		850		230		1,080		257,323		258,403		-
Single-family residential -
Banco de la Gente non-traditional		450		39		489		23,554		24,043		-
Commercial		28		37		65		363,109		363,174		-
Multifamily and farmland		-		-		-		58,856		58,856		-
Total real estate loans		1,334		306		1,640		782,845		784,485		-
Loans not secured by real estate:
Commercial loans		176		-		176		94,200		94,376		-
Farm loans		-		-		-		633		633		-
Consumer loans		66		1		67		6,254		6,321		-
All other loans		8		-		8		5,182		5,190		-
Total loans	$	1,584		307		1,891		889,114		891,005		-

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		-

Non-accrual loans

(Dollars in thousands)
	September 30, 2021		December 31, 2020
Real estate loans:
Single-family residential	$	1,020		1,266
Single-family residential -
Banco de la Gente non-traditional		1,244		1,709
Commercial		271		440
Multifamily and farmland		109		117
Total real estate loans		2,644		3,532
Loans not secured by real estate:
Commercial loans		54		212
Consumer loans		6		14
Total	$	2,704		3,758

Impaired loans

September 30, 2021
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	75		-		75		75		3
Single-family residential		4,506		275		4,021		4,296		80
Single-family residential -
Banco de la Gente non-traditional		12,269		-		11,383		11,383		724
Commercial		2,229		439		1,692		2,131		12
Multifamily and farmland		115		-		109		109		-
Total impaired real estate loans		19,194		714		17,280		17,994		819
Loans not secured by real estate:
Commercial loans		299		54		183		237		3
Consumer loans		12		-		8		8		-
Total impaired loans	$	19,505		768		17,471		18,239		822

Schedule of average impaired loan losses

(Dollars in thousands)
	Three months ended								Nine months ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	76		1		153		-		91		5		123		7
Single-family residential		5,875		49		5,107		63		5,683		166		4,451		181
Single-family residential -
Banco de la Gente stated income		10,349		140		13,402		197		11,090		477		13,785		617
Commercial		2,280		20		2,665		31		2,617		85		2,772		103
Multifamily and farmland		110		2		-		-		113		4		-		-
Total impaired real estate loans		18,690		212		21,327		291		19,594		737		21,131		908
Loans not secured by real estate:
Commercial loans		248		5		494		7		330		16		553		22
Consumer loans		9		-		74		1		19		1		57		4
Total impaired loans	$	18,947		217		21,895		299		19,943		754		21,741		934

December 31, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		Interest Income Recognized
Real estate loans:
Construction and land development	$	108		-		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

Changes in the allowance for loan losses

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial		Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated			Total
Nine months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,196			1,843			1,052			2,212		122			1,345			-		128			2,010			9,908
Charge-offs		-			-			-			-		-			(293	)		-		(249	)		-			(542	)
Recoveries		121			165			-			50		3			7			-		114			-			460
Provision		(421	)		(306	)		(162	)		46		22			(153	)		-		98			13			(863	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Three months ended September 30, 2021:
Allowance for loan losses:
Beginning balance	$	1,038			1,723			980			2,180		148			996			-		89			2,133			9,287
Charge-offs		-			-			-			-		-			(215	)		-		(91	)		-			(306	)
Recoveries		31			86			-			2		4			1			-		40			-			164
Provision		(173	)		(107	)		(90	)		126		(5	)		124			-		53			(110	)		(182	)
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Allowance for loan losses at September 30, 2021:
Ending balance: individually
evaluated for impairment	$	1			58			710			7		-			-			-		-			-			776
Ending balance: collectively
evaluated for impairment		895			1,644			180			2,301		147			906			-		91			2,023			8,187
Ending balance	$	896			1,702			890			2,308		147			906			-		91			2,023			8,963
Loans at September 30, 2021:
Ending balance	$	80,009			258,403			24,043			363,174		58,856			94,376			633		11,511			-			891,005
Ending balance: individually
evaluated for impairment	$	6			1,398			10,236			1,450		-			54			-		-			-			13,144
Ending balance: collectively
evaluated for impairment	$	80,003			257,005			13,807			361,724		58,856			94,322			633		11,511			-			877,861

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development			Single-Family Residential			Single-Family Residential - Banco de la Gente Non-traditional			Commercial			Multifamily and Farmland			Commercial			Farm		Consumer and All Other			Unallocated		Total
Nine months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	694			1,274			1,073			1,305			120			688			-		138			1,388		6,680
Charge-offs		(5	)		(65	)		-			(7	)		-			(109	)		-		(343	)		-		(529	)
Recoveries		2			59			-			45			-			27			-		148			-		281
Provision		573			482			(11	)		751			(4	)		355			-		254			1,060		3,460
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Three months ended September 30, 2020:
Allowance for loan losses:
Beginning balance	$	1,531			1,813			1,114			2,051			115			980			-		162			1,667		9,433
Charge-offs		-			(65	)		-			-			-			-			-		(87	)		-		(152	)
Recoveries		-			34			-			11			-			2			-		42			-		89
Provision		(267	)		(32	)		(52	)		32			1			(21	)		-		80			781		522
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Allowance for loan losses at September 30, 2020:
Ending balance: individually
evaluated for impairment	$	2			4			859			11			-			-			-		-			-		876
Ending balance: collectively
evaluated for impairment		1,262			1,746			203			2,083			116			961			-		197			2,448		9,016
Ending balance	$	1,264			1,750			1,062			2,094			116			961			-		197			2,448		9,892
Loans at September 30, 2020:
Ending balance	$	96,866			272,246			28,099			318,596			49,584			182,862			851		21,128			-		970,232
Ending balance: individually
evaluated for impairment	$	8			1,582			11,630			1,685			-			255			-		-			-		15,160
Ending balance: collectively
evaluated for impairment	$	96,858			270,664			16,469			316,911			49,584			182,607			851		21,128			-		955,072

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

September 30, 2021
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development		Single-Family Residential		Single-Family Residential - Banco de la Gente non-traditional		Commercial		Multifamily and Farmland		Commercial		Farm		Consumer		All Other		Total
1- Excellent Quality	$	-		7,380		-		-		-		382		-		613		-		8,375
2- High Quality		8,982		104,288		-		35,384		19		17,846		-		1,979		1,413		169,911
3- Good Quality		67,245		124,534		9,028		283,657		55,335		69,324		621		3,415		3,777		616,936
4- Management Attention		3,626		16,239		10,878		33,620		2,841		5,122		12		290		-		72,628
5- Watch		82		2,904		1,722		9,802		552		1,644		-		1		-		16,707
6- Substandard		74		3,058		2,415		711		109		58		-		23		-		6,448
7- Doubtful		-		-		-		-		-		-		-		-		-		-
8- Loss		-		-		-		-		-		-		-		-		-		-
Total	$	80,009		258,403		24,043		363,174		58,856		94,376		633		6,321		5,190		891,005

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

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Net Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2021

Net Earnings Per Share

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

For the three months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,390		5,544,596	$	0.61
Effect of dilutive securities:
Restricted stock units		-		14,690
Shares held in deferred comp plan				159,797
Diluted earnings per share	$	3,390		5,719,083	$	0.59

For the nine months ended September 30, 2021
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	12,126		5,601,879	$	2.16
Effect of dilutive securities:
Restricted stock units		-		13,190
Shares held in deferred comp plan				158,039
Diluted earnings per share	$	12,126		5,773,108	$	2.10

For the three months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	4,509		5,634,964	$	0.80
Effect of dilutive securities:
Restricted stock units		-		15,299
Shares held in deferred comp plan		-		151,658
Diluted earnings per share	$	4,509		5,801,921	$	0.78

For the nine months ended September 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	9,437		5,665,294	$	1.67
Effect of dilutive securities:
Restricted stock units		-		13,960
Shares held in deferred comp plan		-		149,163
Diluted earnings per share	$	9,437		5,828,417	$	1.62

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2021

Fair Value

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

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
U. S Treasuries	$	7,990		-	$	7,990		-
U.S. Government
sponsored enterprises		14,677		-		14,677		-
Mortgage-backed securities		223,305		-		223,305		-
State and political subdivisions		156,933		-		156,933		-

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

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

(Dollars in thousands)
	September 30, 2021
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mutual funds held in deferred compensation trust	$	1,514		-		1,514		-

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

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

(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 September 30, 2021		Fair Value December 31, 2020		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	9,086		9,139	Rate lock commitment		N/A		N/A
Impaired loans		17,417		20,369	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0-25	%
Other real estate		-		128	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0-25	%

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

(Dollars in thousands)
			Fair Value Measurements at September 30, 2021
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	263,308		263,308		-		-		263,308
Investment securities available for sale		402,905		-		402,905		-		402,905
Other investments		3,725		-		-		3,725		3,725
Mortgage loans held for sale		9,086		-		-		9,086		9,086
Loans, net		882,042		-		-		862,462		862,462
Mutual funds held in deferred
compensation trust		1,514		-		1,514		-		1,514
Liabilities:
Deposits	$	1,409,965		-		-		1,407,770		1,407,770
Securities sold under agreements
to repurchase		32,332		-		32,332		-		32,332
Junior subordinated debentures		15,464		-		15,464		-		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	161,580		161,580		-		-		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
Mutual funds held in deferred
compensation trust		1,320		-		1,320		-		1,320
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

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Leases (Tables)

9 Months Ended

Sep. 30, 2021

Leases

Lease expense

(Dollars in thousands)
	September 30, 2021			September 30, 2020
Operating lease cost	$	538		$	675
Other information:
Cash paid for amounts included in the measurement of lease liabilities		520			659
Operating cash flows from operating leases		-			-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		952			450
Weighted-average remaining lease term - operating leases		6.72			7.36
Weighted-average discount rate - operating leases		2.71	%		2.97	%

Maturity analysis of operating lease liabilities

(Dollars in thousands)
Maturity Analysis of Operating Lease Liabilities:	September 30, 2021			December 31, 2020
2021	$	181		$	754
2022		555			588
2023		544			567
2024		489			489
2025		433			433
Thereafter		1,041			1,041
Total		3,243			3,872
Less: Imputed Interest		(321	)		(401	)
Operating Lease Liability	$	2,922		$	3,471

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Summary of Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Summary of Significant Accounting Policies
Mutual fund investments	$ 1,300		$ 1,300
Earnings, basic earnings per share	$ 0.61	$ 0.80	$ 2.16	$ 1.67

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Investment Securities (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2021	Dec. 31, 2020
Investment Securities Available for Sale
Amortized cost	$ 398,606
Estimated fair value	402,905	$ 245,249
Total [Member]
Investment Securities Available for Sale
Amortized cost	398,606	238,236
Gross unrealized gains	7,082	7,901
Gross unrealized losses	2,783	888
Estimated fair value	402,905	245,249
U.S. Government Sponsored Enterprises [Member]
Investment Securities Available for Sale
Amortized cost	14,566	7,384
Gross unrealized gains	289	331
Gross unrealized losses	178	208
Estimated fair value	14,677	7,507
Mortgage-Backed Securities [Member]
Investment Securities Available for Sale
Amortized cost	222,526	143,095
Gross unrealized gains	2,427	2,812
Gross unrealized losses	1,648	593
Estimated fair value	223,305	145,314
State and Political Subdivisions [Member]
Investment Securities Available for Sale
Amortized cost	153,551	87,757
Gross unrealized gains	4,327	4,758
Gross unrealized losses	945	87
Estimated fair value	156,933	$ 92,428
U S Treasuries [Member]
Investment Securities Available for Sale
Amortized cost	7,963
Gross unrealized gains	39
Gross unrealized losses	12
Estimated fair value	$ 7,990

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Investment securities (Details 1) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2021	Dec. 31, 2020
Less than 12 months, fair value	$ 162,998,000	$ 87,953,000
Less than 12 months, unrealized losses	2,322,000	652,000
12 months or more, fair value	13,096,000	8,955,000
12 months or more, unrealized losses	461,000	236,000
Total, fair value	176,094,000	96,908,000
Total, unrealized losses	2,783,000	888,000
U.S. Government Sponsored Enterprises [Member]
Less than 12 months, fair value	5,386,000	0
Less than 12 months, unrealized losses	5,000	0
12 months or more, fair value	3,442,000	4,193,000
12 months or more, unrealized losses	173,000	208,000
Total, fair value	8,828,000	4,193,000
Total, unrealized losses	178,000	208,000
Mortgage-Backed Securities [Member]
Less than 12 months, fair value	114,889,000	80,827,000
Less than 12 months, unrealized losses	1,505,000	565,000
12 months or more, fair value	5,897,000	4,762,000
12 months or more, unrealized losses	143,000	28,000
Total, fair value	120,786,000	85,589,000
Total, unrealized losses	1,648,000	593,000
State and Political Subdivisions [Member]
Less than 12 months, fair value	37,729,000	7,126,000
Less than 12 months, unrealized losses	800,000	87,000
12 months or more, fair value	3,757,000	0
12 months or more, unrealized losses	145,000	0
Total, fair value	41,486,000	7,126,000
Total, unrealized losses	945,000	$ 87,000
U.S. Treasuries [Member]
Less than 12 months, fair value	4,994,000
Less than 12 months, unrealized losses	12,000
12 months or more, fair value	0
12 months or more, unrealized losses	0
Total, fair value	4,994,000
Total, unrealized losses	$ 12,000

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Investment securities (Details 2) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Amortized Cost
Due within one year	$ 11,591,000
Due from one to five years	10,143,000
Due from five to ten years	136,387,000
Due after ten years	17,959,000
Mortgage-backed securities	222,526,000
Total	398,606,000
Estimated Fair Value
Due within one year	11,689,000
Due from one to five years	10,763,000
Due from five to ten years	139,315,000
Due after ten years	17,833,000
Mortgage-backed securities	223,305,000
Total	$ 406,630,000	$ 249,404,000

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Investment Securities (Details Narrative) - USD ($) $ in Millions	3 Months Ended	9 Months Ended
	Sep. 30, 2020	Sep. 30, 2020	Sep. 30, 2021	Dec. 31, 2020
Investment Securities
Gain on sale	$ 1.7	$ 2.1
Proceeds from sales of securities	$ 29.2	$ 46.1
Securities pledged to secure public deposits			$ 90.6	$ 77.3
Debt securities total			$ 2.8

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Loans (Details) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Major Classifications
Total loans	$ 891,005,000	$ 948,639,000
Less allowance for loan losses	(8,963,000)	(9,908,000)
Net loans	882,042,000	938,731,000
Total Real Estate Loans
Major Classifications
Total loans	784,485,000	775,183,000
Construction and Land Development
Major Classifications
Total loans	80,009,000	94,124,000
Single-Family Residential
Major Classifications
Total loans	258,403,000	272,325,000
Single-Family Residential - Banco de la Gente Non-Tradtional
Major Classifications
Total loans	24,043,000	26,883,000
Commercial
Major Classifications
Total loans	363,174,000	332,971,000
Multifamily and Farmland
Major Classifications
Total loans	58,856,000	48,880,000
Commercial Loans (Not Secured by Real Estate)
Major Classifications
Total loans	94,376,000	161,740,000
Farm Loans (Not Secured by Real Estate)
Major Classifications
Total loans	633,000	855,000
Consumer Loans (Not Secured by Real Estate)
Major Classifications
Total loans	6,321,000	7,113,000
All Other Loans (Not Secured by Real Estate)
Major Classifications
Total loans	$ 5,190,000	$ 3,748,000

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Loans (Details 1) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Total loans	$ 891,005,000	$ 948,639,000
Construction and Land Development
Loans 30-89 days past due	6,000	298,000
Loans 90 or more days past due	0	0
Total past due loans	6,000	298,000
Total current loans	80,003	93,826
Total loans	80,009,000	94,124,000
Accruing loans 90 or more days past due	0	0
Single-Family Residential
Loans 30-89 days past due	850,000	3,660,000
Loans 90 or more days past due	230,000	270,000
Total past due loans	1,080,000	3,930,000
Total current loans	257,323	268,395
Total loans	258,403,000	272,325,000
Accruing loans 90 or more days past due	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional
Loans 30-89 days past due	450,000	3,566,000
Loans 90 or more days past due	39,000	105,000
Total past due loans	489,000	3,671,000
Total current loans	23,554	23,212
Total loans	24,043,000	26,883,000
Accruing loans 90 or more days past due	0	0
Commercial
Loans 30-89 days past due	28,000	36,000
Loans 90 or more days past due	37,000	0
Total past due loans	65,000	36,000
Total current loans	363,109	332,935
Total loans	363,174,000	332,971,000
Accruing loans 90 or more days past due	0	0
Multifamily and Farmland
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	58,856	48,880
Total loans	58,856,000	48,880,000
Accruing loans 90 or more days past due	0	0
Commercial Loans (Not Secured by Real Estate)
Loans 30-89 days past due	176,000	0
Loans 90 or more days past due	0	0
Total past due loans	176,000	0
Total current loans	94,200	161,740
Total loans	94,376,000	161,740,000
Accruing loans 90 or more days past due	0	0
Farm Loans (Not Secured by Real Estate)
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	633	855
Total loans	633,000	855,000
Accruing loans 90 or more days past due	0	0
Consumer Loans (Not Secured by Real Estate)
Loans 30-89 days past due	66,000	45,000
Loans 90 or more days past due	1,000	2,000
Total past due loans	67,000	47,000
Total current loans	6,254	7,066
Total loans	6,321,000	7,113,000
Accruing loans 90 or more days past due	0	0
All Other Loans (Not Secured by Real Estate)
Loans 30-89 days past due	8,000	0
Loans 90 or more days past due	0	0
Total past due loans	8,000	0
Total current loans	5,182	3,748
Total loans	5,190,000	3,748,000
Accruing loans 90 or more days past due	0	0
Past Due Loans [Member]
Loans 30-89 days past due	1,584,000	7,605,000
Loans 90 or more days past due	307,000	377,000
Total past due loans	1,891,000	7,982,000
Total current loans	889,114	940,657
Total loans	891,005,000	948,639,000
Accruing loans 90 or more days past due	0	0
Total Real Estate Loans
Loans 30-89 days past due	1,334,000	7,560,000
Loans 90 or more days past due	306,000	375,000
Total past due loans	1,640,000	7,935,000
Total current loans	782,845	767,248
Total loans	784,485,000	775,183,000
Accruing loans 90 or more days past due	$ 0	$ 0

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Loans (Details 2) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Non-Accrual Loans
Non-accrual loans	$ 2,704	$ 3,758
Total Real Estate Loans
Non-Accrual Loans
Non-accrual loans	2,644	3,532
Single-Family Residential
Non-Accrual Loans
Non-accrual loans	1,020	1,266
Single-Family Residential - Banco de la Gente Non-Tradtional
Non-Accrual Loans
Non-accrual loans	1,244	1,709
Commercial
Non-Accrual Loans
Non-accrual loans	271	440
Multifamily and Farmland
Non-Accrual Loans
Non-accrual loans	109	117
Commercial Loans (Not Secured by Real Estate)
Non-Accrual Loans
Non-accrual loans	54	212
Consumer Loans (Not Secured by Real Estate)
Non-Accrual Loans
Non-accrual loans	$ 6	$ 14

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Loans (Details 3) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Impaired Loans
Unpaid contractual principal balance	$ 19,505,000		$ 19,505,000		$ 22,501,000
Recorded investment with no allowance	768,000		768,000		1,672,000
Recorded investment with allowance	17,471,000		17,471,000		19,616,000
Recorded investment in impaired loans	18,239,000		18,239,000		21,288,000
Related allowance	8,963,000		8,963,000		9,908,000
Average outstanding impaired loans	18,947,000	$ 21,895,000	19,943,000	$ 21,741,000	21,848,000
Interest income recognized	217,000	299,000	754,000	934,000	1,250,000
Total Real Estate Loans
Impaired Loans
Unpaid contractual principal balance	19,194,000		19,194,000		21,945,000
Recorded investment with no allowance	714,000		714,000		1,461,000
Recorded investment with allowance	17,280,000		17,280,000		19,335,000
Recorded investment in impaired loans	17,994,000		17,994,000		20,796,000
Related allowance	819,000		819,000		913,000
Average outstanding impaired loans	18,690,000	21,327,000	19,594,000	21,131,000	21,224,000
Interest income recognized	212,000	291,000	737,000	908,000	1,213,000
Construction and Land Development
Impaired Loans
Unpaid contractual principal balance	75,000		75,000		108,000
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	75,000		75,000		108,000
Recorded investment in impaired loans	75,000		75,000		108,000
Related allowance	3,000		3,000		4,000
Average outstanding impaired loans	76,000	153,000	91,000	123,000	134,000
Interest income recognized	1,000	0	5,000	7,000	8,000
Single-Family Residential
Impaired Loans
Unpaid contractual principal balance	4,506,000		4,506,000		5,302,000
Recorded investment with no allowance	275,000		275,000		379,000
Recorded investment with allowance	4,021,000		4,021,000		4,466,000
Recorded investment in impaired loans	4,296,000		4,296,000		4,845,000
Related allowance	80,000		80,000		33,000
Average outstanding impaired loans	5,875,000	5,107,000	5,683,000	4,451,000	4,741,000
Interest income recognized	49,000	63,000	166,000	181,000	262,000
Single-Family Residential - Banco de la Gente Non-Tradtional
Impaired Loans
Unpaid contractual principal balance	12,269,000		12,269,000		13,417,000
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	11,383,000		11,383,000		12,753,000
Recorded investment in impaired loans	11,383,000		11,383,000		12,753,000
Related allowance	724,000		724,000		862,000
Average outstanding impaired loans	10,349,000	13,402,000	11,090,000	13,785,000	13,380,000
Interest income recognized	140,000	197,000	477,000	617,000	798,000
Commercial
Impaired Loans
Unpaid contractual principal balance	2,229,000		2,229,000		2,999,000
Recorded investment with no allowance	439,000		439,000		1,082,000
Recorded investment with allowance	1,692,000		1,692,000		1,891,000
Recorded investment in impaired loans	2,131,000		2,131,000		2,973,000
Related allowance	12,000		12,000		14,000
Average outstanding impaired loans	2,280,000	2,665,000	2,617,000	2,772,000	2,940,000
Interest income recognized	20,000	31,000	85,000	103,000	139,000
Multifamily and Farmland
Impaired Loans
Unpaid contractual principal balance	115,000		115,000		119,000
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	109,000		109,000		117,000
Recorded investment in impaired loans	109,000		109,000		117,000
Related allowance	0		0		0
Average outstanding impaired loans	110,000	0	113,000	0	29,000
Interest income recognized	2,000	0	4,000	0	6,000
Commercial Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid contractual principal balance	299,000		299,000		515,000
Recorded investment with no allowance	54,000		54,000		211,000
Recorded investment with allowance	183,000		183,000		244,000
Recorded investment in impaired loans	237,000		237,000		455,000
Related allowance	3,000		3,000		5,000
Average outstanding impaired loans	248,000	494,000	330,000	553,000	564,000
Interest income recognized	5,000	7,000	16,000	22,000	32,000
Consumer Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid contractual principal balance	12,000		12,000		41,000
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	8,000		8,000		37,000
Recorded investment in impaired loans	8,000		8,000		37,000
Related allowance	0		0		1,000
Average outstanding impaired loans	9,000	74,000	19,000	57,000	60,000
Interest income recognized	$ 0	$ 1,000	$ 1,000	$ 4,000	$ 5,000

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Loans (Details 4) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Allowance for Loan Losses
Beginning balance	$ 9,287,000	$ 9,433,000	$ 9,908,000	$ 6,680,000
Charge-offs	(306,000)	(152,000)	(542,000)	(529,000)
Recoveries	164,000	89,000	460,000	281,000
Provision	(182,000)	522,000	(863,000)	3,460,000
Ending balance	8,963,000	9,892,000	8,963,000	9,892,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	776,000	876,000	776,000	876,000
Allowance for loan losses, Ending balance: collectively evaluated for impairments	8,187,000	9,016,000	8,187,000	9,016,000
Allowance for loan losses, Ending balance	8,963,000	9,892,000	8,963,000	9,892,000
Loans, Ending balance: individually evaluated for impairments	891,005,000	15,160,000	891,005,000	15,160,000
Loans, Ending balance: collectively evaluated for impairments	13,144,000	970,232,000	13,144,000	970,232,000
Loans, Ending balance	877,861,000	955,072,000	877,861,000	955,072,000
Consumer And All Other Loans
Allowance for Loan Losses
Beginning balance	89,000	162,000	128,000	138,000
Charge-offs	(91,000)	(87,000)	(249,000)	(343,000)
Recoveries	40,000	42,000	114,000	148,000
Provision	53,000	80,000	98,000	254,000
Ending balance	91,000	197,000	91,000	197,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance: collectively evaluated for impairments	91,000	197,000	91,000	197,000
Allowance for loan losses, Ending balance	91,000	197,000	91,000	197,000
Loans, Ending balance: individually evaluated for impairments	0	0	0	0
Loans, Ending balance: collectively evaluated for impairments	11,511,000	21,128,000	11,511,000	21,128,000
Loans, Ending balance	11,511,000	21,128,000	11,511,000	21,128,000
Unallocated
Allowance for Loan Losses
Beginning balance	2,133,000	1,667,000	2,010,000	1,388,000
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(110,000)	781,000	13,000	1,060,000
Ending balance	2,023,000	2,448,000	2,023,000	2,448,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance: collectively evaluated for impairments	2,023,000	2,448,000	2,023,000	2,448,000
Allowance for loan losses, Ending balance	2,023,000	2,448,000	2,023,000	2,448,000
Loans, Ending balance: individually evaluated for impairments	0	0	0	0
Loans, Ending balance: collectively evaluated for impairments	0	0	0	0
Loans, Ending balance	0	0	0	0
Construction and Land Development
Allowance for Loan Losses
Beginning balance	1,038,000	1,531,000	1,196,000	694,000
Charge-offs	0	0	0	(5,000)
Recoveries	31,000		121,000	2,000
Provision	(173,000)	(267,000)	(421,000)	573,000
Ending balance	896,000	1,264,000	896,000	1,264,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	1,000	2,000	1,000	2,000
Allowance for loan losses, Ending balance: collectively evaluated for impairments	895,000	1,262,000	895,000	1,262,000
Allowance for loan losses, Ending balance	80,003,000	8,000	80,003,000	8,000
Loans, Ending balance: individually evaluated for impairments	896,000	1,264,000	896,000	1,264,000
Loans, Ending balance: collectively evaluated for impairments	80,009,000	96,866,000	80,009,000	96,866,000
Loans, Ending balance	6,000	96,858,000	6,000	96,858,000
Single-Family Residential [Member]
Allowance for Loan Losses
Beginning balance	1,723,000	1,813,000	1,843,000	1,274,000
Charge-offs	0	(65,000)	0	(65,000)
Recoveries	86,000	34,000	165,000	59,000
Provision	(107,000)	(32,000)	(306,000)	482,000
Ending balance	1,702,000	1,750,000	1,702,000	1,750,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	58,000	4,000	58,000	4,000
Allowance for loan losses, Ending balance: collectively evaluated for impairments	1,644,000	1,746,000	1,644,000	1,746,000
Allowance for loan losses, Ending balance	1,702,000	1,750,000	1,702,000	1,750,000
Loans, Ending balance: individually evaluated for impairments	258,403,000	1,582,000	258,403,000	1,582,000
Loans, Ending balance: collectively evaluated for impairments	1,398,000	272,246,000	1,398,000	272,246,000
Loans, Ending balance	257,005,000	270,664,000	257,005,000	270,664,000
Commercial Loans (Not Secured by Real Estate)
Allowance for Loan Losses
Beginning balance	996,000	980,000	1,345,000	688,000
Charge-offs	(215,000)	0	(293,000)	(109,000)
Recoveries	1,000	2,000	7,000	27,000
Provision	124,000	(21,000)	(153,000)	355,000
Ending balance	906,000	961,000	906,000	961,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance: collectively evaluated for impairments	906,000	961,000	906,000	961,000
Allowance for loan losses, Ending balance	906,000	961,000	906,000	961,000
Loans, Ending balance: individually evaluated for impairments	94,376,000	255,000	94,376,000	255,000
Loans, Ending balance: collectively evaluated for impairments	54,000	182,607,000	54,000	182,607,000
Loans, Ending balance	94,322,000	182,862,000	94,322,000	182,862,000
Farm Loans (Not Secured by Real Estate)
Allowance for Loan Losses
Beginning balance	0	0	0	0
Charge-offs	0	0		0
Recoveries	0	0	0	0
Provision	0	0	0	0
Ending balance	0	0	0	0
Allowance for loan losses, Ending balance: individually evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance: collectively evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance	0	0	0	0
Loans, Ending balance: individually evaluated for impairments	633,000	851,000	633,000	851,000
Loans, Ending balance: collectively evaluated for impairments	0	0	0	0
Loans, Ending balance	633,000	851,000	633,000	851,000
Single-Family Residential - Banco de la Gente Non-Tradtional
Allowance for Loan Losses
Beginning balance	980,000	1,114,000	1,052,000	1,073,000
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(90,000)	(52,000)	(162,000)	(11,000)
Ending balance	890,000	1,062,000	890,000	1,062,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	710,000	859,000	710,000	859,000
Allowance for loan losses, Ending balance: collectively evaluated for impairments	180,000	203,000	180,000	203,000
Allowance for loan losses, Ending balance	890,000	1,062,000	890,000	1,062,000
Loans, Ending balance: individually evaluated for impairments	24,043,000	11,630,000	24,043,000	11,630,000
Loans, Ending balance: collectively evaluated for impairments	10,236,000	16,469,000	10,236,000	16,469,000
Loans, Ending balance	13,807,000	28,099,000	13,807,000	28,099,000
Commercial
Allowance for Loan Losses
Beginning balance	2,180,000	2,051,000	2,212,000	1,305,000
Charge-offs	0	0	0	(7,000)
Recoveries	2,000	11,000	50,000	45,000
Provision	126,000	32,000	46,000	751,000
Ending balance	2,308,000	2,094,000	2,308,000	2,094,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	7,000	11,000	7,000	11,000
Allowance for loan losses, Ending balance: collectively evaluated for impairments	2,301,000	2,083,000	2,301,000	2,083,000
Allowance for loan losses, Ending balance	2,308,000	2,094,000	2,308,000	2,094,000
Loans, Ending balance: individually evaluated for impairments	1,450,000	1,685,000	1,450,000	1,685,000
Loans, Ending balance: collectively evaluated for impairments	363,174,000	316,911,000	363,174,000	316,911,000
Loans, Ending balance	361,724,000	318,596,000	361,724,000	318,596,000
Multifamily and Farmland
Allowance for Loan Losses
Beginning balance	148,000	115,000	122,000	120,000
Charge-offs	0	0	0	0
Recoveries	4,000	0	3,000	0
Provision	(5,000)	1,000	22,000	(4,000)
Ending balance	147,000	116,000	147,000	116,000
Allowance for loan losses, Ending balance: individually evaluated for impairments	0	0	0	0
Allowance for loan losses, Ending balance: collectively evaluated for impairments	147,000	116,000	147,000	116,000
Allowance for loan losses, Ending balance	147,000	116,000	147,000	116,000
Loans, Ending balance: individually evaluated for impairments	0	0	0	0
Loans, Ending balance: collectively evaluated for impairments	58,856,000	49,584,000	58,856,000	49,584,000
Loans, Ending balance	$ 58,856,000	$ 49,584,000	$ 58,856,000	$ 49,584,000

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Loans (Details 5) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Credit Risk Profile
Total loans	$ 891,005,000	$ 948,639,000
Excellent Quality
Credit Risk Profile
Total loans	8,375,000	11,179,000
Excellent Quality | Construction and Land Development [Member]
Credit Risk Profile
Total loans	0	228,000
High Quality
Credit Risk Profile
Total loans	169,911,000	194,001,000
Good Quality
Credit Risk Profile
Total loans	616,936,000	623,201,000
Management Attention
Credit Risk Profile
Total loans	72,628,000	92,523,000
Watch
Credit Risk Profile
Total loans	16,707,000	20,908,000
Substandard
Credit Risk Profile
Total loans	6,448,000	6,827,000
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	80,009,000	94,124,000
Construction and Land Development | High Quality
Credit Risk Profile
Total loans	8,982,000	9,092,000
Construction and Land Development | Good Quality
Credit Risk Profile
Total loans	67,245,000	76,897,000
Construction and Land Development | Management Attention
Credit Risk Profile
Total loans	3,626,000	4,917,000
Construction and Land Development | Watch
Credit Risk Profile
Total loans	82,000	2,906,000
Construction and Land Development | Substandard
Credit Risk Profile
Total loans	74,000	84,000
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	258,403,000	272,325,000
Single-Family Residential | High Quality
Credit Risk Profile
Total loans	104,288,000	121,331,000
Single-Family Residential | Watch
Credit Risk Profile
Total loans	2,904,000	2,947,000
Single-Family Residential | Substandard
Credit Risk Profile
Total loans	3,058,000	3,059,000
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-Tradtional
Credit Risk Profile
Total loans	24,043,000	26,883,000
Single-Family Residential - Banco de la Gente Non-Tradtional | Excellent Quality
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | High Quality
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | Good Quality
Credit Risk Profile
Total loans	9,028,000	10,170,000
Single-Family Residential - Banco de la Gente Non-Tradtional | Management Attention
Credit Risk Profile
Total loans	10,878,000	12,312,000
Single-Family Residential - Banco de la Gente Non-Tradtional | Watch
Credit Risk Profile
Total loans	1,722,000	1,901,000
Single-Family Residential - Banco de la Gente Non-Tradtional | Substandard
Credit Risk Profile
Total loans	2,415,000	2,500,000
Single-Family Residential - Banco de la Gente Non-Tradtional | Doubtful
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | Loss
Credit Risk Profile
Total loans	0	0
Commercial
Credit Risk Profile
Total loans	363,174,000	332,971,000
Commercial | Excellent Quality
Credit Risk Profile
Total loans	0	0
Commercial | High Quality
Credit Risk Profile
Total loans	35,384,000	40,569,000
Commercial | Good Quality
Credit Risk Profile
Total loans	283,657,000	241,273,000
Commercial | Substandard
Credit Risk Profile
Total loans	711,000	888,000
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	58,856,000	48,880,000
Multifamily and Farmland | Excellent Quality
Credit Risk Profile
Total loans	0	0
Multifamily and Farmland | High Quality
Credit Risk Profile
Total loans	19,000	22,000
Multifamily and Farmland | Good Quality
Credit Risk Profile
Total loans	55,535,000	44,890,000
Multifamily and Farmland | Management Attention
Credit Risk Profile
Total loans	2,841,000	3,274,000
Multifamily and Farmland | Watch
Credit Risk Profile
Total loans	552,000	694,000
Multifamily and Farmland | Substandard
Credit Risk Profile
Total loans	109,000	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	94,376,000	161,740,000
Commercial Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	382,000	406,000
Commercial Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	69,324,000	128,727,000
Commercial Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	1,644,000	1,583,000
Commercial Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	58,000	266,000
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	633,000	855,000
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	621,000	832,000
Farm Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	12,000	23,000
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	6,321,000	7,113,000
Consumer Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	613,000	678,000
Consumer Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	1,000	6,000
Consumer Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	23,000	30,000
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	5,190,000	3,748,000
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	1,413,000	1,563,000
All Other Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	3,777,000	1,477,000
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
Single-Family Residential [Member] | Excellent Quality
Credit Risk Profile
Total loans	7,380,000	9,867,000
Single-Family Residential [Member] | Good Quality
Credit Risk Profile
Total loans	124,534,000	115,109,000
Single-Family Residential [Member] | Management Attention
Credit Risk Profile
Total loans	16,239,000	20,012,000
Commercial Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	17,846,000	19,187,000
Consumer Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	1,979,000	2,237,000
Consumer Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	3,415,000	3,826,000
Consumer Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	290,000	336,000
Commercial | Management Attention
Credit Risk Profile
Total loans	33,620,000	39,370,000
Commercial | Watch
Credit Risk Profile
Total loans	9,802,000	10,871,000
Commercial Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	5,122,000	11,571,000
All Other Loans (Not Secured by Real Estate) [Member] | Management Attention
Credit Risk Profile
Total loans	$ 0	$ 708,000

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Loans (Details Narrative) - USD ($)	1 Months Ended		3 Months Ended			9 Months Ended		12 Months Ended
	Apr. 24, 2020	Mar. 27, 2020	Sep. 30, 2021	Jun. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2020
Impaired loan								$ 5,800,000
Allowance for loan and leases losses						$ 45,000		61,000
Interest income recognized on accruing impaired loans			$ 217,000		$ 299,000	754,000	$ 934,000	1,250,000
Paycheck Protection Program [Member]
Small Business Administration					25,600,000		25,600,000
PPP loan Amount			128,100,000			128,100,000		75,800,000
PPP loan program description		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
Additional funding loan, description	on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP
PPP loan outstanding amount			25,600,000			25,600,000		75,800,000
Fees paid under ppp loan			5,700,000			5,700,000		4,000,000.0
Recognized ppp loan fee income			$ 489,000,000,000		361,000,000,000	$ 3,000,000.0	361,000,000,000	1,400,000
Allowance for Loan and Lease Losses [Member]
Percentage of construction and land development loans in Bank's loan portfolio			9.00%			9.00%
Percentage of single-family residential loans in Bank's loan portfolio			32.00%			32.00%
Percentage of single-family residential - Banco de la Gente stated income loans in Bank's loan portfolio			3.00%			3.00%
Percentage of commercial real estate loans in Bank's loan portfolio			41.00%			41.00%
Percentage of commercial loans in Bank's loan portfolio			11.00%			11.00%
Accruing impaired loans			$ 18,200,000		21,000,000.0	$ 18,200,000	21,000,000.0	21,300,000
Interest income recognized on accruing impaired loans			217,000		299,000	754,000	934,000	1,200,000
Total current loans					18,700,000		18,700,000	119,600,000
Loan amount decrease								18,300,000
TDR residential mortage portfolio loan amount						250,000
Provision for loan losses				$ 182,000	$ 522,000	863,000	$ 3,500,000
TDR loans modified, past-due TDR loans and non-accrual TDR Loans			$ 1,600,000			$ 1,600,000		$ 3,800,000

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Net Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Net Earnings
Basic earnings per share	$ 3,390,000	$ 4,509,000	$ 12,126,000	$ 9,437,000
Effect of dilutive securities: restricted stock units	0	0	0	0
Effect of dilutive securities: shares held in deferred comp plan	0	0	0	0
Diluted earnings per share	$ 3,390,000	$ 4,509,000	$ 12,126,000	$ 9,437,000
Weighted Average Number of Shares
Basic earnings per share (in shares)	5,544,596	5,634,964	5,601,879	5,665,294
Effect of dilutive securities: restricted stock units (in shares)	14,690	15,299	13,190	13,960
Effect of dilutive securities: shares held in deferred comp plan	159,797	151,658	158,039	149,163
Diluted earnings per share (in shares)	5,719,083	5,801,921	5,773,108	5,828,417
Per Share Amount
Basic earnings per share	$ 0.61	$ 0.80	$ 2.16	$ 1.67
Diluted earnings per share	$ 0.59	$ 0.78	$ 2.10	$ 1.62

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StockBased Compensation (Details Narrative) - USD ($)	3 Months Ended						6 Months Ended	9 Months Ended
	Mar. 31, 2021	Mar. 31, 2019	Mar. 31, 2018	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2015	Jun. 30, 2020	Sep. 30, 2021	Sep. 30, 2020	Dec. 31, 2019
2009 Plan
Unrecognized compensation cost								$ 57,000,000
Recognized compensation expense								$ 166,000,000	$ 73,000,000
Restricted stock units, granted		5,290	3,725	4,114	5,544	16,583
Restricted stock units, fair value per share		$ 28.43	$ 31.43	$ 25	$ 16.91	$ 16.34
Stock price								$ 15.43		$ 32.85
2020 Plan
Unrecognized compensation cost								$ 312,000,000
Recognized compensation expense								$ 166,000,000	$ 73,000,000
Restricted stock units, granted	7,290						7,635
Restricted stock units, fair value per share	$ 22.04						$ 17.08
Stock price								$ 1,543		$ 32.85
Common stock capital shares reserved for future issuance								300,000
Initial shares reserved remain available for future issuance								285,075

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Fair Value (Details) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Estimated fair value	$ 402,905,000	$ 245,249,000
Mutual funds held in deferred compensation trust
Mutual funds held in deferred compensation trust	1,514,000	1,320,000
Mortgage-Backed Securities
Estimated fair value	223,305,000	145,314,000
U.S. Government Sponsored Enterprises [Member]
Estimated fair value	14,677,000	7,507,000
State and Political Subdivisions
Estimated fair value	156,933,000	92,428,000
Level 1 | Mortgage-Backed Securities
Estimated fair value	0	0
Level 1 | U.S. Government Sponsored Enterprises [Member]
Estimated fair value	0	0
Level 1 | State and Political Subdivisions
Estimated fair value	0	0
Level 2 | State and Political Subdivisions
Estimated fair value	156,933,000	92,428,000
Level 2 | Mortgage-Backed Securities
Estimated fair value	223,305,000	145,314,000
Level 2 | U.S. Government Sponsored Enterprises
Estimated fair value	14,677,000	7,507,000
Level 3 | Mortgage-Backed Securities
Estimated fair value	0	0
Level 3 | U.S. Treasuries
Estimated fair value	0
Level 3 | State and Political Subdivisions
Estimated fair value	0	0
Level 3 | U.S. Government Sponsored Enterprises
Estimated fair value	0	0
Level 1
Estimated fair value	0	0
Level 1 | Mutual funds held in deferred compensation trust
Mutual funds held in deferred compensation trust	0	0
Level 2
Estimated fair value	402,905,000	245,249,000
Level 2 | Mutual funds held in deferred compensation trust
Mutual funds held in deferred compensation trust	1,514,000	1,320,000
Level 3
Estimated fair value	0	0
Level 3 | Mutual funds held in deferred compensation trust
Mutual funds held in deferred compensation trust	0	$ 0
U.S. Treasuries [Member] | Level 1
Estimated fair value	0
U.S. Treasuries [Member] | Level 2
Estimated fair value	7,990,000
U.S. Treasuries [Member]
Estimated fair value	$ 7,990,000

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Fair Value (Details 1) - USD ($)	9 Months Ended
	Sep. 30, 2021	Dec. 31, 2020
Mortgage loans held for sale	$ 9,086,000	$ 9,139,000
Impaired loans	17,417,000	5,800.0
Other real estate	0	128,000
Mortgage Loans Held For Sale
Mortgage loans held for sale	$ 9,086,000	9,139,000
Valuation technique	Rate lock commitment
Significant unobservable inputs	N/A
General range of significant unobservable input values	N/A
Impaired Loans
Impaired loans	$ 17,417,000	20,369,000
Valuation technique	Appraised value and discounted cash flows
Significant unobservable inputs	Discounts to reflect current market conditions and ultimate collectability
General range of significant unobservable input values	0-25
Other Real Estate
Other real estate	$ 0	128,000
Valuation technique	Appraised value
Significant unobservable inputs	Discounts to reflect current market conditions and estimated costs to sell
General range of significant unobservable input values	0-25
Level 3
Mortgage loans held for sale	$ 9,086,000	9,139,000
Impaired loans	17,417,000	20,369,000
Other real estate		128,000
Level 1
Mortgage loans held for sale	0	0
Impaired loans	0	0
Other real estate		0
Level 2
Mortgage loans held for sale	0	0
Impaired loans	$ 0	0
Other real estate		$ 0

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Fair Value (Details 2) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Assets:
Cash and cash equivalents	$ 263,308,000	$ 161,580,000
Estimated fair value	402,905,000	245,249,000
Other investments	3,725,000	4,155,000
Mortgage loans held for sale	9,086,000	9,139,000
Loans, net	882,042,000	924,845,000
Mutual funds held in deferred compensation trust	1,514,000	1,320,000
Liabilities:
Deposits	1,407,770,000	1,221,086,000
Securities sold under agreements to repurchase	32,332,000	26,201,000
Junior subordinated debentures	15,464,000	15,464,000
Level 3
Assets:
Cash and cash equivalents	0	0
Estimated fair value	0	0
Other investments	3,725,000	4,155,000
Mortgage loans held for sale	9,086,000	9,139,000
Loans, net	862,462,000	924,845,000
Mutual funds held in deferred compensation trust	0	0
Liabilities:
Deposits	1,407,770,000	1,216,503,000
Securities sold under agreements to repurchase	0	0
Junior subordinated debentures	0	0
Level 1
Assets:
Cash and cash equivalents	263,308,000	161,580,000
Estimated fair value	0	0
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Mutual funds held in deferred compensation trust	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
Estimated fair value	402,905,000	245,249,000
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Mutual funds held in deferred compensation trust	1,514,000	1,320,000
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	32,332,000	26,201,000
Junior subordinated debentures	15,464,000	15,464,000
Estimated Fair Value
Assets:
Cash and cash equivalents	263,308,000	161,580,000
Estimated fair value	402,905,000	245,249,000
Other investments	3,725,000	4,155,000
Mortgage loans held for sale	9,086,000	9,139,000
Loans, net	862,462,000	938,731,000
Mutual funds held in deferred compensation trust	1,514,000	1,320,000
Liabilities:
Deposits	1,409,965,000	1,216,503,000
Securities sold under agreements to repurchase	32,332,000	26,201,000
Junior subordinated debentures	$ 15,464,000	$ 15,464,000

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Leases (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
Leases
Operating lease cost	$ 538	$ 675
Cash paid for amounts included in the measurement of lease liabilities	520	659
Operating cash flows from operating leases	0	0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$ 952	$ 450
Weighted-average remaining lease term - operating leases	6 years 8 months 19 days	7 years 4 months 9 days
Weighted-average discount rate - operating leases	2.71%	2.97%

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Leases (Details 1) - USD ($)	Sep. 30, 2021	Dec. 31, 2020
Leases
2021	$ 181,000	$ 754,000
2022	555,000	588,000
2023	544,000	567,000
2024	489,000	489,000
2025	433,000	433,000
Thereafter	1,041,000	1,041,000
Total	3,243,000	3,872,000
Less: imputed interest	(321,000)	(401,000)
Operating lease liability	$ 2,922,000	$ 3,471,000

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Leases (Details Narrative) $ in Millions	9 Months Ended
	Sep. 30, 2021 USD ($)
Leases
Extended renewal terms	15 years
Operating right of use assets and operating lease liabilities	$ 2.9