UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, ~~2020~~2021

☐[ ] 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. ~~5,787,504~~5,789,166 shares of common stock, outstanding at April 30, ~~2020.~~2021.

INDEX

PART I.

FINANCIAL INFORMATION

		PAGE(S)
Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020 (Audited)	3

	Consolidated Statements of Earnings for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (Unaudited)	4

	Consolidated Statements of Comprehensive Income for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (Unaudited)	5

	Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (Unaudited)	6

	Consolidated Statements of Cash Flows for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 (Unaudited)	7-8

	Notes to Consolidated Financial Statements (Unaudited)	~~9-29~~9-28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~30-41~~29-42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4243

Item 4.	Controls and Procedures	4243

PART II.

OTHER INFORMATION

Item 1.	Legal Proceedings	4243
Item 1A.	Risk Factors	~~42-44~~43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4544
Item 3.	Defaults upon Senior Securities	4544
Item 5.	Other Information	4544
Item 6.	Exhibits	~~45-47~~44-47
Signatures		48
Certifications		49-51

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, ~~2019.~~2020.

PART I.

FINANCIAL INFORMATION

~~PART I. FINANCIAL INFORMATION~~

Item 1.

Financial Statements

P~~EOPLES~~

PEOPLES BANCORP OF NORTH CAROLINA, INC.

~~Consolidated~~Consolidated Balance Sheets

March 31, ~~2020~~2021 and December 31, ~~2019~~2020

(Dollars in thousands)

	March 31,	December 31,	March 31,	December 31,
Assets	2020	2019	2021	2020
	(Unaudited)	(Audited)	(Unaudited)	(Audited)

Cash and due from banks, including reserve requirements	$46,164	48,337
of $0 at 3/31/20 and $13,210 at 12/31/19
of $0 at both 3/31/21 and 12/31/20			$43,726	42,737
Interest-bearing deposits	20,705	720	165,311	118,843
Federal funds sold	36,650	3,330
Cash and cash equivalents	103,519	52,387	209,037	161,580

Investment securities available for sale	201,514	195,746	325,517	245,249
Other investments	7,229	4,231	3,791	4,155
Total securities	208,743	199,977	329,308	249,404

Mortgage loans held for sale	6,149	4,417	4,236	9,139

Loans	880,564	849,874	946,497	948,639
Less allowance for loan losses	(8,112)	(6,680)	(9,532)	(9,908)
Net loans	872,452	843,194	936,965	938,731

Premises and equipment, net	18,370	18,604	18,184	18,600
Cash surrender value of life insurance	16,414	16,319	17,065	16,968
Other real estate			128
Right of use lease asset	3,427	3,622	3,182	3,423
Accrued interest receivable and other assets	15,753	16,362	19,473	18,202
Total assets	$1,244,827	1,154,882	$1,537,578	1,416,175

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$349,513	338,004	$524,176	456,980
NOW, MMDA & savings	535,366	516,757
Interest-bearing demand, MMDA & savings			701,798	657,834
Time, $250,000 or more	22,725	34,269	28,109	25,771
Other time	76,354	77,487	80,382	80,501
Total deposits	983,958	966,517	1,334,465	1,221,086

Securities sold under agreements to repurchase	28,535	24,221	31,916	26,201
FHLB borrowings	70,000	-
Junior subordinated debentures	15,464	15,619	15,464
Lease liability	3,458	3,647	3,232	3,471
Accrued interest payable and other liabilities	9,556	10,758	12,472	10,054
Total liabilities	1,110,971	1,020,762	1,397,549	1,276,276

Commitments

Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued and outstanding	-		-
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,787,504 shares
at March 31, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
20,000,000 shares; issued and outstanding 5,789,166 shares
at March 31, 2021 and 5,787,504 shares at December 31, 2020			56,910	56,871
Common stock held by deferred compensation trust, at cost; 156,808 shares at March 31, 2021 and 155,469 shares at December 31, 2020			(1,849)	(1,796)
Deferred compensation			1,849	1,796
Retained earnings	71,251	70,663	80,819	77,628
Accumulated other comprehensive income	5,734	3,644	2,300	5,400
Total shareholders' equity	133,856	134,120	140,029	139,899

Total liabilities and shareholders' equity	$1,244,827	1,154,882	$1,537,578	1,416,175

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

P~~EOPLES~~PEOPLES BANCORP OF NORTH CAROLINA, INC.

~~Consolidated~~Consolidated Statements of Earnings

Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020

(Dollars in thousands, except per share amounts)

	2021	2020
	(Unaudited)	(Unaudited) ��

Interest income:
Interest and fees on loans	$10,664	10,680
Interest on due from banks	35	43
Interest on federal funds sold	-	123
Interest on investment securities:
U.S. Government sponsored enterprises	538	685
State and political subdivisions	639	641
Other	46	78
Total interest income	11,922	12,250

Interest expense:
Interest-bearing demand, MMDA & savings deposits	497	525
Time deposits	212	277
FHLB borrowings	-	64
Junior subordinated debentures	71	130
Other	35	45
Total interest expense	815	1,041

Net interest income	11,107	11,209

Provision for (reduction of provision for) loan losses	(455)	1,521

Net interest income after provision for loan losses	11,562	9,688

Non-interest income:
Service charges	926	1,108
Other service charges and fees	212	193
Mortgage banking income	870	322
Insurance and brokerage commissions	260	242
Appraisal management fee income	1,816	1,350
Miscellaneous	1,789	1,380
Total non-interest income	5,873	4,595

Non-interest expense:
Salaries and employee benefits	6,183	5,724
Occupancy	1,953	1,921
Professional fees	337	333
Advertising	143	218
Debit card expense	232	230
Appraisal management fee expense	1,456	1,034
Other	1,964	1,989
Total non-interest expense	12,268	11,449

Earnings before income taxes	5,167	2,834

Income tax expense	1,046	467

Net earnings	$4,121	2,367

Basic net earnings per share	$0.73	0.41
Diluted net earnings per share	$0.71	0.40
Cash dividends declared per share	$0.16	0.30

2020

2019

(Unaudited)

(Unaudited)

Interest income:

Interest and fees on loans
$10,680
  10,619
Interest on due from banks
  43
  14
Interest on federal funds sold
  123
  -
Interest on investment securities:


U.S. Government sponsored enterprises
  685
  673
State and political subdivisions
  641
  834
Other
  78
  43
Total interest income
  12,250
  12,183



Interest expense:


NOW, MMDA & savings deposits
  525
  282
Time deposits
  277
  151
FHLB borrowings
  64
  46
Junior subordinated debentures
  130
  226
Other
  45
  52
Total interest expense
  1,041
  757



Net interest income
  11,209
  11,426



Provision for loan losses
  1,521
  178



Net interest income after provision for loan losses
  9,688
  11,248



Non-interest income:


Service charges
  1,108
  1,093
Other service charges and fees
  193
  169
Gain on sale of securities
  -
  231
Mortgage banking income
  322
  147
Insurance and brokerage commissions
  242
  231
Appraisal management fee income
  1,350
  862
Miscellaneous
  1,380
  1,387
Total non-interest income
  4,595
  4,120



Non-interest expense:


Salaries and employee benefits
  5,724
  5,647
Occupancy
  1,921
  1,737
Professional fees
  333
  289
Advertising
  218
  266
Debit card expense
  230
  227
FDIC Insurance
  40
  72
Appraisal management fee expense
  1,034
  662
Other
  1,949
  2,016
Total non-interest expense
  11,449
  10,916



Earnings before income taxes
  2,834
  4,452



Income tax expense
  467
  785



Net earnings
$2,367
  3,667



Basic net earnings per share
$0.40
  0.61
Diluted net earnings per share
$0.40
  0.61
Cash dividends declared per share
$0.30
  0.24
See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

	2021	2020
	(Unaudited)	(Unaudited)

Net earnings	$4,121	2,367

Other comprehensive income (loss):
Unrealized holding gains (losses) on securities
available for sale	(4,026)	2,715

Income tax expense (benefit) related to other
comprehensive gain (loss):

Unrealized holding gains (losses) on securities
available for sale	(926)	625

Total other comprehensive income (loss),
net of tax	(3,100)	2,090

Total comprehensive income	$1,021	4,457

See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 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

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

See accompanying Notes to Consolidated Financial Statements.

P~~EOPLES~~PEOPLES BANCORP OF NORTH CAROLINA, INC.

~~Consolidated~~Consolidated Statements of ~~Comprehensive Income~~Cash Flows

Three Months Ended March 31, ~~2020~~2021 and ~~2019~~

~~(Dollars in thousands)~~

2020

2019

(Unaudited)

(Unaudited)

Net earnings
$2,367
  3,667



Other comprehensive income:


Unrealized holding gains on securities


available for sale
  2,715
  1,126
Reclassification adjustment for gains on


securities available for sale


included in net earnings
  -
  (231)



Total other comprehensive income,


before income taxes
  2,715
  895



Income tax expense related to other


comprehensive income:





Unrealized holding gains on securities


available for sale
  625
  258
Reclassification adjustment for gains on sales


of securities available for sale


included in net earnings
  -
  (53)



Total income tax expense related to


other comprehensive income
  625
  205



Total other comprehensive income,


net of tax
  2,090
  690



Total comprehensive income
$4,457
  4,357

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

P~~EOPLES BANCORP OF NORTH CAROLINA, INC.~~

~~Consolidated Statements of Changes in Shareholders' Equity~~

~~Three Months Ended March 31,~~ 2020 ~~and 2019~~

(Dollars in thousands)

Accumulated

Other

Common Stock

Retained

Comprehensive

Shares

Amount

Earnings

Income

Total

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Balance, December 31, 2019
  5,912,300
$59,813
  70,663
  3,644
  134,120






Common stock repurchase
  (126,800)
  (2,999)
  -
  -
  (2,999)
Cash dividends declared on





common stock
  -
  -
  (1,779)
  -
  (1,779)
Restricted stock units exercised
  2,004
  57
  -
  -
  57
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
  5,734
  133,856






Balance, December 31, 2018
  5,995,256
$62,096
  60,535
  986
  123,617






Common stock repurchase
  (5,518)
  (152)
  -
  -
  (152)
Cash dividends declared on





common stock
  -
  -
  (1,445)
  -
  (1,445)
Restricted stock units exercised
  7,398
  207
  -
  -
  207
Net earnings
  -
  -
  3,667
  -
  3,667
Change in accumulated other





comprehensive income, net of tax
  -
  -
  -
  690
  690
Balance, March 31, 2019
  5,997,136
$62,151
  62,757
  1,676
  126,584

	2021	2020
	(Unaudited)	(Unaudited)

Cash flows from operating activities:
Net earnings	$4,121	2,367
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion	1,198	1,038
Provision for (reduction of provision for) loan losses	(455)	1,521
Deferred income taxes	(9)	(8)
Restricted stock expense	(44)	(77)
Proceeds from sales of mortgage loans held for sale	28,939	14,876
Origination of mortgage loans held for sale	(24,036)	(16,608)
Change in:
Cash surrender value of life insurance	(97)	(95)
Right of use lease asset	241	195
Other assets	(336)	165
Lease liability	(239)	(189)
Other liabilities	2,462	(1,298)

Net cash provided by operating activities	11,745	1,887

Cash flows from investing activities:
Purchases of investment securities available for sale	(90,470)	(10,958)
Proceeds from sales, calls and maturities of investment securities
available for sale	645	2,343
Proceeds from paydowns of investment securities available for sale	4,981	5,138
Proceeds from paydowns of other investment securities	44	44
Redemption (purchase) of FHLB stock	331	(3,031)
Net change in loans	2,221	(30,779)
Purchases of premises and equipment	(243)	(391)

Net cash used in investing activities	(82,491)	(37,634)

Cash flows from financing activities:
Net change in deposits	113,379	17,441
Net change in securities sold under agreement to repurchase	5,715	4,314
Proceeds from FHLB borrowings	-	70,000
Proceeds from Fed Funds purchased	-	6,935
Repayments of Fed Funds purchased	-	(6,935)
Repayments of Junior Subordinated Debentures	-	(155)
Restricted stock units exercised	39	57
Common stock repurchased	-	(2,999)
Cash dividends paid on common stock	(930)	(1,779)

Net cash provided by financing activities	118,203	86,879

Net change in cash and cash equivalents	47,457	51,132

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

Cash and cash equivalents at end of period	$209,037	103,519

See accompanying Notes to Consolidated Financial Statements.

P~~EOPLES BANCORP OF NORTH CAROLINA, INC.~~

~~Consolidated Statements of Cash Flows~~

~~Three Months Ended March 31, 2020 and 2019~~

~~(Dollars in thousands)~~

2020

2019

(Unaudited)

(Unaudited)

Cash flows from operating activities:

Net earnings
$2,367
  3,667
Adjustments to reconcile net earnings to


net cash provided by operating activities:


Depreciation, amortization and accretion
  1,038
  942
Provision for loan losses
  1,521
  178
Deferred income taxes
  (8)
  (2)
Gain on sale of investment securities
  -
  (231)
Restricted stock expense
  (77)
  110
Proceeds from sales of mortgage loans held for sale
  14,876
  6,098
Origination of mortgage loans held for sale
  (16,608)
  (5,779)
Change in:


Cash surrender value of life insurance
  (95)
  (95)
Right of use lease asset
  195
  200
Other assets
  (8)
  2,539
Lease liability
  (189)
  (200)
Other liabilities
  (1,125)
  (3,203)



Net cash provided by operating activities
  1,887
  4,224



Cash flows from investing activities:


Purchases of investment securities available for sale
  (10,958)
  (7,395)
Proceeds from sales, calls and maturities of investment securities


available for sale
  2,343
  15,403
Proceeds from paydowns of investment securities available for sale
  5,138
  2,871
Proceeds from paydowns of other investment securities
  44
  33
Purchases of FHLB stock
  (3,031)
  (1)
Net change in loans
  (30,779)
  (19,596)
Purchases of premises and equipment
  (391)
  (342)



Net cash used in investing activities
  (37,634)
  (9,027)



Cash flows from financing activities:


Net change in deposits
  17,441
  30,901
Net change in securities sold under agreement to repurchase
  4,314
  (16,864)
Proceeds from FHLB borrowings
  70,000
  82,300
Repayments of FHLB borrowings
  -
  (82,300)
Proceeds from Fed Funds purchased
  6,935
  25,065
Repayments of Fed Funds purchased
  (6,935)
  (25,065)
Repayments of Junior Subordinated Debentures
  (155)
  -
Restricted stock units exercised
  57
  207
Common stock repurchased
  (2,999)
  (152)
Cash dividends paid on Series A preferred stock
  -
  -
Cash dividends paid on common stock
  (1,779)
  (1,445)



Net cash provided by financing activities
  86,879
  12,647



Net change in cash and cash equivalents
  51,132
  7,844



Cash and cash equivalents at beginning of period
  52,387
  43,370



Cash and cash equivalents at end of period
$103,519
  51,214

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Three Months Ended March 31, ~~2020~~2021 and ~~2019~~2020

(Dollars in thousands)

	2020	2019	2021	2020
	(Unaudited)		(Unaudited)

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$994	737	$802	994
Income taxes	$-	-	$-	-

Noncash investing and financing activities:
Change in unrealized gain on investment securities
Change in unrealized gain (loss) on investment securities
available for sale, net	$2,090	690	$(3,100)	2,090
Issuance of accrued restricted stock units	$57	207	$39	57
Initial recognition of lease right-of-use asset and lease liability
recorded upon adoption of ASU 2016-02	$-	4,401

See accompanying Notes to Consolidated Financial Statements.

P~~EOPLES~~PEOPLES BANCORP OF NORTH CAROLINA, INC.

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

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, ~~2019)~~2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management 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 ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~6, 2021 Annual Meeting of Shareholders.

~~Recent Accounting Pronouncements~~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 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 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 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 $0.40 to $0.41 for the three months ended March 31, 2020. The impact of the changes in the fair value of the mutual funds held in the 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.

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 plan, as well as the corresponding deferred compensation associated with these shares.

The ~~following tables provide a summary~~Company’s Consolidated Statements of ~~Accounting Standards Updates (“ASU”) issued by~~Cash Flows were adjusted for the ~~Financial Accounting Standards Board (“FASB”) that~~three months ended March 31, 2020 in order to reflect the ~~Company has recently adopted.~~

~~Recently Adopted Accounting Guidance~~

~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
ASU 2018-04: Investments—Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (SEC Update)	Incorporates recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulation.	~~Effective upon issuance~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-06: Codification Improvements to Topic 942: Financial Services—Depository and Lending~~	Eliminates a reference to the Office of the Comptroller of the Currency’s Banking Circular 202, Accounting for Net Deferred Tax Charges, from the ASC. The Office of the Comptroller of the Currency published the guidance in 1985 but has since rescinded it.	~~Effective upon issuance~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2016-02: Leases~~	~~Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.~~	~~January 1, 2019~~	~~See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures.~~

~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
~~ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities~~	~~Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.~~	~~January 1, 2019~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-11: Leases (Topic 842): Targeted Improvements~~	~~Intended to reduce costs and ease implementation of ASU 2016-02.~~	~~January 1, 2019~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-20: Narrow- Scope Improvements for Lessors~~	Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components.	~~January 1, 2019~~	~~See comments for ASU 2016-02 below.~~
~~ASU 2019-07: Codification Updates to SEC Sections~~	~~Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.~~	~~Effective upon issuance~~	~~The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)~~	~~Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.~~	~~January 1, 2020~~	~~The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.~~
~~ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606~~	~~Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.~~	~~January 1, 2020 Early adoption permitted~~	The Company does not intend to adopt this guidance early. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
~~ASU 2018-19: Leases (Topic 842): Codification Improvements~~	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	~~January 1, 2020~~	~~The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.~~

changes to other assets and other liabilities made on the Consolidated Balance Sheets.

~~ASU 2014-09~~9

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. All adjustments were not considered material to the financial statements.

Revenue Recognition

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

Revenue and Method of Adoption

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

The Company adopted ASU 2014-09 using the modified retrospective transition approach which does not require restatement of prior periods. The method was selected as there were no material changes in the timing of revenue recognition resulting in no comparability issues with prior periods. This adoption method is considered a change

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

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was ~~$241,000~~$260,000 and ~~$231,000~~$241,000 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was ~~$972,000~~$1.2 million and ~~$940,000~~$972,000 for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was ~~$181,000~~$180,000 and ~~$156,000~~$181,000 for the three months ended March 31, 2021 and 2020, ~~and 2019, respectively.~~respectively Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was ~~$1.4~~$1.8 million and ~~$862,000~~$1.4 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the three months ended March 31, ~~2020~~2021 derived from contracts in which services are transferred at a point in time was approximately $2.2 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

Recent Accounting Pronouncements

~~ASU 2016-02~~

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

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

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

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

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

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 Early adoption permitted	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

The Company recorded operating ROU assets and operating lease liabilities of $4.4 million and $4.4 million, respectively at the commencement date of January 1, 2019. The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations, financial position or disclosures.11

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $58,000 for the three months ended March 31, 2020 and 2019.

The following ~~tables provide~~table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of March 31, ~~2020,~~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 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2018-19: 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~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU

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 is not expected to 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 is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

~~ASU~~	~~Description~~	~~Effective Date~~	~~Effect on Financial Statements or Other Significant Matters~~
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 ~~generally accepted accounting principles~~GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity.

January 1, 2022

The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

Reclassification

Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation.

(2)

Investment Securities

Investment securities available for sale at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

(Dollars in thousands)

March 31, 2020

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Mortgage-backed securities
$80,815
  3,391
  130
  84,076
U.S. Government




sponsored enterprises
  26,275
  905
  272
  26,908
State and political subdivisions
  86,726
  3,691
  137
  90,280
Trust preferred securities
  250
  -
  -
  250
Total
$194,066
  7,987
  539
  201,514
               (Dollars in thousands)

	March 31, 2021
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
U.S Treasuries	$7,960	-	-	7,960
U.S. Government
sponsored enterprises	12,939	282	202	13,019
Mortgage-backed securities	184,445	2,225	967	185,703
State and political subdivisions	117,186	3,070	1,421	118,835
Total	$322,530	5,577	2,590	325,517

(Dollars in thousands)

December 31, 2019

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Mortgage-backed securities
$77,812
  1,371
  227
  78,956
U.S. Government




sponsored enterprises
  28,265
  443
  311
  28,397
State and political subdivisions
  84,686
  3,657
  200
  88,143
Trust preferred securities
  250
  -
  -
  250
Total
$191,013
  5,471
  738
  195,746
               (Dollars in thousands)

	December 31, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated 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 March 31, ~~2020~~2021 and December 31, ~~2019~~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)

March 31, 2020

Less than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Mortgage-backed securities
$12,376
  130
  -
  -
  12,376
  130
U.S. Government






sponsored enterprises
  -
  -
  5,536
  272
  5,536
  272
State and political subdivisions
  8,465
  137
  -
  -
  8,465
  137
Total
$20,841
  267
  5,536
  272
  26,377
  539

(Dollars in thousands)

December 31, 2019

Less than 12 Months

12 Months or More

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Mortgage-backed securities
$28,395
  177
  6,351
  50
  34,746
  227
U.S. Government






sponsored enterprises
  2,899
  10
  6,151
  301
  9,050
  311
State and political subdivisions
  7,367
  200
  -
  -
  7,367
  200
Total
$38,661
  387
  12,502
  351
  51,163
  738
               (Dollars in thousands)

	March 31, 2021
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
U.S. Government
sponsored enterprises	$-	-	4,098	202	4,098	202
Mortgage-backed securities	82,322	947	1,979	20	84,301	967
State and political subdivisions	38,420	1,421	-	-	38,420	1,421
Total	$120,742	2,368	6,077	222	126,819	2,590

(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 March 31, ~~2020,~~2021, unrealized losses in the investment securities portfolio relating to debt securities totaled ~~$539,000.~~$2.6 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the March 31, ~~2020~~2021 tables above, ~~eight~~33 out of 95111 securities issued by state and political subdivisions ~~contained unrealized losses~~ and 1030 out of 5983 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 March 31, ~~2020,~~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.

March 31, 2020

(Dollars in thousands)

Amortized Cost

Estimated Fair Value

Due within one year
$6,679
  6,770
Due from one to five years
  54,189
  56,595
Due from five to ten years
  27,801
  29,452
Due after ten years
  24,332
  24,371
Mortgage-backed securities
  80,815
  84,076
Trust preferred securities
  250
  250
Total
$194,066
  201,514
             March 31, 2021

(Dollars in thousands)

	Amortized Cost	Estimated Fair Value
Due within one year	$15,906	16,126
Due from one to five years	10,216	10,785
Due from five to ten years	87,596	89,027
Due after ten years	24,367	23,876
Mortgage-backed securities	184,445	185,703
Total	$322,530	325,517

No securities available for sale were sold during the three months ended March 31, ~~2020. Proceeds from sales of securities available for sale during the three months ended March 31, 2019 were $12.3 million~~2021 and ~~resulted in net gains of $231,000.~~2020.

Securities with a fair value of approximately ~~$69.5~~$76.6 million and ~~$66.0~~$77.3 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, were pledged to secure public deposits and for other purposes as required by law.

(3)

~~(3)~~ Loans

Major classifications of loans at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are summarized as follows:

(Dollars in thousands)

March 31,
2020

December 31,
2019

Real estate loans:

Construction and land development
$105,939
  92,596
Single-family residential
  271,489
  269,475
Single-family residential -


Banco de la Gente non-traditional
  29,887
  30,793
Commercial
  301,490
  291,255
Multifamily and farmland
  48,191
  48,090
Total real estate loans
  756,996
  732,209



Loans not secured by real estate:


Commercial loans
  104,221
  100,263
Farm loans
  1,044
�� 1,033
Consumer loans
  8,241
  8,432
All other loans
  10,062
  7,937



Total loans
  880,564
  849,874



Less allowance for loan losses
  8,112
  6,680



Total net loans
$872,452
  843,194

(Dollars in thousands)

	March 31, 2021	December 31, 2020
Real estate loans:
Construction and land development	$87,878	94,124
Single-family residential	264,356	272,325
Single-family residential -
Banco de la Gente non-traditional	26,278	26,883
Commercial	337,943	332,971
Multifamily and farmland	57,914	48,880
Total real estate loans	774,369	775,183

Loans not secured by real estate:
Commercial loans	160,892	161,740
Farm loans	860	855
Consumer loans	6,778	7,113
All other loans	3,598	3,748

Total loans	946,497	948,639

Less allowance for loan losses	9,532	9,908

Total net loans	$936,965	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 and Durham counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

●

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of March 31, ~~2020,~~2021, construction and land development loans comprised approximately ~~12%~~9% 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 March 31, ~~2020,~~2021, single-family residential loans comprised approximately ~~34%~~31% 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 March 31, ~~2020,~~2021, commercial real estate loans comprised approximately ~~34%~~36% 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 March 31, ~~2020,~~2021, commercial loans comprised approximately ~~12%~~17% of the Bank’s total loan ~~portfolio.~~portfolio, including $78.2 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all 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 March 31, ~~2020~~2021 and December 31, ~~2019:~~

March 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
$1,055
  -
  1,055
  104,884
  105,939
  -
Single-family residential
  5,559
  268
  5,827
  265,662
  271,489
  34
Single-family residential -






Banco de la Gente non-traditional
  5,366
  455
  5,821
  24,066
  29,887
  -
Commercial
  1,526
  175
  1,701
  299,789
  301,490
  -
Multifamily and farmland
  -
  -
  -
  48,191
  48,191
  -
Total real estate loans
  13,506
  898
  14,404
  742,592
  756,996
  34







Loans not secured by real estate:






Commercial loans
  702
  254
  956
  103,265
  104,221
  -
Farm loans
  93
  -
  93
  951
  1,044
  -
Consumer loans
  119
  3
  122
  8,119
  8,241
  -
All other loans
  -
  -
  -
  10,062
  10,062
  -
Total loans
$14,420
  1,155
  15,575
  864,989
  880,564
  34

December 31, 2019

(Dollars in thousands)

Loans 30-89 Days Past Due

Loans 90 or More Days Past Due

Total Past Due Loans

Total Current Loans

Total Loans

Accruing Loans 90 or More Days Past Due

Real estate loans:

Construction and land development
$803
  -
  803
  91,793
  92,596
  -
Single-family residential
  3,000
  126
  3,126
  266,349
  269,475
  -
Single-family residential -






Banco de la Gente non-traditional
  4,834
  413
  5,247
  25,546
  30,793
  -
Commercial
  504
  176
  680
  290,575
  291,255
  -
Multifamily and farmland
  -
  -
  -
  48,090
  48,090
  -
Total real estate loans
  9,141
  715
  9,856
  722,353
  732,209
  -







Loans not secured by real estate:






Commercial loans
  432
  -
  432
  99,831
  100,263
  -
Farm loans
  -
  -
  -
  1,033
  1,033
  -
Consumer loans
  170
  22
  192
  8,240
  8,432
  -
All other loans
  -
  -
  -
  7,937
  7,937
  -
Total loans
$9,743
  737
  10,480
  839,394
  849,874
  -

2020:

March 31, 2021

(Dollars in thousands)

	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$434	-	434	87,444	87,878	-
Single-family residential	2,314	67	2,381	261,975	264,356	-
Single-family residential -
Banco de la Gente non-traditional	2,709	48	2,757	23,521	26,278	-
Commercial	713	-	713	337,230	337,943	-
Multifamily and farmland	-	-	-	57,914	57,914	-
Total real estate loans	6,170	115	6,285	768,084	774,369	-

Loans not secured by real estate:
Commercial loans	144	-	144	160,748	160,892	-
Farm loans	-	-	-	860	860	-
Consumer loans	33	2	35	6,743	6,778	-
All other loans	-	-	-	3,598	3,598	-
Total loans	$6,347	117	6,464	940,033	946,497	-

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 March 31, ~~2020~~2021 and December 31, ~~2019:~~

2020:

(Dollars in thousands)

March 31,
2020

December 31,
2019

Real estate loans:

Construction and land development
$-
  -
Single-family residential
  1,132
  1,378
Single-family residential -


Banco de la Gente non-traditional
  1,946
  1,764
Commercial
  476
  256
Total real estate loans
  3,554
  3,398



Loans not secured by real estate:


Commercial loans
  378
  122
Consumer loans
  34
  33
Total
$3,966
  3,553

(Dollars in thousands)

	March 31, 2021	December 31, 2020
Real estate loans:
Single-family residential	$1,207	1,266
Single-family residential -
Banco de la Gente non-traditional	1,665	1,709
Commercial	429	440
Multifamily and farmland	115	117
Total real estate loans	3,416	3,532

Loans not secured by real estate:
Commercial loans	141	212
Consumer loans	9	14
Total	$3,566	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 ~~$22.8~~$20.6 million, $21.3 million and ~~$22.1~~$22.8 million at March 31, ~~2020,~~2021, December 31, ~~2019~~2020 and March 31, ~~2019,~~2020, respectively. Interest income recognized on accruing impaired loans was ~~$329,000, $1.3~~$283,000, $1.2 million, and ~~$342,000~~$329,000 for the three months ended March 31, ~~2020,~~2021, the year ended December 31, ~~2019~~2020 and the three months ended March 31, ~~2019,~~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 March 31, ~~2020:~~2021:

March 31, 2020

(Dollars in thousands)

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

Recorded Investment in Impaired Loans

Related Allowance

Average Outstanding Impaired Loans

YTD Interest Income Recognized

Real estate loans:

Construction and land development
$180
  -
  180
  180
  8
  182
  3
Single-family residential
  5,027
  397
  4,189
  4,586
  36
  4,615
  58
Single-family residential -







Banco de la Gente non-traditional
  14,767
  1,034
  12,930
  13,964
  926
  14,168
  228
Commercial
  3,260
  -
  3,243
  3,243
  19
  2,557
  29
Multifamily and farmland
  -
  -
  -
  -
  -
  -
  -
Total impaired real estate loans
  23,234
  1,431
  20,542
  21,973
  989
  21,522
  318








Loans not secured by real estate:







Commercial loans
  702
  90
  606
  696
  35
  436
  9
Consumer loans
  92
  -
  87
  87
  2
  91
  2
Total impaired loans
$24,028
  1,521
  21,235
  22,756
  1,026
  22,049
  329
               March 31, 2021

(Dollars in thousands)

	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$104	-	104	104	4	106	2
Single-family residential	4,837	278	4,248	4,526	30	5,490	60
Single-family residential -
Banco de la Gente non-traditional	13,162	-	12,575	12,575	843	11,832	177
Commercial	2,966	1,071	1,865	2,936	14	2,955	36
Multifamily and farmland	118	-	115	115	-	116	1
Total impaired real estate loans	21,187	1,349	18,907	20,256	891	20,499	276

Loans not secured by real estate:
Commercial loans	430	141	231	372	4	413	6
Consumer loans	24	-	19	19	-	28	1
Total impaired loans	$21,641	1,490	19,157	20,647	895	20,940	283

The following table presents impaired loans as of and for the year ended December 31, ~~2019:~~2020:

December 31, 2019

(Dollars in thousands)

Unpaid Contractual Principal Balance

Recorded Investment With No Allowance

Recorded Investment With Allowance

Recorded Investment in Impaired Loans

Related Allowance

Average Outstanding Impaired Loans

YTD Interest Income Recognized

Real estate loans:

Construction and land development
$183
  -
  183
  183
  7
  231
  12
Single-family residential
  5,152
  403
  4,243
  4,646
  36
  4,678
  269
Single-family residential -







Banco de la Gente non-traditional
  15,165
  -
  14,371
  14,371
  944
  14,925
  956
Commercial
  1,879
  -
  1,871
  1,871
  7
  1,822
  91
Total impaired real estate loans
  22,379
  403
  20,668
  21,071
  994
  21,656
  1,328








Loans not secured by real estate:







Commercial loans
  180
  92
  84
  176
  -
  134
  9
Consumer loans
  100
  -
  96
  96
  2
  105
  7
Total impaired loans
$22,659
  495
  20,848
  21,343
  996
  21,895
  1,344

December 31, 2020

(Dollars in thousands)

~~Changes~~

	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$108	-	108	108	4	134	8
Single-family residential	5,302	379	4,466	4,845	33	4,741	262
Single-family residential -
Banco de la Gente non-traditional	13,417	-	12,753	12,753	862	13,380	798
Commercial	2,999	1,082	1,891	2,973	14	2,940	139
Multifamily and farmland	119	-	117	117	-	29	6
Total impaired real estate loans	21,945	1,461	19,335	20,796	913	21,224	1,213

Loans not secured by real estate:
Commercial loans	515	211	244	455	5	564	32
Consumer loans	41	-	37	37	1	60	5
Total impaired loans	$22,501	1,672	19,616	21,288	919	21,848	1,250

Impaired loans collectively evaluated for impairment totaled $5.8 million and $6.1 million at March 31, 2021 and 2020, respectively.

The following tables present changes in the allowance for loan losses for the three months ended March 31, ~~2020~~2021 and ~~2019 were~~2020. PPP loans are excluded from the allowance for loan losses as ~~follows:~~

(Dollars in thousands)

Real Estate Loans

Construction and Land Development

Single-Family Residential

Single-Family Residential - Banco de la Gente non-traditional

Commercial

Multifamily and Farmland

Commercial

Farm

Consumer and All Other

Unallocated

Total

Three months ended March 31, 2020

Allowance for loan losses:

Beginning balance
$694
  1,274
  1,073
  1,305
  120
  688
  -
  138
  1,388
  6,680
Charge-offs
  (5)
  -
  -
  (7)
  -
  (31)
  -
  (167)
  -
  (210)
Recoveries
  2
  16
  -
  23
  -
  25
  -
  55
  -
  121
Provision
  602
  423
  11
  478
  (2)
  335
  -
  154
  (480)
  1,521
Ending balance
$1,293
  1,713
  1,084
  1,799
  118
  1,017
  -
  180
  908
  8,112











Allowance for loan losses March 31, 2020









Ending balance: individually










evaluated for impairment
$2
  6
  906
  9
  -
  29
  -
  -
  -
  952
Ending balance: collectively










evaluated for impairment
  1,291
  1,707
  178
  1,790
  118
  988
  -
  180
  908
  7,160
Ending balance
$1,293
  1,713
  1,084
  1,799
  118
  1,017
  -
  180
  908
  8,112











Loans March 31, 2020:










Ending balance
$105,939
  271,489
  29,887
  301,490
  48,191
  104,221
  1,044
  18,303
  -
  880,564











Ending balance: individually










evaluated for impairment
$8
  1,678
  12,489
  2,095
  -
  344
  -
  -
  -
  16,614
Ending balance: collectively










evaluated for impairment
$105,931
  269,811
  17,398
  299,395
  48,191
  103,877
  1,044
  18,303
  -
  863,950

PPP loans are 100 percent guaranteed by the SBA.

(Dollars in thousands)

Real Estate Loans

Construction and Land Development

Single-Family Residential

Single-Family Residential - Banco de la Gente non-traditional

Commercial

Multifamily and Farmland

Commercial

Farm

Consumer and All Other

Unallocated

Total

Three months ended March 31, 2019

Allowance for loan losses:

Beginning balance
$813
  1,325
  1,177
  1,278
  83
  626
  -
  161
  982
  6,445
Charge-offs
  -
  (13)
  -
  -
  -
  (1)
  -
  (150)
  -
  (164)
Recoveries
  1
  48
  -
  4
  -
  6
  -
  43
  -
  102
Provision
  17
  (104)
  (3)
  10
  15
  (21)
  -
  108
  156
  178
Ending balance
$831
  1,256
  1,174
  1,292
  98
  610
  -
  162
  1,138
  6,561











Allowance for loan losses March 31, 2019










Ending balance: individually










evaluated for impairment
$-
  2
  1,008
  13
  -
  -
  -
  -
  -
  1,023
Ending balance: collectively










evaluated for impairment
  831
  1,254
  166
  1,279
  98
  610
  -
  162
  1,138
  5,538
Ending balance
$831
  1,256
  1,174
  1,292
  98
  610
  -
  162
  1,138
  6,561











Loans March 31, 2019:










Ending balance
$95,219
  255,338
  33,717
  278,619
  39,106
  101,572
  984
  19,002
  -
  823,557











Ending balance: individually










evaluated for impairment
$95
  1,758
  14,127
  1,658
  -
  63
  -
  -
  -
  17,701
Ending balance: collectively










evaluated for impairment
$95,124
  253,580
  19,590
  276,961
  39,106
  101,509
  984
  19,002
  -
  805,856
               (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
Three months ended March 31, 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	-	-	-	-	-	-	-	(85)	-	(85)
Recoveries	50	60	-	12	-	3	-	39	-	164
Provision	(185)	(53)	(19)	28	23	(104)	-	9	(154)	(455)
Ending balance	$1,061	1,850	1,033	2,252	145	1,244	-	91	1,856	9,532

Allowance for loan losses March 31, 2021
Ending balance: individually
evaluated for impairment	$2	4	826	8	-	-	-	-	-	840
Ending balance: collectively
evaluated for impairment	1,059	1,846	207	2,244	145	1,244	-	91	1,856	8,692
Ending balance	$1,061	1,850	1,033	2,252	145	1,244	-	91	1,856	9,532

Loans March 31, 2021:
Ending balance	$87,878	264,356	26,278	337,943	57,914	160,892	860	10,376	-	946,497

Ending balance: individually
evaluated for impairment	$7	1,444	11,193	2,098	-	141	-	-	-	14,883
Ending balance: collectively
evaluated for impairment	$87,871	262,912	15,085	335,845	57,914	160,751	860	10,376	-	931,614

(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
Three months ended March 31, 2020
Allowance for loan losses:
Beginning balance	$694	1,274	1,073	1,305	120	688	-	138	1,388	6,680
Charge-offs	(5)	-	-	(7)	-	(31)	-	(167)	-	(210)
Recoveries	2	16	-	23	-	25	-	55	-	121
Provision	602	423	11	478	(2)	335	-	154	(480)	1,521
Ending balance	$1,293	1,713	1,084	1,799	118	1,017	-	180	908	8,112

Allowance for loan losses March 31, 2020
Ending balance: individually
evaluated for impairment	$2	6	906	9	-	29	-	-	-	952
Ending balance: collectively
evaluated for impairment	1,291	1,707	178	1,790	118	988	-	180	908	7,160
Ending balance	$1,293	1,713	1,084	1,799	118	1,017	-	180	908	8,112

Loans March 31, 2020:
Ending balance	$105,939	271,489	29,887	301,490	48,191	104,221	1,044	18,303	-	880,564

Ending balance: individually
evaluated for impairment	$8	1,678	12,489	2,095	-	344	-	-	-	16,614
Ending balance: collectively
evaluated for impairment	$105,931	269,811	17,398	299,395	48,191	103,877	1,044	18,303	-	863,950

The provision for loan losses for the three months ended March 31, ~~2020~~2021 was ~~$1.5 million,~~a credit of $455,000, compared to ~~$178,000~~an expense of $1.5 million for the three months ended March 31, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~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 generally flat volumes of loans in the ~~qualitative factors applied in~~general reserve pools. At March 31, 2021, the balance of loans with existing modifications as a result of COVID-19 was $1.9 million, of which $602,000 represents the balance of loans under the terms of a first modification and $1.3 million represents the balance of outstanding loans under the terms of a second or third modification. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of COVID-19. At March 31, 2021, the balance for all loans that are currently modified or previously modified but have returned to their original terms was $114.8 million. The loan balances associated with COVID-19 related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model ~~due to the impact to the current economic implications and rising unemployment rate from the COVID-19 pandemic~~as they have a higher likelihood of risk, and a ~~$57.0 million increase in~~higher reserve rate has been applied to that pool. Of all loans ~~from March 31, 2019 to March 31, 2020. The ALLL model also includes reserves on $57.4 million in loans with payment modifications made in March 2020~~modified as a result of COVID-19, $112.9 million have returned to their original terms; however, the ~~COVID-19 pandemic. Loans with payment modifications associated with~~effects of stimulus in the ~~COVID-19 pandemic include $51.5 million~~current environment are still unknown, and additional losses may be present in loans ~~secured by real estate, $5.1 million in commercial~~that are currently modified and/or loans ~~not secured by real estate and $764,000 in consumer loans not secured by real estate at March 31, 2020.~~that were once modified. These payment modifications are primarily interest only payments for three to ~~six~~nine months. Loans with COVID-19 related payment modifications that have reverted to their original terms are still included with reserves associated with COVID-19 payment modifications at March 31, 2021. There is still uncertainty about the ongoing and future effects of national and local policy decisions on these borrowers that could still limit their ability to adhere to their original payment terms. 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. 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 ~~(“CARES~~(the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

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 March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

March 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
$65
  8,378
  -
  -
  -
  353
  -
  672
  -
  9,468
2- High Quality
  33,845
  129,848
  -
  22,109
  220
  20,070
  -
  2,523
  1,785
  210,400
3- Good Quality
  63,525
  108,720
  11,685
  237,118
  42,810
  75,457
  964
  4,558
  7,557
  552,394
4- Management Attention
  5,454
  18,167
  13,351
  38,116
  4,626
  7,625
  80
  435
  720
  88,574
5- Watch
  2,988
  3,405
  1,938
  3,289
  535
  288
  -
  8
  -
  12,451
6- Substandard
  62
  2,971
  2,913
  858
  -
  428
  -
  45
  -
  7,277
7- Doubtful
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
8- Loss
  -
  -
  -
  -
  -
  -
  -
  -
  -
  -
Total
$105,939
  271,489
  29,887
  301,490
  48,191
  104,221
  1,044
  8,241
  10,062
  880,564

March 31, 2021

(Dollars in thousands)

	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total

1- Excellent Quality	$-	5,196	-	-	-	436	-	701	-	6,333
2- High Quality	10,147	113,727	-	39,402	20	16,955	-	2,150	1,486	183,887
3- Good Quality	71,651	119,255	9,856	249,646	54,014	132,296	839	3,540	1,420	642,517
4- Management Attention	3,413	19,477	11,998	37,337	3,196	8,761	21	345	692	85,240
5- Watch	2,586	3,633	1,883	10,684	569	2,248	-	5	-	21,608
6- Substandard	81	3,068	2,541	874	115	196	-	37	-	6,912
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$87,878	264,356	26,278	337,943	57,914	160,892	860	6,778	3,598	946,497

December 31, 2019

(Dollars in thousands)

Real Estate Loans

Construction and Land Development

Single-Family Residential

Single-Family Residential - Banco de la Gente non-traditional

Commercial

Multifamily and Farmland

Commercial

Farm

Consumer

All Other

Total

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

December 31, 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

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled ~~$4.8~~$3.4 million and ~~$4.3~~$3.8 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 ~~was zero in~~were no performing loans classified as TDR loans at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

There were no new TDR modifications during the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

There were no loans modified as TDR that defaulted during the three months ended March 31, ~~2020~~2021 and ~~2019,~~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.

(4)

Net Earnings Per Share

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the ~~year~~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 months ended March 31, ~~2020~~2021 and ~~2019~~2020 is as follows:

For the three months ended March 31, 2020
For the three months ended March 31, 2021
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$2,367	5,869,938	$0.40	$4,121	5,631,414	$0.73
Effect of dilutive securities:
Restricted stock units	-	13,440		-	12,169
Shares held in deferred comp plan				-	156,662
Diluted earnings per share	$2,367	5,883,378	$0.40	$4,121	5,800,245	$0.71

For the three months ended March 31, 2019
For the three months ended March 31, 2020
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$3,667	5,996,488	$0.61	$2,367	5,723,540	$0.41
Effect of dilutive securities:
Restricted stock units	-	24,369		-	13,440
Shares held in deferred comp plan				-	146,938
Diluted earnings per share	$3,667	6,020,857	$0.61	$2,367	5,883,378	$0.40

(5)

Stock-Based Compensation

The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the ~~“Plan”~~“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. NoThe 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of March 31, 2021, there were no outstanding shares ~~were available~~reserved for possible issuance under the ~~Plan at March 31, 2020 as all stock-based rights under the Plan must have been granted or awarded by May 7, 2019 (i.e., ten years from the Plan effective date).~~2009 Plan.

The Company granted 32,465 restricted stock units under the Plan at a grant date fair value of $7.18 per share during the first quarter of 2012, of which 5,891 restricted stock units were forfeited by the executive officers of the Company as required by the agreement with the U.S. Department of the Treasury in conjunction with the Company’s participation in the Capital Purchase Program under the Troubled Asset Relief Program. In July 2012, the Company granted 5,891 restricted stock units at a grant date fair value of $7.50 per share. The Company granted 29,475 restricted stock units under the Plan at a grant date fair value of $10.82 per share during the second quarter of 2013. The Company granted 23,162 restricted stock units under the Plan at a grant date fair value of $14.27 per share during the first quarter of 2014.

The Company granted 16,583 restricted stock units under the 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 ~~2012~~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 ~~(five~~(four years from the grant date for the ~~2012 grants, four years from the grant date for the 2013,~~ 2015, 2016, 2017, 2018 and 2019 ~~grants and three years from the grant date for the 2014~~ grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of March 31, ~~2020,~~2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was ~~$129,000.~~$74,000.

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 March 31, 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 March 31, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $304,000.

The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $44,000 for the three months ended March 31, 2021. The Company recognized a $77,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan for the three months ended March 31, 2020 due to a reduction in the Company’s stock price from $32.85 per share at December 31, 2019, compared to $20.36 per share at March 31, 2020. ~~The Company recognized compensation expense for restricted stock unit awards granted under the Plan of $110,000 for the three months ended March 31, 2019.~~

(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 ~~2019~~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.

~~Cash Surrender Value of Life Insurance~~Mutual Funds

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

~~Other Real Estate~~

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

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 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 ~~table~~tables below ~~presents~~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 March 31, ~~2020~~2021 and December ~~31, 2019.~~

(Dollars in thousands)

March 31, 2020

Fair Value Measurements

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage-backed securities
$84,076
  -
  84,076
  -
U.S. Government




sponsored enterprises
$26,908
  -
  26,908
  -
State and political subdivisions
$90,280
  -
  90,280
  -
Trust preferred securities
$250
  -
  -
  250

December 31, 2019

Fair Value Measurements

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage-backed securities
$78,956
  -
  78,956
  -
U.S. Government




sponsored enterprises
$28,397
  -
  28,397
  -
State and political subdivisions
$88,143
  -
  88,143
  -
Trust preferred securities
$250
  -
  -
  250

~~The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the three months ended March~~ 31, 2020.

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

~~Change in unrealized gain/(loss) for assets still held in Level 3~~	$-

(Dollars in thousands)
	March 31, 2021
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
U. S Treasuries	$7,960	-	$7,960	-
U.S. Government
sponsored enterprises	13,019	-	13,019	-
Mortgage-backed securities	185,703	-	185,703	-
State and political subdivisions	118,835	-	118,835	-

(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 ofmutual 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 March 31, 2021 and December 31, 2020.

(Dollars in thousands)
	March 31, 2021
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mutual funds held in deferred compensation trust	$1,372	-	1,372	-

(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 March 31, ~~2020~~2021 and December 31, ~~2019~~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 March 31,
2020

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage loans held for sale
$6,149
  -
  -
  6,149
Impaired loans
$21,730
  -
  -
  21,730
Other real estate
$-
  -
  -
  -

(Dollars in thousands)

Fair Value Measurements December 31,
2019

Level 1 Valuation

Level 2 Valuation

Level 3 Valuation

Mortgage loans held for sale
$4,417
  -
  -
  4,417
Impaired loans
$20,347
  -
  -
  20,347
Other real estate
$-
  -
  -
  -

(Dollars in thousands)
	Fair Value March 31, 2020	Fair Value December 31, 2019	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values	Fair Value Measurements March 31, 2021	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$6,149	4,417	Rate lock commitment	N/A	N/A	$4,236	-		4,236
Impaired loans	$21,730	20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%	19,752	-		19,752
Other real estate	$-	-	Appraised value	Discounts to reflect current market conditions and estimated costs to sell	0 - 25%	128	-		128

(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 March 31, 2021	Fair Value December 31, 2020	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$4,236	9,139	Rate lock commitment	N/A	N/A
Impaired loans	19,752	20,369	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%
Other real estate	128	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 March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

(Dollars in thousands)

Fair Value Measurements at March 31, 2020

Carrying Amount

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents
$103,519
  103,519
  -
  -
  103,519
Investment securities available for sale
$201,514
  -
  201,264
  250
  201,514
Other investments
$7,229
  -
  -
  7,229
  7,229
Mortgage loans held for sale
$6,149
  -
  -
  6,149
  6,149
Loans, net
$872,452
  -
  -
  846,684
  846,684
Cash surrender value of life insurance
$16,414
  -
  16,414
  -
  16,414






Liabilities:





Deposits
$983,958
  -
  -
  989,131
  989,131
Securities sold under agreements





to repurchase
$28,535
  -
  28,535
  -
  28,535
FHLB borrowings
$70,000
  -
  -
  69,929
  69,929
Junior subordinated debentures
$15,464
  -
  15,464
  -
  15,464

(Dollars in thousands)

Fair Value Measurements at December 31, 2019

Carrying Amount

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents
$52,387
  52,387
  -
  -
  52,387
Investment securities available for sale
$195,746
  -
  195,496
  250
  195,746
Other investments
$4,231
  -
  -
  4,231
  4,231
Mortgage loans held for sale
$4,417
  -
  -
  4,417
  4,417
Loans, net
$843,194
  -
  -
  819,397
  819,397
Cash surrender value of life insurance
$16,319
  -
  16,319
  -
  16,319






Liabilities:





Deposits
$966,517
  -
  -
  955,766
  955,766
Securities sold under agreements





to repurchase
$24,221
  -
  24,221
  -
  24,221
Junior subordinated debentures
$15,619
  -
  15,619
  -
  15,619

(Dollars in thousands)
		Fair Value Measurements at March 31, 2021
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$209,037	209,037	-	-	209,037
Investment securities available for sale	325,517	-	325,517	-	325,517
Other investments	3,791	-	-	3,791	3,791
Mortgage loans held for sale	4,236	-	-	4,236	4,236
Loans, net	936,965	-	-	921,096	921,096
Mutual funds held in deferred compensation trust	1,372	-	1,372	-	1,372

Liabilities:
Deposits	$1,334,465	-	-	1,330,015	1,330,015
Securities sold under agreements
to repurchase	31,916	-	31,916	-	31,916
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

(7) ~~Leases~~

Leases

As of March 31, ~~2020~~2021, the Company had operating ROU assets of ~~$3.4~~$3.2 million and operating lease liabilities of ~~$3.5~~$3.2 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 March 31, ~~2020~~2021 and ~~2019.~~2020.

(Dollars in thousands)
	March 31, 2020	March 31, 2019	March 31, 2021	March 31, 2020

Operating lease cost $	$224	221	$195	224

Other information:
Cash paid for amounts included in the measurement of lease liabilities	218	214	189	218
Operating cash flows from operating leases	-		-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	-		-
Weighted-average remaining lease term - operating leases	7.20	7.59	6.95	7.20
Weighted-average discount rate - operating leases	3.20%	3.16%	2.69%	3.20%

The following table presents lease maturities as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Maturity Analysis of Operating Lease Liabilities:

March 31,
2020

December 31,
2019

2020
$605
$823
2021
  793
  793
2022
  501
  501
2023
  393
  393
2024
  304
  304
Thereafter
  1,320
  1,320
      Total
  3,916
  4,134
      Less: Imputed Interest
  (458)
  (487)
      Operating Lease Liability
$3,458
$3,647

(Dollars in thousands)

Maturity Analysis of Operating Lease Liabilities:	March 31, 2021	December 31, 2020

2021	$537	$754
2022	550	588
2023	544	567
2024	489	489
2025	433	433
Thereafter	1,041	1,041
Total	3,594	3,872
Less: Imputed Interest	(362)	(401)
Operating Lease Liability	$3,232	$3,471

(8)

Subsequent Events

The Company has reviewed and evaluated subsequent events and transactions for ~~potential recognition and/or disclosure~~material subsequent events through the date the ~~unaudited consolidated~~ financial statements ~~included in this Quarterly Report on Form 10-Q were~~are issued. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around theworld. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19, economic uncertainties have arisen which are likely to negatively impact net interest income and noninterest income. Other financial impacts could occur though such potential impacts are unknown at this time.

The Bank has continued to ~~modify payments on~~originate PPP loans. PPP loans ~~due to the COVID-19 pandemic. Loans modified~~originated in April ~~2020~~2021 totaled ~~$50.7~~$2.7 million. ~~At April 30, 2020,~~The outstanding balance of PPP loans ~~totaling $108.1~~was $65.5 million had payment modifications due to the COVID-19 pandemic. Loans with payment modifications associated with the COVID-19 pandemic include $100.8 million in loans secured by real estate, $6.4 million in commercial loans not secured by real estate and $822,000 in consumer loans not secured by real estate at April 30, ~~2020. These payment modifications are~~2021, as compared to $78.2 million at March 31, 2021. The decrease from March 31, 2021 to April 30, 2021 was primarily ~~interest only payments for three to six months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDRs~~ 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~~

2928

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-24~~A-26 through ~~A-68~~A-71 of the Company’s ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~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 ~~Wake~~ and ~~Durham~~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 have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020 for the first time. Such events also may adversely affect business and consumer confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors may be adversely affected. On March 3, 2020, the ~~FOMC~~Federal Reserve Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to a range of 1.00% to 1.25%. Subsequently on March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations. Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as ~~those experienced in~~ the ~~pre-crisis~~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 ~~Significant Developments~~COVID-19 Impact below for additional information regarding the impact of the COVID-19 pandemic on the ~~Company's~~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.

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.

~~Significant Developments~~COVID 19 Impact

~~Impact of COVID-19~~

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

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic ~~have~~ led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the ~~Governor issued a series~~remainder of ~~orders, including an order that,~~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 subject to limited exceptions, all individuals stay at home and non-essential businesses cease all activities. This order was issued on March 27, 2020, effective from March 30, 2020 and currently extends through May 8, 2020. The Bank has remained open during these orders because banks have been identified as essential services. The Bank has been serving its customers through its drive-ups at its locations, and in all of its branch offices by appointment only.

~~To date, many of the~~ public health reopening guidelines, restrictions and ~~economic effects~~limitations on capacity. While guidelines, restrictions and limitations remain in place in North Carolina, as the number of COVID-19 cases decrease and COVID-19 vaccinations increase, the restrictions and limitations have ~~been concentrated~~slowly eased, and it is anticipated that these restrictions will continue to ease so long as COVID-19 cases continue to decrease and COVID-19 vaccinations continue to increase. We are unable to predict when these restrictions and limitations will be fully lifted allowing businesses to operate in ~~large cities, such as New York City, but we anticipate that similar effects will occur on~~ a ~~more delayed basis~~manner in ~~smaller cities and communities, where our banking operations are primarily focused.~~which they operated prior to the COVID-19 pandemic.

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

●

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

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the ~~SBA,~~Small Business Administration (“SBA”), referred to as the ~~PPP.~~Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopens and expands the PPP loan program. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans. 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 extends the PPP loan program until May 31, 2021. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to ~~TDRs~~troubled debt restructured (“TDR”) loans for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of March 31, ~~2020~~2021.

●

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 March 31, ~~2020.~~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 ~~establishes~~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 will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP ~~will be~~are able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope of its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. The Bank did not participate in the MSELF or MSNLF.

●

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

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

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

●

On March 13, 2020 we enacted our Pandemic Plan. ~~The Governor of the State of North Carolina issued a "Stay-At-Home" order pursuant to Executive Order No. 121, which will remain in effect until at least May 8, 2020.~~ We used available physical resources to achieve appropriate social distancing protocols in all facilities; in addition, we established mandatory remote work to isolate certain personnel essential to critical business continuity operations. We also expanded and tested remote access for the core banking system, funds transfer and loan operations.

●

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

●

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~~remotely.

●

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and ~~communities, which we are carrying out in a prudent and responsible manner.~~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 ~~office temporarily~~located in an assisted living facility was permanently closed effective December 31, 2020 due to ~~security concerns.~~limited lobby space and COVID-19 restrictions. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.

Summary of Significant 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 ~~2019~~2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May ~~7, 2020~~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 ~~$2.4~~$4.1 million or ~~$0.40~~$0.73 basic net earnings per share and $0.71 diluted net earnings per share for the three months ended March 31, ~~2020,~~2021, as compared to ~~$3.7~~$2.4 million or ~~$0.61~~$0.41 basic net earnings per share and $0.40 diluted net earnings per share for the same period one year ago. The ~~decrease~~increase in first quarter net earnings is primarily ~~the result of~~due to a decrease ~~in net interest income, an increase~~ in the provision for loan losses and an increase in non-interest ~~expense,~~income, which were partially offset by a decrease in net interest income and an increase in non-interest ~~income~~expense during the three months ended March 31, ~~2020,~~2021, compared to the three months ended March 31, ~~2019,~~2020, as discussed ~~below~~below.

The annualized return on average assets was ~~0.80%~~1.14% for the three months ended March 31, ~~2020,~~2021, compared to ~~1.36%~~0.79% for the same period one year ago, and annualized return on average shareholders’ equity was ~~7.09%~~11.99% for the three months ended March 31, ~~2020,~~2021, compared to ~~11.86%~~7.09% for the same period one year ago.

Net Interest Income. Net interest income, the major component of the Company’s net earnings, was $11.1 million for the three months ended March 31, 2021, compared to $11.2 million for the three months ended March 31, ~~2020, compared to $11.4 million for the three months ended March 31, 2019.~~2020. The decrease in net interest income was primarily due to a ~~$284,000 increase~~$328,000 decrease in interest ~~expense,~~income, which was partially offset by a ~~$67,000 increase~~$226,000 decrease in interest ~~income.~~expense. The ~~increase~~decrease in interest income was primarily ~~attributable~~due to ~~an increase~~a $131,000 decrease in interest income on interest bearing cash and federal funds sold resulting from the 1.50% reduction in the ~~average outstanding balance of fed funds sold, compared~~Fed Funds rate in March 2020, and a $147,000 reduction in U.S. Government sponsored enterprise securities income due to ~~the same period last year.~~volume and rate reductions. The ~~increase~~decrease in interest expense was primarily due to ~~an increase~~a decrease in ~~interest~~ rates paid on ~~deposits.~~interest-bearing liabilities and a decrease in Federal Home Loan Bank (“FHLB”) borrowings.

Interest income was $11.9 million for the three months ended March 31, 2021, compared to $12.3 million for the three months ended March 31, 2020. The decrease in interest income was primarily due to a $131,000 decrease in interest income on interest bearing cash and federal funds sold resulting from the 1.50% reduction in the Fed Funds rate in March 2020, ~~compared~~and a $147,000 reduction in U.S. Government sponsored enterprise securities income due to ~~$12.2~~volume and rate reductions. During the three months ended March 31, 2021, average loans increased $85.6 million to $947.2 million from $861.6 million for the three months ended March 31, ~~2019. The increase in interest income was primarily attributable to an increase in the average outstanding balance of fed funds sold, compared to the same period last year.~~2020. During the three months ended March 31, ~~2020, fed funds sold~~2021, average investment securities available for sale increased ~~$30.0~~$76.0 million to ~~$30.0~~$264.9 million from ~~zero for the three months ended March 31, 2019. During the three months ended March 31, 2020, average loans increased $46.4 million to $861.6 million from $815.2~~$188.9 million for the three months ended March 31, ~~2019. During the three months ended March 31, 2020, average investment securities available for sale decreased $920,000 to $188.9 million from $189.8 million for the three months ended March 31, 2019.~~2020. The average yield on loans for the three months ended March 31, 2021 and 2020 was 4.57% and ~~2019 was~~ 4.99% ~~and 5.28%~~, respectively. The average yield on investment securities available for sale was ~~3.15%~~1.96% and ~~3.66%~~3.15% for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The average yield on earning assets was ~~4.52%~~3.55% and ~~4.97%~~4.52% for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Interest expense was $815,000 for the three months ended March 31, 2021, compared to $1.0 million for the three months ended March 31, ~~2020, compared~~2020. The decrease in interest expense was primarily due to ~~$757,000~~a decrease in rates paid on interest-bearing liabilities and a decrease in FHLB borrowings. During the three months ended March 31, 2021, average interest-bearing non-maturity deposits increased $150.6 million to $671.9 million from $521.3 million for the three months ended March 31, ~~2019. The increase in interest expense was primarily due~~2020. During the three months ended March 31, 2021, average certificates of deposit increased $1.8 million to ~~an increase in interest rates on deposits.~~$108.0 million from $106.2 million for the three months ended March 31, 2020. Average FHLB borrowings decreased $43.8 million to zero for the three months ended March 31, 2021 from $43.8 million for the three months ended March 31, 2020. The average rate paid on interest-bearing checking and savings accounts was ~~0.41%~~0.30% and ~~0.24%~~0.41% for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The average rate paid on certificates of deposit was ~~1.05%~~0.80% for the three months ended March 31, ~~2020,~~2021, compared to ~~0.59%~~1.05% for the same period one year ago. The average rate paid on interest-bearing liabilities was ~~0.59%~~0.40% for the three months ended March 31, ~~2020,~~2021, compared to ~~0.47%~~0.59% for the same period one year ago. During the three months ended March 31, 2020, average certificates of deposit increased $2.7 million to $106.2 million from $103.5 million for the three months ended March 31, 2019. Average FHLB borrowings increased $36.7 million to $43.8 million for the three months ended March 31, 2020 from $6.9 million for the three months ended March 31, 2019.

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 March 31, ~~2020~~2021 and ~~2019.~~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 March 31, ~~2020~~2021 and ~~2019~~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~~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.

	Three months ended						Three months ended
	March 31, 2020			March 31, 2019			March 31, 2021			March 31, 2020
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:

Loans receivable	$861,634	10,680	4.99%	$815,203	10,619	5.28%	$947,205	10,664	4.57%	$861,634	10,680	4.99%
Investments - taxable	83,356	621	3.00%	57,592	466	3.28%	161,029	539	1.36%	83,356	621	3.00%
Investments - nontaxable*	112,117	940	3.37%	137,457	1,312	3.87%	108,466	804	3.01%	112,117	940	3.37%
Federal funds sold	29,588	123	1.67%	-		0.00%	-		0.00%	29,588	123	1.67%
Other	17,253	43	1.00%	3,058	14	1.86%	159,495	35	0.09%	17,253	43	1.00%

Total interest-earning assets	1,103,948	12,407	4.52%	1,013,310	12,411	4.97%	1,376,195	12,042	3.55%	1,103,948	12,407	4.52%

Non-interest earning assets:
Cash and due from banks	36,977			33,743			29,965			36,977
Allowance for loan losses	(6,679)			(6,429)			(9,928)			(6,679)
Other assets	62,691			51,198			64,601			63,624

Total assets	$1,196,937			$1,091,822			$1,460,833			$1,197,870


Interest-bearing liabilities:

NOW, MMDA & savings deposits	$521,265	525	0.41%	$479,927	282	0.24%
Interest-bearing demand, MMDA & savings deposits							$671,883	497	0.30%	$521,265	525	0.41%
Time deposits	106,178	277	1.05%	103,510	151	0.59%	108,024	212	0.80%	106,178	277	1.05%
FHLB borrowings	43,846	64	0.59%	6,893	46	-	-		0.00%	43,846	64	0.59%
Trust preferred securities	15,520	130	3.37%	20,000	226	4.58%	15,464	71	1.86%	15,520	130	3.37%
Other	22,970	45	0.79%	40,238	52	0.52%	27,372	35	0.52%	22,970	45	0.79%

Total interest-bearing liabilities	709,779	1,041	0.59%	650,568	757	0.47%	822,743	815	0.40%	709,779	1,041	0.59%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits	345,843			312,271			488,883			345,843
Other liabilities	7,129			3,634			9,841			8,062
Shareholders' equity	134,186			125,349			139,366			134,186

Total liabilities and shareholder's equity	$1,196,937			$1,091,822			$1,460,833			$1,197,870

Net interest spread		$11,366	3.93%		$11,654	4.50%		$11,227	3.15%		$11,366	3.93%

Net yield on interest-earning assets			4.14%			4.66%			3.31%			4.14%

Taxable equivalent adjustment
Investment securities		$157			$228			$120			$157

Net interest income		$11,209			$11,426			$11,107			$11,209

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of ~~$26.7~~$47.4 million in 2020 and ~~$34.9~~$26.7 million in ~~2019.~~2021. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in ~~2020~~2021 and ~~2019.~~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.

	Three months ended March 31, 2020 compared to three months ended March 31, 2019			Three months ended March 31, 2019 compared to three months ended March 31, 2018			Three months ended March 31, 2021 compared to three months ended March 31, 2020			Three months ended March 31, 2020 compared to three months ended March 31, 2019
(Dollars in thousands)	Changes in average volume	Changes in average rates	Total Increase (Decrease)	Changes in average volume	Changes in average rates	Total Increase (Decrease)	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	$590	(529)	61	616	934	1,550	1,012	(1,028)	(16)	590	(529)	61
Investments - taxable	200	(45)	155	15	46	61	419	(501)	(82)	200	(45)	155
Investments - nontaxable	(227)	(145)	(372)	(250)	49	(201)	(29)	(106)	(135)	(227)	(145)	(372)
Federal funds sold	61	62	123	-			(62)	(61)	(123)	61	62	123
Other	50	(21)	29	(42)	13	(29)	193	(201)	(8)	50	(21)	29
Total interest income	674	(678)	(4)	339	1,042	1,381	1,533	(1,897)	(364)	674	(678)	(4)

Interest expense:
NOW, MMDA & savings deposits	33	210	243	(6)	112	106	132	(160)	(28)	33	210	243
Time deposits	5	121	126	(20)	66	46	4	(69)	(65)	5	121	126
FHLB borrowings	151	(132)	19	23		46	(33)	(32)	(65)	151	(132)	19
Trust preferred securities	(44)	(52)	(96)	(6)	61	55	-	(59)		(44)	(52)	(96)
Other	(28)	20	(8)	1	35	36	7	(15)	(8)	(28)	20	(8)
Total interest expense	117	167	284	(8)	297	289	110	(335)	(225)	117	167	284
Net interest income	$557	(845)	(288)	347	745	1,092	1,423	(1,562)	(139)	557	(845)	(288)

Provision for Loan Losses. The provision for loan losses for the three months ended March 31, ~~2020~~2021 was ~~$1.5 million,~~a credit of $455,000, compared to ~~$178,000~~an expense of $1.5 million for the three months ended March 31, ~~2019.~~2020. The ~~increase~~decrease in the provision for loan losses is primarily attributable to ~~increases~~a decrease in the qualitative factors applied in the Company’s ALLL model due to the current economic implications and rising unemployment rate from the COVID-19 pandemic and a $57.0 million increase in loans from March 31, 2019 to March 31, 2020. The ALLL model also includes reserves on ~~$57.4 million in~~ loans with payment modifications made ~~in March 2020~~ as a result of the COVID-19 ~~pandemic. Loans~~pandemic and a decrease in reserves due to generally flat volumes of loans in the general reserve pools. At March 31, 2021, the balance of loans with ~~payment~~existing modifications as a result of COVID-19 was $1.9 million, of which $602,000 represents the balance of loans under the terms of a first modification and $1.3 million represents the balance of outstanding loans under the terms of a second or third modification. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At March 31, 2021, the balance for all loans that are currently modified or previously modified but have returned to their original terms was $114.8 million. The loan balances associated with COVID-19 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. Of all loans modified as a result of COVID-19, ~~pandemic include $51.5~~$112.9 million 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 ~~secured by real estate, $5.1 million in commercial~~that are currently modified and/or loans ~~not secured by real estate and $764,000 in consumer~~that were once modified. At December 31, 2020, the balance for all loans ~~not secured by real estate at March 31, 2020. These payment modifications~~that are ~~primarily interest only payments for three~~currently modified or previously modified but have returned to ~~six months.~~their original terms was $119.6 million. 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~~GAAP.

Non-Interest Income. Total non-interest income was $5.9 million for the three months ended March 31, 2021, compared to $4.6 million for the three months ended March 31, ~~2020, compared to $4.1 million for the three months ended March 31, 2019.~~2020. The increase in non-interest income is primarily attributable to a ~~$488,000~~$548,000 increase in mortgage banking income due to an increase in the volume of mortgage loans and a $466,000 increase in appraisal management fee income due to an increase in the volume of ~~appraisals.~~appraisals, which were partially offset by a $163,000 decrease in service charges and fees.

Non-Interest Expense. Total non-interest expense was $12.3 million for the three months ended March 31, 2021, compared to $11.4 million for the three months ended March 31, ~~2020, compared to $10.9 million for the three months ended March 31, 2019.~~2020. The increase in non-interest expense was primarily attributable to a ~~$77,000 increase in salaries and benefits expense, a $184,000 increase in occupancy expense and a $372,000~~$422,000 increase in appraisal management fee ~~expense. The increase in salaries and benefits~~ expense was primarily attributable to an increase in salary expense primarily due to annual salary increases and an increase in insurance costs. The increase in occupancy expense was primarily due to increases in depreciation and maintenance expenses. The increase in appraisal management fee expense was primarily due to an increase in the volume of ~~appraisals.~~appraisals and a $459,000 increase in salaries and employee benefits expense primarily due to increases in insurance costs and incentive compensation.

Income ~~Taxes.~~Taxes. Income tax expense was $1.0 million for the three months ended March 31, 2021, compared to $467,000 for the three months ended March 31, ~~2020, compared to $785,000~~2020. The effective tax rate was 20.24% for the three months ended March 31, ~~2019. The effective tax rate was~~2021, compared to 16.48% ~~for~~f or the three months ended March 31, ~~2020, compared to 17.63% for the three months ended March 31, 2019.~~2020.

Analysis of Financial Condition

Investment Securities. Available for sale securities were ~~$201.5~~$325.5 million at March 31, ~~2020,~~2021, compared to ~~$195.7~~$245.2 million at December 31, ~~2019.~~2020. Average investment securities available for sale for the three months ended March 31, ~~2020~~2021 were ~~$188.9~~$264.9 million, compared to ~~$185.3~~$200.8 million for the year ended December 31, ~~2019.~~2020.

Loans. At March 31, ~~2020,~~2021, loans were ~~$880.6~~$946.5 million, compared to ~~$849.9~~$948.6 million at December 31, ~~2019.~~2020. Average loans represented ~~78%~~69% and ~~79%~~74% of average earning assets for the three months ended March 31, ~~2020~~2021 and the year ended December 31, ~~2019,~~2020, respectively.
The Company had $78.2 million and $75.8 million in PPP loans at March 31, 2021 and December 31, 2020, respectively. PPP loans originated during the three months ended March 31, 2021 totaled $25.8 million. The increase in PPP loans from December 31, 2020 to March 31, 2021 was primarily due to the Company’s PPP loan originations during the three months ended March 31, 2021 exceeding the amount of PPP loans being forgiven by the SBA during the three months ended March 31, 2021.

The Company had ~~$6.1~~$4.2 million and ~~$4.4~~$9.1 million in mortgage loans held for sale as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At March 31, ~~2020,~~2021, the Company had ~~$99.0~~$98.0 million in residential mortgage loans, ~~$110.5~~$93.9 million in home equity loans and ~~$440.0~~$491.8 million in commercial mortgage loans, which include ~~$347.3~~$389.0 million secured by commercial property and ~~$92.7~~$102.8 million secured by residential property. Residential mortgage loans at March 31, 2021 include ~~$29.9~~$26.3 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.

~~At March 31, 2020, the~~The Company had ~~$105.9~~$87.9 million and $94.1 million in construction and land development ~~loans.~~loans at March 31, 2021 and December 31, 2020, respectively. The following ~~table presents~~tables present a breakout of these loans.

March 31, 2021
(Dollars in thousands)
	Number of Loans	Balance Outstanding	Non-accrual Balance	Number of Loans	Balance Outstanding	Non-accrual Balance
Land acquisition and development - commercial purposes	37	$7,958	$-	39	$7,969	$-
Land acquisition and development - residential purposes	168	20,241	-	153	17,666	-
1 to 4 family residential construction	140	31,592	-	93	19,613	-
Commercial construction	33	46,148	-	28	42,630	-
Total construction and land development	378	$105,939	$-	313	$87,878	$-

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	$-

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled ~~$4.8~~$3.4 million and ~~$4.3~~$3.8 million at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 March 31, ~~2020~~2021 and December 31, ~~2019.~~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~~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~~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.

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s 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 March 31, 2021, the balance of loans with existing modifications as a result of COVID-19 was $1.9 million, of which $602,000 represents the balance of loans under the terms of a first modification and $1.3 million represents the balance of outstanding loans under the terms of a second or third modification. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At March 31, 2021, the balance for all loans that are currently modified or previously modified but have returned to their original terms was $114.8 million. The loan balances associated with COVID-19 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. Of all loans modified as a result of COVID-19, $112.9 million 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 are currently modified and/or 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 months ended March 31, 2021, as compared to the three months ended March 31, 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~~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.

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 months ended March 31, 2020 compared to the three months ended March 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

The allowance for loan losses at March 31, ~~2020~~2021 was ~~$8.1~~$9.5 million or ~~0.92%~~1.01% of total loans, compared to ~~$6.7~~$9.9 million or ~~0.79%~~1.04% of total loans at December 31, 2019. The increase in the allowance for loan losses is due to the current economic implications and rising unemployment rate impact to the economy from the COVID-19 pandemic and a $57.0 million increase in loans from March 31, 2019 to March 31, 2020. ~~The ALLL model also includes reserves on $57.4 million in loans with payment modifications made in March 2020 as a result of the COVID-19 pandemic.~~

~~The following table presents the percentage of loans assigned to each risk grade at March 31, 2020 and December 31, 2019.~~

	Percentage of Loans		Percentage of Loans
	By Risk Grade		By Risk Grade
Risk Grade	3/31/2020	12/31/2020	3/31/2021	12/31/2020
Risk Grade 1 (Excellent Quality)	1.08%	1.16%	0.67%	1.18%
Risk Grade 2 (High Quality)	23.89%	24.46%	19.43%	20.45%
Risk Grade 3 (Good Quality)	62.73%	62.15%	67.88%	65.70%
Risk Grade 4 (Management Attention)	10.06%	10.02%	9.01%	9.75%
Risk Grade 5 (Watch)	1.41%	1.45%	2.28%	2.20%
Risk Grade 6 (Substandard)	0.83%	0.76%	0.73%	0.72%
Risk Grade 7 (Doubtful)	0.00%		0.00%
Risk Grade 8 (Loss)	0.00%		0.00%

At March 31, ~~2020,~~2021, including non-accrual loans, there were ~~two~~four relationships exceeding $1.0 million in the Watch risk grade (which totaled ~~$3.1~~$10.2 million). At December 31, 2020, including non-accrual loans, there were three relationships exceeding $1.0 million in the Watch risk grade (which totaled $7.9 million). There were no relationships exceeding $1.0 million in the Substandard risk ~~grade.~~grade at March 31, 2021 and December 31, 2020.

Non-performing Assets. Non-performing assets totaled ~~$4.0~~$3.7 million at March 31, ~~2020~~2021 or ~~0.32%~~0.24% of total assets, compared to ~~$3.6~~$3.8 million or ~~0.31%~~0.27% of total assets at December 31, ~~2019.~~2020. Non-accrual loans were ~~$4.0~~$3.6 million at March 31, ~~2020~~2021 and ~~$3.6~~$3.9 million at December 31, ~~2019.~~2020. As a percentage of total loans outstanding, non-accrual loans were ~~0.45%~~0.38% at March 31, ~~2020,~~2021, compared to ~~0.42%~~0.40% at December 31, ~~2019.~~2020. Non-performing ~~loans~~assets include ~~$3.6 million in commercial and residential mortgage loans and $412,000 in other loans at March 31, 2020, compared to~~ $3.4 million in commercial and residential mortgage loans, ~~and $155,000~~$150,000 in other loans and $128,000 in other real estate owned at March 31, 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, 2019. The Bank had $34,000 in loans 90 days past due and still accruing at March~~ 31, 2020. The Bank had no loans 90 days past due and still accruing at March 31, 2021 and December 31, ~~2019.~~2020. The Bank had no$128,000 in other real estate owned at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Deposits. Total deposits at March 31, ~~2020~~2021 were ~~$984.0 million~~$1.3 billion compared to ~~$966.5 million~~$1.2 billion at December 31, ~~2019.~~2020. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to ~~$961.2 million~~$1.3 billion at March 31, ~~2020,~~2021, compared to ~~$932.2 million~~$1.2 billion at December 31, ~~2019.~~2020.

Borrowed Funds. There were no FHLB borrowings ~~were $70.0 million~~outstanding at March 31, ~~2020, compared to zero at~~2021 and December 31, 2019. The increase in FHLB borrowings reflects a new $70.0 million FHLB advance executed in February 2020 to take advantage of a ten-year convertible advance program available from the FHLB at a rate of 0.58%.2020.

Securities sold under agreements to repurchase were ~~$28.5~~$31.9 million at March 31, ~~2020,~~2021, compared to ~~$24.2~~$26.2 million at December 31, ~~2019.~~2020.

Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million ~~and $15.6 million~~ at March 31, ~~2020~~2021 and December 31, ~~2019, respectively.~~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, six-month, and 12-month USD LIBOR rates will continue to be published through June 30, 2023.

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

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the three months ended March 31, ~~2020~~2021 totaled ~~$1.1~~$1.4 billion, exceeding average rate sensitive liabilities of ~~$709.8~~$822.7 million by ~~$394.2~~$553.5 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 March 31, ~~2020.~~2021.

Included in the rate sensitive assets are ~~$251.7~~$228.9 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 March 31, ~~2020,~~2021, the Company had ~~$142.7~~$143.1 million in loans with interest rate floors. The floors were in effect on ~~$135.1~~$114.0 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is ~~0.90%~~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 March 31, 2021 and December 31, 2020, such unfunded commitments to extend credit were ~~$289.6~~$299.0 million, while commitments in the form of standby letters of credit totaled ~~$4.1~~$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 March 31, 2021, the Company’s core deposits totaled $1.3 billion, or 97.89% of total deposits. As of December 31, 2020, the Company’s core deposits totaled ~~$961.2 million,~~$1.2 billion, or ~~97.69%~~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 ~~6.53%~~0.82% and 0.88% as of March 31, ~~2020.~~
2021 and December 31, 2020, respectively.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. There were no FHLB borrowings ~~were $70 million and zero~~outstanding at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. At March 31, ~~2020,~~2021, the carrying value of loans pledged as collateral to the FHLB totaled ~~$187.6~~$158.2 million compared to ~~$139.4~~$165.1 million at December 31, ~~2019.~~2020. The remaining availability under the line of credit with the FHLB was ~~$58.6~~$106.3 million at March 31, ~~2020~~2021 compared to ~~$86.1~~$111.4 million at December 31, ~~2019.~~2020. The Bank had no borrowings from the FRB at March 31, ~~2020~~2021 or December 31, ~~2019.~~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 March 31, ~~2020,~~2021, the carrying value of loans pledged as collateral to the FRB totaled ~~$476.7~~$467.1 million compared to ~~$452.6~~$469.5 million at December 31, ~~2019.~~2020. Availability under the line of credit with the FRB was $341.9 million and $340.0 million at March 31, 2021 and December 31, 2020, respectively.

The Bank also had the ability to borrow up to ~~$82.5~~$100.5 million for the purchase of overnight federal funds from ~~six~~five correspondent financial institutions as of March 31, ~~2020.~~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 ~~24.83%~~35.38% at March 31, ~~2020~~2021 and ~~18.20%~~28.12% at December 31, ~~2019.~~2020. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of March 31, ~~2020~~2021 and December 31, ~~2019~~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)

March 31,
2020

December 31,
2019

Contractual Cash Obligations

Long-term borrowings
$70,000
  -
Junior subordinated debentures
$15,464
  15,619
Operating lease obligations
  3,914
  4,134
Total
$89,378
  19,753
Other Commitments


Commitments to extend credit
$289,642
  276,338
Standby letters of credit and financial guarantees written
  4,089
  3,558
Income tax credits
  333
  333
Total
$294,064
  280,229
40


(Dollars in thousands)
	March 31, 2021	December 31, 2020
Contractual Cash Obligations
Junior subordinated debentures	$15,464	15,464
Operating lease obligations	2,933	3,083
Total	$18,397	18,547
Other Commitments
Commitments to extend credit	$299,040	299,039
Standby letters of credit and financial guarantees written	4,745	4,745
Income tax credits	184	184
Total	$303,969	303,968

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 ~~$133.9~~$140.0 million, or ~~10.75%~~9.12% of total assets, at March 31, ~~2020,~~2021, compared to ~~$134.1~~$139.9 million, or ~~11.61%~~9.89% of total assets, at December 31, ~~2019.~~2020.

Annualized return on average equity for the three months ended March 31, ~~2020~~2021 was ~~10.75%~~11.99%, compared to ~~11.39%~~7.09% for the three months ended March 31, ~~2019.~~2020. Total cash dividends paid on common stock were ~~$1.8 million~~$930,000 and ~~$1.4~~$1.8 million for the three months ended March 31, ~~2020~~2021 and ~~2019,~~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 ~~January~~February of ~~2020,~~2021, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3$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 not repurchased ~~approximately $3.0 million, or 126,800~~any shares of its common stock under this stock repurchase program as of March 31, ~~2020.~~

2021.

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

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 ~~million and $20.0 million~~ in trust preferred securities at March 31, ~~2020~~2021 and December 31, ~~2019, respectively.~~2020. The Company’s Tier 1 capital ratio was ~~14.20%~~15.15% and ~~15.37%~~15.07% at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 ~~15.00%~~16.10% and ~~16.08%~~16.07% at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 ~~12.71%~~13.66% and ~~13.79%~~13.56% at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 ~~12.00%~~10.50% and ~~11.91%~~10.24% at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

The Bank’s Tier 1 risk-based capital ratio was ~~13.67%~~14.68% and ~~15.09%~~14.85% at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The total risk-based capital ratio for the Bank was ~~14.48%~~15.63% and ~~15.79%~~15.85% at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The Bank’s common equity Tier 1 capital ratio was ~~13.67%~~14.68% and ~~15.09%~~14.85% at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. The Bank’s Tier 1 leverage capital ratio was ~~11.48%~~10.11% and ~~11.61%~~10.04% at March 31, ~~2020~~2021 and December 31, ~~2019,~~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 March 31, ~~2020.~~

2021.

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 ~~13, 2020.~~19, 2021.

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.

~~PART~~PART II. OTHER INFORMATION

I~~tem~~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

Inaddition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in the Company’s“Item 1A. Risk Factors” of our Form 10-K filed with the SEC on March ~~13, 2020. Additional~~19, 2021 includes a discussion of our known material risk factors, other than risks ~~not presently known~~that could apply to ~~us,~~any issuer or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements,offering. There have been no material changes from the risk factors ~~set forth below also is a cautionary statement identifying important factors that could cause the Company’s actual results to differ materially from those expressed~~described in ~~any forward-looking statements made by or on behalf of the Company.~~our Form 10-K.

~~The economic impact of the COVID-19 pandemic could adversely affect the Company’s financial condition and results of operations.~~

In December 2019, COVID-19 was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of people have filed claims for unemployment, and stock markets have declined in value. In response to the COVID-19 pandemic, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. In addition, the Company has had to modify its business practices in response to the COVID-19 pandemic, and additional actions may be required by government authorities or that the Company determines are in the best interests of its employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Company could be subject to any of the following risks, any of which could have a material, adverse effect on the Company’s business, financial condition, liquidity, and results of operations:

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

●

~~collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;~~

●

~~the Company’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect its net income;~~

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on the Company’s assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income; and

●

~~the Company relies on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 pandemic could have an adverse effect on the Company.~~

Moreover, the Company’s future success depends on the management skills of our directors, executive officers and other key employees. The unanticipated loss or unavailability of key employees due to the COVID-19 pandemic could harm the Company’s ability to operate its business or execute its business strategy. The Company may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

~~Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.~~

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

On March 27, 2020, President Trump signed the CARES, which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Additional PPP loan funding was approved on April 24, 2020.

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

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

Item 2.

I~~tem 2.~~ Unregistered Sales of Equity Securities and Use of Proceeds

Period

Total Number of Shares Purchased

Average Price Paid per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)

Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (3)

January 1 - 31, 2020
  1,010
$28.62
  -
$3,000,000





February 1 - 29, 2020
  262
  28.39
  126,800
$3,000,000





March 1 - 31, 2020
  1,126
  24.82
  -
$1,178





Total
  2,398(1)
$28.48
  126,800

ISSUER PURCHASES OF EQUITY SECURITIES

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

January 1 - 31, 2021	1,494	$21.11	-	$4,000,000

February 1 - 28, 2021	566	20.30	-	$4,000,000

March 1 - 31, 2021	397	25.00	-	$4,000,000

Total	2,457(1)	$20.79	-

(1) The Company purchased ~~2,398~~2,457 shares on the open market in the three months ended March 31, ~~2020~~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 ~~January 2020.~~February 2021.

RECENT SALES OF UNREGISTERED SECURITIES

On February 3, 2021, the Company granted 7,290 non-transferable restricted stock units to employees pursuant to the 2020 Omnibus Stock Ownership and Long Term Incentive Plan; each restricted stock unit is subject to time-based vesting restrictions and once vested will be convertible into one share of the Company’s common stock. On March 1, 2021, the Company issued an aggregate of 1,662 shares of common stock to employees upon the vesting of restricted stock units previously awarded under the 2009 Omnibus Stock Ownership and Long Term Incentive Plan. The awards and stock issuances were compensatory in nature without cost to the employees and were made pursuant to exemptions from registration under the Securities Act of 1933, including Regulation D.

Item 3.

Defaults Upon Senior Securities

Not applicable

I~~tem~~Item 5. Other Information

Not applicable

Item 6.

Exhibits

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

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 ~~13,~~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

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 (14)		Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2005

Exhibit (31)(a)		Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (31)(b)		Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

Exhibit (32)		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit (101)		The following materials from the Company’s 10-Q Report for the quarterly period ended March 31, ~~2020,~~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.

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.

May ~~8, 2020~~10, 2021		~~/s/~~/s/ Lance A. Sellers
Date		Lance A. Sellers President and Chief Executive Officer ~~(Principal~~ (Principal Executive Officer)

May ~~8, 2020~~10, 2021		~~/s/ A. Joseph Lampron, Jr.~~ /s/ Jeffrey N. Hooper
Date		~~A. Joseph Lampron, Jr.~~Jeffrey N. Hooper Executive Vice President and Chief Financial Officer ~~(Principal~~ (Principal Financial and Principal Accounting Officer)

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

(Dollars in thousands)
	March 31, 2020	December 31, 2019
Real estate loans:
Construction and land development	$105,939	92,596
Single-family residential	271,489	269,475
Single-family residential -
Banco de la Gente non-traditional	29,887	30,793
Commercial	301,490	291,255
Multifamily and farmland	48,191	48,090
Total real estate loans	756,996	732,209

Loans not secured by real estate:
Commercial loans	104,221	100,263
Farm loans	1,044	�� 1,033
Consumer loans	8,241	8,432
All other loans	10,062	7,937

Total loans	880,564	849,874

Less allowance for loan losses	8,112	6,680

Total net loans	$872,452	843,194

March 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	$1,055	-	1,055	104,884	105,939	-
Single-family residential	5,559	268	5,827	265,662	271,489	34
Single-family residential -
Banco de la Gente non-traditional	5,366	455	5,821	24,066	29,887	-
Commercial	1,526	175	1,701	299,789	301,490	-
Multifamily and farmland	-	-	-	48,191	48,191	-
Total real estate loans	13,506	898	14,404	742,592	756,996	34

Loans not secured by real estate:
Commercial loans	702	254	956	103,265	104,221	-
Farm loans	93	-	93	951	1,044	-
Consumer loans	119	3	122	8,119	8,241	-
All other loans	-	-	-	10,062	10,062	-
Total loans	$14,420	1,155	15,575	864,989	880,564	34

March 31, 2020
(Dollars in thousands)

	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$180	-	180	180	8	182	3
Single-family residential	5,027	397	4,189	4,586	36	4,615	58
Single-family residential -
Banco de la Gente non-traditional	14,767	1,034	12,930	13,964	926	14,168	228
Commercial	3,260	-	3,243	3,243	19	2,557	29
Multifamily and farmland	-	-	-	-	-	-	-
Total impaired real estate loans	23,234	1,431	20,542	21,973	989	21,522	318

Loans not secured by real estate:
Commercial loans	702	90	606	696	35	436	9
Consumer loans	92	-	87	87	2	91	2
Total impaired loans	$24,028	1,521	21,235	22,756	1,026	22,049	329

(Dollars in thousands)
	Fair Value Measurements March 31, 2020	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$6,149	-	-	6,149
Impaired loans	$21,730	-	-	21,730
Other real estate	$-	-	-	-

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