PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

10-Q 1 pebk_10q.htm QUARTERLY REPORT pebk_10q   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: September 30, 2020   OR   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   For the transition period from __________ to __________   000-27205 (Commission File No.)   PEOPLES BANCORP OF NORTH CAROLINA, INC. (Exact name of registrant as specified in its charter)   North Carolina 56-2132396   (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)   518 West C Street, Newton, North Carolina 28658 (Address of principal executive offices) (Zip Code)   (828) 464-5620 (Registrant’s telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act:   Title of each class Trading Symbol(s) Name on each exchange on which registered         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒ No ☐   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.   Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒     Emerging growth company ☐   If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) ☐   Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ☐ No ☒   Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,787,504 shares of common stock, outstanding at October 31, 2020.       INDEX   PART I.    FINANCIAL INFORMATION     PAGE(S) Item 1. Financial Statements           Consolidated Balance Sheets at September 30, 2020 (Unaudited) and December 31, 2019 (Audited) 3         Consolidated Statements of Earnings for the three and nine months ended September 30, 2020 and 2019 (Unaudited) 4         Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (Unaudited) 5         Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2020 and 2019 (Unaudited) 6         Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited) 7-8         Notes to Consolidated Financial Statements (Unaudited) 9-30       Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations 30-44       Item 3. Quantitative and Qualitative Disclosures About Market Risk 45       Item 4. Controls and Procedures 45   PART II.         OTHER INFORMATION   Item 1. Legal Proceedings 45 Item 1A. Risk Factors 45-47 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 48 Item 3. Defaults upon Senior Securities 48 Item 5. Other Information 48 Item 6. Exhibits 48-50 Signatures   51 Certifications   52-54   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.       P ART I.       FINANCIAL INFORMATION   I tem 1.           Financial Statements   PEOPLES BANCORP OF NORTH CAROLINA, INC. C onsolidated Balance Sheets September 30, 2020 and December 31, 2019 (Dollars in thousands)       September 30,     December 31,   Assets    2020      2019        (Unaudited)      (Audited)                 Cash and due from banks, including reserve requirements             of $0 at 9/30/20 and $13,210 at 12/31/19   $ 48,355       48,337   Interest-bearing deposits     15,778       720   Federal funds sold     140,095       3,330   Cash and cash equivalents     204,228       52,387                     Investment securities available for sale     222,991       195,746   Other investments     7,163       4,231   Total securities     230,154       199,977                     Mortgage loans held for sale     8,960       4,417                     Loans     970,232       849,874   Less allowance for loan losses     (9,892 )     (6,680 ) Net loans     960,340       843,194                     Premises and equipment, net     19,057       18,604   Cash surrender value of life insurance     16,742       16,319   Other real estate     128       -     Right of use lease asset     3,097       3,622   Accrued interest receivable and other assets     15,903       16,362   Total assets   $ 1,458,609       1,154,882                     Liabilities and Shareholders' Equity                                   Deposits:                 Noninterest-bearing demand   $ 455,199       338,004   NOW, MMDA & savings     626,674       516,757   Time, $250,000 or more     24,717       34,269   Other time     79,806       77,487   Total deposits     1,186,396       966,517                     Securities sold under agreements to repurchase     34,151       24,221   FHLB borrowings     70,000       -   Junior subordinated debentures     15,464       15,619   Lease liability     3,139       3,647   Accrued interest payable and other liabilities     10,008       10,758   Total liabilities     1,319,158       1,020,762                     Commitments                                   Shareholders' equity:                 Preferred stock, no par value; authorized                 5,000,000 shares; no shares issued and outstanding     -       -   Common stock, no par value; authorized                 20,000,000 shares; issued and outstanding 5,787,504 shares                 at September 30, 2020 and 5,912,300 shares at December 31, 2019     56,871       59,813   Retained earnings     76,580       70,663   Accumulated other comprehensive income     6,000       3,644   Total shareholders' equity     139,451       134,120   Total liabilities and shareholders' equity   $ 1,458,609       1,154,882     See accompanying Notes to Consolidated Financial Statements.     3     PEOPLES BANCORP OF NORTH CAROLINA, INC. C onsolidated Statements of Earnings Three and Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands, except per share amounts)       Three months ended     Nine months ended       September 30,     September 30,        2020      2019      2020      2019        (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)                             Interest income:                         Interest and fees on loans   $ 10,507       11,004       31,367       32,517   Interest on due from banks     19       87       103       136   Interest on fededal funds sold     33       -       178       -   Interest on investment securities:                                 U.S. Government sponsored enterprises     528       628       1,864       1,942   State and political subdivisions     717       671       2,042       2,265   Other     64       40       202       128   Total interest income     11,868       12,430       35,756       36,988                                     Interest expense:                                 NOW, MMDA & savings deposits     482       455       1,455       1,057   Time deposits     224       259       725       581   FHLB borrowings     103       21       269       70   Junior subordinated debentures     76       210       296       656   Other     57       49       150       168   Total interest expense     942       994       2,895       2,532   Net interest income     10,926       11,436       32,861       34,456                                     Provision for loan losses     522       422       3,460       677   Net interest income after provision for loan losses     10,404       11,014       29,401       33,779                                     Non-interest income:                                 Service charges     809       1,178       2,635       3,409   Other service charges and fees     188       202       543       548   Gain/(loss) on sale of investment securities     1,688       (5 )     2,145       226   Mortgage banking income     750       376       1,635       834   Insurance and brokerage commissions     200       206       647       642   Appraisal management fee income     1,871       1,311       4,955       3,285   Gain/(loss) on sale and write-down of                                 other real estate     (47 )     (1 )     (47 )     (18 ) Miscellaneous     1,673       1,441       4,453       4,287   Total non-interest income     7,132       4,708       16,966       13,213                                     Non-interest expense:                                 Salaries and employee benefits     5,737       5,695       16,996       17,060   Occupancy     1,943       1,861       5,725       5,409   Professional fees     374       237       1,121       955   Advertising     152       234       566       775   Debit card expense     278       201       766       667   FDIC Insurance     81       (36 )     169       116   Appraisal management fee expense     1,478       1,012       3,845       2,538   Other     1,871       2,063       5,627       5,907   Total non-interest expense     11,914       11,267       34,815       33,427   Earnings before income taxes     5,622       4,455       11,552       13,565                                     Income tax expense     1,113       834       2,115       2,464                                     Net earnings   $ 4,509       3,621       9,437       11,101                                     Basic net earnings per share   $ 0.78       0.62       1.62       1.87   Diluted net earnings per share   $ 0.78       0.61       1.62       1.86   Cash dividends declared per share   $ 0.15       0.14       0.60       0.52     See accompanying Notes to Consolidated Financial Statements.     4     PEOPLES BANCORP OF NORTH CAROLINA, INC. C onsolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands)       Three months ended     Nine months ended       September 30,     September 30,        2020      2019      2020      2019        (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)                             Net earnings   $ 4,509       3,621       9,437       11,101                                     Other comprehensive income:                                 Unrealized holding gains on securities                                 available for sale     93       700       5,204       4,584   Reclassification adjustment for (gains) losses on                                 securities available for sale                                 included in net earnings     (1,688 )     5       (2,145 )     (226 )                                   Total other comprehensive income (loss),                                 before income taxes     (1,595 )     705       3,059       4,358                                     Income tax expense related to other                                 comprehensive income:                                                                   Unrealized holding gains on securities                                 available for sale     21       161       1,196       1,054   Reclassification adjustment for (gains) losses                                 on securities available for sale                                 included in net earnings     (388 )     1       (493 )     (52 )                                   Total income tax expense related to                                 other comprehensive income (loss)     (367 )     162       703       1,002                                     Total other comprehensive income (loss),                                 net of tax     (1,228 )     543       2,356       3,356                                     Total comprehensive income   $ 3,281       4,164       11,793       14,457     See accompanying Notes to Consolidated Financial Statements.     5     PEOPLES BANCORP OF NORTH CAROLINA, INC. C onsolidated Statements of Changes in Shareholders' Equity Three and Nine Months Ended September 30, 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                                             Cash dividends declared on                                         common stock     -       -       (870 )     -       (870 ) Net earnings     -       -       2,561       -       2,561   Change in accumulated other                                         comprehensive income, net of tax     -       -       -       1,494       1,494   Balance, June 30, 2020     5,787,504     $ 56,871       72,942       7,228       137,041                                             Cash dividends declared on                                         common stock     -       -       (871 )     -       (871 ) Net earnings     -       -       4,509       -       4,509   Change in accumulated other                                         comprehensive income, net of tax     -       -       -       (1,228 )     (1,228 ) Balance, September 30, 2020     5,787,504     $ 56,871       76,580       6,000       139,451                                                                                       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                                             Common stock repurchase     (63,996 )     (1,761 )     -       -       (1,761 ) Cash dividends declared on                                         common stock     -       -       (832 )     -       (832 ) Net earnings     -       -       3,813       -       3,813   Change in accumulated other                                         comprehensive income, net of tax     -       -       -       2,123       2,123   Balance, June 30, 2019     5,933,140     $ 60,390       65,738       3,799       129,927                                             Common stock repurchase     (20,840 )     (577 )     -       -       (577 ) Cash dividends declared on                                         common stock     -       -       (831 )     -       (831 ) Restricted stock units exercised     -       -       -       -       -   Net earnings     -       -       3,621       -       3,621   Change in accumulated other                                         comprehensive income, net of tax     -       -       -       543       543   Balance, September 30, 2019     5,912,300     $ 59,813       68,528       4,342       132,683     See accompanying Notes to Consolidated Financial Statements.     6     PEOPLES BANCORP OF NORTH CAROLINA, INC. C onsolidated Statements of Cash Flows Nine Months Ended Septemer 30, 2020 and 2019 (Dollars in thousands)        2020      2019        (Unaudited)      (Unaudited)                 Cash flows from operating activities:             Net earnings   $ 9,437       11,101   Adjustments to reconcile net earnings to                 net cash provided by operating activities:                 Depreciation, amortization and accretion     3,080       2,949   Provision for loan losses     3,460       677   Deferred income taxes     (25 )     (7 ) Gain on sale of investment securities     (2,145 )     (226 ) Loss (gain) on sale of other real estate     -       1   Write-down of other real estate     47       17   Loss on sale of premises and equipment     -       138   Restricted stock expense     (73 )     201   Proceeds from sales of mortgage loans held for sale     78,526       34,002   Origination of mortgage loans held for sale     (83,069 )     (37,585 ) Change in:                 Cash surrender value of life insurance     (283 )     (286 ) Right of use lease asset     525       585   Other assets     (219 )     (790 ) Lease liabilty     (508 )     (935 ) Other liabilities     (677 )     (765 ) Net cash provided by operating activities     8,076       9,077                     Cash flows from investing activities:                 Purchases of investment securities available for sale     (90,233 )     (36,515 ) Proceeds from sales, calls and maturities of investment securities                 available for sale     52,289       36,700   Proceeds from paydowns of investment securities available for sale     14,635       11,416   Purchases of other investments     -       -   Proceeds from paydowns on other investments     132       132   Purchases of FHLB stock     (3,031 )     (2,976 ) Net change in loans     (120,781 )     (42,146 ) Purchases of premises and equipment     (2,298 )     (2,800 ) Purchases of bank owned life insurance     (140 )     -   Proceeds from sale of premises and equipment     -       697   Proceeds from sale of other real estate and repossessions     -       9   Net cash used by investing activities     (149,427 )     (35,483 )                   Cash flows from financing activities:                 Net change in deposits     219,879       84,355   Net change in securities sold under agreement to repurchase     9,930       (36,168 ) Proceeds from FHLB borrowings     70,000       184,500   Repayments of FHLB borrowings     -       (114,500 ) Proceeds from Fed Funds purchased     6,935       100,075   Repayments of Fed Funds purchased     (6,935 )     (100,075 ) Repayment of Junior Subordinated Debt     (155 )     -   Restricted stock units exercised     57       -   Common stock repurchased     (2,999 )     (2,490 ) Cash dividends paid on common stock     (3,520 )     (3,108 ) Net cash provided by financing activities     293,192       112,589                     Net change in cash and cash equivalents     151,841       86,183                     Cash and cash equivalents at beginning of period     52,387       43,370                     Cash and cash equivalents at end of period   $ 204,228       129,553       7     PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Nine Months Ended September 30, 2020 and 2019 (Dollars in thousands)        2020      2019        (Unaudited)      (Unaudited)                 Supplemental disclosures of cash flow information:             Cash paid during the period for:             Interest   $ 1,908       2,510   Income taxes   $ 1,651       2,463                     Noncash investing and financing activities:                 Change in unrealized gain on investment securities                  available for sale, net   $ 2,356       3,356   Issuance of accrued restricted stock units   $ 57       207   Transfers of loans to other real estate and repossessions   $ 175       26   Initial recognition of lease right of use asset and lease liability   $ 450       4,401     See accompanying Notes to Consolidated Financial Statements.     8   PEOPLES BANCORP OF NORTH CAROLINA, INC.   N otes 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 three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente (“Banco”). These offices are now branded as Bank branches and considered a separate market territory of the Bank as they offer normal and customary banking services as are offered in the Bank’s other branches such as the taking of deposits and the making of loans.   The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2019) 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 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.   Recent Accounting Pronouncements   The following table provides a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted.   Recently Adopted Accounting Guidance             ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2016-02: Leases Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. January 1, 2019 See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures. ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium. January 1, 2019 The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2018-11: Leases (Topic 842): Targeted Improvements Intended to reduce costs and ease implementation of ASU 2016-02. January 1, 2019 The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2018-20: Narrow- Scope Improvements for Lessors Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. January 1, 2019 See comments for ASU 2016-02 below. ASU 2019-07: Codification Updates to SEC Sections Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. Effective upon issuance The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.      9     ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement. January 1, 2020 The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606 Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. January 1, 2020 Early adoption permitted The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2018-19: Leases (Topic 842): Codification Improvements Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. January 1, 2020 The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.   ASU 2014-09 The Company has applied ASU 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues are not affected. Appraisal management fee income and expense from the Bank’s subsidiary, CBRES, was reported as a net amount prior to March 31, 2018, which was included in miscellaneous non-interest income. This income and expense is now reported on separate line items under non-interest income and non-interest expense.   See below for additional information related to revenue generated from contracts with customers.   Revenue and Method of Adoption The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment advisory, and appraisal services. On January 1, 2018, the Company adopted the requirements of ASU 2014-09. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.   The Company adopted ASU 2014-09 using the modified retrospective transition approach which does not require restatement of prior periods. The method was selected as there were no material changes in the timing of revenue recognition resulting in no comparability issues with prior periods. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of, and reason for, the change, which is solely a result of the adoption of the required standard. When applying the modified retrospective approach under ASU 2014-09, the Company has elected, as a practical expedient, to apply this approach only to contracts that were not completed as of January 1, 2018. A completed contract is considered to be a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that was in effect before January 1, 2018. There were no uncompleted contracts as of January 1, 2018 for which application of the new standard required an adjustment to retained earnings.   The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $646,000 and $641,000 for the nine months ended September 30, 2020 and 2019, 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 $3.1 million and $3.1 million for the nine months ended September 30, 2020 and 2019, 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 $618,000 and $500,000 for the nine months ended September 30, 2020 and 2019, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $5.0 million and $3.3 million for the nine months ended September 30, 2020 and 2019, 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.     10     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 nine months ended September 30, 2020 derived from contracts in which services are transferred at a point in time was approximately $6.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors,   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, 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 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 customers. Variable consideration does exist for contracts related to the Company’s contract with its registered investment advisor as some revenues earned pursuant to that contract are based on market values of accounts at the end of the period.   ASU 2016-02 On January 1, 2019, the Company adopted the requirements of ASU 2016-02, Leases (Topic 842). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease agreements. The key difference of Topic 842 from the previous guidance (Topic 840) is the recognition of a right-of-use (“ROU”) asset and lease liability on the statement of financial position for those leases previously classified as operating leases under the previous guidance. Topic 842 states that a contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company reviewed its material non-real estate contracts to determine if they included a lease and did not note any that would need to be considered under Topic 842. The Company’s lease agreements in which Topic 842 has been applied are primarily for retail branch real estate properties. These real estate leases have lease terms from less than 12 months to leases with options up to 15 years, and payment terms vary with some being fixed payments or based on a fixed annual increase while others are variable and the annual increases are based on market rates or other indexes.   Initially transition from Topic 840 to Topic 842 required a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11, which, among other things, provided an additional transition method that would allow entities to not apply the initial guidance of ASU 2016-02 to the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company chose the transition method of adoption provided by ASU 2018-11, therefore, the Company has applied this standard to all existing leases as of the adoption date of January 1, 2019, recording a ROU asset and a lease liability and a cumulative-effect adjustment to the opening balance of retained earnings (if applicable) in the period of adoption. With this transition method, comparative prior period disclosures will be under the previous accounting guidance for leases (Topic 840). This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.     11     Topic 842 provides a package of practical expedients in applying the lease standard to be chosen at the date of adoption. The Company has chosen to elect the package of practical expedients provided under ASU 2016-02 whereby it will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. The Company has also chosen not to apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related accounting guidance). The Company will account for lease and non-lease components separately because such amounts are readily determinable under its lease contracts. Additionally, the Company has chosen to elect the use of hindsight, when applicable, in determining the lease term, in assessing the likelihood that a lessee purchase option will be exercised; and in assessing the impairment of ROU assets.   ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determined that all of its leases are classified as operating leases under Topic 842. For operating and finance leases, lease liabilities are initially measured at commencement date based on the present value of lease payments not yet paid, discounted using the discount rate for the lease at the lease commencement date over the lease term. For operating and finance leases, ROU assets are measured at the commencement date as the amount of the initial liability, adjusted for lease payments made to the lessor at or before commencement date, minus incentives; and for any initial direct costs incurred by the lessee. Based on the transition method that the Company has chosen to follow, the initial application date of the lease term for all existing leases is January 1, 2019.   For operating leases, after lease commencement, the lease liability is recorded at the present value of the unpaid lease payments discounted at the discount rate for the lease established at the commencement date. Lease expense is determined by the sum of the lease payments to be recognized on a straight-line basis over the lease term. The ROU asset is subsequently amortized as the difference between the straight line lease cost for the period and the periodic accretion of the lease liability. The lease term used for the calculation of the initial operating ROU asset and lease liability will include the initial lease term in addition to one renewal option the Company thinks it is reasonably certain to exercise or incur. Regarding the discount rate, Topic 842 requires that the implicit rate within the lease agreement be used if available. If not available, the Company should use its incremental borrowing rate in effect at the time of the lease commencement date. The Company utilized Federal Home Loan Bank (“FHLB”) Atlanta’s Fixed Rate Credit rates for terms consistent with the Company’s lease terms.   The Company recorded operating ROU assets and operating lease liabilities of $4.4 million and $4.4 million, respectively   at the commencement date of January 1, 2019. The Company did not have a cumulative-effect adjustment to the opening balance of retained earnings. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations, financial position or disclosures.   A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $173,000 for the nine months ended September 30, 2020 and 2019. The Bank purchased these branch facilities in September 2020.     12     The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of September 30, 2020, which may impact the Company’s financial statements.   Recently Issued Accounting Guidance Not Yet Adopted           ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2016-13: Measurement of Credit Losses on Financial Instruments Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. See ASU 2019-10 below. The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.         ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20) Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. January 1, 2021 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.     13     ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. January 1, 2021 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. January 1, 2021 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update) Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. Effective upon issuance The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-03: Codification Improvements to Financial Instruments Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. March 12, 2020 through December 31, 2022 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity   Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. January 1, 2022 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.     14     Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of   operations, financial position or disclosures.    (2)  Investment Securities   Investment securities available for sale at September 30, 2020 and December 31, 2019 are as follows:   (Dollars in thousands)                              September 30, 2020        Amortized Cost      Gross Unrealized Gains      Gross Unrealized Losses      Estimated Fair Value   Mortgage-backed securities   $ 112,274       3,242       533       114,983   U.S. Government                                 sponsored enterprises     7,479       342       213       7,608   State and political subdivisions     95,196       4,975       21       100,150   Trust preferred securities     250       -       -       250   Total   $ 215,199       8,559       767       222,991     (Dollars in thousands)                              December 31, 2019        Amortized Cost      Gross Unrealized Gains      Gross Unrealized Losses      Estimated Fair Value   Mortgage-backed securities   $ 77,812       1,371       227       78,956   U.S. Government                                 sponsored enterprises     28,265       443       311       28,397   State and political subdivisions     84,686       3,657       200       88,143   Trust preferred securities     250       -       -       250   Total   $ 191,013       5,471       738       195,746     The current fair value and associated unrealized losses on investments in securities with unrealized losses at September 30, 2020 and December 31, 2019 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.   (Dollars in thousands)                                         September 30, 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   $ 24,665       532       3,013       1       27,678       533   U.S. Government                                                 sponsored enterprises     -       -       4,284       213       4,284       213   State and political subdivisions     3,410       21       -       -       3,410       21   Total   $ 28,075       553       7,297       214       35,372       767       15     (Dollars in thousands)                                         December 31, 2019        Less than 12 Months      12 Months or More      Total        Fair Value      Unrealized Losses      Fair Value      Unrealized Losses      Fair Value      Unrealized Losses   Mortgage-backed securities   $ 28,395       177       6,351       50       34,746       227   U.S. Government                                                 sponsored enterprises     2,899       10       6,151       301       9,050       311   State and political subdivisions     7,367       200       -       -       7,367       200   Total   $ 38,661       387       12,502       351       51,163       738     At September 30, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $767,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2020 tables above, three out of 120 securities issued by state and political subdivisions and 13 out of 73 securities issued by U.S. Government sponsored enterprises contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.   The amortized cost and estimated fair value of investment securities available for sale at September 30, 2020, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.   September 30, 2020             (Dollars in thousands)                  Amortized Cost      Estimated Fair Value   Due within one year   $ 9,837       9,988   Due from one to five years     24,402       25,770   Due from five to ten years     61,085       64,485   Due after ten years     7,351       7,515   Mortgage-backed securities     112,274       114,983   Trust preferred securities     250       250   Total   $ 215,199       222,991     Proceeds from sales of securities available for sale during the three months ended September 30, 2020 were $29.2 million and resulted in net gains of $1.7 million. Proceeds from sales of securities available for sale during the nine months ended September 30, 2020 were $46.1 million and resulted in net gains of $2.1 million. Proceeds from sales of securities available for sale during the three months ended September 30, 2019 were $8.4 million and resulted in net losses of $5,000. Proceeds from sales of securities available for sale during the nine months ended September 30, 2019 were $20.7 million and resulted in net gains of $226,000.   Securities with a fair value of approximately $77.7 million and $66.0 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes as required by law.     16     (3)      Loans   Major classifications of loans at September 30, 2020 and December 31, 2019 are summarized as follows:   (Dollars in thousands)                 September 30, 2020     December 31, 2019   Real estate loans:             Construction and land development   $ 96,866       92,596   Single-family residential     272,246       269,475   Single-family residential -                 Banco de la Gente non-traditional     28,099       30,793   Commercial     318,596       291,255   Multifamily and farmland     49,584       48,090   Total real estate loans     765,391       732,209                     Loans not secured by real estate:                 Commercial loans     182,862       100,263   Farm loans     851       1,033   Consumer loans     7,341       8,432   All other loans     13,787       7,937                     Total loans     970,232       849,874                     Less allowance for loan losses     9,892       6,680                     Total net loans   $ 960,340       843,194     The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties, and also in Mecklenburg, Wake and Durham counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:   ● Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of September 30, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.   ● Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 2020, single-family residential loans comprised approximately 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 September 30, 2020, commercial real estate loans comprised approximately 33% of the Bank’s total loan portfolio.   ● Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business. As of September 30, 2020, commercial loans comprised approximately 19% of the Bank’s total loan portfolio, including $98.4 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.     17     Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   The following tables present an age analysis of past due loans, by loan type, as of September 30, 2020 and December 31, 2019:   September 30, 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   $ 8       -       8       96,858       96,866       -   Single-family residential     837       378       1,215       271,031       272,246       -   Single-family residential -                                                 Banco de la Gente non-traditional     428       131       559       27,540       28,099       84   Commercial     -       -       -       318,596       318,596       -   Multifamily and farmland     -       -       -       49,584       49,584       -   Total real estate loans     1,273       509       1,782       763,609       765,391       84                                                     Loans not secured by real estate:                                                 Commercial loans     130       -       130       182,732       182,862       -   Farm loans     -       -       -       851       851       -   Consumer loans     84       2       86       7,255       7,341       -   All other loans     -       -       -       13,787       13,787       -   Total loans   $ 1,487       511       1,998       968,234       970,232       84     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       -       18     The following table presents non-accrual loans as of September 30, 2020 and December 31, 2019:   (Dollars in thousands)                 September 30, 2020     December 31, 2019   Real estate loans:             Construction and land development   $ -       -   Single-family residential     1,019       1,378   Single-family residential -                 Banco de la Gente non-traditional     1,733       1,764   Commercial     451       256   Total real estate loans     3,203       3,398                     Loans not secured by real estate:                 Commercial loans     255       122   Consumer loans     17       33   Total   $ 3,475       3,553     At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $21.0 million, $21.3 million and $21.4 million at September 30, 2020, December 31, 2019 and September 30, 2019, respectively. Interest income recognized on accruing impaired loans was $934,000, $1.3 million, and $1.0 million for the nine months ended September 30, 2020, the year ended December 31, 2019 and the nine months ended September 30, 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.   The following table presents impaired loans as of September 30, 2020:   September 30, 2020                               (Dollars in thousands)                                                                    Unpaid Contractual Principal Balance      Recorded Investment With No Allowance      Recorded Investment With Allowance      Recorded Investment in Impaired Loans      Related Allowance   Real estate loans:                               Construction and land development   $ 113       -       113       113       4   Single-family residential     5,110       388       4,309       4,697       18   Single-family residential -                                         Banco de la Gente stated income     13,854       -       13,055       13,055       865   Commercial     2,579       351       2,206       2,557       13   Multifamily and farmland     -       -       -       -       -   Total impaired real estate loans     21,656       739       19,683       20,422       900                                             Loans not secured by real estate:                                         Commercial loans     569       255       259       514       2   Consumer loans     53       -       49       49       1   Total impaired loans   $ 22,278       994       19,991       20,985       903         19     The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and nine months ended September 30, 2020 and 2019.   (Dollars in thousands)                                                      Three months ended      Nine months ended       September 30, 2020     September 30, 2019     September 30, 2020     September 30, 2019        Average Balance      Interest Income Recognized      Average Balance      Interest Income Recognized      Average Balance      Interest Income Recognized      Average Balance      Interest Income Recognized   Real estate loans:                                                 Construction and land development   $ 153       -       188       3       123       7       232       9   Single-family residential     5,107       63       4,360       70       4,451       181       4,724       188   Single-family residential -                                                                 Banco de la Gente stated income     13,402       197       14,805       241       13,785       617       14,916       732   Commercial     2,665       31       1,808       26       2,772       103       1,823       71   Multifamily and farmland     -       -       -       -       -       -       -       -   Total impaired real estate loans     21,327       291       21,161       340       21,131       908       21,695       1,000                                                                     Loans not secured by real estate:                                                                 Commercial loans     494       7       153       16       553       22       127       20   Consumer loans     74       1       94       1       57       4       102       5   Total impaired loans   $ 21,895       299       21,408       357       21,741       934       21,924       1,025     The following table presents impaired loans as of and for the year ended December 31, 2019:   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         20     Changes in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019 were as follows:   (Dollars in thousands)                                                                 Real Estate Loans                                     Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Non-traditional     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer and All Other     Unallocated     Total   Nine months ended September 30, 2020:                                                       Allowance for loan losses:                                                             Beginning balance   $ 694       1,274       1,073       1,305       120       688       -       138       1,388       6,680   Charge-offs     (5 )     (65 )     -       (7 )     -       (109 )     -       (343 )     -       (529 ) Recoveries     2       59       -       45       -       27       -       148       -       281   Provision     573       482       (11 )     751       (4 )     355       -       254       1,060       3,460   Ending balance   $ 1,264       1,750       1,062       2,094       116       961       -       197       2,448       9,892                                                                                                                                                               Allowance for loan losses:                                                                                 Beginning balance   $ 1,531       1,813       1,114       2,051       115       980       -       162       1,667       9,433   Charge-offs     -       (65 )     -       -       -       -       -       (87 )     -       (152 ) Recoveries     -       34       -       11       -       2       -       42       -       89   Provision     (267 )     (32 )     (52 )     32       1       (21 )     -       80       781       522   Ending balance   $ 1,264       1,750       1,062       2,094       116       961       -       197       2,448       9,892                                                                                     Allowance for loan losses at September 30, 2020:                                                                         Ending balance: individually                                                                                 evaluated for impairment   $ 2       4       859       11       -       -       -       -       -       876   Ending balance: collectively                                                                                 evaluated for impairment     1,262       1,746       203       2,083       116       961       -       197       2,448       9,016   Ending balance   $ 1,264       1,750       1,062       2,094       116       961       -       197       2,448       9,892                                                                                     Loans at September 30, 2020:                                                                                 Ending balance   $ 96,866       272,246       28,099       318,596       49,584       182,862       851       21,128       -       970,232                                                                                     Ending balance: individually                                                                                 evaluated for impairment   $ 8       1,582       11,630       1,685       -       255       -       -       -       15,160   Ending balance: collectively                                                                                 evaluated for impairment   $ 96,858       270,664       16,469       316,911       49,584       182,607       851       21,128       -       955,072     (Dollars in thousands)                                                                 Real Estate Loans                                     Construction and Land Development     Single-Family Residential     Single-Family Residential - Banco de la Gente Non-traditional     Commercial     Multifamily and Farmland     Commercial     Farm     Consumer and All Other     Unallocated     Total   Nine months ended September 30, 2019:                                                       Allowance for loan losses:                                                             Beginning balance   $ 813       1,325       1,177       1,278       83       626       -       161       982       6,445   Charge-offs     (21 )     (42 )     -       -       -       (389 )     -       (459 )     -       (911 ) Recoveries     44       59       -       27       -       80       -       157       -       367   Provision     (141 )     22       (87 )     (26 )     35       333       -       303       238       677   Ending balance   $ 695       1,364       1,090       1,279       118       650       -       162       1,220       6,578                                                                                     Three months ended September 30, 2019:                                                                         Allowance for loan losses:                                                                                 Beginning balance   $ 763       1,312       1,116       1,334       110       548       -       161       1,197       6,541   Charge-offs     -       (19 )     -       -       -       (388 )     -       (144 )     -       (551 ) Recoveries     41       6       -       4       -       66       -       49       -       166   Provision     (109 )     65       (26 )     (59 )     8       424       -       96       23       422   Ending balance   $ 695       1,364       1,090       1,279       118       650       -       162       1,220       6,578                                                                                     Allowance for loan losses at September 30, 2019:                                                                 Ending balance: individually                                                                                 evaluated for impairment   $ -       2       948       10       -       -       -       -       -       960   Ending balance: collectively                                                                                 evaluated for impairment     695       1,362       142       1,269       118       650       -       162       1,220       5,618   Ending balance   $ 695       1,364       1,090       1,279       118       650       -       162       1,220       6,578                                                                                     Loans at September 30, 2019:                                                                                 Ending balance   $ 95,622       269,304       31,673       281,607       47,266       99,382       1,101       19,644       -       845,599                                                                                     Ending balance: individually                                                                                 evaluated for impairment   $ 11       1,719       13,196       1,628       -       100       -       -       -       16,654   Ending balance: collectively                                                                                 evaluated for impairment   $ 95,611       267,585       18,477       279,979       47,266       99,282       1,101       19,644       -       828,945       21     The provision for loan losses for the three months ended September 30, 2020 was $522,000, compared to $422,000 for the three months ended September 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. PPP loans are excluded from ALLL as PPP loans are 100 percent guaranteed by the SBA. The ALLL model also includes reserves on $119.7 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. Reserves associated with COVID-19 payment modifications were $1.6 million at June 30, 2020 and September 30, 2020. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million in loans secured by commercial real estate, $23.0 million in loans secured by residential real estate, $8.7 in loans secured by other real estate, $8.0 million in commercial loans not secured by real estate and $765,000 in consumer loans not secured by real estate at September 30, 2020. These payment modifications are primarily interest only payments for three to six 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 September 30, 2020. 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. Approximately 12% of loans with COVID-19 payment modifications at September 30, 2020 have received secondary payment modifications as a result of the COVID-19 pandemic. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.   The provision for loan losses for the nine months ended September 30, 2020 was $3.5 million, compared to $677,000 for the nine months ended September 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in SBA PPP loans, from September 30, 2019 to September 30, 2020. PPP loans are excluded from ALLL as PPP loans are 100 percent guaranteed by the SBA. The ALLL model also includes reserves on $119.7 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic.   The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:   ● Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade. ● Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes. ● Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change). ● Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course. ● Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date. ● Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. ● Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off. ● Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.   The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of September 30, 2020 and December 31, 2019:   September 30, 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   $ 230       9,184       -       -       -       739       -       675       -       10,828   2- High Quality     17,962       125,821       -       30,959       261       24,377       -       2,373       1,643       203,396   3- Good Quality     70,142       112,716       10,896       236,533       44,393       143,379       785       3,917       11,424       634,185   4- Management Attention     5,506       18,472       12,643       41,687       4,344       12,555       66       336       720       96,329   5- Watch     2,939       2,997       2,003       8,517       586       1,500       -       7       -       18,549   6- Substandard     87       3,056       2,557       900       -       312       -       33       -       6,945   7- Doubtful     -       -       -       -       -       -       -       -       -       -   8- Loss     -       -       -       -       -       -       -       -       -       -   Total   $ 96,866       272,246       28,099       318,596       49,584       182,862       851       7,341       13,787       970,232     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     Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $4.3 million at September 30, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at September 30, 2020 and December 31, 2019.     22     There were no new TDR modifications during the nine months ended September 30, 2020 and 2019.   There were no loans modified as TDR that defaulted during the nine months ended September 30, 2020 and 2019, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.   On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of September 30, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of September 30, 2020 amounted to $98.8 million. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of September 30, 2020. The Bank has recognized $361,000 PPP loan fee income as of September 30, 2020.   The Bank has continued to modify payments on loans due to the COVID-19 pandemic. At September 30, 2020, loans totaling $119.7 million had payment modifications due to the COVID-19 pandemic. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million in loans secured by commercial real estate, $23.0 million in loans secured by residential real estate, $8.7 in loans secured by other real estate, $8.0 million in commercial loans not secured by real estate and $765,000 in consumer loans not secured by real estate at September 30, 2020. These payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.   (4) Net Earnings Per Share   Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares.   The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and nine months ended September 30, 2020 and 2019 is as follows:   For the three months ended September 30, 2020                  Net Earnings (Dollars in thousands)      Weighted Average Number of Shares      Per Share Amount   Basic earnings per share   $ 4,509       5,787,504     $ 0.78   Effect of dilutive securities:                         Restricted stock units     -       15,299           Diluted earnings per share   $ 4,509       5,802,803     $ 0.78     For the nine months ended September 30, 2020                  Net Earnings (Dollars in thousands)      Weighted Average Number of Shares      Per Share Amount   Basic earnings per share   $ 9,437       5,815,044     $ 1.62   Effect of dilutive securities:                         Restricted stock units     -       13,960           Diluted earnings per share   $ 9,437       5,829,004     $ 1.62       23     For the three months ended September 30, 2019                  Net Earnings (Dollars in thousands)      Weighted Average Number of Shares      Per Share Amount   Basic earnings per share   $ 3,621       5,919,322     $ 0.62   Effect of dilutive securities:                         Restricted stock units     -       25,883           Diluted earnings per share   $ 3,621       5,945,205     $ 0.61     For the nine months ended September 30, 2019                  Net Earnings (Dollars in thousands)      Weighted Average Number of Shares      Per Share Amount   Basic earnings per share   $ 11,101       5,951,840     $ 1.87   Effect of dilutive securities:                         Restricted stock units     -       24,908           Diluted earnings per share   $ 11,101       5,976,748     $ 1.86     ( 5) Stock-Based Compensation   The Company has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. The 2009 Plan expired on May 7, 2019 but still governs the rights and obligations of the parties for grants made thereunder. As of September 30, 2020, there were no outstanding shares under the 2009 Plan.   The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of September 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $72,000.   The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).   The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of September 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $106,000.     24     The Company recognized a $73,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the nine months ended September 30, 2020 due to a reduction in the Company’s stock price from $32.85 per share at December 31, 2019, compared to $15.43 per share at September 30, 2020. The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan of $201,000 for the nine months ended September 30, 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 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.     25     Cash Surrender Value of Life Insurance For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.   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 below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of September 30, 2020 and December 31, 2019.   (Dollars in thousands)                             September 30, 2020       Fair Value Measurements     Level 1 Valuation     Level 2 Valuation     Level 3 Valuation   Mortgage-backed securities   $ 114,983       -       114,983       -   U.S. Government                                 sponsored enterprises   $ 7,608       -       7,608       -   State and political subdivisions   $ 100,150       -       100,150       -   Trust preferred securities   $ 250       -       -       250       26     (Dollars in thousands)                             December 31, 2019       Fair Value Measurements     Level 1 Valuation     Level 2 Valuation     Level 3 Valuation   Mortgage-backed securities   $ 78,956       -       78,956       -   U.S. Government                                 sponsored enterprises   $ 28,397       -       28,397       -   State and political subdivisions   $ 88,143       -       88,143       -   Trust preferred securities   $ 250       -       -       250     The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the nine months ended September 30, 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   $ -     The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at September 30, 2020 and December 31, 2019 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.   (Dollars in thousands)                             Fair Value Measurements September 30, 2020     Level 1 Valuation     Level 2 Valuation     Level 3 Valuation   Mortgage loans held for sale   $ 8,960       -       -       8,960   Impaired loans   $ 20,082       -       -       20,082     (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       27     (Dollars in thousands)                         Fair Value September 30, 2020     Fair Value December 31, 2019   Valuation Technique   Significant Unobservable Inputs     General Range of Significant Unobservable Input Values   Mortgage loans held for sale   $ 8,960       4,417   Rate lock commitment     N/A       N/A   Impaired loans   $ 20,082       20,347    Appraised value and discounted cash flows   Discounts to reflect current market conditions and ultimate collectability       0 - 25 %   The carrying amount and estimated fair value of financial instruments at September 30, 2020 and December 31, 2019 are as follows:   (Dollars in thousands)                                         Fair Value Measurements at September 30, 2020        Carrying Amount      Level 1      Level 2      Level 3      Total   Assets:                               Cash and cash equivalents   $ 204,228       204,228       -       -       204,228   Investment securities available for sale   $ 222,991       -       222,741       250       222,991   Other investments   $ 7,163       -       -       7,163       7,163   Mortgage loans held for sale   $ 8,960       -       -       8,960       8,960   Loans, net   $ 960,340       -       -       950,020       950,020   Cash surrender value of life insurance   $ 16,742       -       16,742       -       16,742                                             Liabilities:                                         Deposits   $ 1,186,396       -       -       1,182,713       1,182,713   Securities sold under agreements                                         to repurchase   $ 34,151       -       34,151       -       34,151   FHLB borrowings   $ 70,000       -       -       69,988       69,988   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       28     (7)  Leases   As of September 30, 2020, the Company had operating ROU assets of $3.1 million and operating lease liabilities of $3.1 million. The Company maintains operating leases on land and buildings for some of the Bank’s branch facilities and loan production offices. Most leases include one option to renew, with renewal terms extending up to 15 years. The exercise of renewal options is based on the judgment of management as to whether or not the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. As allowed by ASU 2016-02, leases with a term of 12 months or less are not recorded on the balance sheet and instead are recognized in lease expense on a straight-line basis over the lease term.   The following table presents lease cost and other lease information as of September 30, 2020 and 2019.   (Dollars in thousands)                  September 30, 2020      September 30, 2019                 Operating lease cost $   $ 675       655                     Other information:                 Cash paid for amounts included in the measurement of lease liabilities     659       650   Operating cash flows from operating leases     -       -   Right-of-use assets obtained in exchange for new lease liabilities - operating leases     450       -   Weighted-average remaining lease term - operating leases     7.36       7.51   Weighted-average discount rate - operating leases     2.97 %     3.18 %   The following table presents lease maturities as of September 30, 2020 and December 31, 2019.   Maturity Analysis of Operating Lease Liabilities:    September 30, 2020     December 31, 2019                 2020   $ 166     $ 823   2021     664       793   2022     496       501   2023     471       393   2024     391       304   Thereafter     1,356       1,320         Total     3,544       4,134         Less: Imputed Interest     (405 )     (487 )       Operating Lease Liability   $ 3,139     $ 3,647     (8)  Subsequent Events   The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. Management has concluded that there were no material subsequent events.     29     I tem 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 through A-68 of the Company’s 2019 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.   Introduction Management’s discussion and analysis of earnings and related data are presented to assist in understanding the consolidated financial condition and results of operations of the Company. The Company is the parent company of the Bank and a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell, Wake and Durham counties, operating under the banking laws of North Carolina and the rules and regulations of the 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 Federal Reserve Federal Open Market Committee (“FOMC”) reduced the target federal funds rate by 50 basis points to 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 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 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 below for additional information regarding the impact of the COVID-19 pandemic on the Company’s business.   Although we are unable to control the external factors that influence our business, by maintaining high levels of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends.     30     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 Impact of COVID-19   The COVID-19 pandemic in the United States, and efforts to contain it, have had a complex and significant adverse impact on the economy, the banking industry and the Company. The impact on future fiscal periods is subject to a high degree of uncertainty.   Effects on Our Market Areas.  Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the remainder of the school year, most retail establishments, including restaurants and entertainment venues, were ordered to close for varying lengths of time, and non-critical healthcare services were significantly curtailed. Since the initial shut down in March 2020, phased reopening plans began in mid-May subject to public health reopening guidelines and limitations on capacity.   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, referred to as the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of September 30, 2020   ● On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs. See Note 3 of the financial statements for additional disclosure of loan modifications as of September 30, 2020.   ● On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes 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 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 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.     31     ● In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regular institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve's PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.   Effects on Our Business.  The COVID-19 pandemic and the specific developments referred to above have had and will continue to have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant and retail industries will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.   Our Response . We have taken numerous steps in response to the COVID-19 pandemic, including the following:   ● On March 13, 2020 we enacted our Pandemic Plan. We used available physical resources to achieve appropriate social distancing protocols in all facilities; in addition, we established mandatory remote work to isolate certain personnel essential to critical business continuity operations. We also expanded and tested remote access for the core banking system, funds transfer and loan operations.   ● We are actively working with loan customers to evaluate prudent loan modification terms.   ● We continue to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.   ● We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities, which we are carrying out in a prudent and responsible manner.   ● 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 branch office remains closed due to limited lobby space. 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 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.     32     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 $4.5 million or $0.78 basic and diluted net earnings per share for the three months ended September 30, 2020, as compared to $3.6 million or $0.62 basic net earnings per share and $0.61 diluted net earnings per share for the same period one year ago. The increase in third quarter net earnings is primarily the result of an increase in non-interest income, which was partially offset by a decrease in net interest income, an increase in the provision for loan losses and an increase in non-interest expense during the three months ended September 30, 2020, compared to the three months ended September 30, 2019, as discussed below.   The annualized return on average assets was 1.25% for the three months ended September 30, 2020, compared to 1.26% for the same period one year ago, and annualized return on average shareholders’ equity was 12.81% for the three months ended September 30, 2020, compared to 10.89% for the same period one year ago.   Net Interest Income. Net interest income, the major component of the Company’s net earnings, was $10.9 million for the three months ended September 30, 2020, compared to $11.4 million for the three months ended September 30, 2019. The decrease in net interest income was primarily due to a $562,000 decrease in interest income, which was partially offset by a $52,000 decrease in interest expense. The decrease in interest income was primarily due to a $497,000 decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. The decrease in interest expense was primarily due to a decrease in rates paid on interest-bearing liabilities.   Interest income was $11.9 million for the three months ended September 30, 2020, compared to $12.4 million for the three months ended September 30, 2019. The decrease in interest income was primarily due to a $497,000 decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. During the three months ended September 30, 2020, average loans increased $130.0 million to $970.5 million from $840.5 million for the three months ended September 30, 2019. During the three months ended September 30, 2020, average investment securities available for sale increased $19.7 million to $200.1 million from $180.4 million for the three months ended September 30, 2019. The average yield on loans for the three months ended September 30, 2020 and 2019 was 4.31% and 5.19%, respectively. The average yield on investment securities available for sale was 2.82% and 3.29% for the three months ended September 30, 2020 and 2019, respectively. The average yield on earning assets was 3.56% and 4.79% for the three months ended September 30, 2020 and 2019, respectively.     Interest expense was $942,000 for the three months ended September 30, 2020, compared to $994,000 for the three months ended September 30, 2019. The decrease in interest expense was primarily due to a decrease in rates paid on interest-bearing liabilities. During the three months ended September 30, 2020, average interest-bearing non-maturity deposits increased $111.1 million to $607.1 million from $496.0 million for the three months ended September 30, 2019. During the three months ended September 30, 2020, average certificates of deposit decreased $3.5 million to $102.9 million from $106.4 million for the three months ended September 30, 2019. Average FHLB borrowings increased $63.4 million to $70.0 million for the three months ended September 30, 2020 from $6.6 million for the three months ended September 30, 2019. The average rate paid on interest-bearing checking and savings accounts was 0.32% and 0.36% for the three months ended September 30, 2020 and 2019, respectively. The average rate paid on certificates of deposit was 0.86% for the three months ended September 30, 2020, compared to 0.97% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.45% for the three months ended September 30, 2020, compared to 0.60% for the same period one year ago.     33     The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended September 30, 2020 and 2019. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the three months ended September 30, 2020 and 2019 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.       Three months ended     Three months ended       September 30, 2020     September 30, 2019   (Dollars in thousands)   Average Balance     Interest     Yield / Rate     Average Balance     Interest     Yield / Rate   Interest-earning assets:                                                                           Loans receivable   $ 970,529       10,507       4.31 %   $ 840,523       11,004       5.19 % Investments - taxable     88,823       484       2.17 %     68,527       517       2.99 % Investments - nontaxable*     118,920       985       3.30 %     117,140       1,004       3.40 % Federal funds sold     135,548       33       0.10 %     -       -       0.00 % Other     29,503       21       0.28 %     17,969       87       1.92 %                                                   Total interest-earning assets     1,343,323       12,030       3.56 %     1,044,159       12,612       4.79 %                                                   Non-interest earning assets:                                                 Cash and due from banks     34,906                       40,415                   Allowance for loan losses     (9,399 )                     (6,440 )                 Other assets     69,408                       61,122                                                                     Total assets   $ 1,438,238                     $ 1,139,256                                                                                                                       Interest-bearing liabilities:                                                                                                   NOW, MMDA & savings deposits   $ 607,111       482       0.32 %   $ 495,992       455       0.36 % Time deposits     102,900       223       0.86 %     106,366       259       0.97 % FHLB borrowings     70,000       103       0.59 %     6,659       21       1.25 % Trust preferred securities     15,464       76       1.96 %     20,619       210       4.04 % Other     32,440       58       0.71 %     32,773       49       0.59 %                                                   Total interest-bearing liabilities     827,915       942       0.45 %     662,409       994       0.60 %                                                     Non-interest bearing liabilities and shareholders' equity:                                           Demand deposits     460,615                       336,896                   Other liabilities     9,701                       8,051                   Shareholders' equity     140,007                       131,900                                                                     Total liabilities and shareholder's equity   $ 1,438,238                     $ 1,139,256                                                                     Net interest spread           $ 11,088       3.11 %           $ 11,618       4.19 %                                                   Net yield on interest-earning assets                     3.28 %                     4.41 %                                                   Taxable equivalent adjustment                                                 Investment securities           $ 162                     $ 182                                                             Net interest income           $ 10,926                     $ 11,436             *Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $17.3 million in 2020 and $31.2 million in 2019. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2020 and 2019.     34     Year-to-date net interest income as of September 30, 2020 was $32.9 million, compared to $34.5 million for the same period one year ago. The decrease in net interest income was primarily due to a $1.2 million decrease in interest income and a $363,000 increase in interest expense. The decrease in interest income was primarily due to a $1.2 million decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. The increase in interest expense was primarily due to an increase in average outstanding balances of interest-bearing deposits and FHLB borrowings.   Interest income was $35.8 million for the nine months ended September 30, 2020, compared to $37.0 million for the nine months ended September 30, 2019. The decrease in interest income was primarily due to a $1.2 million decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. During the nine months ended September 30, 2020, average loans increased $97.3 million to $926.7 million from $289.4 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, average investment securities available for sale increased $9.6 million to $194.7 million from $185.1 million for the nine months ended September 30, 2019. The average yield on loans for the nine months ended September 30, 2020 and 2019 was 4.52% and 5.24%, respectively. The average yield on investment securities available for sale was 3.02% and 3.48% for the nine months ended September 30, 2020 and 2019, respectively. The average yield on earning assets was 3.92% and 4.89% for the nine months ended September 30, 2020 and 2019, respectively.   Interest expense was $2.9 million for the nine months ended September 30, 2020, compared to $2.5 million for the nine months ended September 30, 2019. The increase in interest expense was primarily due to an increase in interest bearing deposits and borrowings from FHLB and an increase in interest rates on deposits. During the nine months ended September 30, 2020, average interest-bearing non-maturity deposits increased $77.8 million to $566.3 million from $488.5 million for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, average certificates of deposit decreased $157,000 to $103.0 million from $103.2 million for the nine months ended September 30, 2019. Average FHLB borrowings increased $56.6 million to $61.3 million for the nine months ended September 30, 2020 from $4.7 million for the nine months ended September 30, 2019. The average rate paid on interest-bearing checking and savings accounts was 0.34% and 0.29% for the nine months ended September 30, 2020 and 2019, respectively. The average rate paid on certificates of deposit was 0.94% for the nine months ended September 30, 2020, compared to 0.75% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.50% for the nine months ended September 30, 2020, compared to 0.52% for the same period one year ago.       35     The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the nine months ended September 30, 2020 and 2019. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the nine months ended September 30, 2020 and 2019 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax-exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.       Nine months ended     Nine months ended       September 30, 2020     September 30, 2019   (Dollars in thousands)   Average Balance     Interest     Yield / Rate     Average Balance     Interest     Yield / Rate   Interest-earning assets:                                                                           Loans receivable   $ 926,663       31,367       4.52 %   $ 829,385       32,517       5.24 % Investments - taxable     85,887       1,664       2.59 %     62,230       1,457       3.13 % Investments - nontaxable*     116,113       2,929       3.37 %     128,024       3,493       3.65 % Federal funds sold     80,379       178       0.30 %     -       -       0.00 % Other     26,618       104       0.52 %     8,934       136       2.04 %                                                   Total interest-earning assets     1,235,660       36,242       3.92 %     1,028,573       37,603       4.89 %                                                   Non-interest earning assets:                                                 Cash and due from banks     36,372                       36,882                   Allowance for loan losses     (8,059 )                     (6,475 )                 Other assets     68,276                       63,246                                                                     Total assets   $ 1,332,249                     $ 1,122,226                                                                                                                       Interest-bearing liabilities:                                                                                                   NOW, MMDA & savings deposits   $ 566,348       1,455       0.34 %   $ 488,467       1,057       0.29 % Time deposits     103,047       725       0.94 %     103,204       581       0.75 % FHLB borrowings     61,314       270       0.59 %     4,700       70       1.99 % Trust preferred securities     15,483       296       2.55 %     20,619       656       4.25 % Other     28,086       149       0.71 %     39,666       168       0.57 %                                                   Total interest-bearing liabilities     774,278       2,895       0.50 %     656,656       2,532       0.52 %                                                     Non-interest bearing liabilities and shareholders' equity:                                           Demand deposits     413,693                       324,749                   Other liabilities     4,087                       8,768                   Shareholders' equity     140,191                       132,053                                                                     Total liabilities and shareholder's equity   $ 1,332,249                     $ 1,122,226                                                                     Net interest spread           $ 33,347       3.42 %           $ 35,071       4.37 %                                                   Net yield on interest-earning assets                     3.60 %                     4.56 %                                                   Taxable equivalent adjustment                                                 Investment securities           $ 486                     $ 615                                                             Net interest income           $ 32,861                     $ 34,456             *Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $23.1 million in 2020 and $33.2 million in 2019. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2020 and 2019.     36     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 September 30, 2020 compared to three months ended September 30, 2019      Nine months ended September 30, 2020 compared to nine months ended September 30, 2019   (Dollars in thousands)   Changes in average volume     Changes in average rates     Total Increase (Decrease)     Changes in average volume     Changes in average rates     Total Increase (Decrease)   Interest income:                                     Loans: Net of unearned income   $ 1,555       (2,052 )     (497 )     3,553       (4,703 )     (1,150 ) Investments - taxable     132       (165 )     (33 )     506       (299 )     207   Investments - nontaxable     15       (34 )     (19 )     (313 )     (251 )     (564 ) Federal funds sold     17       16       33       89       89       178   Other     32       (98 )     (66 )     169       (201 )     (32 ) Total interest income     1,751       (2,333 )     (582 )     4,004       (5,365 )     (1,361 )                                                   Interest expense:                                                 NOW, MMDA & savings deposits     95       (68 )     27       184       214       398   Time deposits     (8 )     (28 )     (36 )     (1 )     145       144   FHLB borrowings     146       (64 )     82       546       (346 )     200   Trust preferred securities     (39 )     (95 )     (134 )     (131 )     (229 )     (360 ) Other     (1 )     10       9       (55 )     36       (19 ) Total interest expense     193       (245 )     (52 )     543       (180 )     363   Net interest income   $ 1,558       (2,088 )     (530 )     3,461       (5,185 )     (1,724 )   Provision for Loan Losses. The provision for loan losses for the three months ended September 30, 2020 was $522,000, compared to $422,000 for the three months ended September 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans , from September 30, 2019 to September 30, 2020. The ALLL model also includes reserves on $119.7 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. Reserves associated with COVID-19 payment modifications were $1.6 million at June 30, 2020 and September 30, 2020. Loans with payment modifications associated with the COVID-19 pandemic include $79.2 million in loans secured by commercial real estate, $23.0 million in loans secured by residential real estate, $8.7 in loans secured by other real estate, $8.0 million in commercial loans not secured by real estate and $765,000 in consumer loans not secured by real estate at September 30, 2020. These payment modifications are primarily interest only payments for three to six 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 September 30, 2020. 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. Approximately 12% of loans with COVID-19 payment modifications at September 30, 2020 have received secondary payment modifications as a result of the COVID-19 pandemic. 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.     37     The provision for loan losses for the nine months ended September 30, 2020 was $3.5 million, compared to $677,000 for the nine months ended September 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. The ALLL model also includes reserves on $119.7 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. Reserves associated with COVID-19 payment modifications were $1.6 million at June 30, 2020 and September 30, 2020.   Non-Interest Income. Total non-interest income was $7.1 million for the three months ended September 30, 2020, compared to $4.7 million for the three months ended September 30, 2019. The increase in non-interest income is primarily attributable to a $1.7 million increase in gains on sale of securities, a $560,000 increase in appraisal management fee income due to an increase in the volume of appraisals and a $374,000 increase in mortgage banking income due to increased mortgage loan volume, which were partially offset by a $383,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.   Non-interest income was $17.0 million for the nine months ended September 30, 2020, compared to $13.2 million for the nine months ended September 30, 2019. The increase in non-interest income is primarily attributable to a $1.9 million increase in gains on sale of securities, a $1.7 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $801,000 increase in mortgage banking income due to increased mortgage loan volume, which were partially offset by a $779,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.   Non-Interest Expense. Total non-interest expense was $11.9 million for the three months ended September 30, 2020, compared to $11.3 million for the three months ended September 30, 2019. The increase in non-interest expense was primarily attributable to a $466,000 increase in appraisal management fee expense due to an increase in the volume of appraisals.   Non-interest expense was $34.8 million for the nine months ended September 30, 2020, compared to $33.4 million for the nine months ended September 30, 2019. The increase in non-interest expense was primarily due to an increase of $1.3 million in appraisal management fee expense due to an increase in the volume of appraisals.   Income Taxes. Income tax expense was $1.1 million for the three months ended September 30, 2020, compared to $834,000 for the three months ended September 30, 2019. The effective tax rate was 19.80% for the three months ended September 30, 2020, compared to 18.72% for the three months ended September 30, 2019. Income tax expense was $2.1 million for the nine months ended September 30, 2020, compared to $2.5 million for the nine months ended September 30, 2019. The effective tax rate was 18.31% for the nine months ended September 30, 2020, compared to 18.16% for the nine months ended September 30, 2019.   Analysis of Financial Condition Investment Securities. Available for sale securities were $223.0 million at September 30, 2020, compared to $195.7 million at December 31, 2019. Average investment securities available for sale for the nine months ended September 30, 2020 were $194.7 million, compared to $185.3 million for the year ended December 31, 2019.   Loans. At September 30, 2020, loans were $970.2 million, compared to $849.9 million at December 31, 2019. Average loans represented 75% and 79% of average earning assets for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively.   The Company had $9.0 million and $4.4 million in mortgage loans held for sale as of September 30, 2020 and December 31, 2019, respectively.   Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At September 30, 2020, the Company had $99.9 million in residential mortgage loans, $102.8 million in home equity loans and $466.7 million in commercial mortgage loans, which include $367.9 million secured by commercial property and $98.8 million secured by residential property. Residential mortgage loans include $28.1 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.       38     At September 30, 2020, the Company had $96.9 million in construction and land development loans. The following table presents a breakout of these loans.   (Dollars in thousands)                       Number of Loans     Balance Outstanding     Non-accrual Balance   Land acquisition and development - commercial purposes     36     $ 7,543     $ -   Land acquisition and development - residential purposes     163       21,044       -   1 to 4 family residential construction     105       19,845       -   Commercial construction     30       48,434       -   Total construction and land development     334     $ 96,866     $ -     Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.6 million and $4.3 million at September 30, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at September 30, 2020 and December 31, 2019.   Allowance for Loan Losses. The allowance for loan losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance for loan losses that management believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. Other factors considered are: ● the Bank’s loan loss experience; ● the amount of past due and non-performing loans; ● specific known risks; ● the status and amount of other past due and non-performing assets; ● underlying estimated values of collateral securing loans; ● current and anticipated economic conditions (including those arising out of the COVID-19 pandemic); and ● other factors which management believes affect the allowance for potential credit losses.   Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by the third party credit review firm (as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The Bank’s Board of Directors reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.   As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than $1.0 million, 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.     39     The allowance for loan losses is comprised of three components: specific reserves, general reserves and unallocated reserves. After a loan has been identified as impaired, management measures impairment. When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.   The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.   The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.   Effective December 31, 2012, certain mortgage loans from the former Banco division of the Bank were analyzed separately from other single family residential loans in the Bank’s loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers.   Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examinations. Management believes it has established the allowance for credit losses pursuant to GAAP, and has taken into account the views of its regulators and the current economic environment. Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements. Although management uses the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting the operating results of the Company.   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 September 30, 2020 compared to the three months ended September 30, 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 September 30, 2020 was $9.9 million or 1.02% of total loans, compared to $6.7 million or 0.79% 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 impacting the economy due to the COVID-19 pandemic and a $26.2 million increase in loans, excluding $98.4 million in PPP loans, from September 30, 2019 to September 30, 2020. The ALLL model also includes reserves on $119.7 million in loans with payment modifications as a result of the COVID-19 pandemic.       Percentage of Loans       By Risk Grade   Risk Grade   9/30/20     12/31/20   Risk Grade 1 (Excellent Quality)     1.12 %     1.16 % Risk Grade 2 (High Quality)     20.96 %     24.46 % Risk Grade 3 (Good Quality)     65.36 %     62.15 % Risk Grade 4 (Management Attention)     9.93 %     10.02 % Risk Grade 5 (Watch)     1.91 %     1.45 % Risk Grade 6 (Substandard)     0.72 %     0.76 % Risk Grade 7 (Doubtful)     0.00 %     0.00 % Risk Grade 8 (Loss)     0.00 %     0.00 %     40     At September 30, 2020, including non-accrual loans, there were three relationships exceeding $1.0 million in the Watch risk grade (which totaled $8.0 million). There were no relationships exceeding $1.0 million in the Substandard risk grade.   Non-performing Assets. Non-performing assets totaled $3.7 million at September 30, 2020 or 0.25% of total assets, compared to $3.6 million   or 0.31% of total assets at December 31, 2019. Non-accrual loans were $3.5 million at September 30, 2020 and $3.6 million at December 31, 2019. As a percentage of total loans outstanding, non-accrual loans were 0.36% at September 30, 2020, compared to 0.42% at December 31, 2019. Non-performing loans include $3.3 million in commercial and residential mortgage loans and $272,000 in other loans at September 30, 2020, compared to $3.4 million in commercial and residential mortgage loans and $155,000 in other loans at December 31, 2019. The Bank had $84,000 in loans 90 days past due and still accruing at September 30, 2020. The Bank had no loans 90 days past due and still accruing at December 31, 2019. The Bank had $128,000 in other real estate owned at September 30, 2020. The Bank had no other real estate owned at December 31, 2019.   Deposits. Total deposits at September 30, 2020 were $1.2 billion compared to $966.5 million at December 31, 2019. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.2 billion at September 30, 2020, compared to $932.2 million at December 31, 2019.   Borrowed Funds. FHLB borrowings were $70.0 million at September 30, 2020. There were no FHLB borrowings outstanding at 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%.   Securities sold under agreements to repurchase were $34.2 million at September 30, 2020, compared to $24.2 million at December 31, 2019.   Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million and $15.6 million at September 30, 2020 and December 31, 2019, respectively.   In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures. All of the common securities of PEBK Trust II are owned by the Company. The proceeds from the issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company, which pay a floating rate equal to three-month LIBOR plus 163 basis points. The proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole asset of PEBK Trust II. PEBK Trust II is not included in the Consolidated Financial Statements.   The trust preferred securities issued by PEBK Trust II accrue and pay quarterly at a floating rate of three-month LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the trust preferred securities to the extent PEBK Trust II does not have funds with which to make the distributions and other payments. The net combined effect of the trust preferred securities transaction is that the Company is obligated to make the distributions and other payments required on the trust preferred securities.   These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.   Asset Liability and Interest Rate Risk Management. The objective of the Company’s Asset Liability and Interest Rate Risk strategies is to identify and manage the sensitivity of net interest income to changing interest rates and to minimize the interest rate risk between interest-earning assets and interest-bearing liabilities at various maturities. This is to be done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income.     41     The Company manages its exposure to fluctuations in interest rates through policies established by our Asset/Liability Committee (“ALCO”). ALCO meets quarterly and has the responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings and reviewing the interest rate sensitivity of the Company. ALCO tries to minimize interest rate risk between interest-earning assets and interest-bearing liabilities by attempting to minimize wide fluctuations in net interest income due to interest rate movements. The ability to control these fluctuations has a direct impact on the profitability of the Company. Management monitors this activity on a regular basis through analysis of its portfolios to determine the difference between rate sensitive assets and rate sensitive liabilities.   The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the nine months ended September 30, 2020 totaled $1.2 billion, exceeding average rate sensitive liabilities of $774.3 million by $461.4 million.   The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of September 30, 2020.   Included in the rate sensitive assets are $233.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At September 30, 2020, the Company had $143.4 million in loans with interest rate floors. The floors were in effect on $122.8 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.84% higher than the indexed rate on the promissory notes without interest rate floors.                               Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of September 30, 2020, such unfunded commitments to extend credit were $303.0 million, while commitments in the form of standby letters of credit totaled $4.2 million.       The Company uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Company considers these to be a stable portion of the Company’s liability mix and the result of on-going consumer and commercial banking relationships. As of September 30, 2020, the Company’s core deposits totaled $1.2 billion, or 97.92% 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 5.65% as of September 30, 2020.   The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. FHLB borrowings were $70 million at September 30, 2020. There were no FHLB borrowings outstanding at December 31, 2019. At September 30, 2020, the carrying value of loans pledged as collateral to the FHLB totaled $176.5 million compared to $139.4 million at December 31, 2019. The remaining availability under the line of credit with the FHLB was $49.7 million at September 30, 2020 compared to $86.1 million at December 31, 2019. The Bank had no borrowings from the FRB at September 30, 2020 or December 31, 2019. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At September 30, 2020, the carrying value of loans pledged as collateral to the FRB totaled $466.6 million compared to $452.6 million at December 31, 2019.   The Bank also had the ability to borrow up to $120.5 million for the purchase of overnight federal funds from six correspondent financial institutions as of September 30, 2020.     42     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 30.50% at September 30, 2020 and 18.20% at December 31, 2019. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at September 30, 2020 and December 31, 2019.   Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of September 30, 2020 and December 31, 2019 are summarized in the table below. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit. Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.   (Dollars in thousands)                  September 30, 2020      December 31, 2019   Contractual Cash Obligations             Long-term borrowings   $ 70,000       -   Junior subordinated debentures     15,464       15,619   Operating lease obligations     3,234       4,134   Total   $ 88,698       19,753   Other Commitments                 Commitments to extend credit   $ 303,001       276,338   Standby letters of credit and financial guarantees written     4,224       3,558   Income tax credits     184       333   Total   $ 307,409       280,229     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 $139.5 million, or 9.54% of total assets, at September 30, 2020, compared to $134.1 million, or 11.61% of total assets, at December 31, 2019.   Annualized return on average equity for the nine months ended September 30, 2020 was 8.99%, compared to 11.24% for the nine months ended September 30, 2019. Total cash dividends paid on common stock were $3.5 million and $3.1 million for the nine months ended September 30, 2020 and 2019, respectively.   The Board of Directors, at its discretion, can issue shares of preferred stock up to a maximum of 5,000,000 shares. The Board is authorized to determine the number of shares, voting powers, designations, preferences, limitations and relative rights. The Board of Directors does not currently anticipate issuing any additional series of preferred stock.   In January of 2020, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $3.0 million, or 126,800 shares of its common stock, under this stock repurchase program as of September 30, 2020.     In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019). This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions.     43     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 September 30, 2020 and December 31, 2019, respectively. The Company’s Tier 1 capital ratio was 14.53% and 15.37% at September 30, 2020 and December 31, 2019, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for loan losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.49% and 16.08% at September 30, 2020 and December 31, 2019, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.06% and 13.79% at September 30, 2020 and December 31, 2019, 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 10.38% and 11.91% at September 30, 2020 and December 31, 2019, respectively.   The Bank’s Tier 1 risk-based capital ratio was 14.21% and 15.09% at September 30, 2020 and December 31, 2019, respectively. The total risk-based capital ratio for the Bank was 15.18% and 15.79% at September 30, 2020 and December 31, 2019, respectively. The Bank’s common equity Tier 1 capital ratio was 14.21% and 15.09% at September 30, 2020 and December 31, 2019, respectively. The Bank’s Tier 1 leverage capital ratio was 10.10% and 11.61% at September 30, 2020 and December 31, 2019, respectively.   A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at September 30, 2020.     44   I tem 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.   I tem 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.   P ART II.          OTHER INFORMATION   I tem 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.   I tem 1A.     Risk Factors   In   addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in the Company’s Form 10-K, filed with the SEC on March 13, 2020. Additional risks not presently known to us, 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, 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 in any forward-looking statements made by or on behalf of the Company.   The outbreak of Coronavirus Disease 2019 (“COVID-19”) has adversely impacted, and an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak has led to an economic recession and other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread issues for the Company.     45     The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. COVID-19 continues to spread through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created a recession and reduced economic activity. We expect that we could experience significant disruptions across our business due to these effects, possibly leading to decreased earnings, significant slowdowns in our loan collections or increased loan defaults.   COVID-19 has and may continue to impact businesses’ and consumers’ desire or financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of our borrowers are in or have exposure to the various industries impacted by COVID-19 and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. Prolonged spread of COVID-19 and the related suppression of business activities would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.   The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases has resulted in and may continue to result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.   The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.   We believe that the economic impact from COVID-19 could have an adverse impact on our business and could result in losses in our loan portfolio, all of which would impact our earnings and capital.   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. We do not yet know the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third party providers’ ability to support our operation, and any actions taken by governmental authorities and other third parties in response to the pandemic. We are continuing to monitor the COVID-19 pandemic and related risks, although the rapid development and fluidity of the situation precludes any specific prediction as to its ultimate impact on the Company. However, if the COVID-19 outbreak continues to spread or otherwise results in a continuation or worsening of the current economic and commercial environments, our business, financial condition, results of operations and cash flows as well as our regulatory capital and liquidity ratios could be materially adversely affected and many of the risks described in our Annual Report on Form 10-K for the year ended December 31, 2019 will be heightened.     46     As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.   On March 27, 2020, President Trump signed the CARES Act, which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP.   Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP   and loan forgiveness applications. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.   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.         47     I tem 2. Unregistered Sales of Equity Securities and Use of Proceeds   ISSUER PURCHASES OF EQUITY SECURITIES    Period    Total Number of Shares Purchased      Average Price Paid per Share      Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs      Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)                              July 1 - 31, 2020     1,796     $ 17.66       -     $ 1,178                                    August 1 - 31, 2020     420       16.90       -     $ 1,178                                      September 1 - 30, 2020     481       17.14       -     $ 1,178                                      Total     2,697 (1)   $ 17.40       -             (1) The Company purchased 2,697 shares on the open market in the three months ended September 30, 2020 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.   (2) Reflects dollar value of shares that may yet be purchased under the Company's stock repurchase program , which was funded in January 2020.   I tem 3. Defaults Upon Senior Securities   Not applicable   I tem 5. Other Information   Not applicable   I tem 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)(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         48       Exhibit (4)(ii) Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Act of 1934   filed with the Securities and Exchange Commission on March 13, 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         49     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 the Form DEF 14A filed with the Securities and Exchange Commission on March 25, 2020     Exhibit (14) Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2005     Exhibit (31)(a) Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002     Exhibit (31)(b) Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002     Exhibit (32) Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     Exhibit (101) The following materials from the Company’s 10-Q Report for the quarterly period ended September 30, 2020, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*   *Furnished, not filed.     50     S IGNATURES   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.     Peoples Bancorp of North Carolina, Inc.       November 4, 2020     /s/  Lance A. Sellers Date   Lance A. Sellers President and Chief Executive Officer  (Principal Executive Officer)         November 4, 2020     /s/  Jeffrey N. Hooper Date   Jeffrey N. Hooper Executive Vice President and Chief Financial Officer  (Principal Financial and Principal Accounting Officer)         51