PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets June 30, 2021 and December 31, 2020 (Dollars in thousands) June 30, December 31, 2021 2020 (Unaudited) (Audited) Assets Cash and due from banks, including reserve requirements of $ 0 at both June 30, 2021 and December 31, 2020 $ 47,151 42,737 Interest-bearing deposits 240,158 118,843 Cash and cash equivalents 287,309 161,580 Investment securities available for sale 367,529 245,249 Other investments 3,758 4,155 Total securities 371,287 249,404 Mortgage loans held for sale 5,501 9,139 Loans 888,360 948,639 Less allowance for loan losses ( 9,287 ) ( 9,908 ) Net loans 879,073 938,731 Premises and equipment, net 17,217 18,600 Cash surrender value of life insurance 17,164 16,968 Other real estate - 128 Right of use lease asset 3,017 3,423 Accrued interest receivable and other assets 19,005 18,202 Total assets $ 1,599,573 1,416,175 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 512,577 456,980 Interest-bearing demand, MMDA & savings 775,009 657,834 Time, $250,000 or more 26,631 25,771 Other time 77,837 80,501 Total deposits 1,392,054 1,221,086 Securities sold under agreements to repurchase 31,249 26,201 Junior subordinated debentures 15,464 15,464 Lease liability 3,073 3,471 Accrued interest payable and other liabilities 12,359 10,054 Total liabilities 1,454,199 1,276,276 Commitments - - Shareholders' equity: Preferred stock, no par value; authorized 5,000,000 shares; no shares issued and outstanding - - Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,789,166 shares at June 30, 2021 and 5,787,504 shares at December 31, 2020 56,910 56,871 Common stock held by deferred compensation trust, at cost; 158,985 shares at June 30, 2021 and 155,469 shares at December 31, 2020 ( 1,901 ) ( 1,796 ) Deferred compensation 1,901 1,796 Retained earnings 84,504 77,628 Accumulated other comprehensive income 3,960 5,400 Total shareholders' equity 145,374 139,899 Total liabilities and shareholders' equity $ 1,599,573 1,416,175 See accompanying Notes to Consolidated Financial Statements. 3 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings Three and Six Months Ended June 30, 2021 and 2020 (Dollars in thousands, except per share amounts) Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 11,003 10,180 21,667 20,860 Interest on due from banks 48 41 83 84 Interest on fededal funds sold - 22 - 145 Interest on investment securities: U.S. Government sponsored enterprises 682 651 1,220 1,336 State and political subdivisions 758 684 1,397 1,325 Other 26 60 72 138 Total interest income 12,517 11,638 24,439 23,888 Interest expense: NOW, MMDA & savings deposits 543 448 1,040 973 Time deposits 191 224 403 501 FHLB borrowings - 102 - 166 Junior subordinated debentures 71 90 142 220 Other 37 48 72 93 Total interest expense 842 912 1,657 1,953 Net interest income 11,675 10,726 22,782 21,935 Provision for (recovery of) loan losses (226 ) 1,417 (681 ) 2,938 Net interest income after provision for loan losses 11,901 9,309 23,463 18,997 Non-interest income: Service charges 910 718 1,836 1,826 Other service charges and fees 171 162 383 355 Gain on sale of investment securities - 457 - 457 Mortgage banking income 723 563 1,593 885 Insurance and brokerage commissions 238 205 498 447 Appraisal management fee income 2,005 1,734 3,821 3,084 Gain on sale of other real estate 21 - 21 - Miscellaneous 1,972 1,400 3,761 2,780 Total non-interest income 6,040 5,239 11,913 9,834 Non-interest expense: Salaries and employee benefits 5,666 5,535 11,849 11,259 Occupancy 1,939 1,861 3,892 3,782 Professional fees 435 414 772 747 Advertising 154 196 297 414 Debit card expense 264 258 496 488 FDIC Insurance 164 48 196 88 Appraisal management fee expense 1,634 1,333 3,090 2,367 Other 1,876 1,807 3,808 3,756 Total non-interest expense 12,132 11,452 24,400 22,901 Earnings before income taxes 5,809 3,096 10,976 5,930 Income tax expense 1,194 535 2,240 1,002 Net earnings $ 4,615 2,561 8,736 4,928 Basic net earnings per share $ 0.82 0.46 1.55 0.87 Diluted net earnings per share $ 0.80 0.44 1.51 0.84 Cash dividends declared per share $ 0.16 0.15 0.32 0.45 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2021 and 2020 (Dollars in thousands) Three months ended Six months ended June 30, June 30, 2021 2020 2021 2020 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net earnings $ 4,615 2,561 8,736 4,928 Other comprehensive income: Unrealized holding gains (losses) on securities available for sale 2,155 2,396 ( 1,870 ) 5,110 Reclassification adjustment for gains on securities available for sale included in net earnings - ( 457 ) - ( 457 ) Total other comprehensive income (loss), before income taxes 2,155 1,939 ( 1,870 ) 4,653 Income tax expense (benefit) related to other comprehensive income: Unrealized holding gains (losses) on securities available for sale 495 550 ( 430 ) 1,174 Reclassification adjustment for gains on securities available for sale included in net earnings - ( 105 ) - ( 105 ) Total income tax expense (benefit) related to other comprehensive income 495 445 ( 430 ) 1,069 Total other comprehensive income (loss), net of tax 1,660 1,494 ( 1,440 ) 3,584 Total comprehensive income $ 6,275 4,055 7,296 8,512 See accompanying Notes to Consolidated Financial Statements. 5 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Changes in Shareholders' Equity Three and Six Months Ended June 30, 2021 and 2020 (Dollars in thousands) Common Stock Retained Deferred Common Stock Held By Deferred Compensation Accumulated Other Comprehensive Shares Amount Earnings Compensation Trust Income Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Balance, As At December 31, 2020 5,787,504 $ 56,871 77,628 1,796 ( 1,796 ) 5,400 139,899 Cash dividends declared on common stock - - ( 930 ) - - - ( 930 ) Restricted stock units exercised 1,662 39 - - - - 39 Equity incentive plan, net - - - 53 ( 53 ) - - Net earnings - - 4,121 - - - 4,121 Change in accumulated other comprehensive income, net of tax - - - - - ( 3,100 ) ( 3,100 ) Balance, As At March 31, 2021 5,789,166 56,910 80,819 1,849 ( 1,849 ) 2,300 140,029 Cash dividends declared on common stock - - ( 930 ) - - - ( 930 ) Equity incentive plan, net - - - 52 ( 52 ) - - Net earnings - - 4,615 - - - 4,615 Change in accumulated other comprehensive income, net of tax - - - - - 1,660 1,660 Balance, As At June 30, 2021 5,789,166 $ 56,910 84,504 1,901 ( 1,901 ) 3,960 145,374 Balance, As At December 31, 2019 5,912,300 $ 59,813 70,663 1,588 ( 1,588 ) 3,644 134,120 Common stock repurchase ( 126,800 ) ( 2,999 ) - - - - ( 2,999 ) Cash dividends declared on common stock - - ( 1,779 ) - - - ( 1,779 ) Restricted stock units exercised 2,004 57 - - 57 Equity incentive plan, net - - - 64 ( 64 ) - - Net earnings - - 2,367 - - - 2,367 Change in accumulated other comprehensive income, net of tax - - - - - 2,090 2,090 Balance, As At March 31, 2020 5,787,504 56,871 71,251 1,652 ( 1,652 ) 5,734 133,856 Cash dividends declared on common stock - - ( 870 ) - - - ( 870 ) Equity incentive plan, net - - - 48 ( 48 ) - - Net earnings - - 2,561 - - - 2,561 Change in accumulated other comprehensive income, net of tax - - - - - 1,494 1,494 Balance, As At June 30, 2020 5,787,504 $ 56,871 72,942 1,700 ( 1,700 ) 7,228 137,041 See accompanying Notes to Consolidated Financial Statements. 6 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Six Months Ended June 30, 2021 and 2020 (Dollars in thousands) 2021 2020 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 8,736 4,928 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 2,549 2,017 Provision for (recovery of) loan losses ( 681 ) 2,938 Deferred income taxes ( 18 ) ( 16 ) Gain on sale of investment securities - ( 457 ) Gain on sale of other real estate ( 21 ) - Restricted stock expense ( 100 ) ( 75 ) Proceeds from sales of mortgage loans held for sale 54,006 43,832 Origination of mortgage loans held for sale ( 50,368 ) ( 50,009 ) Change in: Cash surrender value of life insurance ( 196 ) ( 188 ) Right of use lease asset 406 255 Other assets 53 ( 212 ) Lease liability ( 398 ) ( 244 ) Other liabilities 2,405 3,214 Net cash provided by operating activities 16,373 5,983 Cash flows from investing activities: Purchases of investment securities available for sale ( 141,780 ) ( 37,340 ) Proceeds from sales, calls and maturities of investment securities available for sale 5,300 20,592 Proceeds from paydowns of investment securities available for sale 11,073 9,305 Proceeds from paydowns on other investments 88 88 Redemptions (purchases) of FHLB stock 331 ( 3,031 ) Net change in loans 60,339 ( 116,854 ) Purchases of premises and equipment ( 339 ) ( 1,085 ) Proceeds from sale of other real estate and repossessions 149 - Net cash used by investing activities ( 64,839 ) ( 128,325 ) Cash flows from financing activities: Net change in deposits 170,968 187,812 Net change in securities sold under agreement to repurchase 5,048 7,526 Proceeds from FHLB borrowings - 70,000 Repayments of FHLB borrowings - - Repayment of Junior Subordinated Debt - ( 155 ) Proceeds from Fed Funds purchased - ( 6,935 ) Repayments of Fed Funds purchased - 6,935 Restricted stock units exercised 39 57 Common stock repurchased - ( 2,999 ) Cash dividends paid on common stock ( 1,860 ) ( 2,647 ) Net cash provided by financing activities 174,195 259,594 Net change in cash and cash equivalents 125,729 137,252 Cash and cash equivalents at beginning of period 161,580 52,387 Cash and cash equivalents at end of period $ 287,309 189,639 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Six Months Ended June 30, 2021 and 2020 (Dollars in thousands) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,653 1,909 Income taxes $ 2,000 796 Noncash investing and financing activities: Change in unrealized gain on investment securities available for sale, net $ ( 1,440 ) 3,584 Issuance of accrued restricted stock units $ 39 57 Transfer of premises and equipment to other assets held for sale $ 408 - See accompanying Notes to Consolidated Financial Statements. 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Notes to Consolidated Financial Statements ( Unaudited ) (1) Summary of Significant Accounting Policies The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation. The Bank formerly operated three banking offices focused on the Latino population that were operated as a division of the Bank under the name Banco de la Gente (“Banco”). Two of these offices remain open as Bank branches that offer the same banking services offered in the Bank’s other branches such as the taking of deposits and the making of loans. The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders. Correction of an Error Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the trust should be recorded on the Company’s financial statements along with a corresponding liability. For balances related to mutual fund investments held in the rabbi trust, the accrued interest receivable and other assets, accrued interest payable and other liabilities, total assets, and total liabilities line items on the Consolidated Balance Sheets were adjusted as of December 31, 2020 to reflect the asset and corresponding liability associated with the portion of the rabbi trust held in mutual fund investments. This resulted in an increase to these line items of $ 1.3 million. Additionally, an adjustment to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets has been made to disclose the number of shares of Company stock held by the rabbi trust and the cost basis for those shares, as well as a corresponding liability for the deferred compensation as of December 31, 2020. On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.44 to $ 0.46 for the three months ended June 30, 2020 and from $0.84 to $ 0.87 for the six months ended June 30, 2020. The impact of the changes in the fair value of the mutual funds held in the rabbi trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements. In addition to the adjustments to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets, the Company adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the rabbi trust, as well as the corresponding deferred compensation associated with these shares. The Company’s Consolidated Statements of Cash Flows were adjusted for the six months ended June 30, 2020 in order to reflect the changes to other assets and other liabilities made on the Consolidated Balance Sheets. 9 Table of Contents These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of the periods presented. All adjustments were not considered material to the financial statements. Revenue Recognition The Company has applied Accounting Standards Update (“ASU”) 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and non-interest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues are not affected. Appraisal management fee income and expense from the Bank’s subsidiary, CBRES, was reported as a net amount prior to March 31, 2018, which was included in miscellaneous non-interest income. This income and expense is now reported on separate line items under non-interest income and non-interest expense. See below for additional information related to revenue generated from contracts with customers. Revenue and Method of Adoption The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment advisory, and appraisal services. On January 1, 2018, the Company adopted the requirements of ASU 2014-09. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 using the modified retrospective transition approach which does not require restatement of prior periods. The method was selected as there were no material changes in the timing of revenue recognition resulting in no comparability issues with prior periods. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of, and reason for, the change, which is solely a result of the adoption of the required standard. When applying the modified retrospective transition approach under ASU 2014-09, the Company has elected, as a practical expedient, to apply this approach only to contracts that were not completed as of January 1, 2018. A completed contract is considered to be a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that was in effect before January 1, 2018. There were no uncompleted contracts as of January 1, 2018 for which application of the new standard required an adjustment to retained earnings. The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $ 260,000 and $ 241,000 for the three months ended June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts was $ 498,000 and $ 446,000 for the six months ended June 30, 2021 and 2020, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was $ 1.2 million and $ 972,000 for the three months ended June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with these third parties was $ 2.5 million and $ 2.0 million for the six months ended June 30, 2021 and 2020, respectively. This revenue is reflected in the “Miscellaneous” line under “Non-interest income” on the Company’s June 30, 2021 consolidated statements of earnings. 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 $ 180,000 and $ 181,000 for the three months ended June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with customers was $ 388,000 for the six months ended June 30, 2021 and 2020. This revenue is reflected in the “Miscellaneous” line under “Non-interest income” on the Company’s June 30, 2021 consolidated statements of earnings. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $ 1.8 million and $ 1.4 million for the three months ended June 30, 2021 and 2020, respectively. Total revenue recognized from these contracts with customers was $ 3.8 million and $ 3.1 million for the six months ended June 30, 2021 and 2020, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized. 10 Table of Contents 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 six months ended June 30, 2021 derived from contracts in which services are transferred at a point in time was approximately $ 4.7 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received. Contract Balances . The timing of revenue recognition, billings, and cash collections results in billed accounts receivable on the balance sheet. Most contracts call for payment by a charge or deduction to the respective customer account but there are some that require a receipt of payment from the customer. For fee per transaction contracts, the customers are billed as the transactions are processed. The Company has no contracts in which customers are billed in advance for services to be performed. These types of contracts would create contract liabilities or deferred revenue, as the customers pay in advance for services. There are no contract liabilities or accounts receivables balances that are material to the Company’s balance sheet. Performance Obligations . A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASU 2014-09. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied as the service is provided to the customer at a point in time. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts within the scope of ASU 2014-09 contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated. Significant Judgements . All of the Company’s contracts create performance obligations that are satisfied at a point in time excluding some immaterial deposit revenues. Revenue is recognized as services are billed to the customers. Variable consideration does exist for contracts related to the Company’s contract with its registered investment advisor as some revenues earned pursuant to that contract are based on market values of accounts at the end of the period. Recent Accounting Pronouncements The following table provides a summary of ASUs issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted. Recently Adopted Accounting Guidance ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2019-07: Codification Updates to SEC Sections Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. Effective upon issuance The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures. ASU 2018-13: Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement. January 1, 2020 The adoption of this guidance did not have a material impact on the Company s results of operations, financial position or disclosures. ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606 Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. January 1, 2020 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. 11 Table of Contents The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of June 30, 2021, which may impact the Company’s financial statements. 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 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. 12 Table of Contents ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. January 1, 2021 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2020-01: Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) Guidance to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. January 1, 2021 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 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. 13 Table of Contents ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. January 1, 2022 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of operations, financial position or disclosures. Reclassification Certain amounts in the 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation. These reclassifications did not have any impact on shareholders’ equity or net earnings. (2) Investment Securities Investment securities available for sale at June 30, 2021 and December 31, 2020 are as follows: (Dollars in thousands) June 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S Treasuries $ 7,961 30 31 7,960 U.S. Government sponsored enterprises 15,098 291 195 15,194 Mortgage-backed securities 207,289 2,483 654 209,118 State and political subdivisions 132,038 4,185 966 135,257 Total $ 362,386 6,989 1,846 367,529 (Dollars in thousands) December 31, 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. Government sponsored enterprises $ 7,384 331 208 7,507 Mortgage-backed securities 143,095 2,812 593 145,314 State and political subdivisions 87,757 4,758 87 92,428 Total $ 238,236 7,901 888 245,249 The current fair value and associated unrealized losses on investments in securities with unrealized losses at June 30, 2021 and December 31, 2020 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. 14 Table of Contents (Dollars in thousands) June 30, 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ 4,975 31 - - 4,975 31 U.S. Government sponsored enterprises 5,515 4 3,841 191 9,356 195 Mortgage-backed securities 41,819 635 1,980 19 43,799 654 State and political subdivisions 34,460 966 - - 34,460 966 Total $ 86,769 1,636 5,821 210 92,590 1,846 (Dollars in thousands) December 31, 2020 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government sponsored enterprises $ - - 4,193 208 4,193 208 Mortgage-backed securities 80,827 565 4,762 28 85,589 593 State and political subdivisions 7,126 87 - - 7,126 87 Total $ 87,953 652 8,955 236 96,908 888 At June 30, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 1.8 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2021 tables above, one out of two U.S. Treasury securities, 29 out of 129 securities issued by state and political subdivisions and 21 out of 92 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 June 30, 2021, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. June 30, 2021 (Dollars in thousands) Amortized Cost Estimated Fair Value Due within one year $ 12,347 12,511 Due from one to five years 10,160 10,812 Due from five to ten years 102,044 104,879 Due after ten years 30,546 30,209 Mortgage-backed securities 207,289 209,118 Total $ 362,386 367,529 No securities available for sale were sold during the three and six months ended June 30, 2021. Proceeds from sales of securities available for sale during the three and six months ended June 30, 2020 were $ 17.0 million and resulted in net gains of $ 457,000 . Securities with a fair value of approximately $ 79.3 million and $ 77.3 million at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes as required by law. 15 Table of Contents (3) Loans Major classifications of loans at June 30, 2021 and December 31, 2020 are summarized as follows: (Dollars in thousands) June 30, 2021 December 31, 2020 Real estate loans: Construction and land development $ 90,579 94,124 Single-family residential 257,901 272,325 Single-family residential - Banco de la Gente non-traditional 25,198 26,883 Commercial 340,216 332,971 Multifamily and farmland 59,142 48,880 Total real estate loans 773,036 775,183 Loans not secured by real estate: Commercial loans 104,506 161,740 Farm loans 742 855 Consumer loans 6,519 7,113 All other loans 3,557 3,748 Total loans 888,360 948,639 Less allowance for loan losses ( 9,287 ) ( 9,908 ) Total net loans $ 879,073 938,731 The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties, and also in Mecklenburg, Wake, Durham and Rowan counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below: · Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of June 30, 2021, 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 June 30, 2021, single-family residential loans comprised approximately 32 % of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3 % of the Bank’s total loan portfolio. · Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of June 30, 2021, commercial real estate loans comprised approximately 38 % 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 June 30, 2021, commercial loans comprised approximately 12 % of the Bank’s total loan portfolio, including $ 35.7 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans. The Company had $ 75.8 million in PPP loans at December 31, 2020. 16 Table of Contents 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 June 30, 2021 and December 31, 2020: June 30, 2021 (Dollars in thousands) Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ 49 - 49 90,530 90,579 - Single-family residential 1,114 44 1,158 256,743 257,901 - Single-family residential - Banco de la Gente non-traditional 306 41 347 24,851 25,198 - Commercial - - - 340,216 340,216 - Multifamily and farmland - - - 59,142 59,142 - Total real estate loans 1,469 85 1,554 771,482 773,036 - Loans not secured by real estate: Commercial loans 110 - 110 104,396 104,506 - Farm loans - - - 742 742 - Consumer loans 61 1 62 6,457 6,519 - All other loans - - - 3,557 3,557 - Total loans $ 1,640 86 1,726 886,634 888,360 - December 31, 2020 (Dollars in thousands) Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ 298 - 298 93,826 94,124 - Single-family residential 3,660 270 3,930 268,395 272,325 - Single-family residential - Banco de la Gente non-traditional 3,566 105 3,671 23,212 26,883 - Commercial 36 - 36 332,935 332,971 - Multifamily and farmland - - - 48,880 48,880 - Total real estate loans 7,560 375 7,935 767,248 775,183 - Loans not secured by real estate: Commercial loans - - - 161,740 161,740 - Farm loans - - - 855 855 - Consumer loans 45 2 47 7,066 7,113 - All other loans - - - 3,748 3,748 - Total loans $ 7,605 377 7,982 940,657 948,639 - 17 Table of Contents The following table presents non-accrual loans as of June 30, 2021 and December 31, 2020: (Dollars in thousands) June 30, 2021 December 31, 2020 Real estate loans: Single-family residential 1,273 1,266 Single-family residential - Banco de la Gente non-traditional 1,516 1,709 Commercial 412 440 Multifamily and farmland 111 117 Total real estate loans 3,312 3,532 Loans not secured by real estate: Commercial loans 59 212 Consumer loans 7 14 Total $ 3,378 3,758 At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $ 250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $ 19.7 million, $ 21.3 million and $ 22.5 million at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. Interest income recognized on accruing impaired loans was $ 536,000 , $ 1.2 million, and $ 635,000 for the six months ended June 30, 2021, the year ended December 31, 2020 and the six months ended June 30, 2020, respectively. Interest income recognized on accruing impaired loans was $ 253,000 and $ 306,000 for the three months ended June 30, 2021 and 2020, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual. The following table presents impaired loans as of June 30, 2021: June 30, 2021 (Dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Recorded Investment in Impaired Loans Related Allowance Real estate loans: Construction and land development $ 78 - 78 78 3 Single-family residential 4,886 277 4,417 4,694 31 Single-family residential - Banco de la Gente non-traditional 12,692 - 12,075 12,075 806 Commercial 2,466 441 1,987 2,428 15 Multifamily and farmland 116 - 111 111 - Total impaired real estate loans 20,238 718 18,668 19,386 855 Loans not secured by real estate: Commercial loans 319 59 199 258 3 Consumer loans 15 - 11 11 - Total impaired loans $ 20,572 777 18,878 19,655 858 18 Table of Contents The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2021 and 2020. (Dollars in thousands) Three months ended Six months ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Average Balance Interest Income Recognized Average Balance Interest Income Recognized Average Balance Interest Income Recognized Average Balance Interest Income Recognized Real estate loans: Construction and land development $ 91 1 157 4 97 3 166 7 Single-family residential 6,100 57 4,778 59 5,731 118 4,734 118 Single-family residential - Banco de la Gente stated income 10,835 160 13,856 193 11,407 337 14,028 421 Commercial 2,682 29 3,115 43 2,779 64 2,700 72 Multifamily and farmland 113 1 - - 114 2 - - Total impaired real estate loans 19,821 248 21,906 299 20,128 524 21,628 618 Loans not secured by real estate: Commercial loans 315 5 643 6 362 11 487 15 Farm loans (non RE) - - - - - - - Consumer loans 15 - 77 1 22 1 83 2 Total impaired loans $ 20,151 253 22,626 306 20,512 536 22,198 635 The following table presents impaired loans as of and for the year ended December 31, 2020: December 31, 2020 (Dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Recorded Investment in Impaired Loans Related Allowance Average Outstanding Impaired Loans Interest Income Recognized Real estate loans: Construction and land development $ 108 - 108 108 4 134 8 Single-family residential 5,302 379 4,466 4,845 33 4,741 262 Single-family residential - Banco de la Gente non-traditional 13,417 - 12,753 12,753 862 13,380 798 Commercial 2,999 1,082 1,891 2,973 14 2,940 139 Multifamily and farmland 119 - 117 117 - 29 6 Total impaired real estate loans 21,945 1,461 19,335 20,796 913 21,224 1,213 Loans not secured by real estate: Commercial loans 515 211 244 455 5 564 32 Consumer loans 41 - 37 37 1 60 5 Total impaired loans $ 22,501 1,672 19,616 21,288 919 21,848 1,250 Impaired loans collectively evaluated for impairment totaled $ 5.7 million and $ 6.2 million at June 30, 2021 and 2020, respectively and are included in the tables above. The following tables present changes in the allowance for loan losses for the three and six months ended June 30, 2021 and 2020. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA. PPP loans are classified as risk grade 3. 19 Table of Contents (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 Six months ended June 30, 2021: Allowance for loan losses: Beginning balance $ 1,196 1,843 1,052 2,212 122 1,345 - 128 2,010 9,908 Charge-offs - - - - - ( 78 ) - ( 158 ) - ( 236 ) Recoveries 90 78 - 48 - 6 - 74 - 296 Provision ( 248 ) ( 198 ) ( 72 ) ( 80 ) 26 ( 277 ) - 45 123 ( 681 ) Ending balance $ 1,038 1,723 980 2,180 148 996 - 89 2,133 9,287 Three months ended June 30, 2021: Allowance for loan losses: Beginning balance $ 1,061 1,850 1,033 2,252 145 1,244 - 91 1,856 9,532 Charge-offs - - - - - ( 78 ) - ( 73 ) - ( 151 ) Recoveries 40 18 - 36 - - - 38 - 132 Provision ( 63 ) ( 145 ) ( 53 ) ( 108 ) 3 ( 170 ) - 33 277 ( 226 ) Ending balance $ 1,038 1,723 980 2,180 148 996 - 89 2,133 9,287 Allowance for loan losses at June 30, 2021: Ending balance: individually evaluated for impairment $ 1 5 790 10 - - - - - 806 Ending balance: collectively evaluated for impairment 1,037 1,718 190 2,170 148 996 - 89 2,133 8,481 Ending balance $ 1,038 1,723 980 2,180 148 996 - 89 2,133 9,287 Loans at June 30, 2021: Ending balance $ 90,579 257,901 25,198 340,216 59,142 104,506 742 10,076 - 888,360 Ending balance: individually evaluated for impairment $ 6 1,426 10,722 1,741 - 59 - - - 13,954 Ending balance: collectively evaluated for impairment $ 90,573 256,475 14,476 338,475 59,142 104,447 742 10,076 - 874,406 (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 Six months ended June 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 ) - - ( 7 ) - ( 109 ) - ( 257 ) - ( 378 ) Recoveries 2 25 - 34 - 26 - 106 - 193 Provision 840 514 41 719 ( 5 ) 375 - 175 279 2,938 Ending balance $ 1,531 1,813 1,114 2,051 115 980 - 162 1,667 9,433 Three months ended June 30, 2020: Allowance for loan losses: Beginning balance $ 1,293 1,713 1,084 1,799 118 1,017 - 180 908 8,112 Charge-offs - - - - - ( 78 ) - ( 90 ) - ( 168 ) Recoveries - 9 - 11 - - - 52 - 72 Provision 238 91 30 241 ( 3 ) 41 - 20 759 1,417 Ending balance $ 1,531 1,813 1,114 2,051 115 980 - 162 1,667 9,433 Allowance for loan losses at June 30, 2020: Ending balance: individually evaluated for impairment $ 2 5 894 11 - - - - - 912 Ending balance: collectively evaluated for impairment 1,529 1,808 220 2,040 115 980 - 162 1,667 8,521 Ending balance $ 1,531 1,813 1,114 2,051 115 980 - 162 1,667 9,433 Loans at June 30, 2020: Ending balance $ 110,077 268,174 29,325 303,828 49,465 188,398 887 16,389 - 966,543 Ending balance: individually evaluated for impairment $ 8 1,657 12,297 2,084 - 275 - - - 16,321 Ending balance: collectively evaluated for impairment $ 110,069 266,517 17,028 301,744 49,465 188,123 887 16,389 - 950,222 20 Table of Contents The provision for loan losses for the three months ended June 30, 2021 was a recovery of $ 226,000 , compared to a provision of $ 1.4 million for the three months ended June 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool. At June 30, 2021, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $ 283,000 . At December 31, 2020, the balance of loans with existing modifications as a result of the COVID-19 pandemic was $ 18.3 million. The Company continues to track all loans that are currently modified or have been modified as a result of the COVID-19 pandemic. The loan balances associated with COVID-19 pandemic related modifications have been grouped into their own pool within the Company’s Allowance for Loan and Lease Losses (“ALLL”) model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of the COVID-19 pandemic, $ 108.2 million have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be present in loans that are currently modified and/or loans that were once modified. At December 31, 2020, the balance for all loans that were then currently modified or previously modified but returned to their original terms was $ 119.6 million. The $ 11.4 million decrease from December 31, 2020 to June 30, 2021 in the balance of currently or previously modified loans that had returned to their original terms is primarily due to loans paid off during the six months ended June 30, 2021. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP. The provision for loan losses for the six months ended June 30, 2021 was a recovery of $ 681,000 , compared to a provision of $ 2.9 million for the six months ended June 30, 2020. The decrease in the provision for loan losses is primarily attributable to a decrease in reserves on loans with payment modifications made as a result of the COVID-19 pandemic and a decrease in reserves due to a net decrease in the volume of loans in the general reserve pool. The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows: · Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade. · Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes. · Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change). · Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course. · Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date. · Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. · Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off. · Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off. 21 Table of Contents The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of June 30, 2021 and December 31, 2020: June 30, 2021 (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer All Other Total 1- Excellent Quality $ - 4,463 - - - 427 - 724 - 5,614 2- High Quality 8,186 105,826 - 36,894 20 15,825 - 2,034 1,430 170,215 3- Good Quality 78,058 124,184 9,350 257,930 55,338 80,494 728 3,450 1,442 610,974 4- Management Attention 4,218 17,083 11,515 34,508 3,110 5,711 14 278 685 77,122 5- Watch 39 2,999 1,862 10,031 563 1,985 - 5 - 17,484 6- Substandard 78 3,346 2,471 853 111 64 - 28 - 6,951 7- Doubtful - - - - - - - - - - 8- Loss - - - - - - - - - - Total $ 90,579 257,901 25,198 340,216 59,142 104,506 742 6,519 3,557 888,360 December 31, 2020 (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer All Other Total 1- Excellent Quality $ 228 9,867 - - - 406 - 678 - 11,179 2- High Quality 9,092 121,331 - 40,569 22 19,187 - 2,237 1,563 194,001 3- Good Quality 76,897 115,109 10,170 241,273 44,890 128,727 832 3,826 1,477 623,201 4- Management Attention 4,917 20,012 12,312 39,370 3,274 11,571 23 336 708 92,523 5- Watch 2,906 2,947 1,901 10,871 694 1,583 - 6 - 20,908 6- Substandard 84 3,059 2,500 888 - 266 - 30 - 6,827 7- Doubtful - - - - - - - - - - 8- Loss - - - - - - - - - - Total $ 94,124 272,325 26,883 332,971 48,880 161,740 855 7,113 3,748 948,639 Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $ 2.2 million and $ 3.8 million at June 30, 2021 and December 31, 2020, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at June 30, 2021 and December 31, 2020. There were no new TDR modifications during the three and six months ended June 30, 2021 and 2020. There were no loans modified as TDR that defaulted during the six months ended June 30, 2021 and 2020, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification. On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP . Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. The Bank is participating as a lender in the PPP. Total PPP loans originated as of June 30, 2021 amounted to $128.1 million . The outstanding balance of PPP loans was $ 35.7 million and $ 75.8 million at June 30, 2021 and December 31, 2020, respectively. The Bank has received $ 5.7 million and $ 4.0 million in fees from the SBA for PPP loans originated as of June 30, 2021. The Bank recognized $ 2.5 million and $ 1.4 million PPP loan fee income for the six months ended June 30, 2021 and the year ended December 31, 2020 respectively. PPP loan fee income recognized for the three months ended June 30, 2021 was $ 1.5 million. No PPP loan fee income was recognized for the three and six months ended June 30, 2020. 22 Table of Contents (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 six months ended June 30, 2021 and 2020 is as follows: For the three months ended June 30, 2021 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,615 5,630,580 $ 0.82 Effect of dilutive securities: Restricted stock units - 12,683 Shares held in deferred comp plan 157,897 Diluted earnings per share $ 4,615 5,801,160 $ 0.80 For the six months ended June 30, 2021 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 8,736 5,630,995 $ 1.55 Effect of dilutive securities: Restricted stock units - 12,427 Shares held in deferred comp plan 157,227 Diluted earnings per share $ 8,736 5,800,649 $ 1.51 For the three months ended June 30, 2020 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 2,561 5,637,711 $ 0.46 Effect of dilutive securities: Restricted stock units - 13,127 Shares held in deferred comp plan - 149,013 Diluted earnings per share $ 2,561 5,799,851 $ 0.44 For the six months ended June 30, 2020 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 4,928 5,680,625 $ 0.87 Effect of dilutive securities: Restricted stock units - 13,284 Shares held in deferred comp plan - 147,814 Diluted earnings per share $ 4,928 5,841,723 $ 0.84 (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 June 30, 2021, there were no outstanding shares reserved for possible issuance under the 2009 Plan. 23 Table of Contents 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 June 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $ 66,000 . The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 300,000 shares were reserved for possible issuance under the 2020 Plan when it was adopted. As of June 30, 2021, a total of 285,075 shares out of the initial 300,000 shares reserved remain available for future issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date). The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $ 17.08 per share during the second quarter of 2020. The Company granted 7,290 restricted stock units under the 2020 Plan at a grant date fair value of $ 22.04 per share during the first quarter of 2021. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 and 2021 grants). As of June 30, 2021, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $ 308,000 . The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan of $ 99,000 for the six months ended June 30, 2021. The Company recognized a $ 75,000 credit to compensation expense for restricted stock unit awards granted under the 2009 Plan and 2020 Plan for the six months ended June 30, 2020 due to a reduction in the Company’s stock price from $ 32.85 per share at December 31, 2019, compared to $ 17.67 per share at June 30, 2020. (6) Fair Value The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance. The methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s 2020 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01. The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: · Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. · Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. · Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. 24 Table of Contents Cash and Cash Equivalents For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category. Investment Securities Available for Sale Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category. Other Investments For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category. Loans In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments. Mutual Funds For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on balance sheet and reported in the Level 2 fair value category. Deposits The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category. Securities Sold Under Agreements to Repurchase For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category. FHLB Borrowings The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category. Junior Subordinated Debentures Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category. Commitments to Extend Credit and Standby Letters of Credit Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial. 25 Table of Contents Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. The tables below present the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2021 and December 31, 2020. (Dollars in thousands) June 30, 2021 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation U. S Treasuries $ 7,960 - $ 7,960 - U.S. Government sponsored enterprises 15,194 - 15,194 - Mortgage-backed securities 209,118 - 209,118 - State and political subdivisions 135,257 - 135,257 - (Dollars in thousands) December 31, 2020 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Government sponsored enterprises $ 7,507 - 7,507 - Mortgage-backed securities 145,314 - 145,314 - State and political subdivisions 92,428 - 92,428 - The tables below present the balance of mutual funds held in the deferred compensation trust, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2021 and December 31, 2020. (Dollars in thousands) June 30, 2021 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation Mutual funds held in deferred compensation trust $ 1,421 - 1,421 - (Dollars in thousands) December 31, 2020 Fair Value Measurements Level 1 Valuation Level 2 Valuation Level 3 Valuation Mutual funds held in deferred compensation trust $ 1,320 - 1,320 - The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at June 30, 2021 and December 31, 2020 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3. 26 Table of Contents (Dollars in thousands) Fair Value Measurements June 30, 2021 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 5,501 - - 5,501 Impaired loans 18,797 - - 18,797 (Dollars in thousands) Fair Value Measurements December 31, 2020 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 9,139 - - 9,139 Impaired loans 20,369 - - 20,369 Other real estate 128 - - 128 (Dollars in thousands) Fair Value June 30, 2021 Fair Value December 31, 2020 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Mortgage loans held for sale $ 5,501 9,139 Rate lock commitment N/A N/A Impaired loans 18,797 20,369 Appraised value and discounted cash flows Discounts to reflect current market conditions and ultimate collectability 0 - 25 % Other real estate - 128 Appraised value Discounts to reflect current market conditions and estimated costs to sell 0 - 25 % The carrying amount and estimated fair value of financial instruments at June 30, 2021 and December 31, 2020 are as follows: (Dollars in thousands) Fair Value Measurements at June 30, 2021 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 287,309 287,309 - - 287,309 Investment securities available for sale 367,529 - 367,529 - 367,529 Other investments 3,758 - - 3,758 3,758 Mortgage loans held for sale 5,501 - - 5,501 5,501 Loans, net 879,073 - - 861,686 861,686 Mutual funds held in deferred compensation trust 1,421 - 1,421 - 1,421 Liabilities: Deposits $ 1,392,054 - - 1,389,964 1,389,964 Securities sold under agreements to repurchase 31,249 - 31,249 - 31,249 Junior subordinated debentures 15,464 - 15,464 - 15,464 27 Table of Contents (Dollars in thousands) Fair Value Measurements at December 31, 2020 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 161,580 161,580 - - 161,580 Investment securities available for sale 245,249 - 245,249 - 245,249 Other investments 4,155 - - 4,155 4,155 Mortgage loans held for sale 9,139 - - 9,139 9,139 Loans, net 938,731 - - 924,845 924,845 Mutual funds held in deferred compensation trust 1,320 - 1,320 - 1,320 Liabilities: Deposits $ 1,221,086 - - 1,216,503 1,216,503 Securities sold under agreements to repurchase 26,201 - 26,201 - 26,201 Junior subordinated debentures 15,464 - 15,464 - 15,464 (7) Leases As of June 30, 2021, the Company had operating ROU assets of $ 3.0 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 June 30, 2021 and 2020. (Dollars in thousands) June 30, 2021 June 30, 2020 Operating lease cost $ 418 $ 443 Other information: Cash paid for amounts included in the measurement of lease liabilities 404 432 Operating cash flows from operating leases - - Right-of-use assets obtained in exchange for new lease liabilities - operating leases 942 132 Weighted-average remaining lease term - operating leases 6.84 7.03 Weighted-average discount rate - operating leases 2.71 % 3.13 % 28 Table of Contents The following table presents lease maturities as of June 30, 2021 and December 31, 2020. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: June 30, 2021 December 31, 2020 2021 $ 357 $ 754 2022 550 588 2023 544 567 2024 489 489 2025 433 433 Thereafter 1,041 1,041 Total 3,414 3,872 Less: Imputed Interest ( 341 ) ( 401 ) Operating Lease Liability $ 3,073 $ 3,471 (8) Subsequent Events The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. The SBA has continued to forgive the Bank’s PPP loans. The outstanding balance of PPP loans was $ 33.1 million at July 31, 2021, as compared to $ 35.7 million at June 30, 2021. The decrease from June 30, 2021 to July 31, 2021 was primarily due to PPP loans being forgiven by the SBA. The Bank closed its West Lincoln branch location on June 11, 2021. The West Lincoln branch property was sold on July 1, 2021 for a net gain of $ 107,000 that will be recognized in the third quarter of 2021. The $ 408,000 net book value of the West Lincoln branch property at June 30, 2021 was classified as held for sale at June 30, 2021 and is reflected in “Accrued interest receivable and other assets” on the Company’s June 30, 2021 consolidated balance sheets. 29 Table of Contents