PEOPLES BANCORP OF NORTH CAROLINA INC 10-Q

Item 1. Financial Statements PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Balance Sheets June 30, 2022 and December 31, 2021 (Dollars in thousands) June 30, December 31, Assets 2022 2021 (Unaudited) (Audited) Cash and due from banks, including reserve requirements of $0 at both 6/30/22 and 12/31/21 $ 47,953 44,711 Interest-bearing deposits 175,754 232,788 Cash and cash equivalents 223,707 277,499 Investment securities available for sale 426,804 406,549 Other investments 2,791 3,668 Total securities 429,595 410,217 Mortgage loans held for sale 1,288 3,637 Loans 959,473 884,869 Less allowance for loan losses ( 9,789 ) ( 9,355 ) Net loans 949,684 875,514 Premises and equipment, net 16,001 16,104 Cash surrender value of life insurance 17,500 17,365 Right of use lease asset 5,969 4,612 Accrued interest receivable and other assets 33,151 19,245 Total assets $ 1,676,895 1,624,193 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing demand $ 559,163 514,319 Interest-bearing demand, MMDA & savings 833,094 797,179 Time, $ 250,000 or more 30,856 26,333 Other time 70,857 74,917 Total deposits 1,493,970 1,412,748 Securities sold under agreements to repurchase 37,146 37,094 Junior subordinated debentures 15,464 15,464 Lease liability 6,043 4,677 Accrued interest payable and other liabilities 11,866 11,841 Total liabilities 1,564,489 1,481,824 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 5,641,030 shares at June 30, 2022 and 5,661,569 shares at December 31, 2021 52,752 53,305 Common stock held by deferred compensation trust, at cost; 165,984 shares at June 30, 2022 and 162,193 shares at December 31, 2021 ( 2,099 ) ( 1,992 ) Deferred compensation 2,099 1,992 Retained earnings 92,741 88,968 Accumulated other comprehensive income (loss) ( 33,087 ) 96 Total shareholders' equity 112,406 142,369 Total liabilities and shareholders' equity $ 1,676,895 1,624,193 See accompanying Notes to Consolidated Financial Statements. 4 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Earnings Three and Six Months Ended June 30, 2022 and 2021 (Dollars in thousands, except per share amounts) Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Interest income: Interest and fees on loans $ 9,934 11,003 19,676 21,667 Interest on due from banks 442 48 553 83 Interest on investment securities: U.S. Government sponsored enterprises 585 682 1,096 1,220 State and political subdivisions 1,010 758 1,953 1,397 Other 21 26 43 72 Total interest income 11,992 12,517 23,321 24,439 Interest expense: NOW, MMDA & savings deposits 366 543 769 1,040 Time deposits 141 191 287 403 Junior subordinated debentures 103 71 178 142 Other 34 37 73 72 Total interest expense 644 842 1,307 1,657 Net interest income 11,348 11,675 22,014 22,782 Provision for (recovery of) loan losses 410 ( 226 ) 481 ( 681 ) Net interest income after provision for loan losses 10,938 11,901 21,533 23,463 Non-interest income: Service charges 1,374 910 2,542 1,836 Other service charges and fees 178 171 371 383 Mortgage banking income 99 723 299 1,593 Insurance and brokerage commissions 256 238 496 498 Appraisal management fee income 3,439 2,005 6,945 3,821 Gain on sale of other real estate - 21 - 21 Miscellaneous 1,982 1,972 3,721 3,761 Total non-interest income 7,328 6,040 14,374 11,913 Non-interest expense: Salaries and employee benefits 6,443 5,666 12,292 11,849 Occupancy 1,932 1,939 3,848 3,892 Professional fees 455 435 828 772 Advertising 169 154 334 297 Debit card expense 322 264 598 496 FDIC Insurance 115 164 225 196 Appraisal management fee expense 2,757 1,634 5,529 3,090 Miscellaneous 2,050 1,876 3,930 3,808 Total non-interest expense 14,243 12,132 27,584 24,400 Earnings before income taxes 4,023 5,809 8,323 10,976 Income tax expense 806 1,194 1,654 2,240 Net earnings $ 3,217 4,615 6,669 8,736 Basic net earnings per share $ 0.59 0.82 1.21 1.55 Diluted net earnings per share $ 0.57 0.80 1.18 1.51 Cash dividends declared per share $ 0.18 0.16 0.51 0.32 See accompanying Notes to Consolidated Financial Statements. 5 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Comprehensive Income (Loss) Three and Six Months Ended June 30, 2022 and 2021 (Dollars in thousands) Three months ended Six months ended June 30, June 30, 2022 2021 2022 2021 (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net earnings $ 3,217 4,615 6,669 8,736 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale ( 19,268 ) 2,155 ( 43,081 ) ( 1,870 ) Income tax expense (benefit) related to other comprehensive income: Unrealized holding gains (losses) on securities available for sale ( 4,427 ) 495 ( 9,898 ) ( 430 ) Total other comprehensive income (loss), net of tax ( 14,841 ) 1,660 ( 33,183 ) ( 1,440 ) Total comprehensive income (loss) $ ( 11,624 ) 6,275 ( 26,514 ) 7,296 See accompanying Notes to Consolidated Financial Statements. 6 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Changes in Shareholders' Equity Three and Six Months Ended June 30, 2022 and 2021 (Dollars in thousands) Common Stock Held By Accumulated Deferred Other Common Stock Retained Deferred Compensation Comprehensive Shares Amount Earnings Compensation Trust Income (Loss) Total (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Balance, December 31, 2021 5,661,569 $ 53,305 88,968 1,992 ( 1,992 ) 96 142,369 Common stock repurchase ( 7,000 ) ( 199 ) - - - - ( 199 ) Cash dividends declared on common stock - - ( 1,877 ) - - - ( 1,877 ) Restricted stock units exercised 1,461 41 - - - - 41 Equity incentive plan, net - - - 50 ( 50 ) - - Net earnings - - 3,452 - - - 3,452 Change in accumulated other comprehensive loss, net of tax - - - - - ( 18,342 ) ( 18,342 ) Balance, March 31, 2022 5,656,030 $ 53,147 90,543 2,042 ( 2,042 ) ( 18,246 ) 125,444 Common stock repurchase ( 15,000 ) ( 395 ) - - - - ( 395 ) Cash dividends declared on common stock - - ( 1,019 ) - - - ( 1,019 ) Equity incentive plan, net - - - 57 ( 57 ) - - Net earnings - - 3,217 - - - 3,217 Change in accumulated other comprehensive loss, net of tax - - - - - ( 14,841 ) ( 14,841 ) Balance, June 30, 2022 5,641,030 $ 52,752 92,741 2,099 ( 2,099 ) ( 33,087 ) 112,406 Balance, December 31, 2020 5,787,504 $ 56,871 77,628 1,796 ( 1,796 ) 5,400 139,899 Common stock repurchase - - - - - - - Cash dividends declared on common stock - - ( 930 ) - - - ( 930 ) Restricted stock units exercised 1,662 39 - - - - 39 Equity incentive plan, net - - - 53 ( 53 ) - - Net earnings - - 4,121 - - - 4,121 Change in accumulated other comprehensive loss, net of tax - - - - - ( 3,100 ) ( 3,100 ) Balance, March 31, 2021 5,789,166 56,910 80,819 1,849 ( 1,849 ) 2,300 140,029 Cash dividends declared on common stock - - ( 930 ) - - - ( 930 ) Equity incentive plan, net - - - 52 ( 52 ) - - Net earnings - - 4,615 - - - 4,615 Change in accumulated other comprehensive income, net of tax - - - - - 1,660 1,660 Balance, June 30, 2021 5,789,166 $ 56,910 84,504 1,901 ( 1,901 ) 3,960 145,374 See accompanying Notes to Consolidated Financial Statements. 7 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows Six Months Ended June 30, 2022 and 2021 (Dollars in thousands) 2022 2021 (Unaudited) (Unaudited) Cash flows from operating activities: Net earnings $ 6,669 8,736 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation, amortization and accretion 3,505 2,549 Provision for (recovery of) loan losses 481 ( 681 ) Deferred income taxes ( 21 ) ( 18 ) Gain on sale of other real estate - ( 21 ) Restricted stock expense ( 83 ) ( 100 ) Proceeds from sales of mortgage loans held for sale 16,428 54,006 Origination of mortgage loans held for sale ( 14,079 ) ( 50,368 ) Change in: Cash surrender value of life insurance ( 200 ) ( 196 ) Right of use lease asset 369 406 Other assets ( 3,946 ) 92 Lease liability ( 360 ) ( 398 ) Other liabilities 108 2,405 Net cash provided by operating activities 8,871 16,412 Cash flows from investing activities: Purchases of investment securities available for sale ( 96,357 ) ( 141,780 ) Proceeds from sales, calls and maturities of investment securities available for sale 7,870 5,300 Proceeds from paydowns of investment securities available for sale 22,840 11,073 Proceeds from paydowns on other investments 982 88 Redemptions (purchases) of FHLB stock ( 105 ) 331 Net change in loans ( 74,651 ) 60,339 Purchases of premises and equipment ( 1,091 ) ( 339 ) Proceeds from sale of other real estate and repossessions - 149 Proceeds from bank owned life insurance 65 - Net cash used by investing activities ( 140,447 ) ( 64,839 ) Cash flows from financing activities: Net change in deposits 81,222 170,968 Net change in securities sold under agreement to repurchase 52 5,048 Common stock repurchased ( 594 ) - Cash dividends paid on common stock ( 2,896 ) ( 1,860 ) Net cash provided by financing activities 77,784 174,156 Net change in cash and cash equivalents ( 53,792 ) 125,729 Cash and cash equivalents at beginning of period 277,499 161,580 Cash and cash equivalents at end of period $ 223,707 287,309 8 Table of Contents PEOPLES BANCORP OF NORTH CAROLINA, INC. Consolidated Statements of Cash Flows, continued Six Months Ended June 30, 2022 and 2021 (Dollars in thousands) 2022 2021 (Unaudited) (Unaudited) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,293 1,653 Income taxes $ 2,319 2,000 Noncash investing and financing activities: Change in unrealized gain on investment securities available for sale, net $ ( 33,183 ) ( 1,440 ) Issuance of accrued restricted stock units $ 41 39 Transfer of premises and equipment to other assets held for sale $ - 408 Initial recognition of lease right-of-use asset and lease liability $ 1,726 - See accompanying Notes to Consolidated Financial Statements. 9 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. (the “Company”) 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. All significant intercompany balances and transactions have been eliminated in consolidation. In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust II”), to facilitate the issuance of $ 20.6 million of trust preferred securities. PEBK Trust II is not included in the Consolidated Financial Statements. The Bank operates three banking offices focused on the Latino population that were formerly operated as a separate division of the Bank under the name Banco de la Gente (“Banco”). These offices, which offer the same banking services as our other branches offer, now operate under the same name as our other offices; however, we continue to separately categorize mortgage loans originated from these offices. The Consolidated Financial Statements in this report (other than the Consolidated Balance Sheet at December 31, 2021) are unaudited. In the opinion of management, all adjustments 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 2021 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the 2022 Annual Meeting of Shareholders. Recent Accounting Pronouncements The following table provides a summary of Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has not adopted as of June 30, 2022, 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. 10 Table of Contents ASU Description Effective Date Effect on Financial Statements or Other Significant Matters ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. See ASU 2019-10 below. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above. ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases and hedging. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC. January 1, 2023 The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. ASU 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 2022-02: Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures Eliminates the guidance on troubled debt restructurings (TDRs) for creditors in ASC 310-40 2 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. 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. 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. 11 Table of Contents Reclassification Certain amounts in the 2021 Consolidated Financial Statements have been reclassified to conform to the 2022 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, 2022 and December 31, 2021 are as follows: (Dollars in thousands) June 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S Treasuries $ 10,940 - 882 10,058 U.S. Government sponsored enterprises 13,192 - 499 12,693 Mortgage-backed securities 263,904 538 16,243 248,199 State and political subdivisions 181,722 91 25,959 155,854 Total $ 469,758 629 43,583 426,804 (Dollars in thousands) December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S Treasuries $ 7,964 - 75 7,889 U.S. Government sponsored enterprises 14,252 200 185 14,267 Mortgage-backed securities 218,402 1,769 3,019 217,152 State and political subdivisions 165,804 3,694 2,257 167,241 Total $ 406,422 5,663 5,536 406,549 The current fair value and associated unrealized losses on investments in securities with unrealized losses at June 30, 2022 and December 31, 2021 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position. (Dollars in thousands) June 30, 2022 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ 10,058 882 - - 10,058 882 U.S. Government sponsored enterprises 5,261 337 7,432 162 12,693 499 Mortgage-backed securities 179,160 12,653 34,152 3,590 213,312 16,243 State and political subdivisions 129,621 21,403 15,128 4,556 144,749 25,959 Total $ 324,100 35,275 56,712 8,308 380,812 43,583 12 Table of Contents (Dollars in thousands) December 31, 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Treasuries $ 7,889 75 - - 7,889 75 U.S. Government sponsored enterprises 5,232 15 3,263 170 8,495 185 Mortgage-backed securities 131,483 2,477 19,632 542 151,115 3,019 State and political subdivisions 80,076 1,981 5,922 276 85,998 2,257 Total $ 224,680 4,548 28,817 988 253,497 5,536 At June 30, 2022, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 43.6 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2022 tables above, all three U.S. Treasury securities, 143 out of 164 securities issued by state and political subdivisions and 104 out of 124 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the 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. At December 31, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $ 5.5 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2021 tables above, both of the U.S. Treasury securities, 70 of the 146 securities issued by state and political subdivisions contained unrealized losses and 54 of the 99 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of the acceptable financial condition and results of operations of the 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, 2022, 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, 2022 (Dollars in thousands) Amortized Cost Fair Value Due within one year $ 1,413 1,419 Due from one to five years 9,605 9,529 Due from five to ten years 74,859 68,680 Due after ten years 119,977 98,977 Mortgage-backed securities 263,904 248,199 Total $ 469,758 426,804 No securities available for sale were sold during the three and six months ended June 30, 2022 and 2021. Securities with a fair value of approximately $ 98.5 million and $ 98.6 million at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes as required by law. 13 Table of Contents (3) Loans Major classifications of loans at June 30, 2022 and December 31, 2021 are summarized as follows: (Dollars in thousands) June 30, 2022 December 31, 2021 Real estate loans: Construction and land development $ 103,241 95,760 Single-family residential 292,685 266,111 Single-family residential - Banco de la Gente non-traditional 21,378 23,147 Commercial 386,368 337,841 Multifamily and farmland 62,687 58,366 Total real estate loans 866,359 781,225 Loans not secured by real estate: Commercial loans 70,691 91,172 Farm loans 1,006 796 Consumer loans 6,284 6,436 All other loans 15,133 5,240 Total loans 959,473 884,869 Less allowance for loan losses ( 9,789 ) ( 9,355 ) Total net loans $ 949,684 875,514 The Bank makes 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, Rowan and Forsyth 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. · 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. · 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 the 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. · 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. · Multifamily and farmland loans – Decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. Loans are considered past due if the required principal and interest payments have not been received within 30 days 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. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 14 Table of Contents The following tables present an age analysis of past due loans, by loan type, as of June 30, 2022 and December 31, 2021: June 30, 2022 (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 $ 43 - 43 103,198 103,241 - Single-family residential 1,009 370 1,379 291,306 292,685 - Single-family residential - Banco de la Gente non-traditional 514 171 685 20,693 21,378 - Commercial 250 - 250 386,118 386,368 - Multifamily and farmland - - - 62,687 62,687 - Total real estate loans 1,816 541 2,357 864,002 866,359 - Loans not secured by real estate: Commercial loans 99 - 99 70,592 70,691 - Farm loans - - - 1,006 1,006 - Consumer loans 123 - 123 6,161 6,284 - All other loans 7 - 7 15,126 15,133 - Total loans $ 2,045 541 2,586 956,887 959,473 - December 31, 2021 (Dollars in thousands) Loans 30-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Total Current Loans Total Loans Accruing Loans 90 or More Days Past Due Real estate loans: Construction and land development $ - - - 95,760 95,760 - Single-family residential 2,323 634 2,957 263,154 266,111 - Single-family residential - Banco de la Gente non-traditional 2,593 112 2,705 20,442 23,147 - Commercial 488 - 488 337,353 337,841 - Multifamily and farmland - - - 58,366 58,366 - Total real estate loans 5,404 746 6,150 775,075 781,225 - Loans not secured by real estate: Commercial loans 43 - 43 91,129 91,172 - Farm loans - - - 796 796 - Consumer loans 38 - 38 6,398 6,436 - All other loans - - - 5,240 5,240 - Total loans $ 5,485 746 6,231 878,638 884,869 - 15 Table of Contents The following table presents non-accrual loans as of June 30, 2022 and December 31, 2021: (Dollars in thousands) June 30, 2022 December 31, 2021 Real estate loans: Construction and land development $ - - Single-family residential 1,914 1,642 Single-family residential - Banco de la Gente non-traditional 1,416 1,232 Commercial 137 200 Multifamily and farmland 98 105 Total real estate loans 3,565 3,179 Loans not secured by real estate: Commercial loans - 49 Consumer loans 21 2 Total $ 3,586 3,230 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 less estimated selling costs. 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 Restructurings (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans were $ 16.5 million, $ 18.3 million and $ 19.7 million at June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Interest income recognized on accruing impaired loans was $ 433,000 , $ 1.0 million, and $ 536,000 for the six months ended June 30, 2022, the year ended December 31, 2021 and the six months ended June 30, 2021, respectively. Interest income recognized on accruing impaired loans was $ 217,000 and $ 253,000 for the three months ended June 30, 2022 and the three months ended June 30, 2021, 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, 2022: June 30, 2022 (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 $ 62 - 62 62 1 Single-family residential 4,177 514 3,378 3,892 61 Single-family residential - Banco de la Gente non-traditional 11,022 - 10,356 10,356 654 Commercial 2,020 429 1,520 1,949 10 Multifamily and farmland 108 - 98 98 - Total impaired real estate loans 17,389 943 15,414 16,357 726 Loans not secured by real estate: Commercial loans 146 - 145 145 1 Consumer loans 24 - 23 23 - Total impaired loans $ 17,559 943 15,582 16,525 727 16 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, 2022 and 2021. (Dollars in thousands) Three months ended Six months ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 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 $ 65 1 91 1 68 3 97 3 Single-family residential 1,231 51 6,100 57 1,015 99 5,731 118 Single-family residential - Banco de la Gente stated income 13,273 135 10,835 160 13,927 273 11,407 337 Commercial 1,984 26 2,682 29 2,004 50 2,779 64 Multifamily and farmland 100 1 113 1 102 3 114 2 Total impaired real estate loans 16,653 214 19,821 248 17,116 428 20,128 524 Loans not secured by real estate: Commercial loans 151 2 315 5 174 4 362 11 Farm loans (non RE) - - - - - - Consumer loans 16 1 15 - 12 1 22 1 Total impaired loans $ 16,820 217 20,151 253 17,302 433 20,512 536 The following table presents impaired loans as of and for the year ended December 31, 2021: December 31, 2021 (Dollars in thousands) Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Recorded Investment in Impaired Loans Related Allowance Average Outstanding Impaired Loans YTD Interest Income Recognized Real estate loans: Construction and land development $ 73 - 73 73 3 82 6 Single-family residential 5,138 524 4,374 4,898 86 6,017 253 Single-family residential - Banco de la Gente non-traditional 11,753 - 10,922 10,922 687 10,325 609 Commercial 2,138 435 1,608 2,043 11 2,385 109 Multifamily and farmland 113 - 105 105 - 110 6 Total impaired real estate loans 19,215 959 17,082 18,041 787 18,919 983 Loans not secured by real estate: Commercial loans 282 49 170 219 2 271 19 Consumer loans 8 - 4 4 - 11 1 Total impaired loans $ 19,505 1,008 17,256 18,264 789 19,201 1,003 Impaired loans collectively evaluated for impairment totaled $ 5.1 million at June 30, 2022 and December 31, 2021 and are included in the tables above. Allowance on impaired loans collectively evaluated for impairment totaled $ 44,000 and $ 52,000 at June 30, 2022 and December 31, 2021, respectively. The following tables present changes in the allowance for loan losses for the three and six months ended June 30, 2022 and 2021. Unallocated balances in the following tables include allowance for loan losses based on qualitative factors such as economic outlook, concentrations of credit, interest rate risk and loan volume trends. Paycheck Protection Program ("PPP") loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the Small Business Administration (“SBA”). 17 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, 2022: Allowance for loan losses: Beginning balance $ 1,193 2,013 864 2,234 150 711 - 110 2,080 9,355 Charge-offs - ( 31 ) - - - ( 7 ) - ( 246 ) - ( 284 ) Recoveries - 127 - 4 - 55 - 51 - 237 Provision 79 62 ( 51 ) 918 7 ( 126 ) - 301 ( 709 ) 481 Ending balance $ 1,272 2,171 813 3,156 157 633 - 216 1,371 9,789 Three months ended June 30, 2022: Allowance for loan losses: Beginning balance $ 1,163 2,095 841 3,011 147 646 - 128 1,395 9,426 Charge-offs - - - - - ( 3 ) - ( 121 ) - ( 124 ) Recoveries - 10 - 2 - 36 - 29 - 77 Provision 109 66 ( 28 ) 143 10 ( 46 ) - 180 ( 24 ) 410 Ending balance $ 1,272 2,171 813 3,156 157 633 - 216 1,371 9,789 Allowance for loan losses at June 30, 2022: Ending balance: individually evaluated for impairment $ - 37 640 6 - - - - - 683 Ending balance: collectively evaluated for impairment 1,272 2,134 173 3,150 157 633 - 216 1,371 9,106 Ending balance $ 1,272 2,171 813 3,156 157 633 - 216 1,371 9,789 Loans at June 30, 2022: Ending balance $ 103,241 292,685 21,378 386,368 62,687 70,691 1,006 21,417 - 959,473 Ending balance: individually evaluated for impairment $ - 845 9,214 1,413 - - - - - 11,472 Ending balance: collectively evaluated for impairment $ 103,241 291,840 12,164 384,955 62,687 70,691 1,006 21,417 - 948,001 18 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 19 Table of Contents The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows: · Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade. · Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Bank’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 Bank’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). PPP loans are classified as risk grade 3. · 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 Bank’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 Bank will sustain some loss if the deficiencies are not corrected. · Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off. · Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off. 20 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, 2022 and December 31, 2021: June 30, 2022 (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 $ - 3,556 - - - 1,381 - 564 - 5,501 2- High Quality 18,945 116,720 - 31,456 18 15,391 - 1,923 1,530 185,983 3- Good Quality 81,150 156,099 8,053 324,117 60,121 51,572 1,005 3,508 13,317 698,942 4- Management Attention 3,018 11,599 9,627 27,554 1,922 1,473 1 259 137 55,590 5- Watch 66 1,199 1,282 2,675 528 874 - 1 149 6,774 6- Substandard 62 3,512 2,416 566 98 - - 29 - 6,683 7- Doubtful - - - - - - - - - - 8- Loss - - - - - - - - - - Total $ 103,241 292,685 21,378 386,368 62,687 70,691 1,006 6,284 15,133 959,473 There were no new TDR modifications during the three and six months ended June 30, 2022 and 2021. December 31, 2021 (Dollars in thousands) Real Estate Loans Construction and Land Development Single-Family Residential Single-Family Residential - Banco de la Gente non-traditional Commercial Multifamily and Farmland Commercial Farm Consumer All Other Total 1- Excellent Quality $ - 5,923 - - - 371 - 581 - 6,875 2- High Quality 11,752 109,337 - 28,546 19 16,177 - 2,039 1,309 169,179 3- Good Quality 80,325 129,856 8,712 272,786 54,945 68,183 792 3,510 3,931 623,040 4- Management Attention 3,534 14,964 10,478 30,937 2,754 5,214 4 284 - 68,169 5- Watch 76 2,464 1,703 4,938 543 1,177 - 1 - 10,902 6- Substandard 73 3,567 2,254 634 105 50 - 21 - 6,704 7- Doubtful - - - - - - - - - - 8- Loss - - - - - - - - - - Total $ 95,760 266,111 23,147 337,841 58,366 91,172 796 6,436 5,240 884,869 There were no loans modified as TDR loans that defaulted during the six months ended June 30, 2022 and 2021, which were within 12 months of their modification date. 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 were able to apply for loans from existing SBA lenders and other approved regulated lenders, subject to certain limitations and eligibility criteria. A second round of PPP funding provided a total of $320 billion additional funding for the PPP. The Bank participated as a lender in the PPP. Total PPP loans originated during the years ended December 31, 2020 and 2021 amounted to $ 128.1 million. The outstanding balance of PPP loans was $ 1.4 million and $ 18.0 million at June 30, 2022 and December 31, 2021, respectively, classified as commercial loans in the tables above. The Bank recognized $ 293,000 and $ 1.5 million of PPP loan fee income for the three months ended June 30, 2022 and the three months ended June 30, 2021, respectively. The Bank recognized $ 893,000 and $ 2.5 million of PPP loan fee income for the six months ended June 30, 2022 and six months ended June 30, 2021, respectively. 21 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, 2022 and 2021 is as follows: For the three months ended June 30, 2022 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 3,217 5,481,899 $ 0.59 Effect of dilutive securities: Restricted stock units - unvested 14,879 Shares held in deferred comp plan by deferred compensation trust 164,934 Diluted earnings per share $ 3,217 5,661,712 $ 0.57 For the six months ended June 30, 2022 Net Earnings (Dollars in thousands) Weighted Average Number of Shares Per Share Amount Basic earnings per share $ 6,669 5,489,461 $ 1.21 Effect of dilutive securities: Restricted stock units - unvested 14,024 Shares held in deferred comp plan by deferred compensation trust 164,089 Diluted earnings per share $ 6,669 5,667,574 $ 1.18 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 - unvested - 12,683 Shares held in deferred comp plan by deferred compensation trust 157,897 Diluted earnings per share $ 4,615 5,801,160 $ 0.80 22 Table of Contents 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 - unvested - 12,427 Shares held in deferred comp plan by deferred compensation trust 157,227 Diluted earnings per share $ 8,736 5,800,649 $ 1.51 (5) 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 Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are: · Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. · Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. · Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Cash and Cash Equivalents For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category. Investment Securities Available for Sale Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category. Other Investments For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category. 23 Table of Contents Loans The fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments. Mutual Funds For mutual funds held in the deferred compensation trust, the carrying value is a reasonable estimate of fair value. Mutual funds held in the deferred compensation trust are included in other assets on the balance sheet and reported in the Level 2 fair value category. Deposits The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 3 fair value category. Securities Sold Under Agreements to Repurchase For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category. FHLB Borrowings The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported in the Level 3 fair value category. Junior Subordinated Debentures Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2 fair value category. Commitments to Extend Credit and Standby Letters of Credit Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 24 Table of Contents The tables below present all financial instruments measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2022 and December 31, 2021. (Dollars in thousands) June 30, 2022 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 10,058 - 10,058 - U.S. Government sponsored enterprises $ 12,692 - 12,692 - Mortgage-backed securities $ 248,200 - 248,200 - State and political subdivisions $ 155,854 - 155,854 - Mutual funds held in deferred compensation trust $ 1,332 - 1,332 (Dollars in thousands) December 31, 2021 Fair Value Level 1 Valuation Level 2 Valuation Level 3 Valuation U.S. Treasuries $ 7,889 - 7,889 - U.S. Government sponsored enterprises $ 14,267 - 14,267 - Mortgage-backed securities $ 217,152 - 217,152 - State and political subdivisions $ 167,241 - 167,241 - Mutual funds held in deferred compensation trust $ 1,510 - 1,510 - The fair value measurements for mortgage loans held for sale and impaired loans on a non-recurring basis at June 30, 2022 and December 31, 2021 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 June 30, 2022 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 1,288 - - 1,288 Impaired loans $ 15,798 - - 15,798 (Dollars in thousands) Fair Value Measurements December 31, 2021 Level 1 Valuation Level 2 Valuation Level 3 Valuation Mortgage loans held for sale $ 3,637 - - 3,637 Impaired loans $ 17,475 - - 17,475 25 Table of Contents (Dollars in thousands) Fair Value June 30, 2022 Fair Value December 31, 2021 Valuation Technique Significant Unobservable Inputs General Range of Significant Unobservable Input Values Mortgage loans held for sale $ 1,288 3,637 Rate lock commitment N/A N/A Impaired loans $ 15,798 17,475 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 June 30, 2022 and December 31, 2021 are as follows: (Dollars in thousands) Fair Value Measurements at June 30, 2022 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 223,707 223,707 - - 223,707 Investment securities available for sale 426,804 - 426,804 - 426,804 Other investments 2,791 - - 2,791 2,791 Mortgage loans held for sale 1,288 - - 1,288 1,288 Loans, net 949,684 - - 924,433 924,433 Mutual funds held in deferred compensation trust 1,332 - 1,332 - 1,332 Liabilities: Deposits $ 1,493,970 - - 1,415,392 1,415,392 Securities sold under agreements to repurchase 37,146 - 37,146 - 37,146 Junior subordinated debentures 15,464 - 15,464 - 15,464 (Dollars in thousands) Fair Value Measurements at December 31, 2021 Carrying Amount Level 1 Level 2 Level 3 Total Assets: Cash and cash equivalents $ 277,499 277,499 - - 277,499 Investment securities available for sale 406,549 - 406,549 - 406,549 Other investments 3,668 - - 3,668 3,668 Mortgage loans held for sale 3,637 - - 3,637 3,637 Loans, net 875,514 - - 855,814 855,814 Mutual funds held in deferred compensation trust 1,510 - 1,510 - 1,510 Liabilities: Deposits $ 1,412,748 - - 1,401,833 1,401,833 Securities sold under agreements to repurchase 37,094 - 37,094 - 37,094 Junior subordinated debentures 15,464 - 15,464 - 15,464 26 Table of Contents (6) Leases As of June 30, 2022, the Bank had operating right of use assets of $ 6.0 million and operating lease liabilities of $ 6.0 million. The Bank 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 Bank if the option is not exercised. 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, 2022 and 2021. (Dollars in thousands) June 30, 2022 June 30, 2021 Operating lease cost $ 408 $ 418 Other information: Cash paid for amounts included in the measurement of lease liabilities 670 404 Right-of-use assets obtained in exchange for new lease liabilities - operating leases 1,726 942 Weighted-average remaining lease term - operating leases 8.54 6.84 Weighted-average discount rate - operating leases 2.14 % 2.71 % The following table presents lease maturities as of June 30, 2022 and December 31, 2021. (Dollars in thousands) Maturity Analysis of Operating Lease Liabilities: June 30, 2022 December 31, 2021 2022 $ 459 $ 740 2023 922 746 2024 867 691 2025 812 635 2026 694 518 Thereafter 2,975 1,838 Total 6,729 5,168 Less: Imputed Interest ( 686 ) ( 491 ) Operating Lease Liability $ 6,043 $ 4,677 (7) 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. 27 Table of Contents