10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2020

OR

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

For the transition period from __________ to __________

000-27205

(Commission File No.)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

North Carolina	56-2132396
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

518 West C Street, Newton, North Carolina	28658
(Address of principal executive offices)	(Zip Code)

(828) 464-5620

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,787,504 shares of common stock, outstanding at July 31, 2020.

INDEX

PART I.    FINANCIAL INFORMATION

		PAGE(S)
Item 1.	Financial Statements
	Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019 (Audited)	3
	Consolidated Statements of Earnings for the three and six months ended June 30, 2020 and 2019 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2020 and 2019 (Unaudited)	6
	Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)	7-8
	Notes to Consolidated Financial Statements (Unaudited)	9-32
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33-47
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49-50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	51
Item 5.	Other Information	51
Item 6.	Exhibits	52-53
Signatures		54
Certifications

Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by theregistrant and its subsidiaries, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2019.

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

June 30, 2020 and December 31, 2019

(Dollars in thousands)

	June 30,	December 31,
Assets	2020	2019
	(Unaudited)	(Audited)
Cash and due from banks, including reserve requirements of $0 at 6/30/20 and $13,210 at 12/31/19	$48,990	48,337
Interest-bearing deposits	15,694	720
Federal funds sold	124,955	3,330
Cash and cash equivalents	189,639	52,387
Investment securities available for sale	207,469	195,746
Other investments	7,196	4,231
Total securities	214,665	199,977
Mortgage loans held for sale	10,594	4,417
Loans	966,543	849,874
Less allowance for loan losses	(9,433)	(6,680)
Net loans	957,110	843,194
Premises and equipment, net	18,480	18,604
Cash surrender value of life insurance	16,507	16,319
Right of use lease asset	3,367	3,622
Accrued interest receivable and other assets	15,519	16,362
Total assets	$1,425,881	1,154,882
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$457,637	338,004
NOW, MMDA & savings	594,948	516,757
Time, $250,000 or more	24,477	34,269
Other time	77,267	77,487
Total deposits	1,154,329	966,517
Securities sold under agreements to repurchase	31,747	24,221
FHLB borrowings	70,000	-
Junior subordinated debentures	15,464	15,619
Lease liability	3,403	3,647
Accrued interest payable and other liabilities	13,897	10,758
Total liabilities	1,288,840	1,020,762
Commitments
Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized 5,000,000 shares; no shares issued and outstanding	-	-
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,787,504 shares at June 30, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
Retained earnings	72,942	70,663
Accumulated other comprehensive income	7,228	3,644
Total shareholders' equity	137,041	134,120
Total liabilities and shareholders' equity	$1,425,881	1,154,882

See accompanying Notes to Consolidated Financial Statements.

3

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three and Six Months Ended June 30, 2020 and 2019

(Dollars in thousands, except per share amounts)

	Three months ended		Six months ended
	June 30,		June 30,
	2020	2019	2020	2019
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Interest income:
Interest and fees on loans	$10,180	10,894	20,860	21,513
Interest on due from banks	41	35	84	49
Interest on fededal funds sold	22	-	145	-
Interest on investment securities:
U.S. Government sponsored enterprises	651	641	1,336	1,314
State and political subdivisions	684	760	1,325	1,594
Other	60	45	138	88
Total interest income	11,638	12,375	23,888	24,558
Interest expense:
NOW, MMDA & savings deposits	448	320	973	602
Time deposits	224	171	501	322
FHLB borrowings	102	3	166	49
Junior subordinated debentures	90	220	220	446
Other	48	67	93	119
Total interest expense	912	781	1,953	1,538
Net interest income	10,726	11,594	21,935	23,020
Provision for loan losses	1,417	77	2,938	255
Net interest income after provision for loan losses	9,309	11,517	18,997	22,765
Non-interest income:
Service charges	718	1,138	1,826	2,231
Other service charges and fees	162	177	355	346
Gain on sale of investment securities	457	-	457	231
Mortgage banking income	563	311	885	458
Insurance and brokerage commissions	205	205	447	436
Appraisal management fee income	1,734	1,112	3,084	1,974
Miscellaneous	1,400	1,442	2,780	2,829
Total non-interest income	5,239	4,385	9,834	8,505
Non-interest expense:
Salaries and employee benefits	5,535	5,718	11,259	11,365
Occupancy	1,861	1,811	3,782	3,548
Professional fees	414	429	747	718
Advertising	196	275	414	541
Debit card expense	258	239	488	466
FDIC Insurance	48	80	88	152
Appraisal management fee expense	1,333	864	2,367	1,526
Other	1,807	1,828	3,756	3,844
Total non-interest expense	11,452	11,244	22,901	22,160
Earnings before income taxes	3,096	4,658	5,930	9,110
Income tax expense	535	845	1,002	1,630
Net earnings	$2,561	3,813	4,928	7,480
Basic net earnings per share	$0.44	0.64	0.84	1.25
Diluted net earnings per share	$0.44	0.64	0.84	1.25
Cash dividends declared per share	$0.15	0.14	0.45	0.38

See accompanying Notes to Consolidated Financial Statements.

4

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

Three and Six Months Ended June 30, 2020 and 2019

(Dollars in thousands)

	Three months ended		Six months ended
	June 30,		June 30,
	2020	2019	2020	2019
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Net earnings	$2,561	3,813	4,928	7,480
Other comprehensive income:
Unrealized holding gains on securities available for sale	2,396	2,757	5,110	3,883
Reclassification adjustment for gains on securities available for sale included in net earnings	(457)	-	(457)	(231)
Total other comprehensive income, before income taxes	1,939	2,757	4,653	3,652
Income tax expense related to other comprehensive income:
Unrealized holding gains on securities available for sale	550	634	1,174	892
Reclassification adjustment for gains on securities available for sale included in net earnings	(105)	-	(105)	(53)
Total income tax expense related to other comprehensive income	445	634	1,069	839
Total other comprehensive income, net of tax	1,494	2,123	3,584	2,813
Total comprehensive income	$4,055	5,936	8,512	10,293

See accompanying Notes to Consolidated Financial Statements.

5

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

Three and Six Months Ended June 30, 2020 and 2019

(Dollars in thousands)

				Accumulated
				Other
	Common Stock		Retained	Comprehensive
	Shares	Amount	Earnings	Income	Total
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Balance, December 31, 2019	5,912,300	$59,813	70,663	3,644	123,617
Common stock repurchase	(126,800)	(2,999)	-	-	(2,999)
Cash dividends declared on common stock	-	-	(1,779)	-	(1,779)
Restricted stock units exercised	2,004	57	-	-	57
Net earnings	-	-	2,367	-	2,367
Change in accumulated other comprehensive income, net of tax	-	-	-	2,090	2,090
Balance, March 31, 2020	5,787,504	56,871	71,251	5,734	133,856
Cash dividends declared on common stock	-	-	(870)	-	(870)
Net earnings	-	-	2,561	-	2,561
Change in accumulated other comprehensive income, net of tax	-	-	-	1,494	1,494
Balance, June 30, 2020	5,787,504	$56,871	72,942	7,228	137,041
Balance, December 31, 2018	5,995,256	$62,096	60,535	986	123,617
Common stock repurchase	(5,518)	(152)	-	-	(152)
Cash dividends declared on common stock	-	-	(1,445)	-	(1,445)
Restricted stock units exercised	7,398	207	-	-	207
Net earnings	-	-	3,667	-	3,667
Change in accumulated other comprehensive income, net of tax	-	-	-	690	690
Balance, March 31, 2019	5,997,136	62,151	62,757	1,676	126,584
Common stock repurchase	(63,996)	(1,761)	-	-	(1,761)
Cash dividends declared on common stock	-	-	(832)	-	(832)
Restricted stock units exercised	-	-	-	-	-
Net earnings	-	-	3,813	-	3,813
Change in accumulated other comprehensive income, net of tax	-	-	-	2,123	2,123
Balance, June 30, 2019	5,933,140	$60,390	65,738	3,799	129,927

See accompanying Notes to Consolidated Financial Statements.

6

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2020 and 2019

(Dollars in thousands)

	2020	2019
	(Unaudited)	(Unaudited)
Cash flows from operating activities:
Net earnings	$4,928	7,480
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	2,017	1,926
Provision for loan losses	2,938	255
Deferred income taxes	(16)	(4)
Gain on sale of investment securities	(457)	(231)
Write-down of other real estate	-	17
Restricted stock expense	(75)	170
Proceeds from sales of mortgage loans held for sale	43,832	18,572
Origination of mortgage loans held for sale	(50,009)	(20,201)
Change in:
Cash surrender value of life insurance	(188)	(190)
Right of use lease asset	255	392
Other assets	(212)	1,202
Lease liability	(244)	(400)
Other liabilities	3,214	(3,596)
Net cash provided by operating activities	5,983	5,392
Cash flows from investing activities:
Purchases of investment securities available for sale	(37,340)	(21,405)
Proceeds from sales, calls and maturities of investment securities available for sale	20,592	23,707
Proceeds from paydowns of investment securities available for sale	9,305	6,354
Proceeds from paydowns on other investments	88	66
Purchases of FHLB stock	(3,031)	(1)
Net change in loans	(116,854)	(29,503)
Purchases of premises and equipment	(1,085)	(1,827)
Net cash used by investing activities	(128,325)	(22,609)
Cash flows from financing activities:
Net change in deposits	187,812	27,014
Net change in securities sold under agreement to repurchase	7,526	(10,362)
Proceeds from FHLB borrowings	70,000	89,000
Repayments of FHLB borrowings	-	(89,000)
Repayment of Junior Subirdinated Debt	(155)	-
Proceeds from Fed Funds purchased	(6,935)	74,450
Repayments of Fed Funds purchased	6,935	(74,450)
Restricted stock units excerised	57	207
Common stock repurchased	(2,999)	(1,913)
Cash dividends paid on common stock	(2,647)	(2,277)
Net cash provided by financing activities	259,594	12,669
Net change in cash and cash equivalents	137,252	(4,548)
Cash and cash equivalents at beginning of period	52,387	43,370
Cash and cash equivalents at end of period	$189,639	38,822

7

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Six Months Ended June 30, 2020 and 2019

(Dollars in thousands)

	2020	2019
	(Unaudited)	(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$1,909	1,529
Income taxes	$796	1,616
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	$3,584	2,813
Issuance of accrued restricted stock units	$57	207
Transfers of loans to other real estate and repossessions	$-	-
Initial recognition of lease right-of-use asset and lease liability recorded upon adoption of ASU 2016-02	$132	4,401

See accompanying Notes to Consolidated Financial Statements.

8

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements (Unaudited)

(1) 

   Summary of Significant Accounting Policies

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

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

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2019) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.

Recent Accounting Pronouncements

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

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

9

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

ASU 2014-09

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

10

Revenue and Method of Adoption

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

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

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $446,000 and $435,000 for the six months ended June 30, 2020 and 2019, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third partieswas $2.0 million for the six months ended June 30, 2020 and 2019. 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 $388,000 and $304,000 for the six months ended June 30, 2020 and 2019, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $3.1 million and $2.0 million for the six months ended June 30, 2020 and 2019, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

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, 2020 derived from contracts in which services are transferred at a point in time was approximately $4.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors,such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

11

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

ASU 2016-02

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

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

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

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

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

12

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

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $115,000 for the six months ended June 30, 2020 and 2019.

The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of June 30, 2020, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.

13

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

14

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.

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

 (2) 

   Investment Securities

Investment securities available for sale at June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)
	June 30, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
Mortgage-backed securities	$74,338	3,362	39	77,661
U.S. Government
sponsored enterprises	22,166	1,044	222	22,988
State and political subdivisions	101,329	5,241	-	106,570
Trust preferred securities	250	-	-	250
Total	$198,083	9,647	261	207,469

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

The current fair value and associated unrealized losses on investments in securities with unrealized losses at June 30, 2020 and December 31, 2019 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

15

(Dollars in thousands)
	June 30, 2020
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$10,857	39	-	-	10,857	39
U.S. Government
sponsored enterprises	-	-	4,454	222	4,454	222
Total	$10,857	39	4,454	222	15,311	261

(Dollars in thousands)
	December 31, 2019
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
Mortgage-backed securities	$28,395	177	6,351	50	34,746	227
U.S. Government
sponsored enterprises	2,899	10	6,151	301	9,050	311
State and political subdivisions	7,367	200	-	-	7,367	200
Total	$38,661	387	12,502	351	51,163	738

At June 30, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $261,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2020 tables above, eight out of 63 securities issued by state and political subdivisions 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, 2020, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2020
(Dollars in thousands)
	Amortized Cost	Estimated Fair Value
Due within one year	$9,933	10,127
Due from one to five years	48,311	50,935
Due from five to ten years	48,710	51,567
Due after ten years	16,541	16,929
Mortgage-backed securities	74,338	77,661
Trust preferred securities	250	250
Total	$198,083	207,469

Proceeds from sales of securities available for sale during the six months ended June 30, 2020 were $17.0 million and resulted in net gains of $457,000. Proceeds from sales of securities available for sale during the six months ended June 30, 2019 were $12.3 million and resulted in net gains of $231,000.

Securities with a fair value of approximately $70.0 million and $66.0 million at June 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes as required by law.

16

 (3)

Loans

Major classifications of loans at June 30, 2020 and December 31, 2019 are summarized as follows:

(Dollars in thousands)
	June 30, 2020	December 31, 2019
Real estate loans:
Construction and land development	$110,077	92,596
Single-family residential	268,174	269,475
Single-family residential -
Banco de la Gente non-traditional	29,325	30,793
Commercial	303,828	291,255
Multifamily and farmland	49,465	48,090
Total real estate loans	760,869	732,209
Loans not secured by real estate:
Commercial loans	188,398	100,263
Farm loans	887	1,033
Consumer loans	7,545	8,432
All other loans	8,844	7,937
Total loans	966,543	849,874
Less allowance for loan losses	9,433	6,680
Total net loans	$957,110	843,194

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

●

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of June 30, 2020, construction and land development loans comprised approximately 11% 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, 2020, single-family residential loans comprised approximately 31% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.

●

Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of June 30, 2020, commercial real estate loans comprised approximately 31% 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, 2020, commercial loans comprised approximately 19% of the Bank’s total loan portfolio, including $98.1 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.

17

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

The following tables present an age analysis of past due loans, by loan type, as of June 30, 2020 and December 31, 2019:

June 30, 2020
(Dollars in thousands)
	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$-	-	-	110,077	110,077	-
Single-family residential	1,030	371	1,401	266,773	268,174	-
Single-family residential -
Banco de la Gente non-traditional	1,556	263	1,819	27,506	29,325	-
Commercial	-	405	405	303,423	303,828	-
Multifamily and farmland	-	-	-	49,465	49,465	-
Total real estate loans	2,586	1,039	3,625	757,244	760,869	-
Loans not secured by real estate:
Commercial loans	-	-	-	188,398	188,398	-
Farm loans	-	-	-	887	887	-
Consumer loans	27	18	45	7,500	7,545	-
All other loans	-	-	-	8,844	8,844	-
Total loans	$2,613	1,057	3,670	962,873	966,543	-

December 31, 2019
(Dollars in thousands)
	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$803	-	803	91,793	92,596	-
Single-family residential	3,000	126	3,126	266,349	269,475	-
Single-family residential -
Banco de la Gente non-traditional	4,834	413	5,247	25,546	30,793	-
Commercial	504	176	680	290,575	291,255	-
Multifamily and farmland	-	-	-	48,090	48,090	-
Total real estate loans	9,141	715	9,856	722,353	732,209	-
Loans not secured by real estate:
Commercial loans	432	-	432	99,831	100,263	-
Farm loans	-	-	-	1,033	1,033	-
Consumer loans	170	22	192	8,240	8,432	-
All other loans	-	-	-	7,937	7,937	-
Total loans	$9,743	737	10,480	839,394	849,874	-

18

The following table presents non-accrual loans as of June 30, 2020 and December 31, 2019:

(Dollars in thousands)
	June 30, 2020	December 31, 2019
Real estate loans:
Construction and land development	$-	-
Single-family residential	1,401	1,378
Single-family residential -
Banco de la Gente non-traditional	1,822	1,764
Commercial	476	256
Total real estate loans	3,699	3,398
Loans not secured by real estate:
Commercial loans	276	122
Consumer loans	24	33
Total	$3,999	3,553

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $22.5 million, $21.3 million and $21.4 million at June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Interest income recognized on accruing impaired loans was $635,000, $1.3 million, and $668,000 for the six months ended June 30, 2020, the year ended December 31, 2019 and the six months ended June 30, 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

19

The following table presents impaired loans as of June 30, 2020:

June 30, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance
Real estate loans:
Construction and land development	$134	-	134	134	5
Single-family residential	5,414	391	4,579	4,970	20
Single-family residential -
Banco de la Gente stated income	14,535	-	13,749	13,749	900
Commercial	3,005	739	2,248	2,987	14
Multifamily and farmland	-	-	-	-	-
Total impaired real estate loans	23,088	1,130	20,710	21,840	939
Loans not secured by real estate:
Commercial loans	640	275	315	590	2
Consumer loans	70	-	66	66	1
Total impaired loans	$23,798	1,405	21,091	22,496	942

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, 2020 and 2019.

(Dollars in thousands)
	Three months ended				Six months ended
	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
	Average Balance	Interest Income Recognized	Average Balance	Interest Income Recognized	Average Balance	Interest Income Recognized	Average Balance	Interest Income Recognized
Real estate loans:
Construction and land development	$157	4	232	2	166	7	248	6
Single-family residential	4,778	59	4,214	57	4,734	118	4,826	118
Single-family residential -
Banco de la Gente stated income	13,856	193	15,347	239	14,028	421	15,010	491
Commercial	3,115	43	1,739	22	2,700	72	1,801	45
Multifamily and farmland	-	-	-	-	-	-	-	-
Total impaired real estate loans	21,906	299	21,532	320	21,628	618	21,885	660
Loans not secured by real estate:
Commercial loans	643	6	114	3	487	15	106	4
Consumer loans	77	1	104	2	83	2	107	4
Total impaired loans	$22,626	306	21,750	325	22,198	635	22,098	668

20

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

December 31, 2019
(Dollars in thousands)
	Unpaid Contractual Principal Balance	Recorded Investment With No Allowance	Recorded Investment With Allowance	Recorded Investment in Impaired Loans	Related Allowance	Average Outstanding Impaired Loans	YTD Interest Income Recognized
Real estate loans:
Construction and land development	$183	-	183	183	7	231	12
Single-family residential	5,152	403	4,243	4,646	36	4,678	269
Single-family residential-Banco de la Gente non-traditional	15,165	-	14,371	14,371	944	14,925	956
Commercial	1,879	-	1,871	1,871	7	1,822	91
Total impaired real estate loans	22,379	403	20,668	21,071	994	21,656	1,328
Loans not secured by real estate:
Commercial loans	180	92	84	176	-	134	9
Consumer loans	100	-	96	96	2	105	7
Total impaired loans	$22,659	495	20,848	21,343	996	21,895	1,344

Changes in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019 were as follows:

(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer and All Other	Unallocated	Total
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

21

(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, 2019:
Allowance for loan losses:
Beginning balance	$813	1,325	1,177	1,278	83	626	-	161	982	6,445
Charge-offs	(21)	(22)	-	-	-	(1)	-	(316)	-	(360)
Recoveries	3	53	-	23	-	14	-	108	-	201
Provision	(32)	(44)	(61)	33	27	(91)	-	208	215	255
Ending balance	$763	1,312	1,116	1,334	110	548	-	161	1,197	6,541
Three months ended June 30, 2019:
Allowance for loan losses:
Beginning balance	$831	1,256	1,174	1,292	98	610	-	162	1,138	6,561
Charge-offs	(21)	(9)	-	-	-	-	-	(166)	-	(196)
Recoveries	2	5	-	19	-	8	-	65	-	99
Provision	(49)	60	(58)	23	12	(70)	-	100	59	77
Ending balance	$763	1,312	1,116	1,334	110	548	-	161	1,197	6,541
Allowance for loan losses at June 30, 2019:
Ending balance: individually
evaluated for impairment	$-	2	970	12	-	-	-	-	-	984
Ending balance: collectively
evaluated for impairment	763	1,310	146	1,322	110	548	-	161	1,197	5,557
Ending balance	$763	1,312	1,116	1,334	110	548	-	161	1,197	6,541
Loans at June 30, 2019:
Ending balance	$86,920	264,724	32,499	281,895	44,065	103,466	1,060	18,738	-	833,367
Ending balance: individually evaluated for impairment	$11	1,738	13,508	1,643	-	38	-	-	-	16,938
Ending balance: collectively evaluated for impairment	$86,909	262,986	18,991	280,252	44,065	103,428	1,060	18,738	-	816,429

22

The provision for loan losses for the three months ended June 30, 2020 was $1.4 million, compared to $77,000 for the three months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model due to the impact to the economy from the COVID-19 pandemic and a $34.4 million increase in loans, excluding $98.1 million in SBA PPP loans, from June 30, 2019 to June 30, 2020. PPP loans are excluded from the ALLL as PPP loans are 100 percent guaranteed by SBA. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic.

The provision for loan losses for the six months ended June 30, 2020 was $2.9 million, compared to $255,000 for the six months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $133.2 million increase in loans, excluding $98.1 million in SBA PPP loans, from June 30, 2019 to June 30, 2020. PPP loans are excluded from the ALLL as PPP loans are 100 percent guaranteed by SBA. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic.

Reserves associated with COVID-19 payment modifications increased $1.2 million from $439,000 at March 31, 2020 to $1.6 million at June 30, 2020.

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.

23

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of June 30, 2020 and December 31, 2019:

June 30, 2020
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$138	13,742	-	-	-	742	-	626	-	15,248
2- High Quality	31,603	126,830	-	22,702	299	23,690	-	2,347	1,713	209,184
3- Good Quality	69,907	103,328	11,382	238,800	44,129	152,603	816	4,150	6,411	631,526
4- Management Attention	5,388	17,814	13,141	38,202	4,504	10,576	71	374	720	90,790
5- Watch	2,981	3,104	1,923	3,265	533	411	-	7	-	12,224
6- Substandard	60	3,356	2,879	859	-	376	-	41	-	7,571
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$110,077	268,174	29,325	303,828	49,465	188,398	887	7,545	8,844	966,543

December 31, 2019
(Dollars in thousands)
	Real Estate Loans
	Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$-	8,819	-	-	-	330	-	693	-	9,842
2- High Quality	32,029	128,757	-	21,829	256	20,480	-	2,708	1,860	207,919
3- Good Quality	52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention	5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch	3,007	3,196	2,027	3,072	543	492	-	8	-	12,345
6- Substandard	64	3,048	2,926	256	-	124	-	48	-	6,466
7- Doubtful	-	-	-	-	-	-	-	-	-	-
8- Loss	-	-	-	-	-	-	-	-	-	-
Total	$92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

24

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.9 million and $4.3 million at June 30, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at June 30, 2020 and December 31, 2019.

There were no new TDR modifications during the six months ended June 30, 2020 and 2019.

There were no loans modified as TDR that defaulted during the six months ended June 30, 2020 and 2019, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of June 30, 2020, the Bank had originated $34.3 million in PPP loans during the second round of PPP funding. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of June 30, 2020. Total PPP loans originated as of June 30, 2020 amounted to $98.8 million.

The Bank has continued to modify payments on loans due to the COVID-19 pandemic. At June 30, 2020, loans totaling $120.6 million had payment modifications due to the COVID-19 pandemic. Loans with payment modifications associated with the COVID-19 pandemic include $111.4 million in loans secured by real estate, $8.4 million in commercial loans not secured by real estate and $788,000 in consumer loans not secured by real estate at June 30, 2020. These payment modifications are primarily interest only payments for three to six months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

(4)

Net Earnings Per Share

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the applicable period is used to compute equivalent shares.

The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three and six months ended June 30, 2020 and 2019 is as follows:

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	5,787,504	$0.44
Effect of dilutive securities:
Restricted stock units	-	13,127
Diluted earnings per share	$2,561	5,800,631	$0.44

25

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	5,828,965	$0.84
Effect of dilutive securities:
Restricted stock units	-	13,284
Diluted earnings per share	$4,928	5,842,249	$0.84

For the three months ended June 30, 2019
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$3,813	5,940,556	$0.64
Effect of dilutive securities:
Restricted stock units	-	24,453
Diluted earnings per share	$3,813	5,965,009	$0.64

For the six months ended June 30, 2019
	Net Earnings (Dollars in thousands)	Weighted Average Number of Shares	Per Share Amount
Basic earnings per share	$7,480	5,968,368	$1.25
Effect of dilutive securities:
Restricted stock units	-	24,412
Diluted earnings per share	$7,480	5,992,780	$1.25

(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, 2020, there were no outstanding shares under the 2009 Plan.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of June 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $97,000.

26

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of June 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $226,000.

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. The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan of $170,000 for the six months ended June 30, 2019.

(6) 

Fair Value

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance. The methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s 2019 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

●

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

●

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

●

Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

27

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

Loans

In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

28

The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)
	June 30, 2020
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$77,661	-	77,661	-
U.S. Government
sponsored enterprises	$22,988	-	22,988	-
State and political subdivisions	$106,570	-	106,570	-
Trust preferred securities	$250	-	-	250

(Dollars in thousands)
	December 31, 2019
	Fair Value Measurements	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage-backed securities	$78,956	-	78,956	-
U.S. Government
sponsored enterprises	$28,397	-	28,397	-
State and political subdivisions	$88,143	-	88,143	-
Trust preferred securities	$250	-	-	250

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the six months ended June 30, 2020.

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

29

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at June 30, 2020 and December 31, 2019 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

(Dollars in thousands)
	Fair Value Measurements June 30, 2020	Level 1 Valuation	Level 2 Valuation	Level 3 Valuation
Mortgage loans held for sale	$10,594	-	-	10,594
Impaired loans	$21,554	-	-	21,554

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

(Dollars in thousands)
	Fair Value June 30, 2020	Fair Value December 31, 2019	Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$ 10,594	4,417	Rate lock commitment	N/A	N/A
Impaired loans	$ 21,554	20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

The carrying amount and estimated fair value of financial instruments at June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)
		Fair Value Measurements at June 30, 2020
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$189,639	189,639	-	-	189,639
Investment securities available for sale	$207,469	-	207,219	250	207,469
Other investments	$7,196	-	-	7,196	7,196
Mortgage loans held for sale	$10,594	-	-	10,594	10,594
Loans, net	$957,110	-	-	949,158	949,158
Cash surrender value of life insurance	$16,507	-	16,507	-	16,507
Liabilities:
Deposits	$1,154,329	-	-	1,148,380	1,148,380
Securities sold under agreements
to repurchase	$31,747	-	31,747	-	31,747
FHLB borrowings	$70,000	-	-	69,974	69,974
Junior subordinated debentures	$15,464	-	15,464	-	15,464

30

(Dollars in thousands)
		Fair Value Measurements at December 31, 2019
	Carrying Amount	Level 1	Level 2	Level 3	Total
Assets:
Cash and cash equivalents	$52,387	52,387	-	-	52,387
Investment securities available for sale	$195,746	-	195,496	250	195,746
Other investments	$4,231	-	-	4,231	4,231
Mortgage loans held for sale	$4,417	-	-	4,417	4,417
Loans, net	$843,194	-	-	819,397	819,397
Cash surrender value of life insurance	$16,319	-	16,319	-	16,319
Liabilities:
Deposits	$966,517	-	-	955,766	955,766
Securities sold under agreements
to repurchase	$24,221	-	24,221	-	24,221
Junior subordinated debentures	$15,619	-	15,619	-	15,619

(7) 

Leases

As of June 30, 2020, the Company had operating ROU assets of $3.4 million and operating lease liabilities of $3.4 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, 2020 and 2019.

(Dollars in thousands)
	June 30, 2020	June 30, 2019
Operating lease cost $	$443	446
Other information:
Cash paid for amounts included in the measurement of lease liabilities	432	433
Operating cash flows from operating leases	-	-
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	132	-
Weighted-average remaining lease term - operating leases	7.03	7.05
Weighted-average discount rate - operating leases	3.13%	3.17%

31

The following table presents lease maturities as of June 30, 2020 and December 31, 2019.

Maturity Analysis of Operating Lease Liabilities:	June 30, 2020	December 31, 2019
2020	$420	$823
2021	822	793
2022	525	501
2023	416	393
2024	328	304
Thereafter	1,325	1,320
Total	3,836	4,134
Less: Imputed Interest	(433)	(487)
Operating Lease Liability	$3,403	$3,647

(8) 

Subsequent Events

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

32

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

The following is a discussion of the financial position and results of operations of the Company and should be read in conjunction with the information set forth under Item 1A Risk Factors and the Company’s Consolidated Financial Statements and Notes thereto on pages A-24 through A-68 of the Company’s 2019 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.

Introduction

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

Overview

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

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

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

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

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

Significant Developments

Impact of COVID-19

The COVID-19 pandemic in the United States, and efforts to contain it, have had a complex and significant adverse impact on the economy, the banking industry and the Company. The impact on future fiscal periods is subject to a high degree of uncertainty.

Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily in North Carolina where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020. In North Carolina, schools closed for the remainder of the school year, most retail establishments, including restaurants and entertainment venues, were ordered to close for varying lengths of time, and non-critical healthcare services were significantly curtailed. Since the initial shut down in March 2020, phased reopening plans began in mid-May subject to public health reopening guidelines and limitations on capacity.

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

●

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

●

On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the SBA, referred to as the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of June 30, 2020

●

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

●

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

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●

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

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

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

●

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

●

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

●

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

●

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities, which we are carrying out in a prudent and responsible manner.

●

On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services. Branch lobbies were reopened on May 20, 2020. One branch office remains closed due to limited lobby space. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.

Summary of Significant Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of specific accounting guidance. A more complete description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.

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

Results of Operations

Summary. Net earnings were $2.6 million or $0.44 basic and diluted net earnings per share for the three months ended June 30, 2020, as compared to $3.8 million or $0.64 basic and diluted net earnings per share for the same period one year ago. The decrease in second quarter net earnings is primarily the result of a decrease in net interest income, an increase in the provision for loan losses and an increase in non-interest expense, which were partially offset by an increase in non-interest income during the three months ended June 30, 2020, compared to the three months ended June 30, 2019, as discussed below.

The annualized return on average assets was 0.76% for the three months ended June 30, 2020, compared to 1.37% for the same period one year ago, and annualized return on average shareholders’ equity was 7.64% for the three months ended June 30, 2020, compared to 11.96% for the same period one year ago.

Net Interest Income. Net interest income, the major component of the Company’s net earnings, was $10.7 million for the three months ended June 30, 2020, compared to $11.6 million for the three months ended June 30, 2019. The decrease in net interest income was primarily due to a $737,000 decrease in interest income and a $131,000 increase in interest expense. The decrease in interest income was primarily due to a $714,000 decrease in interest income on loans resulting from the 1.50% reduction in Prime Rate in March 2020. The increase in interest expense was primarily due to an increase in interest bearing deposits and borrowings from the FHLB and an increase in interest rates on deposits.

Interest income was $11.6 million for the three months ended June 30, 2020, compared to $12.4 million for the three months ended June 30, 2019. The decrease in interest income was primarily due to a $714,000 decrease in interest income on loans resulting from the 1.50% reduction in Prime Rate in March 2020. During the three months ended June 30, 2020, average loans increased $115.2 million to $947.3 million from $832.1 million for the three months ended June 30, 2019. During the three months ended June 30, 2020, average investment securities available for sale increased $9.9 million to $195.1 million from $185.2 million for the three months ended June 30, 2019. The average yield on loans for the three months ended June 30, 2020 and 2019 was 4.32% and 5.25%, respectively. The average yield on investment securities available for sale was 3.09% and 3.48% for the three months ended June 30, 2020 and 2019, respectively. The average yield on earning assets was 3.77% and 4.91% for the three months ended June 30, 2020 and 2019, respectively.

  Interest expense was $912,000 for the three months ended June 30, 2020, compared to $781,000 for the three months ended June 30, 2019. The increase in interest expense was primarily due to an increase in interest bearing deposits and borrowings from FHLB and an increase ininterest rates on deposits. During the three months ended June 30, 2020, average interest bearing non-maturity deposits increased $80.9 million to $570.2 million from $589.3 million for the three months ended June 30, 2019. During the three months ended June 30, 2020, average certificates of deposit increased $360,000 to $100.1 million from $99.7 million for the three months ended June 30, 2019. Average FHLB borrowings increased $69.4 million to $70.0 million for the three months ended June 30, 2020 from $551,000 for the three months ended June 30, 2019. The average rate paid on interest-bearing checking and savings accounts was 0.32% and 0.26% for the three months ended June 30, 2020 and 2019, respectively. The average rate paid on certificates of deposit was 0.90% for the three months ended June 30, 2020, compared to 0.69% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.47% for the three months ended June 30, 2020, compared to 0.48% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the three months ended June 30, 2020 and 2019. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the three months ended June 30, 2020 and 2019 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

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	Three months ended			Three months ended
	June 30, 2020			June 30, 2019
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans receivable	$947,344	10,180	4.32%	$832,150	10,894	5.25%
Investments - taxable	85,505	554	2.61%	60,450	472	3.13%
Investments - nontaxable*	117,271	1,004	3.44%	129,699	1,184	3.66%
Federal funds sold	75,393	22	0.12%	-	-	0.00%
Other	33,070	41	0.50%	5,422	35	2.59%
Total interest-earning assets	1,258,583	11,801	3.77%	1,027,721	12,585	4.91%
Non-interest earning assets:
Cash and due from banks	37,250			36,604
Allowance for loan losses	(8,084)			(6,557)
Other assets	72,659			57,112
Total assets	$1,360,408			$1,114,880
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$570,220	448	0.32%	$489,305	320	0.26%
Time deposits	100,064	224	0.90%	99,704	171	0.69%
FHLB borrowings	70,000	102	0.59%	551	3	2.18%
Trust preferred securities	15,464	90	2.34%	20,619	220	4.28%
Other	28,804	48	0.67%	46,074	67	0.58%
Total interest-bearing liabilities	784,552	912	0.47%	656,253	781	0.48%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits	434,109			324,813
Other liabilities	6,944			5,949
Shareholders' equity	134,803			127,865
Total liabilities and shareholder's equity	$1,360,408			$1,114,880
Net interest spread		$10,889	3.30%		$11,804	4.43%
Net yield on interest-earning assets			3.48%			4.61%
Taxable equivalent adjustment
Investment securities		$163			$210
Net interest income		$10,726			$11,594

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $24.7 million in 2020 and $33.6 million in 2019. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2020 and 2019.

Year-to-date net interest income as of June 30, 2020 was $21.9 million, compared to $23.0 million for the same period one year ago. The decrease in net interest income was primarily due to a $670,000 decrease in interest income and a $415,000 increase in interest expense. The decrease in interest income was primarily due to a $653,000 decrease in interest income on loans resulting from the 1.50% reduction in Prime Rate in March 2020. The increase in interest expense was primarily due to an increase in interest bearing deposits and FHLB borrowings and an increase in interest rates on deposits.

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Interest income was $23.9 million for the six months ended June 30, 2020, compared to $24.6 million for the six months ended June 30, 2019. The decrease in interest income was primarily due to a $653,000 decrease in interest income on loans resulting from the 1.50% reduction in Prime Rate in March 2020. During the six months ended June 30, 2020, average loans increased $80.8 million to $904.5 million from $823.7 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, average investment securities available for sale increased $4.5 million to $192.0 million from $187.5 million for the six months ended June 30, 2019. The average yield on loans for the six months ended June 30, 2020 and 2019 was 4.64% and 5.27%, respectively. The average yield on investment securities available for sale was 3.12% and 3.58% for the six months ended June 30, 2020 and 2019, respectively. The average yield on earning assets was 4.12% and 4.94% for the six months ended June 30, 2020 and 2019, respectively.

Interest expense was $2.0 million for the six months ended June 30, 2020, compared to $1.5 million for the six months ended June 30, 2019. The increase in interest expense was primarily due to an increase in interest bearing deposits and borrowings from FHLB and an increase in interest rates on deposits. During the six months ended June 30, 2020, average interest bearing non-maturity deposits increased $61.1 million to $545.7 million from $484.6 million for the six months ended June 30, 2019. During the six months ended June 30, 2020, average certificates of deposit increased $1.5 million to $103.1 million from $101.6 million for the six months ended June 30, 2019. Average FHLB borrowings increased $53.2 million to $56.9 million for the six months ended June 30, 2020 from $3.7 million for the six months ended June 30, 2019. The average rate paid on interest-bearing checking and savings accounts was 0.36% and 0.25% for the six months ended June 30, 2020 and 2019, respectively. The average rate paid on certificates of deposit was 0.98% for the six months ended June 30, 2020, compared to 0.64% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.53% for the six months ended June 30, 2020, compared to 0.47% for the same period one year ago.

The following table sets forth for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest incurred on such amounts and the average rate earned or incurred for the six months ended June 30, 2020 and 2019. The table also sets forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, and the net yield on total average interest-earning assets for the same periods. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields and interest income on tax-exempt investments for the six months ended June 30, 2020 and 2019 have been adjusted to a tax equivalent basis using an effective tax rate of 22.98% for securities that are both federal and state tax exempt and an effective tax rate of 20.48% for federal tax exempt securities. Non-accrual loans and the interest income that was recorded on non-accrual loans, if any, are included in the yield calculations for loans in all periods reported. The Company believes the presentation of net interest income on a tax-equivalent basis provides comparability of net interest income from both taxable and tax-exempt sources and facilitates comparability within the industry. Although the Company believes these non-GAAP financial measures enhance investors’ understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are presented below.

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	Six months ended			Six months ended
	June 30, 2020			June 30, 2019
(Dollars in thousands)	Average Balance	Interest	Yield / Rate	Average Balance	Interest	Yield / Rate
Interest-earning assets:
Loans receivable	$904,489	20,860	4.64%	$823,723	21,513	5.27%
Investments - taxable	84,402	1,180	2.81%	59,029	940	3.21%
Investments - nontaxable*	114,694	1,944	3.41%	133,557	2,489	3.76%
Federal funds sold	52,491	145	0.56%	-	-	0.00%
Other	25,161	84	0.67%	4,247	49	2.33%
Total interest-earning assets	1,181,237	24,213	4.12%	1,020,556	24,991	4.94%
Non-interest earning assets:
Cash and due from banks	37,113			35,181
Allowance for loan losses	(7,382)			(6,493)
Other assets	67,705			54,171
Total assets	$1,278,673			$1,103,415
Interest-bearing liabilities:
NOW, MMDA & savings deposits	$545,742	973	0.36%	$484,642	602	0.25%
Time deposits	103,121	501	0.98%	101,597	322	0.64%
FHLB borrowings	56,923	166	0.59%	3,704	49	2.67%
Trust preferred securities	15,520	220	2.85%	20,619	446	4.36%
Other	25,885	93	0.72%	43,171	119	0.56%
Total interest-bearing liabilities	747,191	1,953	0.53%	653,733	1,538	0.47%
Non-interest bearing liabilities and shareholders' equity:
Demand deposits	389,975			318,575
Other liabilities	5,732			2,597
Shareholders' equity	135,775			128,510
Total liabilities and shareholder's equity	$1,278,673			$1,103,415
Net interest spread		$22,260	3.60%		$23,453	4.47%
Net yield on interest-earning assets			3.79%			4.63%
Taxable equivalent adjustment
Investment securities		$325			$433
Net interest income		$21,935			$23,020

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $26.1 million in 2020 and $34.3 million in 2019. A tax rate of 2.50% was used to calculate the tax equivalent yield on these securities in 2020 and 2019.

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

	Three months ended June 30, 2020 compared to three months ended June 30, 2019			Six months ended June 30, 2020 compared to six months ended June 30, 2019
(Dollars in thousands)	Changes in average volume	Changes in average rates	Total Increase (Decrease)	Changes in average volume	Changes in average rates	Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$1,373	(2,087)	(714)	1,986	(2,639)	(653)
Investments - taxable	179	(97)	82	379	(139)	240
Investments - nontaxable	(110)	(70)	(180)	(336)	(209)	(545)
Federal funds sold	11	11	22	73	72	145
Other	106	(101)	5	155	(121)	34
Total interest income	1,559	(2,344)	(785)	2,257	(3,036)	(779)
Interest expense:
NOW, MMDA & savings deposits	58	70	128	92	279	371
Time deposits	1	53	54	6	173	179
FHLB borrowings	240	(141)	99	430	(313)	117
Trust preferred securities	(43)	(87)	(130)	(91)	(135)	(226)
Other	(27)	7	(20)	(55)	29	(26)
Total interest expense	229	(98)	131	382	33	415
Net interest income	$1,330	(2,246)	(916)	1,875	(3,069)	(1,194)

Provision for Loan Losses. The provision for loan losses for the three months ended June 30, 2020 was $1.4 million, compared to $77,000 for the three months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $133.2 million increase in loans, excluding $98.1 million in PPP loans, from June 30, 2019 to June 30, 2020. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. Reserves associated with COVID-19 payment modifications increased $1.2 million from $439,000 at March 31, 2020 to $1.6 million at June 30, 2020. Loans with payment modifications associated with the COVID-19 pandemic include $111.4 million in loans secured by real estate, $8.4 million in commercial loans not secured by real estate and $788,000 in consumer loans not secured by real estate at June 30, 2020. These payment modifications are primarily interest only payments for three to six months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

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The provision for loan losses for the six months ended June 30, 2020 was $2.9 million, compared to $255,000 for the six months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $133.2 million increase in loans, excluding $98.1 million in PPP loans, from June 30, 2019 to June 30, 2020. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. Reserves associated with COVID-19 payment modifications increased $1.2 million from $439,000 at March 31, 2020 to $1.6 million at June 30, 2020.

Non-Interest Income. Total non-interest income was $5.2 million for the three months ended June 30, 2020, compared to $4.4 million for the three months ended June 30, 2019. The increase in non-interest income is primarily attributable to a $622,000 increase in appraisal management fee income due to an increase in the volume of appraisals, a $457,000 increase in gains on the sale of securities and a $252,000 increase in mortgage banking income, which were partially offset by a $435,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.

Non-interest income was $9.8 million for the six months ended June 30, 2020, compared to $8.5 million for the six months ended June 30, 2019. The increase in non-interest income is primarily attributable to a $1.1 million increase in appraisal management fee income due to an increase in the volume of appraisals, a $427,000 increase in mortgage banking income and a $226,000 increase in gains on the sale of securities, which were partially offset by a $396,000 decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.

Non-Interest Expense. Total non-interest expense was $11.5 million for the three months ended June 30, 2020, compared to $11.2 million for the three months ended June 30, 2019. The increase in non-interest expense was primarily attributable to a $469,000 increase in appraisal management fee expense due to an increase in the volume of appraisals.

Non-interest expense was $22.9 million for the six months ended June 30, 2020, compared to $22.2 million for the six months ended June 30, 2019. The increase in non-interest expense was primarily due to an $841,000 increase in appraisal management fee expense due to an increase in the volume of appraisals.

Income Taxes. Income tax expense was $535,000 for the three months ended June 30, 2020, compared to $845,000 for the three months ended June 30, 2019. The effective tax rate was 17.28% for the three months ended June 30, 2020, compared to 18.14% for the three months ended June 30, 2019. Income tax expense was $1.0 million for the six months ended June 30, 2020, compared to $1.6 million for the six months ended June 30, 2019. The effective tax rate was 16.90% for the six months ended June 30, 2020, compared to 17.89% for the six months ended June 30, 2019.

Analysis of Financial Condition

Investment Securities. Available for sale securities were $207.5 million at June 30, 2020, compared to $195.7 million at December 31, 2019. Average investment securities available for sale for the six months ended June 30, 2020 were $192.0 million, compared to $185.3 million for the year ended December 31, 2019.

Loans. At June 30, 2020, loans were $966.5 million, compared to $849.9 million at December 31, 2019. Average loans represented 77% and 79% of average earning assets for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.

The Company had $10.6 million and $4.4 million in mortgage loans held for sale as of June 30, 2020 and December 31, 2019, respectively.

Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At June 30, 2020, the Company had $98.1 million in residential mortgage loans, $106.5 million in home equity loans and $446.5 million in commercial mortgage loans, which include $353.3 million secured by commercial property and $93.2 million secured by residential property. Residential mortgage loans include $29.3 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

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At June 30, 2020, the Company had $110.1 million in construction and land development loans. The following table presents a breakout of these loans.

(Dollars in thousands)
	Number of Loans	Balance Outstanding	Non-accrual Balance
Land acquisition and development - commercial purposes	37	$8,232	$-
Land acquisition and development - residential purposes	169	21,316	-
1 to 4 family residential construction	123	28,385	-
Commercial construction	33	52,144	-
Total construction and land development	362	$110,077	$-

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.9 million and $4.3 million at June 30, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at June 30, 2020 and December 31, 2019.

Allowance for Loan Losses. The allowance for loan losses reflects management’s assessment and estimate of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance for loan losses that management believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. Other factors considered are:

●

the Bank’s loan loss experience;

●

the amount of past due and non-performing loans;

●

specific known risks;

●

the status and amount of other past due and non-performing assets;

●

underlying estimated values of collateral securing loans;

●

current and anticipated economic conditions (including those arising out of the COVID-19 pandemic); and

●

other factors which management believes affect the allowance for potential credit losses.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectability becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by the third party credit review firm (as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan. The Bank’s Board of Directors reviews, on a monthly basis, an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

As an additional measure, the Bank engages an independent third party to review the underwriting, documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank’s Board of Directors.

Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.

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Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance for loan losses. The provision for loan losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.

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

The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves.

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

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

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

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.

The allowance for loan losses at June 30, 2020 was $9.4 million or 0.98% of total loans, compared to $6.7 million or 0.79% of total loans at December 31, 2019. The increase in the allowance for loan losses is due to the current economic implications and rising unemployment rate impacting the economy due to the COVID-19 pandemic and a $133.2 million increase in loans, excluding $98.1 million in PPP loans, from June 30, 2019 to June 30, 2020. The ALLL model also includes reserves on $120.6 million in loans with payment modifications as a result of the COVID-19 pandemic.

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	Percentage of Loans
	By Risk Grade
Risk Grade	6/30/2020	12/31/2020
Risk Grade 1 (Excellent Quality)	1.58%	1.16%
Risk Grade 2 (High Quality)	21.64%	24.46%
Risk Grade 3 (Good Quality)	65.35%	62.15%
Risk Grade 4 (Management Attention)	9.39%	10.02%
Risk Grade 5 (Watch)	1.26%	1.45%
Risk Grade 6 (Substandard)	0.78%	0.76%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

At June 30, 2020, including non-accrual loans, there were two relationships exceeding $1.0 million in the Watch risk grade (which totaled $3.1 million). There were no relationships exceeding $1.0 million in the Substandard risk grade.

Non-performing Assets. Non-performing assets totaled $4.0 million at June 30, 2020 or 0.28% of total assets, compared to $3.6 millionor 0.31% of total assets at December 31, 2019. Non-accrual loans were $4.0 million at June 30, 2020 and $3.6 million at December 31, 2019. As a percentage of total loans outstanding, non-accrual loans were 0.41% at June 30, 2020, compared to 0.42% at December 31, 2019. Non-performing loans include $3.7 million in commercial and residential mortgage loans and $299,000 in other loans at June 30, 2020, compared to $3.4 million in commercial and residential mortgage loans and $155,000 in other loans at December 31, 2019. The Bank had no loans 90 days past due and still accruing at June 30, 2020 and December 31, 2019. The Bank had no other real estate owned at June 30, 2020 and December 31, 2019.

Deposits. Total deposits at June 30, 2020 were $1.2 billion compared to $966.5 million at December 31, 2019. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.1 billion at June 30, 2020, compared to $932.2 million at December 31, 2019.

Borrowed Funds. FHLB borrowings were $70.0 million at June 30, 2020. There were no FHLB borrowings outstanding at December 31, 2019. The increase in FHLB borrowings reflects a new $70.0 million FHLB advance executed in February 2020 to take advantage of a ten-year convertible advance program available from the FHLB at a rate of 0.58%.

Securities sold under agreements to repurchase were $31.7 million at June 30, 2020, compared to $24.2 million at December 31, 2019.

Junior Subordinated Debentures (related to Trust Preferred Securities). Junior subordinated debentures were $15.5 million and $15.6 million at June 30, 2020 and December 31, 2019, respectively.

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

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

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

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

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

The Company’s rate sensitive assets are those earning interest at variable rates and those with contractual maturities within one year. Rate sensitive assets therefore include both loans and available for sale securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the six months ended June 30, 2020 totaled $1.2 billion, exceeding average rate sensitive liabilities of $747.2 million by $434.0 million.

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By using derivative instruments, the Company is exposed to credit and market risk. If the counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of June 30, 2020.

Included in the rate sensitive assets are $245.5 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the FOMC. The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At June 30, 2020, the Company had $147.5 million in loans with interest rate floors. The floors were in effect on $128.8 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.87% higher than the indexed rate on the promissory notes without interest rate floors.

Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments to extend credit and standby letters of credit. As of June 30, 2020, such unfunded commitments to extend credit were $302.3 million, while commitments in the form of standby letters of credit totaled $4.1 million.

The Company uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit of denominations less than $250,000. The Company considers these to be a stable portion of the Company’s liability mix and the result of on-going consumer and commercial banking relationships. As of June 30, 2020, the Company’s core deposits totaled $1.1 billion, or 97.88% of total deposits.

The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank (“FRB”) on a short-term basis. The Company’s policies include the ability to access wholesale funding of up to 40% of total assets. The Company’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Company’s ratio of wholesale funding to total assets was 5.78% as of June 30, 2020.

The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets. FHLB borrowings were $70 million at June 30, 2020. There were no FHLB borrowings outstanding at December 31, 2019. At June 30, 2020, the carrying value of loans pledged as collateral to the FHLB totaled $182.7 million compared to $139.4 million at December 31, 2019. The remaining availability under the line of credit with the FHLB was $53.3 million at June 30, 2020 compared to $86.1 million at December 31, 2019. The Bank had no borrowings from the FRB at June 30, 2020 or December 31, 2019. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At June 30, 2020, the carrying value of loans pledged as collateral to the FRB totaled $473.8 million compared to $452.6 million at December 31, 2019.

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The Bank also had the ability to borrow up to $82.5 million for the purchase of overnight federal funds from six correspondent financial institutions as of June 30, 2020.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 29.19% at June 30, 2020 and 18.20% at December 31, 2019. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy was 10% at June 30, 2020 and December 31, 2019.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of June 30, 2020 and December 31, 2019 are summarized in the table below. The Company’s contractual obligations include junior subordinated debentures, as well as certain payments under current lease agreements. Other commitments include commitments to extend credit. Because not all of these commitments to extend credit will be drawn upon, the actual cash requirements are likely to be significantly less than the amounts reported for other commitments below.

(Dollars in thousands)
	June 30, 2020	December 31, 2019
Contractual Cash Obligations
Long-term borrowings	$70,000	-
Junior subordinated debentures	$15,464	15,619
Operating lease obligations	3,718	4,134
Total	$89,182	19,753
Other Commitments
Commitments to extend credit	$302,272	276,338
Standby letters of credit and financial guarantees written	4,071	3,558
Income tax credits	184	333
Total	$306,527	280,229

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

Capital Resources. Shareholders’ equity was $137.0 million, or 9.61% of total assets, at June 30, 2020, compared to $134.1 million, or 11.61% of total assets, at December 31, 2019.

Annualized return on average equity for the six months ended June 30, 2020 was 7.30%, compared to 11.74% for the six months ended June 30, 2019. Total cash dividends paid on common stock were $2.6 million and $2.3 million for the six months ended June 30, 2020 and 2019, respectively.

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

In January of 2020, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $3 million will be allocated to repurchase the Company’s common stock. Any purchases under the Company’s stock repurchase program may be made periodically as permitted by securities laws and other legal requirements in the open market or in privately-negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company’s management, based on its evaluation of market conditions and other factors. The stock repurchase program may be suspended at any time or from time-to-time without prior notice. The Company has repurchased approximately $3.0 million, or 126,800 shares of its common stock, under this stock repurchase program as of June 30, 2020.

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

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital includes $15.0 million and $20.0 million in trust preferred securities at June 30, 2020 and December 31, 2019, respectively. The Company’s Tier 1 capital ratio was 14.13% and 15.37% at June 30, 2020 and December 31, 2019, respectively. Total risk-based capital is defined as Tier 1 capital plus supplementary capital. Supplementary capital, or Tier 2 capital, consists of the Company’s allowance for loan losses, not exceeding 1.25% of the Company’s risk-weighted assets. Total risk-based capital ratio is therefore defined as the ratio of total capital (Tier 1 capital and Tier 2 capital) to risk-weighted assets. The Company’s total risk-based capital ratio was 15.05% and 16.08% at June 30, 2020 and December 31, 2019, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 12.67% and 13.79% at June 30, 2020 and December 31, 2019, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.69% and 11.91% at June 30, 2020 and December 31, 2019, respectively.

The Bank’s Tier 1 risk-based capital ratio was 13.72% and 15.09% at June 30, 2020 and December 31, 2019, respectively. The total risk-based capital ratio for the Bank was 14.64% and 15.79% at June 30, 2020 and December 31, 2019, respectively. The Bank’s common equity Tier 1 capital ratio was 13.72% and 15.09% at June 30, 2020 and December 31, 2019, respectively. The Bank’s Tier 1 leverage capital ratio was 10.32% and 11.61% at June 30, 2020 and December 31, 2019, respectively.

A bank is considered to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a common equity Tier 1 capital ratio of 6.5% or greater and a leverage ratio of 5.0% or greater. Based upon these guidelines, the Bank was considered to be “well capitalized” at June 30, 2020.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Quantitative and Qualitative Disclosures About Market Risk from those previously disclosed in Part 7A. of Part II of the Company’s Form 10-K, filed with the SEC on March 13, 2020.

Item 4. Controls and Procedures

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

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Inaddition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in the Company’s Form 10-K, filed with the SEC on March 13, 2020. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also is a cautionary statement identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has adversely impacted, and an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak has led to an economic recession and other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread issues for the Company.

The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. We are starting to see the impact from COVID-19 on our business, and we believe that it could be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created a recession, reduced economic activity and caused a significant correction in the global stock markets. We expect that we could experience significant disruptions across our business due to these effects, possibly leading to decreased earnings, significant slowdowns in our loan collections or increased loan defaults.

COVID-19 has and may continue to impact businesses’ and consumers’ desire or financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of our borrowers are in or have exposure to the various industries impacted by COVID-19 and/or are located in areas that had been quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. Prolonged spread of COVID-19 and the related suppression of business activities would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

49

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases has resulted in or may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

We believe that the economic impact from COVID-19 could have an adverse impact on our business and could result in losses in our loan portfolio, all of which would impact our earnings and capital. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on the Company’s business. The extent of such impact will depend on future developments, which are highly uncertain.

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

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

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

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

50

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
April 1 - 30, 2020	1,608	$18.97	-	$1,178
May 1 - 31, 2020	423	17.41	-	$1,178
June 1 - 30, 2020	561	18.08	-	$1,178
Total	2,592(1)	$18.38	-

(1)

The Company purchased 2,592 shares on the open market in the three months ended June 30, 2020 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

(2)

Reflects dollar value of shares that may yet be purchased under the Company's stock repurchase program , which was funded in January 2020.

Item 3. Defaults Upon Senior Securities

Not applicable

Item 5. Other Information

Not applicable

51

Item 6. Exhibits

Exhibit (3)(i)(a)	Articles of Incorporation of the Registrant, incorporated by reference to Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (3)(i)(b)	Articles of Amendment dated December 19, 2008, regarding the Series A Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (3)(i)(c)	Articles of Amendment dated February 26, 2010, incorporated by reference to Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2010
Exhibit (3)(ii)	Second Amended and Restated Bylaws of the Registrant, incorporated by reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and Exchange Commission on June 24, 2015
Exhibit (4)(i)	Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form 8-A filed with the Securities and Exchange Commission on September 2, 1999
Exhibit (4)(ii)	Description of Registrant’s Securities registered pursuant to Section 12 of the Securities Act of 1934filed with the Securities and Exchange Commission on March 13, 2020
Exhibit (10)(i)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Tony W. Wolfe dated December 18, 2008, incorporated by reference to Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(ii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Joseph F. Beaman, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(iii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated December 18, 2008, incorporated by reference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(iv)	Employment Agreement dated January 22, 2015 between the Registrant and William D. Cable, Sr., incorporated by reference to Exhibit (10)(c) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(v)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated December 18, 2008, incorporated by reference to Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(vi)	Employment Agreement dated January 22, 2015 between the Registrant and Lance A. Sellers, incorporated by reference to Exhibit (10)(a) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015
Exhibit (10)(vii)	Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated December 18, 2008, incorporated by reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(viii)	Employment Agreement dated January 22, 2015 between the Registrant and A. Joseph Lampron, Jr., incorporated by reference to Exhibit (10)(b) to the Form 8-K filed with the Securities and Exchange Commission on February 9, 2015

52

Exhibit (10)(ix)	Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(h) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(x)	Rabbi Trust for the Peoples Bank Directors’ and Officers’ Deferral Plan, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 28, 2002
Exhibit (10)(xi)	Description of Service Recognition Program maintained by Peoples Bank, incorporated by reference to Exhibit 10(i) to the Form 10-K filed with the Securities and Exchange Commission on March 27, 2003
Exhibit (10)(xii)	Capital Securities Purchase Agreement dated as of June 26, 2006, by and among the Registrant, PEBK Capital Trust II and Bear, Sterns Securities Corp., incorporated by reference to Exhibit 10(j) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xiii)	Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of June 28, 2006, incorporated by reference to Exhibit 10(k) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xiv)	Guarantee Agreement of the Registrant dated as of June 28, 2006, incorporated by reference to Exhibit 10(l) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xv)	Indenture, dated as of June 28, 2006, by and between the Registrant and LaSalle Bank National Association, as Trustee, relating to Junior Subordinated Debt Securities Due September 15, 2036, incorporated by reference to Exhibit 10(m) to the Form 10-Q filed with the Securities and Exchange Commission on November 13, 2006
Exhibit (10)(xvi)	Form of Amended and Restated Director Supplemental Retirement Agreement between Peoples Bank and Directors Robert C. Abernethy, James S. Abernethy, Douglas S. Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L. Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman, Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit (10)(n) to the Form 8-K filed with the Securities and Exchange Commission on December 29, 2008
Exhibit (10)(xvii)	2009 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to Exhibit (10)(o) to the Form 10-K filed with the Securities and Exchange Commission on March 20, 2009
Exhibit (10)(xviii)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and Lance A. Sellers dated February 16, 2018, incorporated by reference to Exhibit (10)(xx) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xix)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and A. Joseph Lampron, Jr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxi) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xx)	First Amendment to Amended and Restated Executive Salary Continuation Agreement between Peoples Bank and William D. Cable, Sr. dated February 16, 2018, incorporated by reference to Exhibit (10)(xxii) to the Form 10-Q filed with the Securities and Exchange Commission on March 18, 2018
Exhibit (10)(xxi)	2020 Omnibus Stock Ownership and Long Term Incentive Plan incorporated by reference to the Form DEF 14A filed with the Securities and Exchange Commission on March 25, 2020
Exhibit (14)	Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the Securities and Exchange Commission on March 25, 2005
Exhibit (31)(a)	Certification of principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (31)(b)	Certification of principal financial officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit (101) The following materials from the Company’s 10-Q Report for the quarterly period ended June 30, 2020, formatted in eXtensible Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Earnings, (iii) the Condensed Consolidated Statements of Comprehensive Income (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*

*Furnished, not filed.

53

SIGNATURES

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

	Peoples Bancorp of North Carolina, Inc.
August 6, 2020	/s/ Lance A. Sellers
Date	Lance A. Sellers President and Chief Executive Officer (Principal Executive Officer)

August 6, 2020	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

54

EX-31.A

EXHIBIT (31)(a)

CERTIFICATIONS

I, Lance A. Sellers, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.

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

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2020	/s/ Lance A. Sellers
Date	Lance A. Sellers President and Chief Executive Officer (Principal Executive Officer)

EX-31.B

EXHIBIT (31)(b)

CERTIFICATIONS

I, Jeffrey N. Hooper, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Peoples Bancorp of North Carolina Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

5.

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

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

August 6, 2020	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper Executive Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer)

  

EX-32

EXHIBIT (32)

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Peoples Bancorp of North Carolina, Inc. (the “Company”) certifies that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2020 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

August 6, 2020	/s/ Lance A. Sellers
Date	Lance A. Sellers Chief Executive Officer

August 6, 2020	/s/ Jeffrey N. Hooper
Date	Jeffrey N. Hooper Chief Financial Officer

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

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Jul. 31, 2020
Document And Entity Information
Entity Registrant Name	PEOPLES BANCORP OF NORTH CAROLINA INC
Entity Central Index Key	0001093672
Document Type	10-Q
Document Period End Date	Jun. 30, 2020
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Non-accelerated Filer
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Shell Company	false
Entity Interactive Data Current	Yes
Entity Incorporation, State or Country Code	NC
Entity File Number	000-27205
Entity Common Stock, Shares Outstanding		5,787,504
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2020

XML

Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Assets
Cash and due from banks, including reserve requirements of $0 at 6/30/20 and $13,210 at 12/31/19	$ 48,990	$ 48,337
Interest-bearing deposits	15,694	720
Federal funds sold	124,955	3,330
Cash and cash equivalents	189,639	52,387
Investment securities available for sale	207,469	195,746
Other investments	7,196	4,231
Total securities	214,665	199,977
Mortgage loans held for sale	10,594	4,417
Loans	966,543	849,874
Less allowance for loan losses	(9,433)	(6,680)
Net loans	957,110	843,194
Premises and equipment, net	18,480	18,604
Cash surrender value of life insurance	16,507	16,319
Right of use lease asset	3,367	3,622
Accrued interest receivable and other assets	15,519	16,362
Total assets	1,425,881	1,154,882
Deposits:
Noninterest-bearing demand	457,637	338,004
NOW, MMDA & savings	594,948	516,757
Time, $250,000 or more	24,477	34,269
Other time	77,267	77,487
Total deposits	1,154,329	966,517
Securities sold under agreements to repurchase	31,747	24,221
FHLB borrowings	70,000	0
Junior subordinated debentures	15,464	15,619
Lease liability	3,403	3,647
Accrued interest payable and other liabilities	13,897	10,758
Total liabilities	1,288,840	1,020,762
Commitments
Shareholders' equity:
Series A preferred stock, $1,000 stated value; authorized 5,000,000 shares; no shares issued and outstanding	0	0
Common stock, no par value; authorized 20,000,000 shares; issued and outstanding 5,787,504 shares at June 30, 2020 and 5,912,300 shares at December 31, 2019	56,871	59,813
Retained earnings	72,942	70,663
Accumulated other comprehensive income	7,228	3,644
Total shareholders' equity	137,041	134,120
Total liabilities and shareholders' equity	$ 1,425,881	$ 1,154,882

XML

Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Assets
Cash and due from banks, reserve requirements	$ 0	$ 13,210
Shareholders' equity:
Series A preferred stock, stated value (in dollars per share)	$ 1,000	$ 1,000
Series A preferred stock, shares authorized (in shares)	5,000,000	5,000,000
Series A preferred stock, shares issued (in shares)	0	0
Series A preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.00	$ 0.00
Common stock, shares authorized (in shares)	20,000,000	20,000,000
Common stock, shares issued (in shares)	5,787,504	5,912,300
Common stock, shares outstanding (in shares)	5,787,504	5,912,300

XML

Consolidated Statements of Earnings (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Interest income:
Interest and fees on loans	$ 10,180	$ 10,894	$ 20,860	$ 21,513
Interest on due from banks	41	35	84	49
Interest on federal funds sold	22	0	145	0
Interest on investment securities:
U.S. Government sponsored enterprises	651	641	1,336	1,314
State and political subdivisions	684	760	1,325	1,594
Other	60	45	138	88
Total interest income	11,638	12,375	23,888	24,558
Interest expense:
NOW, MMDA & savings deposits	448	320	973	602
Time deposits	224	171	501	322
FHLB borrowings	102	3	166	49
Junior subordinated debentures	90	220	220	446
Other	48	67	93	119
Total interest expense	912	781	1,953	1,538
Net interest income	10,726	11,594	21,935	23,020
Provision for loan losses	1,417	77	2,938	255
Net interest income after provision for loan losses	9,309	11,517	18,997	22,765
Non-interest income:
Service charges	718	1,138	1,826	2,231
Other service charges and fees	162	177	355	346
Gain on sale of securities	457	0	457	231
Mortgage banking income	563	311	885	458
Insurance and brokerage commissions	205	205	447	436
Appraisal management fee income	1,734	1,112	3,084	1,974
Miscellaneous	1,400	1,442	2,780	2,829
Total non-interest income	5,239	4,385	9,834	8,505
Non-interest expense:
Salaries and employee benefits	5,535	5,718	11,259	11,365
Occupancy	1,861	1,811	3,782	3,548
Professional fees	414	429	747	718
Advertising	196	275	414	541
Debit card expense	258	239	488	466
FDIC insurance	48	80	88	152
Appraisal management fee expense	1,333	864	2,367	1,526
Other	1,807	1,828	3,756	3,844
Total non-interest expense	11,452	11,244	22,901	22,160
Earnings before income taxes	3,096	4,658	5,930	9,110
Income tax expense	535	845	1,002	1,630
Net earnings	$ 2,561	$ 3,813	$ 4,928	$ 7,480
Basic net earnings per share	$ 0.44	$ 0.64	$ 0.84	$ 1.25
Diluted net earnings per share	0.44	0.64	0.84	1.25
Cash dividends declared per share	$ 0.15	$ 0.14	$ 0.45	$ 0.38

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Statement of Comprehensive Income [Abstract]
Net earnings	$ 2,561	$ 3,813	$ 4,928	$ 7,480
Other comprehensive income:
Unrealized holding gains on securities available for sale	2,396	2,757	5,110	3,883
Reclassification adjustment for gains on securities available for sale included in net earnings	(457)	0	(457)	(231)
Total other comprehensive income, before income taxes	1,939	2,757	4,653	3,652
Income tax benefit related to other comprehensive income:
Unrealized holding gains on securities available for sale	550	634	1,174	892
Reclassification adjustment for gains on securities available for sale included in net earnings	(105)	0	(105)	(53)
Total income tax benefit related to other comprehensive income (loss)	445	634	1,069	839
Total other comprehensive income, net of tax	1,494	2,123	3,584	2,813
Total comprehensive income	$ 4,055	$ 5,936	$ 8,512	$ 10,293

XML

Consolidated Statements of Changes in Shareholders' Equity - USD ($) $ in Thousands	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income	Total
Beginning balance, shares at Dec. 31, 2018	5,995,256
Beginning balance, amount at Dec. 31, 2018	$ 62,096	$ 60,535	$ 986	$ 123,617
Common stock repurchase, shares	(5,518)
Common stock repurchase, amount	$ (152)			(152)
Cash dividends declared on common stock		(1,445)		(1,445)
Restricted stock units exercised, shares	7,398
Restricted stock units exercised, amount	$ 207			207
Net earnings		3,667		3,667
Change in accumulated other comprehensive income, net of tax			690	690
Ending balance, shares at Mar. 31, 2019	5,997,136
Ending balance, amount at Mar. 31, 2019	$ 62,151	62,757	1,676	126,584
Common stock repurchase, shares	(63,996)
Common stock repurchase, amount	$ (1,761)			(1,761)
Cash dividends declared on common stock		(832)		(832)
Restricted stock units exercised, shares	0
Restricted stock units exercised, amount	$ 0			0
Net earnings		3,813		3,813
Change in accumulated other comprehensive income, net of tax			2,123	2,123
Ending balance, shares at Jun. 30, 2019	5,933,140
Ending balance, amount at Jun. 30, 2019	$ 60,390	65,738	3,799	129,927
Beginning balance, shares at Dec. 31, 2019	5,912,300
Beginning balance, amount at Dec. 31, 2019	$ 59,813	70,663	3,644	134,120
Common stock repurchase, shares	(126,800)
Common stock repurchase, amount	$ (2,999)			(2,999)
Cash dividends declared on common stock		(1,779)		(1,779)
Restricted stock units exercised, shares	2,004
Restricted stock units exercised, amount	$ 57			57
Net earnings		2,367		2,367
Change in accumulated other comprehensive income, net of tax			2,090	2,090
Ending balance, shares at Mar. 31, 2020	5,787,504
Ending balance, amount at Mar. 31, 2020	$ 56,871	71,251	5,734	133,856
Cash dividends declared on common stock		(870)		(870)
Net earnings		2,561		2,561
Change in accumulated other comprehensive income, net of tax			1,494	1,491
Ending balance, shares at Jun. 30, 2020	5,787,504
Ending balance, amount at Jun. 30, 2020	$ 56,871	$ 72,942	$ 7,228	$ 137,041

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Cash flows from operating activities:
Net earnings	$ 4,928	$ 7,480
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation, amortization and accretion	2,017	1,926
Provision for loan losses	2,938	255
Deferred income taxes	(16)	(4)
Gain on sale of investment securities	(457)	(231)
Write-down of other real estate	0	17
Restricted stock expense	(75)	170
Proceeds from sales of mortgage loans held for sale	43,832	18,572
Origination of mortgage loans held for sale	(50,009)	(20,201)
Change in:
Cash surrender value of life insurance	(188)	(190)
Right of use lease asset	255	392
Other assets	(212)	1,202
Lease liability	(244)	(400)
Other liabilities	3,214	(3,596)
Net cash provided by operating activities	5,983	5,392
Cash flows from investing activities:
Purchases of investment securities available for sale	(37,340)	(21,405)
Proceeds from sales, calls and maturities of investment securities available for sale	20,592	23,707
Proceeds from paydowns of investment securities available for sale	9,305	6,354
Proceeds from paydowns on other investments	88	66
Purchases of FHLB stock	(3,031)	(1)
Net change in loans	(116,854)	(29,503)
Purchases of premises and equipment	(1,085)	(1,827)
Net cash used by investing activities	(128,325)	(22,609)
Cash flows from financing activities:
Net change in deposits	187,812	27,014
Net change in securities sold under agreement to repurchase	7,526	(10,362)
Proceeds from FHLB borrowings	70,000	89,000
Repayments of FHLB borrowings	0	(89,000)
Repayments of Junior Subordinated Debt	(155)	0
Proceeds from Fed Funds purchased	(6,935)	74,450
Repayments of Fed Funds purchased	6,935	(74,450)
Restricted stock units exercised	57	207
Common stock repurchased	(2,999)	(1,913)
Cash dividends paid on common stock	(2,647)	(2,277)
Net cash provided by financing activities	259,594	12,669
Net change in cash and cash equivalents	137,252	(4,548)
Cash and cash equivalents at beginning of period	52,387	43,370
Cash and cash equivalents at end of period	189,639	38,822
Cash paid during the period for:
Interest	1,909	1,529
Income taxes	796	1,616
Noncash investing and financing activities:
Change in unrealized gain on investment securities available for sale, net	3,584	2,813
Issuance of accrued restricted stock units	57	207
Transfers of loans to other real estate and repossessions	0	0
Initial recognition of lease right-of-use asset and lease liability recorded upon adoption of ASU 2016-02	$ 132	$ 4,401

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1. Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

1. Summary of Significant Accounting Policies

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

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

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2019) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2019 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2020 Annual Meeting of Shareholders.

Recent Accounting Pronouncements

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

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

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

ASU 2014-09

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

Revenue and Method of Adoption

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

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

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $446,000 and $435,000 for the six months ended June 30, 2020 and 2019, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was $2.0 million for the six months ended June 30, 2020 and 2019. 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 $388,000 and $304,000 for the six months ended June 30, 2020 and 2019, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $3.1 million and $2.0 million for the six months ended June 30, 2020 and 2019, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

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, 2020 derived from contracts in which services are transferred at a point in time was approximately $4.0 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

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

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

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

ASU 2016-02

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

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

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

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

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

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

A director of the Company has a membership interest in a company that leases two branch facilities to the Bank. The Bank’s lease payments for these facilities totaled $115,000 for the six months ended June 30, 2020 and 2019.

The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of June 30, 2020, which may impact the Company’s financial statements.

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.

ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
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.

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.

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2. Investment Securities

6 Months Ended

Jun. 30, 2020

Investments, Debt and Equity Securities [Abstract]

2. Investment Securities

Investment securities available for sale at June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)
	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	74,338		3,362		39		77,661
U.S. Government sponsored enterprises		22,166		1,044		222		22,988
State and political subdivisions		101,329		5,241		—		106,570
Trust preferred securities		250		—		—		250
Total	$	198,083		9,647		261		207,469

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

The current fair value and associated unrealized losses on investments in securities with unrealized losses at June 30, 2020 and December 31, 2019 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

(Dollars in thousands)
	June 30, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	10,857		39		—		—		10,857		39
U.S. Government sponsored enterprises		—		—		4,454		222		4,454		222
Total	$	10,857		39		4,454		222		15,311		261

(Dollars in thousands)
	December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	28,395		177		6,351		50		34,746		227
U.S. Government sponsored enterprises		2,899		10		6,151		301		9,050		311
State and political subdivisions		7,367		200		—		—		7,367		200
Total	$	38,661		387		12,502		351		51,163		738

At June 30, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $261,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the June 30, 2020 tables above, eight out of 63 securities issued by state and political subdivisions 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, 2020, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2020
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	9,933		10,127
Due from one to five years		48,311		50,935
Due from five to ten years		48,710		51,567
Due after ten years		16,541		16,929
Mortgage-backed securities		74,338		77,661
Trust preferred securities		250		250
Total	$	198,083		207,469

Proceeds from sales of securities available for sale during the six months ended June 30, 2020 were $17.0 million and resulted in net gains of $457,000. Proceeds from sales of securities available for sale during the six months ended June 30, 2019 were $12.3 million and resulted in net gains of $231,000.

Securities with a fair value of approximately $70.0 million and $66.0 million at June 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits and for other purposes as required by law.

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3. Loans

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

3. Loans

Major classifications of loans at June 30, 2020 and December 31, 2019 are summarized as follows:

(Dollars in thousands)
	June 30, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	110,077		92,596
Single-family residential		268,174		269,475
Single-family residential - Banco de la Gente non-traditional		29,325		30,793
Commercial		303,828		291,255
Multifamily and farmland		49,465		48,090
Total real estate loans		760,869		732,209
Loans not secured by real estate:
Commercial loans		188,398		100,263
Farm loans		887		1,033
Consumer loans		7,545		8,432
All other loans		8,844		7,937
Total loans		966,543		849,874
Less allowance for loan losses		9,433		6,680
Total net loans	$	957,110		843,194

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

● Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of June 30, 2020, construction and land development loans comprised approximately 11% 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, 2020, single-family residential loans comprised approximately 31% of the Bank’s total loan portfolio, and include Banco’s non-traditional single-family residential loans, which were approximately 3% of the Bank’s total loan portfolio.

● Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of June 30, 2020, commercial real estate loans comprised approximately 31% 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, 2020, commercial loans comprised approximately 19% of the Bank’s total loan portfolio, including $98.1 million in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) loans.

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

The following tables present an age analysis of past due loans, by loan type, as of June 30, 2020 and December 31, 2019:

June 30, 2020
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	—		—		—		110,077		110,077		—
Single-family residential		1,030		371		1,401		266,773		268,174		—
Single-family residential - Banco de la Gente non-traditional		1,556		263		1,819		27,506		29,325		—
Commercial		—		405		405		303,423		303,828		—
Multifamily and farmland		—		—		—		49,465		49,465		—
Total real estate loans		2,586		1,039		3,625		757,244		760,869		—
Loans not secured by real estate:
Commercial loans		—		—		—		188,398		188,398		—
Farm loans		—		—		—		887		887		—
Consumer loans		27		18		45		7,500		7,545		—
All other loans		—		—		—		8,844		8,844		—
Total loans	$	2,613		1,057		3,670		962,873		966,543		—

December 31, 2019
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	803		—		803		91,793		92,596		—
Single-family residential		3,000		126		3,126		266,349		269,475		—
Single-family residential - Banco de la Gente non-traditional		4,834		413		5,247		25,546		30,793		—
Commercial		504		176		680		290,575		291,255		—
Multifamily and farmland		—		—		—		48,090		48,090		—
Total real estate loans		9,141		715		9,856		722,353		732,209		—
Loans not secured by real estate:
Commercial loans		432		—		432		99,831		100,263		—
Farm loans		—		—		—		1,033		1,033		—
Consumer loans		170		22		192		8,240		8,432		—
All other loans		—		—		—		7,937		7,937		—
Total loans	$	9,743		737		10,480		839,394		849,874		—

The following table presents non-accrual loans as of June 30, 2020 and December 31, 2019:

(Dollars in thousands)
	June 30, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	—		—
Single-family residential		1,401		1,378
Single-family residential - Banco de la Gente non-traditional		1,822		1,764
Commercial		476		256
Total real estate loans		3,699		3,398
Loans not secured by real estate:
Commercial loans		276		122
Consumer loans		24		33
Total	$	3,999		3,553

At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Accruing impaired loans were $22.5 million, $21.3 million and $21.4 million at June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Interest income recognized on accruing impaired loans was $635,000, $1.3 million, and $668,000 for the six months ended June 30, 2020, the year ended December 31, 2019 and the six months ended June 30, 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following table presents impaired loans as of June 30, 2020:

June 30, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	134		—		134		134		5
Single-family residential		5,414		391		4,579		4,970		20
Single-family residential - Banco de la Gente stated income		14,535		—		13,749		13,749		900
Commercial		3,005		739		2,248		2,987		14
Multifamily and farmland		—		—		—		—		—
Total impaired real estate loans		23,088		1,130		20,710		21,840		939
Loans not secured by real estate:
Commercial loans		640		275		315		590		2
Consumer loans		70		—		66		66		1
Total impaired loans	$	23,798		1,405		21,091		22,496		942

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, 2020 and 2019.

(Dollars in thousands)
	Three months ended								Six months ended
	June 30, 2020				June 30, 2019				June 30, 2020				June 30, 2019
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	157		4		232		2		166		7		248		6
Single-family residential		4,778		59		4,214		57		4,734		118		4,826		118
Single-family residential - Banco de la Gente stated income		13,856		193		15,347		239		14,028		421		15,010		491
Commercial		3,115		43		1,739		22		2,700		72		1,801		45
Multifamily and farmland		—		—		—		—		—		—		—		—
Total impaired real estate loans		21,906		299		21,532		320		21,628		618		21,885		660
Loans not secured by real estate:
Commercial loans		643		6		114		3		487		15		106		4
Consumer loans		77		1		104		2		83		2		107		4
Total impaired loans	$	22,626		306		21,750		325		22,198		635		22,098		668

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

December 31, 2019
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	183		—		183		183		7		231		12
Single-family residential		5,152		403		4,243		4,646		36		4,678		269
Single-family residential - Banco de la Gente non-traditional		15,165		—		14,371		14,371		944		14,925		956
Commercial		1,879		—		1,871		1,871		7		1,822		91
Total impaired real estate loans		22,379		403		20,668		21,071		994		21,656		1,328
Loans not secured by real estate:
Commercial loans		180		92		84		176		—		134		9
Consumer loans		100		—		96		96		2		105		7
Total impaired loans	$	22,659		495		20,848		21,343		996		21,895		1,344

Changes in the allowance for loan losses for the three and six months ended June 30, 2020 and 2019 were as follows:

(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development		Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
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

(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, 2019:
Allowance for loan losses:
Beginning balance	$	813		1,325		1,177		1,278	83	626		—	161		982	6,445
Charge-offs		(21	)	(22	)	—		—	—	(1	)	—	(316	)	—	(360	)
Recoveries		3		53		—		23	—	14		—	108		—	201
Provision		(32	)	(44	)	(61	)	33	27	(91	)	—	208		215	255
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Three months ended June 30, 2019:
Allowance for loan losses:
Beginning balance	$	831		1,256		1,174		1,292	98	610		—	162		1,138	6,561
Charge-offs		(21	)	(9	)	—		—	—	—		—	(166	)	—	(196	)
Recoveries		2		5		—		19	—	8		—	65		—	99
Provision		(49	)	60		(58	)	23	12	(70	)	—	100		59	77
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Allowance for loan losses at June 30, 2019:
Ending balance: individually evaluated for impairment	$	—		2		970		12	—	—		—	—		—	984
Ending balance: collectively evaluated for impairment		763		1,310		146		1,322	110	548		—	161		1,197	5,557
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Loans at June 30, 2019:
Ending balance	$	86,920		264,724		32,499		281,895	44,065	103,466		1,060	18,738		—	833,367
Ending balance: individually evaluated for impairment	$	11		1,738		13,508		1,643	—	38		—	—		—	16,938
Ending balance: collectively evaluated for impairment	$	86,909		262,986		18,991		280,252	44,065	103,428		1,060	18,738		—	816,429

The provision for loan losses for the three months ended June 30, 2020 was $1.4 million, compared to $77,000 for the three months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model due to the impact to the economy from the COVID-19 pandemic and a $34.4 million increase in loans, excluding $98.1 million in SBA PPP loans, from June 30, 2019 to June 30, 2020. PPP loans are excluded from the ALLL as PPP loans are 100 percent guaranteed by SBA. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic.

The provision for loan losses for the six months ended June 30, 2020 was $2.9 million, compared to $255,000 for the six months ended June 30, 2019. The increase in the provision for loan losses is primarily attributable to increases in the qualitative factors applied in the Company’s ALLL model due to the impact to the economy from the COVID-19 pandemic and a $133.2 million increase in loans, excluding $98.1 million in SBA PPP loans, from June 30, 2019 to June 30, 2020. PPP loans are excluded from the ALLL as PPP loans are 100 percent guaranteed by SBA. The ALLL model also includes reserves on $120.6 million in loans with payment modifications made in 2020 as a result of the COVID-19 pandemic.

Reserves associated with COVID-19 payment modifications increased $1.2 million from $439,000 at March 31, 2020 to $1.6 million at June 30, 2020.

The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:

● Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. Certificates of deposit or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.

● Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.

● Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).

● Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

● Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.

● Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

● Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

● Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.

The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of June 30, 2020 and December 31, 2019:

June 30, 2020
(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	138	13,742	—	—	—	742	—	626	—	15,248
2- High Quality		31,603	126,830	—	22,702	299	23,690	—	2,347	1,713	209,184
3- Good Quality		69,907	103,328	11,382	238,800	44,129	152,603	816	4,150	6,411	631,526
4- Management Attention		5,388	17,814	13,141	38,202	4,504	10,576	71	374	720	90,790
5- Watch		2,981	3,104	1,923	3,265	533	411	—	7	—	12,224
6- Substandard		60	3,356	2,879	859	—	376	—	41	—	7,571
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	110,077	268,174	29,325	303,828	49,465	188,398	887	7,545	8,844	966,543

December 31, 2019
(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	—	8,819	—	—	—	330	—	693	—	9,842
2- High Quality		32,029	128,757	—	21,829	256	20,480	—	2,708	1,860	207,919
3- Good Quality		52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention		5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch		3,007	3,196	2,027	3,072	543	492	—	8	—	12,345
6- Substandard		64	3,048	2,926	256	—	124	—	48	—	6,466
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $2.9 million and $4.3 million at June 30, 2020 and December 31, 2019, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at June 30, 2020 and December 31, 2019.

There were no new TDR modifications during the six months ended June 30, 2020 and 2019.

There were no loans modified as TDR that defaulted during the six months ended June 30, 2020 and 2019, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of June 30, 2020, the Bank had originated $34.3 million in PPP loans during the second round of PPP funding. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of June 30, 2020. Total PPP loans originated as of June 30, 2020 amounted to $98.8 million.

The Bank has continued to modify payments on loans due to the COVID-19 pandemic. At June 30, 2020, loans totaling $120.6 million had payment modifications due to the COVID-19 pandemic. Loans with payment modifications associated with the COVID-19 pandemic include $111.4 million in loans secured by real estate, $8.4 million in commercial loans not secured by real estate and $788,000 in consumer loans not secured by real estate at June 30, 2020. These payment modifications are primarily interest only payments for three to six months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.

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4. Net Earnings Per Share

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

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, 2020 and 2019 is as follows:

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		5,787,504	$	0.44
Effect of dilutive securities:
Restricted stock units		—		13,127
Diluted earnings per share	$	2,561		5,800,631	$	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		5,828,965	$	0.84
Effect of dilutive securities:
Restricted stock units		—		13,284
Diluted earnings per share	$	4,928		5,842,249	$	0.84

For the three months ended June 30, 2019
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,813		5,940,556	$	0.64
Effect of dilutive securities:
Restricted stock units		—		24,453
Diluted earnings per share	$	3,813		5,965,009	$	0.64

For the six months ended June 30, 2019
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	7,480		5,968,368	$	1.25
Effect of dilutive securities:
Restricted stock units		—		24,412
Diluted earnings per share	$	7,480		5,992,780	$	1.25

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5. Stock-Based Compensation

6 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

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, 2020, there were no outstanding shares under the 2009 Plan.

The Company granted 16,583 restricted stock units under the 2009 Plan at a grant date fair value of $16.34 per share during the first quarter of 2015. The Company granted 5,544 restricted stock units under the 2009 Plan at a grant date fair value of $16.91 per share during the first quarter of 2016. The Company granted 4,114 restricted stock units under the 2009 Plan at a grant date fair value of $25.00 per share during the first quarter of 2017. The Company granted 3,725 restricted stock units under the 2009 Plan at a grant date fair value of $31.43 per share during the first quarter of 2018. The Company granted 5,290 restricted stock units under the 2009 Plan at a grant date fair value of $28.43 per share during the first quarter of 2019. The number of restricted stock units granted and grant date fair values for the restricted stock units granted in 2015 through 2017 have been restated to reflect the 10% stock dividend that was paid in the fourth quarter of 2017. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As of June 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $97,000.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders on May 7, 2020 (the “2020 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, restricted stock units, performance units, stock appreciation rights or book value shares, may be granted to eligible directors and employees. A total of 292,365 shares are currently reserved for possible issuance under the 2020 Plan. All stock-based rights under the 2020 Plan must be granted or awarded by May 7, 2030 (or ten years from the 2020 Plan effective date).

The Company granted 7,635 restricted stock units under the 2020 Plan at a grant date fair value of $17.08 per share during the second quarter of 2020. The Company recognizes compensation expense on the restricted stock units over the period of time the restrictions are in place (four years from the grant date for 2020 grants). As of June 30, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $226,000.

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. The Company recognized compensation expense for restricted stock unit awards granted under the 2009 Plan of $170,000 for the six months ended June 30, 2019.

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6. Fair Value

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

6. Fair Value

The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination or issuance. The methods of determining the fair value of assets and liabilities presented in this note are consistent with methodologies disclosed in Note 16 of the Company’s 2019 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU No. 2016-01.

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

● Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.

● Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

● Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Cash and Cash Equivalents

For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.

Investment Securities Available for Sale

Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.

Other Investments

For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.

Mortgage Loans Held for Sale

Mortgage loans held for sale are carried at the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

Loans

In accordance with ASU No. 2016-01, the fair value of loans, excluding previously presented impaired loans measured at fair value on a non-recurring basis, is estimated using discounted cash flow analyses. The discount rates used to determine fair value use interest rate spreads that reflect factors such as liquidity, credit, and nonperformance risk of the loans. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

Deposits

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

Securities Sold Under Agreements to Repurchase

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

FHLB Borrowings

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

Junior Subordinated Debentures

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

Commitments to Extend Credit and Standby Letters of Credit

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

Limitations

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

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

The table below presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level within the fair value hierarchy, as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)
	June 30, 2020
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	77,661		—		77,661		—
U.S. Government sponsored enterprises	$	22,988		—		22,988		—
State and political subdivisions	$	106,570		—		106,570		—
Trust preferred securities	$	250		—		—		250

(Dollars in thousands)
	December 31, 2019
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	78,956		—		78,956		—
U.S. Government sponsored enterprises	$	28,397		—		28,397		—
State and political subdivisions	$	88,143		—		88,143		—
Trust preferred securities	$	250		—		—		250

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the six months ended June 30, 2020.

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

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at June 30, 2020 and December 31, 2019 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management’s knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

(Dollars in thousands)
	Fair Value Measurements June 30, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	10,594		—		—		10,594
Impaired loans	$	21,554		—		—		21,554

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

(Dollars in thousands)
	Fair Value June 30, 2020		Fair Value December 31, 2019		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	10,594		4,417	Rate lock commitment	N/A	N/A
Impaired loans	$	21,554		20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

The carrying amount and estimated fair value of financial instruments at June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)
			Fair Value Measurements at June 30, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	189,639		189,639		—		—		189,639
Investment securities available for sale	$	207,469		—		207,219		250		207,469
Other investments	$	7,196		—		—		7,196		7,196
Mortgage loans held for sale	$	10,594		—		—		10,594		10,594
Loans, net	$	957,110		—		—		949,158		949,158
Cash surrender value of life insurance	$	16,507		—		16,507		—		16,507
Liabilities:
Deposits	$	1,154,329		—		—		1,148,380		1,148,380
Securities sold under agreements to repurchase	$	31,747		—		31,747		—		31,747
FHLB borrowings	$	70,000		—		—		69,974		69,974
Junior subordinated debentures	$	15,464		—		15,464		—		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	52,387		52,387		—		—		52,387
Investment securities available for sale	$	195,746		—		195,496		250		195,746
Other investments	$	4,231		—		—		4,231		4,231
Mortgage loans held for sale	$	4,417		—		—		4,417		4,417
Loans, net	$	843,194		—		—		819,397		819,397
Cash surrender value of life insurance	$	16,319		—		16,319		—		16,319
Liabilities:
Deposits	$	966,517		—		—		955,766		955,766
Securities sold under agreements to repurchase	$	24,221		—		24,221		—		24,221
Junior subordinated debentures	$	15,619		—		15,619		—		15,619

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7. Leases

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

7. Leases

As of June 30, 2020, the Company had operating ROU assets of $3.4 million and operating lease liabilities of $3.4 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, 2020 and 2019.

(Dollars in thousands)
	June 30, 2020			June 30, 2019
Operating lease cost	$	443		$	446
Other information:
Cash paid for amounts included in the measurement of lease liabilities		432			433
Operating cash flows from operating leases		—			—
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		132			—
Weighted-average remaining lease term - operating leases		7.03			7.05
Weighted-average discount rate - operating leases		3.13	%		3.17	%

The following table presents lease maturities as of June 30, 2020 and December 31, 2019.

Maturity Analysis of Operating Lease Liabilities:		June 30, 2020			December 31, 2019
	2020	$	420		$	823
	2021		822			793
	2022		525			501
	2023		416			393
	2024		328			304
	Thereafter		1,325			1,320
	Total		3,836			4,134
	Less: Imputed Interest		(433	)		(487	)
	Operating Lease Liability	$	3,403		$	3,647

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8. Subsequent Events

6 Months Ended

Jun. 30, 2020

Subsequent Events [Abstract]

8. Subsequent Events

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

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2. Investment Securities (Tables)

6 Months Ended

Jun. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Investment securities available for sale

(Dollars in thousands)
	June 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	74,338		3,362		39		77,661
U.S. Government sponsored enterprises		22,166		1,044		222		22,988
State and political subdivisions		101,329		5,241		—		106,570
Trust preferred securities		250		—		—		250
Total	$	198,083		9,647		261		207,469

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

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

(Dollars in thousands)
	June 30, 2020
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	10,857		39		—		—		10,857		39
U.S. Government sponsored enterprises		—		—		4,454		222		4,454		222
Total	$	10,857		39		4,454		222		15,311		261

(Dollars in thousands)
	December 31, 2019
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	28,395		177		6,351		50		34,746		227
U.S. Government sponsored enterprises		2,899		10		6,151		301		9,050		311
State and political subdivisions		7,367		200		—		—		7,367		200
Total	$	38,661		387		12,502		351		51,163		738

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

June 30, 2020
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	9,933		10,127
Due from one to five years		48,311		50,935
Due from five to ten years		48,710		51,567
Due after ten years		16,541		16,929
Mortgage-backed securities		74,338		77,661
Trust preferred securities		250		250
Total	$	198,083		207,469

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3. Loans (Tables)

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Major classifications of loans

(Dollars in thousands)
	June 30, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	110,077		92,596
Single-family residential		268,174		269,475
Single-family residential - Banco de la Gente non-traditional		29,325		30,793
Commercial		303,828		291,255
Multifamily and farmland		49,465		48,090
Total real estate loans		760,869		732,209
Loans not secured by real estate:
Commercial loans		188,398		100,263
Farm loans		887		1,033
Consumer loans		7,545		8,432
All other loans		8,844		7,937
Total loans		966,543		849,874
Less allowance for loan losses		9,433		6,680
Total net loans	$	957,110		843,194

Age analysis of past due loans, by loan type

June 30, 2020
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	—		—		—		110,077		110,077		—
Single-family residential		1,030		371		1,401		266,773		268,174		—
Single-family residential - Banco de la Gente non-traditional		1,556		263		1,819		27,506		29,325		—
Commercial		—		405		405		303,423		303,828		—
Multifamily and farmland		—		—		—		49,465		49,465		—
Total real estate loans		2,586		1,039		3,625		757,244		760,869		—
Loans not secured by real estate:
Commercial loans		—		—		—		188,398		188,398		—
Farm loans		—		—		—		887		887		—
Consumer loans		27		18		45		7,500		7,545		—
All other loans		—		—		—		8,844		8,844		—
Total loans	$	2,613		1,057		3,670		962,873		966,543		—

December 31, 2019
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	803		—		803		91,793		92,596		—
Single-family residential		3,000		126		3,126		266,349		269,475		—
Single-family residential - Banco de la Gente non-traditional		4,834		413		5,247		25,546		30,793		—
Commercial		504		176		680		290,575		291,255		—
Multifamily and farmland		—		—		—		48,090		48,090		—
Total real estate loans		9,141		715		9,856		722,353		732,209		—
Loans not secured by real estate:
Commercial loans		432		—		432		99,831		100,263		—
Farm loans		—		—		—		1,033		1,033		—
Consumer loans		170		22		192		8,240		8,432		—
All other loans		—		—		—		7,937		7,937		—
Total loans	$	9,743		737		10,480		839,394		849,874		—

Non-accrual loans

(Dollars in thousands)
	June 30, 2020		December 31, 2019
Real estate loans:
Construction and land development	$	—		—
Single-family residential		1,401		1,378
Single-family residential - Banco de la Gente non-traditional		1,822		1,764
Commercial		476		256
Total real estate loans		3,699		3,398
Loans not secured by real estate:
Commercial loans		276		122
Consumer loans		24		33
Total	$	3,999		3,553

Impaired loans

The following table presents impaired loans as of June 30, 2020:

June 30, 2020
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance
Real estate loans:
Construction and land development	$	134		—		134		134		5
Single-family residential		5,414		391		4,579		4,970		20
Single-family residential - Banco de la Gente stated income		14,535		—		13,749		13,749		900
Commercial		3,005		739		2,248		2,987		14
Multifamily and farmland		—		—		—		—		—
Total impaired real estate loans		23,088		1,130		20,710		21,840		939
Loans not secured by real estate:
Commercial loans		640		275		315		590		2
Consumer loans		70		—		66		66		1
Total impaired loans	$	23,798		1,405		21,091		22,496		942

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, 2020 and 2019.

(Dollars in thousands)
	Three months ended								Six months ended
	June 30, 2020				June 30, 2019				June 30, 2020				June 30, 2019
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
Real estate loans:
Construction and land development	$	157		4		232		2		166		7		248		6
Single-family residential		4,778		59		4,214		57		4,734		118		4,826		118
Single-family residential - Banco de la Gente stated income		13,856		193		15,347		239		14,028		421		15,010		491
Commercial		3,115		43		1,739		22		2,700		72		1,801		45
Multifamily and farmland		—		—		—		—		—		—		—		—
Total impaired real estate loans		21,906		299		21,532		320		21,628		618		21,885		660
Loans not secured by real estate:
Commercial loans		643		6		114		3		487		15		106		4
Consumer loans		77		1		104		2		83		2		107		4
Total impaired loans	$	22,626		306		21,750		325		22,198		635		22,098		668

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

December 31, 2019
(Dollars in thousands)
	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Recorded Investment in Impaired Loans		Related Allowance		Average Outstanding Impaired Loans		YTD Interest Income Recognized
Real estate loans:
Construction and land development	$	183		—		183		183		7		231		12
Single-family residential		5,152		403		4,243		4,646		36		4,678		269
Single-family residential - Banco de la Gente non-traditional		15,165		—		14,371		14,371		944		14,925		956
Commercial		1,879		—		1,871		1,871		7		1,822		91
Total impaired real estate loans		22,379		403		20,668		21,071		994		21,656		1,328
Loans not secured by real estate:
Commercial loans		180		92		84		176		—		134		9
Consumer loans		100		—		96		96		2		105		7
Total impaired loans	$	22,659		495		20,848		21,343		996		21,895		1,344

Changes in the allowance for loan losses

(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development		Single-Family Residential	Single-Family Residential - Banco de la Gente Non-traditional	Commercial		Multifamily and Farmland		Commercial		Farm	Consumer and All Other		Unallocated	Total
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

(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, 2019:
Allowance for loan losses:
Beginning balance	$	813		1,325		1,177		1,278	83	626		—	161		982	6,445
Charge-offs		(21	)	(22	)	—		—	—	(1	)	—	(316	)	—	(360	)
Recoveries		3		53		—		23	—	14		—	108		—	201
Provision		(32	)	(44	)	(61	)	33	27	(91	)	—	208		215	255
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Three months ended June 30, 2019:
Allowance for loan losses:
Beginning balance	$	831		1,256		1,174		1,292	98	610		—	162		1,138	6,561
Charge-offs		(21	)	(9	)	—		—	—	—		—	(166	)	—	(196	)
Recoveries		2		5		—		19	—	8		—	65		—	99
Provision		(49	)	60		(58	)	23	12	(70	)	—	100		59	77
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Allowance for loan losses at June 30, 2019:
Ending balance: individually evaluated for impairment	$	—		2		970		12	—	—		—	—		—	984
Ending balance: collectively evaluated for impairment		763		1,310		146		1,322	110	548		—	161		1,197	5,557
Ending balance	$	763		1,312		1,116		1,334	110	548		—	161		1,197	6,541
Loans at June 30, 2019:
Ending balance	$	86,920		264,724		32,499		281,895	44,065	103,466		1,060	18,738		—	833,367
Ending balance: individually evaluated for impairment	$	11		1,738		13,508		1,643	—	38		—	—		—	16,938
Ending balance: collectively evaluated for impairment	$	86,909		262,986		18,991		280,252	44,065	103,428		1,060	18,738		—	816,429

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

June 30, 2020
(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	138	13,742	—	—	—	742	—	626	—	15,248
2- High Quality		31,603	126,830	—	22,702	299	23,690	—	2,347	1,713	209,184
3- Good Quality		69,907	103,328	11,382	238,800	44,129	152,603	816	4,150	6,411	631,526
4- Management Attention		5,388	17,814	13,141	38,202	4,504	10,576	71	374	720	90,790
5- Watch		2,981	3,104	1,923	3,265	533	411	—	7	—	12,224
6- Substandard		60	3,356	2,879	859	—	376	—	41	—	7,571
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	110,077	268,174	29,325	303,828	49,465	188,398	887	7,545	8,844	966,543

December 31, 2019
(Dollars in thousands)
		Real Estate Loans
		Construction and Land Development	Single-Family Residential	Single-Family Residential - Banco de la Gente non-traditional	Commercial	Multifamily and Farmland	Commercial	Farm	Consumer	All Other	Total
1- Excellent Quality	$	—	8,819	—	—	—	330	—	693	—	9,842
2- High Quality		32,029	128,757	—	21,829	256	20,480	—	2,708	1,860	207,919
3- Good Quality		52,009	107,246	12,103	231,003	42,527	72,417	948	4,517	5,352	528,122
4- Management Attention		5,487	18,409	13,737	35,095	4,764	6,420	85	458	725	85,180
5- Watch		3,007	3,196	2,027	3,072	543	492	—	8	—	12,345
6- Substandard		64	3,048	2,926	256	—	124	—	48	—	6,466
7- Doubtful		—	—	—	—	—	—	—	—	—	—
8- Loss		—	—	—	—	—	—	—	—	—	—
Total	$	92,596	269,475	30,793	291,255	48,090	100,263	1,033	8,432	7,937	849,874

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4. Net Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

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

For the three months ended June 30, 2020
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,561		5,787,504	$	0.44
Effect of dilutive securities:
Restricted stock units		—		13,127
Diluted earnings per share	$	2,561		5,800,631	$	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		5,828,965	$	0.84
Effect of dilutive securities:
Restricted stock units		—		13,284
Diluted earnings per share	$	4,928		5,842,249	$	0.84

For the three months ended June 30, 2019
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	3,813		5,940,556	$	0.64
Effect of dilutive securities:
Restricted stock units		—		24,453
Diluted earnings per share	$	3,813		5,965,009	$	0.64

For the six months ended June 30, 2019
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	7,480		5,968,368	$	1.25
Effect of dilutive securities:
Restricted stock units		—		24,412
Diluted earnings per share	$	7,480		5,992,780	$	1.25

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6. Fair Value (Tables)

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

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

(Dollars in thousands)
	June 30, 2020
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	77,661		—		77,661		—
U.S. Government sponsored enterprises	$	22,988		—		22,988		—
State and political subdivisions	$	106,570		—		106,570		—
Trust preferred securities	$	250		—		—		250

(Dollars in thousands)
	December 31, 2019
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	78,956		—		78,956		—
U.S. Government sponsored enterprises	$	28,397		—		28,397		—
State and political subdivisions	$	88,143		—		88,143		—
Trust preferred securities	$	250		—		—		250

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

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

Fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis

(Dollars in thousands)
	Fair Value Measurements June 30, 2020		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	10,594		—		—		10,594
Impaired loans	$	21,554		—		—		21,554

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

(Dollars in thousands)
	Fair Value June 30, 2020		Fair Value December 31, 2019		Valuation Technique	Significant Unobservable Inputs	General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	10,594		4,417	Rate lock commitment	N/A	N/A
Impaired loans	$	21,554		20,347	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability	0 - 25%

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

(Dollars in thousands)
			Fair Value Measurements at June 30, 2020
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	189,639		189,639		—		—		189,639
Investment securities available for sale	$	207,469		—		207,219		250		207,469
Other investments	$	7,196		—		—		7,196		7,196
Mortgage loans held for sale	$	10,594		—		—		10,594		10,594
Loans, net	$	957,110		—		—		949,158		949,158
Cash surrender value of life insurance	$	16,507		—		16,507		—		16,507
Liabilities:
Deposits	$	1,154,329		—		—		1,148,380		1,148,380
Securities sold under agreements to repurchase	$	31,747		—		31,747		—		31,747
FHLB borrowings	$	70,000		—		—		69,974		69,974
Junior subordinated debentures	$	15,464		—		15,464		—		15,464

(Dollars in thousands)
			Fair Value Measurements at December 31, 2019
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	52,387		52,387		—		—		52,387
Investment securities available for sale	$	195,746		—		195,496		250		195,746
Other investments	$	4,231		—		—		4,231		4,231
Mortgage loans held for sale	$	4,417		—		—		4,417		4,417
Loans, net	$	843,194		—		—		819,397		819,397
Cash surrender value of life insurance	$	16,319		—		16,319		—		16,319
Liabilities:
Deposits	$	966,517		—		—		955,766		955,766
Securities sold under agreements to repurchase	$	24,221		—		24,221		—		24,221
Junior subordinated debentures	$	15,619		—		15,619		—		15,619

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7. Leases (Tables)

6 Months Ended

Jun. 30, 2020

Leases [Abstract]

Lease expense

(Dollars in thousands)
	June 30, 2020			June 30, 2019
Operating lease cost	$	443		$	446
Other information:
Cash paid for amounts included in the measurement of lease liabilities		432			433
Operating cash flows from operating leases		—			—
Right-of-use assets obtained in exchange for new lease liabilities - operating leases		132			—
Weighted-average remaining lease term - operating leases		7.03			7.05
Weighted-average discount rate - operating leases		3.13	%		3.17	%

Maturity analysis of operating lease liabilities

Maturity Analysis of Operating Lease Liabilities:		June 30, 2020			December 31, 2019
	2020	$	420		$	823
	2021		822			793
	2022		525			501
	2023		416			393
	2024		328			304
	Thereafter		1,325			1,320
	Total		3,836			4,134
	Less: Imputed Interest		(433	)		(487	)
	Operating Lease Liability	$	3,403		$	3,647

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2. Investment Securities (Details) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Investment Securities Available for Sale
Amortized cost	$ 198,083	$ 191,013
Estimated fair value	207,469	195,746
Mortgage-Backed Securities
Investment Securities Available for Sale
Amortized cost	74,338	77,812
Gross unrealized gains	3,362	1,371
Gross unrealized losses	39	227
Estimated fair value	77,661	78,956
U.S. Government Sponsored Enterprises
Investment Securities Available for Sale
Amortized cost	22,166	28,265
Gross unrealized gains	1,044	443
Gross unrealized losses	222	311
Estimated fair value	22,988	28,397
State and Political Subdivisions
Investment Securities Available for Sale
Amortized cost	101,329	84,686
Gross unrealized gains	5,241	3,657
Gross unrealized losses	0	200
Estimated fair value	106,570	88,143
Trust Preferred Securities
Investment Securities Available for Sale
Amortized cost	250	250
Gross unrealized gains	0	0
Gross unrealized losses	0	0
Estimated fair value	250	250
Total
Investment Securities Available for Sale
Gross unrealized gains	9,647	5,471
Gross unrealized losses	$ 261	$ 738

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2. Investment securities (Details 1) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Investment Securities With Continuous Unrealized Loss Position
Less than 12 months, fair value	$ 10,857	$ 38,661
Less than 12 months, unrealized losses	39	387
12 months or more, fair value	4,454	12,502
12 months or more, unrealized losses	222	351
Total, fair value	15,311	51,163
Total, unrealized losses	261	738
Mortgage-Backed Securities
Investment Securities With Continuous Unrealized Loss Position
Less than 12 months, fair value	10,857	28,395
Less than 12 months, unrealized losses	39	177
12 months or more, fair value	0	6,351
12 months or more, unrealized losses	0	50
Total, fair value	10,857	34,746
Total, unrealized losses	39	227
U.S. Government Sponsored Enterprises
Investment Securities With Continuous Unrealized Loss Position
Less than 12 months, fair value	0	2,899
Less than 12 months, unrealized losses	0	10
12 months or more, fair value	4,454	6,151
12 months or more, unrealized losses	222	301
Total, fair value	4,454	9,050
Total, unrealized losses	$ 222	311
State and Political Subdivisions
Investment Securities With Continuous Unrealized Loss Position
Less than 12 months, fair value		7,367
Less than 12 months, unrealized losses		200
12 months or more, fair value		0
12 months or more, unrealized losses		0
Total, fair value		7,367
Total, unrealized losses		$ 200

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2. Investment securities (Details 2) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Amortized Cost
Due within one year	$ 9,933
Due from one to five years	48,311
Due from five to ten years	48,710
Due after ten years	16,541
Mortgage-backed securities	74,338
Trust preferred securities	250
Total	198,083	$ 191,013
Estimated Fair Value
Due within one year	10,127
Due from one to five years	50,935
Due from five to ten years	51,567
Due after ten years	16,929
Mortgage-backed securities	77,661
Trust preferred securities	250
Total	$ 207,469

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2. Investment Securities (Details Narrative) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Investments, Debt and Equity Securities [Abstract]
Unrealized losses in the investment securites portfolio relating to debt securities	$ 261
Proceeds from sales of investment securities available for sale	17,000	$ 12,300
Gains on sales of available for sale securities	457	$ 231
Securities pledged to secure public deposits	$ 70,000		$ 66,000

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3. Loans (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Mar. 31, 2020	Dec. 31, 2019	Jun. 30, 2019	Mar. 31, 2019	Dec. 31, 2018
Major Classifications
Total loans	$ 966,543		$ 849,874	$ 833,367
Less allowance for loan losses	9,433	$ 8,112	6,680	6,541	$ 6,561	$ 6,445
Total net loans	957,110		843,194
Construction and Land Development
Major Classifications
Total loans	110,077		92,596	86,920
Less allowance for loan losses	1,531	1,293	694	763	831	813
Single-Family Residential
Major Classifications
Total loans	268,174		269,475	264,724
Less allowance for loan losses	1,813	1,713	1,274	1,312	1,256	1,325
Single-Family Residential - Banco de la Gente Non-Tradtional
Major Classifications
Total loans	29,325		30,793	32,499
Less allowance for loan losses	1,114	1,084	1,073	1,116	1,174	1,177
Commercial
Major Classifications
Total loans	303,828		291,255	281,895
Less allowance for loan losses	2,051	1,799	1,305	1,334	1,292	1,278
Multifamily and Farmland
Major Classifications
Total loans	49,465		48,090	44,065
Less allowance for loan losses	115	118	120	110	98	83
Total Real Estate Loans
Major Classifications
Total loans	760,869		732,209
Commercial Loans (Not Secured by Real Estate)
Major Classifications
Total loans	188,398		100,263	103,466
Less allowance for loan losses	980	1,017	688	548	610	626
Farm Loans (Not Secured by Real Estate)
Major Classifications
Total loans	887		1,033	1,060
Less allowance for loan losses	0	$ 0	0	$ 0	$ 0	$ 0
Consumer Loans (Not Secured by Real Estate)
Major Classifications
Total loans	7,545		8,432
All Other Loans (Not Secured by Real Estate)
Major Classifications
Total loans	$ 8,844		$ 7,937

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3. Loans (Details 1) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019
Past Due Loans
Loans 30-89 days past due	$ 2,613	$ 9,743
Loans 90 or more days past due	1,057	737
Total past due loans	3,670	10,480
Total current loans	962,873	839,394
Total loans	966,543	849,874	$ 833,367
Accruing loans 90 or more days past due	0	0
Construction and Land Development
Past Due Loans
Loans 30-89 days past due	0	803
Loans 90 or more days past due	0	0
Total past due loans	0	803
Total current loans	110,077	91,793
Total loans	110,077	92,596
Accruing loans 90 or more days past due	0	0
Single-Family Residential
Past Due Loans
Loans 30-89 days past due	1,030	3,000
Loans 90 or more days past due	371	126
Total past due loans	1,401	3,126
Total current loans	266,773	266,349
Total loans	268,174	269,475
Accruing loans 90 or more days past due	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional
Past Due Loans
Loans 30-89 days past due	1,556	4,834
Loans 90 or more days past due	263	413
Total past due loans	1,819	5,247
Total current loans	27,506	25,546
Total loans	29,325	30,793
Accruing loans 90 or more days past due	0	0
Commercial
Past Due Loans
Loans 30-89 days past due	0	504
Loans 90 or more days past due	405	176
Total past due loans	405	680
Total current loans	303,423	290,575
Total loans	303,828	291,255
Accruing loans 90 or more days past due	0	0
Multifamily and Farmland
Past Due Loans
Loans 30-89 days past due	0	0
Loans 90 or more days past due	0	0
Total past due loans	0	0
Total current loans	49,465	48,090
Total loans	49,465	48,090
Accruing loans 90 or more days past due	0	0
Total Real Estate Loans
Past Due Loans
Loans 30-89 days past due	2,586	9,141
Loans 90 or more days past due	1,039	715
Total past due loans	3,625	9,856
Total current loans	757,244	722,353
Total loans	760,869	732,209
Accruing loans 90 or more days past due	0	0
Commercial Loans (Not Secured by Real Estate)
Past Due Loans
Loans 30-89 days past due	0	432
Loans 90 or more days past due	0	0
Total past due loans	0	432
Total current loans	188,398	99,831
Total loans	188,398	100,263
Accruing loans 90 or more days past due	0	0
Farm Loans (Not Secured by Real Estate)
Past Due Loans
Loans 30-89 days past due	0	0
Loans 90 or more days past due	0	0
Total past due loans	0	0
Total current loans	887	1,033
Total loans	887	1,033
Accruing loans 90 or more days past due	0	0
Consumer Loans (Not Secured by Real Estate)
Past Due Loans
Loans 30-89 days past due	27	170
Loans 90 or more days past due	18	22
Total past due loans	45	192
Total current loans	7,500	8,240
Total loans	7,545	8,432
Accruing loans 90 or more days past due	0	0
All Other Loans (Not Secured by Real Estate)
Past Due Loans
Loans 30-89 days past due	0	0
Loans 90 or more days past due	0	0
Total past due loans	0	0
Total current loans	8,844	7,937
Total loans	8,844	7,937
Accruing loans 90 or more days past due	$ 0	$ 0

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3. Loans (Details 2) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Non-Accrual Loans
Non-accrual loans	$ 3,999	$ 3,553
Construction and Land Development
Non-Accrual Loans
Non-accrual loans	0	0
Single-Family Residential
Non-Accrual Loans
Non-accrual loans	1,401	1,378
Single-Family Residential - Banco de la Gente Non-Tradtional
Non-Accrual Loans
Non-accrual loans	1,822	1,764
Commercial
Non-Accrual Loans
Non-accrual loans	476	256
Total Real Estate Loans
Non-Accrual Loans
Non-accrual loans	3,699	3,398
Commercial Loans (Not Secured by Real Estate)
Non-Accrual Loans
Non-accrual loans	276	122
Consumer Loans (Not Secured by Real Estate)
Non-Accrual Loans
Non-accrual loans	$ 24	$ 33

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3. Loans (Details 3) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Impaired Loans
Unpaid contractual principal balance	$ 23,798		$ 23,798		$ 22,659
Recorded investment with no allowance	1,405		1,405		495
Recorded investment with allowance	21,091		21,091		20,848
Recorded investment in impaired loans	22,496		22,496		21,343
Related allowance	942		942		996
Average outstanding impaired loans	22,626	$ 21,750	22,198	$ 22,098	21,895
Interest income recognized	306	325	635	668	1,344
Construction and Land Development
Impaired Loans
Unpaid contractual principal balance	134		134		183
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	134		134		183
Recorded investment in impaired loans	134		134		183
Related allowance	5		5		7
Average outstanding impaired loans	157	232	166	248	231
Interest income recognized	4	2	7	6	12
Single-Family Residential
Impaired Loans
Unpaid contractual principal balance	5,414		5,414		5,152
Recorded investment with no allowance	391		391		403
Recorded investment with allowance	4,579		4,579		4,243
Recorded investment in impaired loans	4,970		4,970		4,646
Related allowance	20		20		36
Average outstanding impaired loans	4,778	4,214	4,734	4,826	4,678
Interest income recognized	59	57	118	118	269
Single-Family Residential - Banco de la Gente Non-Tradtional
Impaired Loans
Unpaid contractual principal balance	14,535		14,535		15,165
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	13,749		13,749		14,371
Recorded investment in impaired loans	13,749		13,749		14,371
Related allowance	900		900		944
Average outstanding impaired loans	13,856	15,347	14,028	15,010	14,925
Interest income recognized	193	239	421	491	956
Commercial
Impaired Loans
Unpaid contractual principal balance	3,005		3,005		1,879
Recorded investment with no allowance	739		739		0
Recorded investment with allowance	2,248		2,248		1,871
Recorded investment in impaired loans	2,987		2,987		1,871
Related allowance	14		14		7
Average outstanding impaired loans	3,115	1,739	2,700	1,801	1,822
Interest income recognized	43	22	72	45	91
Multifamily and Farmland
Impaired Loans
Unpaid contractual principal balance	0		0		0
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	0		0		0
Recorded investment in impaired loans	0		0		0
Related allowance	0		0		0
Average outstanding impaired loans	0	0	0	0	0
Interest income recognized	0	0	0	0	0
Total Real Estate Loans
Impaired Loans
Unpaid contractual principal balance	23,088		23,088		22,379
Recorded investment with no allowance	1,130		1,130		403
Recorded investment with allowance	20,710		20,710		20,668
Recorded investment in impaired loans	21,840		21,840		21,071
Related allowance	939		939		994
Average outstanding impaired loans	21,906	21,532	21,628	21,885	21,656
Interest income recognized	299	320	618	660	1,328
Commercial Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid contractual principal balance	640		640		180
Recorded investment with no allowance	275		275		92
Recorded investment with allowance	315		315		84
Recorded investment in impaired loans	590		590		176
Related allowance	2		2		0
Average outstanding impaired loans	643	114	487	106	134
Interest income recognized	6	3	15	4	9
Consumer Loans (Not Secured by Real Estate)
Impaired Loans
Unpaid contractual principal balance	70		70		100
Recorded investment with no allowance	0		0		0
Recorded investment with allowance	66		66		96
Recorded investment in impaired loans	66		66		96
Related allowance	1		1		2
Average outstanding impaired loans	77	104	83	107	105
Interest income recognized	$ 1	$ 2	$ 2	$ 4	$ 7

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3. Loans (Details 4) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Allowance for Loan Losses
Beginning balance	$ 8,112	$ 6,561	$ 6,680	$ 6,445
Charge-offs	(168)	(196)	(378)	(360)
Recoveries	72	99	193	201
Provision	1,417	77	2,938	255
Ending balance	9,433	6,541	9,433	6,541
Ending balance: individually evaluated for impairments	912	984	912	984
Ending balance: collectively evaluated for impairments	8,521	5,557	8,521	5,557
Ending balance	9,433	6,541	9,433	6,541
Loans
Ending balance	966,543	833,367	966,543	833,367
Ending balance: individually evaluated for impairment	16,321	16,938	16,321	16,938
Ending balance: collectively evaluated for impairment	950,222	816,429	950,222	816,429
Construction and Land Development
Allowance for Loan Losses
Beginning balance	1,293	831	694	813
Charge-offs	0	(21)	(5)	(21)
Recoveries	0	2	2	3
Provision	238	(49)	840	(32)
Ending balance	1,531	763	1,531	763
Ending balance: individually evaluated for impairments	2	0	2	0
Ending balance: collectively evaluated for impairments	1,529	763	1,529	763
Ending balance	1,531	763	1,531	763
Loans
Ending balance	110,077	86,920	110,077	86,920
Ending balance: individually evaluated for impairment	8	11	8	11
Ending balance: collectively evaluated for impairment	110,069	86,909	110,069	86,909
Single-Family Residential
Allowance for Loan Losses
Beginning balance	1,713	1,256	1,274	1,325
Charge-offs	0	(9)	0	(22)
Recoveries	9	5	25	53
Provision	91	60	514	(44)
Ending balance	1,813	1,312	1,813	1,312
Ending balance: individually evaluated for impairments	5	2	5	2
Ending balance: collectively evaluated for impairments	1,808	1,310	1,808	1,310
Ending balance	1,813	1,312	1,813	1,312
Loans
Ending balance	268,174	264,724	268,174	264,724
Ending balance: individually evaluated for impairment	1,657	1,738	1,657	1,738
Ending balance: collectively evaluated for impairment	266,517	262,986	266,517	262,986
Single-Family Residential - Banco de la Gente Non-Tradtional
Allowance for Loan Losses
Beginning balance	1,084	1,174	1,073	1,177
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	30	(58)	41	(61)
Ending balance	1,114	1,116	1,114	1,116
Ending balance: individually evaluated for impairments	894	970	894	970
Ending balance: collectively evaluated for impairments	220	146	220	146
Ending balance	1,114	1,116	1,114	1,116
Loans
Ending balance	29,325	32,499	29,325	32,499
Ending balance: individually evaluated for impairment	12,297	13,508	12,297	13,508
Ending balance: collectively evaluated for impairment	17,028	18,991	17,028	18,991
Commercial
Allowance for Loan Losses
Beginning balance	1,799	1,292	1,305	1,278
Charge-offs	0	0	(7)	0
Recoveries	11	19	34	23
Provision	241	23	719	33
Ending balance	2,051	1,334	2,051	1,334
Ending balance: individually evaluated for impairments	11	12	11	12
Ending balance: collectively evaluated for impairments	2,040	1,322	2,040	1,322
Ending balance	2,051	1,334	2,051	1,334
Loans
Ending balance	303,828	281,895	303,828	281,895
Ending balance: individually evaluated for impairment	2,084	1,643	2,084	1,643
Ending balance: collectively evaluated for impairment	301,744	280,252	301,744	280,252
Multifamily and Farmland
Allowance for Loan Losses
Beginning balance	118	98	120	83
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	(3)	12	(5)	27
Ending balance	115	110	115	110
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	115	110	115	110
Ending balance	115	110	115	110
Loans
Ending balance	49,465	44,065	49,465	44,065
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	49,465	44,065	49,465	44,065
Commercial Loans (Not Secured by Real Estate)
Allowance for Loan Losses
Beginning balance	1,017	610	688	626
Charge-offs	(78)	0	(109)	(1)
Recoveries	0	8	26	14
Provision	41	(70)	375	(91)
Ending balance	980	548	980	548
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	980	548	980	548
Ending balance	980	548	980	548
Loans
Ending balance	188,398	103,466	188,398	103,466
Ending balance: individually evaluated for impairment	275	38	275	38
Ending balance: collectively evaluated for impairment	188,123	103,428	188,123	103,428
Farm Loans (Not Secured by Real Estate)
Allowance for Loan Losses
Beginning balance	0	0	0	0
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	0	0	0	0
Ending balance	0	0	0	0
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	0	0	0	0
Ending balance	0	0	0	0
Loans
Ending balance	887	1,060	887	1,060
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	887	1,060	887	1,060
Consumer And All Other Loans
Allowance for Loan Losses
Beginning balance	180	162	138	161
Charge-offs	(90)	(166)	(257)	(316)
Recoveries	52	65	106	108
Provision	20	100	175	208
Ending balance	162	161	162	161
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	162	161	162	161
Ending balance	162	161	162	161
Loans
Ending balance	16,389	18,738	16,389	18,738
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	16,389	18,738	16,389	18,738
Unallocated
Allowance for Loan Losses
Beginning balance	908	1,138	1,388	982
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Provision	759	59	279	215
Ending balance	1,667	1,197	1,667	1,197
Ending balance: individually evaluated for impairments	0	0	0	0
Ending balance: collectively evaluated for impairments	1,667	1,197	1,667	1,197
Ending balance	1,667	1,197	1,667	1,197
Loans
Ending balance	0	0	0	0
Ending balance: individually evaluated for impairment	0	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0	$ 0

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3. Loans (Details 5) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019
Credit Risk Profile
Total loans	$ 966,543	$ 849,874	$ 833,367
Excellent Quality
Credit Risk Profile
Total loans	15,248	9,842
High Quality
Credit Risk Profile
Total loans	209,184	207,919
Good Quality
Credit Risk Profile
Total loans	631,526	528,122
Management Attention
Credit Risk Profile
Total loans	90,790	85,180
Watch
Credit Risk Profile
Total loans	12,224	12,345
Substandard
Credit Risk Profile
Total loans	7,571	6,466
Doubtful
Credit Risk Profile
Total loans	0	0
Loss
Credit Risk Profile
Total loans	0	0
Construction and Land Development
Credit Risk Profile
Total loans	110,077	92,596
Single-Family Residential
Credit Risk Profile
Total loans	268,174	269,475
Single-Family Residential - Banco de la Gente Non-Tradtional
Credit Risk Profile
Total loans	29,325	30,793
Commercial
Credit Risk Profile
Total loans	303,828	291,255
Multifamily and Farmland
Credit Risk Profile
Total loans	49,465	48,090
Commercial Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	188,398	100,263
Farm Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	887	1,033
Consumer Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	7,545	8,432
All Other Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	8,844	7,937
Construction and Land Development
Credit Risk Profile
Total loans	110,077	92,596	86,920
Construction and Land Development | Excellent Quality
Credit Risk Profile
Total loans	138	0
Construction and Land Development | High Quality
Credit Risk Profile
Total loans	31,603	32,029
Construction and Land Development | Good Quality
Credit Risk Profile
Total loans	69,907	52,009
Construction and Land Development | Management Attention
Credit Risk Profile
Total loans	5,388	5,487
Construction and Land Development | Watch
Credit Risk Profile
Total loans	2,981	3,007
Construction and Land Development | Substandard
Credit Risk Profile
Total loans	60	64
Construction and Land Development | Doubtful
Credit Risk Profile
Total loans	0	0
Construction and Land Development | Loss
Credit Risk Profile
Total loans	0	0
Single-Family Residential
Credit Risk Profile
Total loans	268,174	269,475	264,724
Single-Family Residential | Excellent Quality
Credit Risk Profile
Total loans	13,742	8,819
Single-Family Residential | High Quality
Credit Risk Profile
Total loans	126,830	128,757
Single-Family Residential | Good Quality
Credit Risk Profile
Total loans	103,328	107,246
Single-Family Residential | Management Attention
Credit Risk Profile
Total loans	17,814	18,409
Single-Family Residential | Watch
Credit Risk Profile
Total loans	3,104	3,196
Single-Family Residential | Substandard
Credit Risk Profile
Total loans	3,356	3,048
Single-Family Residential | Doubtful
Credit Risk Profile
Total loans	0	0
Single-Family Residential | Loss
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional
Credit Risk Profile
Total loans	29,325	30,793	32,499
Single-Family Residential - Banco de la Gente Non-Tradtional | Excellent Quality
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | High Quality
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | Good Quality
Credit Risk Profile
Total loans	11,382	12,103
Single-Family Residential - Banco de la Gente Non-Tradtional | Management Attention
Credit Risk Profile
Total loans	13,141	13,737
Single-Family Residential - Banco de la Gente Non-Tradtional | Watch
Credit Risk Profile
Total loans	1,923	2,027
Single-Family Residential - Banco de la Gente Non-Tradtional | Substandard
Credit Risk Profile
Total loans	2,879	2,926
Single-Family Residential - Banco de la Gente Non-Tradtional | Doubtful
Credit Risk Profile
Total loans	0	0
Single-Family Residential - Banco de la Gente Non-Tradtional | Loss
Credit Risk Profile
Total loans	0	0
Commercial
Credit Risk Profile
Total loans	303,828	291,255	281,895
Commercial | Excellent Quality
Credit Risk Profile
Total loans	0	0
Commercial | High Quality
Credit Risk Profile
Total loans	22,702	21,829
Commercial | Good Quality
Credit Risk Profile
Total loans	238,800	231,003
Commercial | Management Attention
Credit Risk Profile
Total loans	38,202	35,095
Commercial | Watch
Credit Risk Profile
Total loans	3,265	3,072
Commercial | Substandard
Credit Risk Profile
Total loans	859	256
Commercial | Doubtful
Credit Risk Profile
Total loans	0	0
Commercial | Loss
Credit Risk Profile
Total loans	0	0
Multifamily and Farmland
Credit Risk Profile
Total loans	49,465	48,090	44,065
Multifamily and Farmland | Excellent Quality
Credit Risk Profile
Total loans	0	0
Multifamily and Farmland | High Quality
Credit Risk Profile
Total loans	299	256
Multifamily and Farmland | Good Quality
Credit Risk Profile
Total loans	44,129	42,527
Multifamily and Farmland | Management Attention
Credit Risk Profile
Total loans	4,504	4,764
Multifamily and Farmland | Watch
Credit Risk Profile
Total loans	533	543
Multifamily and Farmland | Substandard
Credit Risk Profile
Total loans	0	0
Multifamily and Farmland | Doubtful
Credit Risk Profile
Total loans	0	0
Multifamily and Farmland | Loss
Credit Risk Profile
Total loans	0	0
Commercial Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	188,398	100,263	103,466
Commercial Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	742	330
Commercial Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	23,690	20,480
Commercial Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	152,603	72,417
Commercial Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	10,576	6,420
Commercial Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	411	492
Commercial Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	376	124
Commercial Loans (Not Secured by Real Estate) | Doubtful
Credit Risk Profile
Total loans	0	0
Commercial Loans (Not Secured by Real Estate) | Loss
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	887	1,033	$ 1,060
Farm Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	816	948
Farm Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	71	85
Farm Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate) | Doubtful
Credit Risk Profile
Total loans	0	0
Farm Loans (Not Secured by Real Estate) | Loss
Credit Risk Profile
Total loans	0	0
Consumer Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	7,545	8,432
Consumer Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	626	693
Consumer Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	2,347	2,708
Consumer Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	4,150	4,517
Consumer Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	374	458
Consumer Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	7	8
Consumer Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	41	48
Consumer Loans (Not Secured by Real Estate) | Doubtful
Credit Risk Profile
Total loans	0	0
Consumer Loans (Not Secured by Real Estate) | Loss
Credit Risk Profile
Total loans	0	0
All Other Loans (Not Secured by Real Estate)
Credit Risk Profile
Total loans	8,844	7,937
All Other Loans (Not Secured by Real Estate) | Excellent Quality
Credit Risk Profile
Total loans	0	0
All Other Loans (Not Secured by Real Estate) | High Quality
Credit Risk Profile
Total loans	1,713	1,860
All Other Loans (Not Secured by Real Estate) | Good Quality
Credit Risk Profile
Total loans	6,411	5,352
All Other Loans (Not Secured by Real Estate) | Management Attention
Credit Risk Profile
Total loans	720	725
All Other Loans (Not Secured by Real Estate) | Watch
Credit Risk Profile
Total loans	0	0
All Other Loans (Not Secured by Real Estate) | Substandard
Credit Risk Profile
Total loans	0	0
All Other Loans (Not Secured by Real Estate) | Doubtful
Credit Risk Profile
Total loans	0	0
All Other Loans (Not Secured by Real Estate) | Loss
Credit Risk Profile
Total loans	$ 0	$ 0

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3. Loans (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Receivables [Abstract]
Percentage of construction and land development loans in Bank's loan portfolio	11.00%		11.00%
Percentage of single-family residential loans in Bank's loan portfolio	31.00%		31.00%
Percentage of Single-family residential - Banco de la Gente stated income loans in Bank's loan portfolio	3.00%		3.00%
Percentage of commercial real estate loans in Bank's loan portfolio	31.00%		31.00%
Percentage of commercial loans in Bank's loan portfolio	19.00%		19.00%
Accruing impaired loans	$ 22,500	$ 21,400	$ 22,500	$ 21,400	$ 21,300
Interest income recognized on accruing impaired loans	306	325	635	668	1,344
Provision for loan losses	1,400	$ 77	2,900	255
TDR loans modified, past-due TDR loans and non-accrual TDR Loans	2,900		2,900		4,300
Performing loans classified as TDR loans	$ 0		0		$ 0
Loans modified considered to be new TDR loans			$ 0	$ 0

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4. Net Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Net Earnings
Basic earnings per share	$ 2,561	$ 3,813	$ 4,928	$ 7,480
Effect of dilutive securities: restricted stock units	0	0	0	0
Diluted earnings per share	$ 2,561	$ 3,813	$ 4,928	$ 7,480
Weighted Average Number of Shares
Basic earnings per share (in shares)	5,787,504	5,940,556	5,828,965	5,968,368
Effect of dilutive securities: restricted stock units (in shares)	13,127	24,453	13,284	24,412
Diluted earnings per share (in shares)	5,800,631	5,965,009	5,842,249	5,992,780
Per Share Amount
Basic earnings per share	$ 0.44	$ 0.64	$ 0.84	$ 1.25
Diluted earnings per share	$ 0.44	$ 0.64	$ 0.84	$ 1.25

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5. Stock-Based Compensation (Details Narrative) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
2009 Plan
Unrecognized compensation cost	$ 97
Recognized compensation expense	75	$ 170
2020 Plan
Unrecognized compensation cost	$ 226

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6. Fair Value (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Estimated fair value	$ 207,469	$ 195,746
Level 1
Estimated fair value	0	0
Level 2
Estimated fair value	207,219	195,496
Level 3
Estimated fair value	250	250
Mortgage-Backed Securities
Estimated fair value	77,661	78,956
Mortgage-Backed Securities | Level 1
Estimated fair value	0	0
Mortgage-Backed Securities | Level 2
Estimated fair value	77,661	78,956
Mortgage-Backed Securities | Level 3
Estimated fair value	0	0
U.S. Government Sponsored Enterprises
Estimated fair value	22,988	28,397
U.S. Government Sponsored Enterprises | Level 1
Estimated fair value	0	0
U.S. Government Sponsored Enterprises | Level 2
Estimated fair value	22,988	28,397
U.S. Government Sponsored Enterprises | Level 3
Estimated fair value	0	0
State and Political Subdivisions
Estimated fair value	106,570	88,143
State and Political Subdivisions | Level 1
Estimated fair value	0	0
State and Political Subdivisions | Level 2
Estimated fair value	106,570	88,143
State and Political Subdivisions | Level 3
Estimated fair value	0	0
Trust Preferred Securities
Estimated fair value	250	250
Trust Preferred Securities | Level 1
Estimated fair value	0	0
Trust Preferred Securities | Level 2
Estimated fair value	0	0
Trust Preferred Securities | Level 3
Estimated fair value	$ 250	$ 250

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6. Fair Value (Details 1) - Level 3 $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($)
Investment Securities Available for Sale Level 3 Valuation
Balance, beginning of period	$ 250
Change in book value	0
Change in gain/(loss) realized and unrealized	0
Purchases/(sales and calls)	0
Transfers in and/or (out) of Level 3	0
Balance, end of period	250
Change in unrealized gain/(loss) for assets still held in Level 3	$ 0

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6. Fair Value (Details 2) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Mortgage loans held for sale	$ 10,594	$ 4,417
Impaired loans	$ 21,554	20,347
Mortgage Loans Held For Sale
Valuation technique	Rate lock commitment
Significant unobservable inputs	N/A
General range of significant unobservable input values	N/A
Impaired Loans
Valuation technique	Appraised value and discounted cash flows
Significant unobservable inputs	Discounts to reflect current market conditions and ultimate collectability
General range of significant unobservable input values	0 - 25%
Level 1
Mortgage loans held for sale	$ 0	0
Impaired loans	0	0
Level 2
Mortgage loans held for sale	0	0
Impaired loans	0	0
Level 3
Mortgage loans held for sale	10,594	4,417
Impaired loans	$ 21,554	$ 20,347

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6. Fair Value (Details 3) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Assets:
Cash and cash equivalents	$ 189,639	$ 52,387
Investment securities available for sale	207,469	195,746
Other investments	7,196	4,231
Mortgage loans held for sale	10,594	4,417
Loans, net	957,110	843,194
Cash surrender value of life insurance	16,507	16,319
Liabilities:
Deposits	1,154,329	966,517
Securities sold under agreements to repurchase	31,747	24,221
FHLB borrowings	70,000	0
Junior subordinated debentures	15,464	15,619
Estimated Fair Value
Assets:
Cash and cash equivalents	189,639	52,387
Investment securities available for sale	207,469	195,746
Other investments	7,196	4,231
Mortgage loans held for sale	10,594	4,417
Loans, net	949,158	819,397
Cash surrender value of life insurance	16,507	16,319
Liabilities:
Deposits	1,148,380	955,766
Securities sold under agreements to repurchase	31,747	24,221
FHLB borrowings	69,974	0
Junior subordinated debentures	15,464	15,619
Level 1
Assets:
Cash and cash equivalents	189,639	52,387
Investment securities available for sale	0	0
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	0	0
FHLB borrowings	0	0
Junior subordinated debentures	0	0
Level 2
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	207,219	195,496
Other investments	0	0
Mortgage loans held for sale	0	0
Loans, net	0	0
Cash surrender value of life insurance	16,507	16,319
Liabilities:
Deposits	0	0
Securities sold under agreements to repurchase	31,747	24,221
FHLB borrowings	0	0
Junior subordinated debentures	15,464	15,619
Level 3
Assets:
Cash and cash equivalents	0	0
Investment securities available for sale	250	250
Other investments	7,196	4,231
Mortgage loans held for sale	10,594	4,417
Loans, net	949,158	819,397
Cash surrender value of life insurance	0	0
Liabilities:
Deposits	1,148,380	955,766
Securities sold under agreements to repurchase	0	0
FHLB borrowings	69,974	0
Junior subordinated debentures	$ 0	$ 0

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7. Leases (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Leases [Abstract]
Operating lease cost	$ 443	$ 446
Cash paid for amounts included in the measurement of lease liabilities	432	433
Operating cash flows from operating leases	0	0
Right-of-use assets obtained in exchange for new lease liabilities - operating leases	$ 132	$ 0
Weighted-average remaining lease term - operating leases	7 years 11 days	7 years 18 days
Weighted-average discount rate - operating leases	3.13%	3.17%

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7. Leases (Details 1) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Leases [Abstract]
2020	$ 420	$ 823
2021	822	793
2022	525	501
2023	416	393
2024	328	304
Thereafter	1,325	1,320
Total	3,836	4,134
Less: imputed interest	(433)	(487)
Operating lease liability	$ 3,403	$ 3,647

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7. Leases (Details Narrative) $ in Thousands	Jun. 30, 2020 USD ($)
Leases
Operating ROU assets	$ 3,400
Operating lease liabilities	$ 3,400