EX-13 3 pebk_ex13.htm 2020 ANNUAL REPORT OF PEOPLES BANCORP OF NORTH CAROLINA, INC.
EXHIBIT (13)
The Annual Report to Security Holders is Appendix A to the Proxy Statement for the 2020 Annual Meeting of Shareholders and is incorporated herein by reference.
APPENDIX A
ANNUAL REPORT
OF
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
General Description of Business
Peoples Bancorp of North Carolina, Inc. (“Bancorp”), was formed in 1999 to serve as the holding company for Peoples Bank (the “Bank”). Bancorp is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Bancorp’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. Bancorp has no operations and conducts no business of its own other than owning the Bank. Accordingly, the discussion of the business which follows concerns the business conducted by the Bank, unless otherwise indicated. Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries are collectively called the “Company”, “we”, “our” or “us” in this Annual Report. Our principal executive offices are located at 518 West C Street, Newtown, North Carolina, 28658, and our telephone number is (828) 464-5620.
The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the Catawba Valley and surrounding communities through 18 banking offices, as of December 31, 2020, located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius, Mooresville, Raleigh, and Cary North Carolina. The Bank also operates loan production offices in Charlotte and Denver North Carolina. The Company’s fiscal year ends December 31. At December 31, 2020, the Company had total assets of $1.4 billion, net loans of $938.7 million, deposits of $1.2 billion, total securities of $249.4 million, and shareholders’ equity of $139.9 million.
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 Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are predominately variable rate and fixed rate commercial property loans, which include residential development loans to commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s deposit and loan customers are individuals and small to medium-sized businesses located in the Bank’s market area. The Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated through the Bank’s Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-25 of the Annual Report.
The operations of the Bank and depository institutions in general are significantly influenced by general economic conditions and by related monetary and fiscal policies of depository institution regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the “Commissioner”).
At December 31, 2020, the Company employed 290 full-time employees and 27 part-time employees, which equated to 307 full-time equivalent employees.
Subsidiaries
The Bank is a subsidiary of the Company. At December 31, 2020, the Bank had four subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc. provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property to be appraised is located. This type of service ensures that the appraisal process remains independent from the financing process within the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted. In 2019, the Company launched PB Insurance Agency, which is part of CBRES.
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
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junior subordinated debentures of the Company, which pay a floating rateequal to three-month LIBOR plus 163 basis points. The proceeds received by the Company from the sale of the junior subordinated debentures were used in December 2006 to repay the trust preferred securities issued in December 2001 by PEBK Capital Trust, awholly 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 Company redeemed $5.0 million of outstanding trust preferred securities in 2019.
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.
This report contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were 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 materially include, but are not limited to, (1) competition in the markets served by the Bank, (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 environment 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 the Company’s other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statements.
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SELECTED FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts

| 2020 | 2019 | 2018 | 2017 | 2016
Summary of Operations |  |  |  |  |
Interest income | $47,958 | 49,601 | 45,350 | 41,949 | 39,809
Interest expense | 3,836 | 3,757 | 2,146 | 2,377 | 3,271
Net interest income | 44,122 | 45,844 | 43,204 | 39,572 | 36,538
Provision for (reduction of) loan losses | 4,259 | 863 | 790 | (507) | (1,206)
Net interest income after provision |  |  |  |  |
for loan losses | 39,863 | 44,981 | 42,414 | 40,079 | 37,744
Non-interest income (1) | 22,914 | 17,739 | 16,166 | 15,364 | 16,236
Non-interest expense (1) | 48,931 | 45,517 | 42,574 | 41,228 | 42,242
Earnings before income taxes | 13,846 | 17,203 | 16,006 | 14,215 | 11,738
Income tax expense | 2,489 | 3,136 | 2,624 | 3,947 | 2,561
Net earnings | $11,357 | 14,067 | 13,382 | 10,268 | 9,177
Selected Year-End Balances |  |  |  |  |
Assets | $1,414,855 | 1,154,882 | 1,093,251 | 1,092,166 | 1,087,991
Investment securities available for sale | 245,249 | 195,746 | 194,578 | 229,321 | 249,946
Net loans | 938,731 | 843,194 | 797,578 | 753,398 | 716,261
Mortgage loans held for sale | 9,139 | 4,417 | 680 | 857 | 5,709
Interest-earning assets | 1,326,489 | 1,058,937 | 1,007,078 | 996,509 | 999,201
Deposits | 1,221,086 | 966,517 | 877,213 | 906,952 | 892,918
Interest-bearing liabilities | 805,771 | 668,353 | 657,110 | 679,922 | 698,120
Shareholders' equity | $139,899 | 134,120 | 123,617 | 115,975 | 107,428
Shares outstanding | 5,787,504 | 5,912,300 | 5,995,256 | 5,995,256 | 5,417,800
Selected Average Balances |  |  |  |  |
Assets | $1,365,642 | 1,143,338 | 1,094,707 | 1,098,992 | 1,076,604
Investment securities available for sale | 200,821 | 185,302 | 209,742 | 234,278 | 252,725
Loans | 935,970 | 834,517 | 777,098 | 741,655 | 703,484
Interest-earning assets | 1,271,764 | 1,055,730 | 1,007,484 | 998,821 | 985,236
Deposits | 1,115,019 | 932,647 | 903,120 | 895,129 | 856,313
Interest-bearing liabilities | 793,188 | 675,992 | 665,165 | 700,559 | 705,291
Shareholders' equity | $141,287 | 134,670 | 123,797 | 116,883 | 113,196
Shares outstanding (2) | 5,808,121 | 5,941,873 | 5,995,256 | 5,988,183 | 6,024,970
Profitability Ratios |  |  |  |  |
Return on average total assets | 0.83% | 1.23% | 1.22% | 0.93% | 0.85%
Return on average shareholders' equity | 8.04% | 10.45% | 10.81% | 8.78% | 8.11%
Dividend payout ratio | 38.67% | 28.00% | 23.41% | 25.67% | 22.95%
Liquidity and Capital Ratios (averages) |  |  |  |  |
Loan to deposit | 83.94% | 89.48% | 86.05% | 82.85% | 82.15%
Shareholders' equity to total assets | 10.35% | 11.78% | 11.31% | 10.64% | 10.51%
Per share of Common Stock (2) |  |  |  |  |
Basic net earnings | $1.95 | 2.37 | 2.23 | 1.71 | 1.53
Diluted net earnings | $1.95 | 2.36 | 2.22 | 1.69 | 1.50
Cash dividends | $0.75 | 0.66 | 0.52 | 0.44 | 0.35
Book value | $24.17 | 22.68 | 20.62 | 19.34 | 18.03

(1) 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. Prior periods have been restated to reflect this change.
(2) Average shares outstanding and per share computations have been restated to reflect a 10% stock dividend paid during the fourth quarter of 2017.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of our financial position and results of operations and should be read in conjunction with the information set forth under Item 1A Risk Factors in the Company’s annual report on Form 10-K and the Company’s consolidated financial statements and notes thereto on pages A-26 through A-71.
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 Peoples Bancorp of North Carolina, Inc. (“Bancorp”), for the years ended December 31, 2020, 2019 and 2018. Bancorp is a registered bank holding company operating under the supervision of the Federal Reserve Board (the “FRB”) and the parent company of Peoples Bank (the “Bank”). The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell and Wake counties, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation (the “FDIC”).
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 Board of Governors of the Federal Reserve System (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 a range of 1.00% to 1.25%. Subsequently on March 16, 2020, the FOMC further reduced the target federal funds rate by an additional 100 basis points to a range of 0.00% to 0.25%. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company’s financial condition and results of operations. Prior to the occurrence of the COVID-19 pandemic, economic conditions, while not as robust as the economic conditions during the period from 2004 to 2007, had stabilized such that businesses in our market area were growing and investing again. The uncertainty expressed in the local, national and international markets through the primary economic indicators of activity were previously sufficiently stable to allow for reasonable economic growth in our markets. See COVID-19 Impact 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
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of balance sheet liquidity, managing our interest rate exposures and by actively monitoring asset quality, we seek to minimize the potentially adverse risks of unforeseen and unfavorable economic trends.
Our business emphasis has been and continues to be to operate as a well-capitalized, profitable and independent community-oriented financial institution dedicated to providing quality customer service. We are committed to meeting the financial needs of the communities in which we operate. We expect growth to be achieved in our local markets and through expansion opportunities in contiguous or nearby markets. While we would be willing to consider growth by acquisition in certain circumstances, we do not consider the acquisition of another company to be necessary for our continued ability to provide a reasonable return to our shareholders. We believe that we can be more effective in serving our customers than many of our non-local competitors because of our ability to quickly and effectively provide senior management responses to customer needs and inquiries. Our ability to provide these services is enhanced by the stability and experience of our Bank officers and managers.
The Company does not have specific plans for additional offices in 2021 but will continue to look for growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.
COVID 19 Impact
Overview. The COVID-19 pandemic has caused and continues to cause significant, unprecedented disruption that affects daily living and negatively impacts the global economy, the banking industry and the Company. While we are unable to estimate the magnitude, we expect the COVID-19 pandemic and related global economic crisis will adversely affect our future operating results. As such, the impact of the COVID-19 pandemic on future fiscal periods 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 2019-2020 academic year, businesses were ordered to temporarily close or reduce their business operations to accommodate social distancing and shelter in place requirements, non-critical healthcare services were significantly curtailed and unemployment levels rose. Since the initial shut down in March 2020, phased reopening plans began in mid-May subject to public health reopening guidelines and limitations on capacity and limitations continue to remain in place.
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:
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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.
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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 Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“PPP”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. 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 troubled debt restructured (“TDR”) loans for a limited period of time to account for the effects of COVID-19. See Note 3 of the financial statements for additional disclosure of loan modifications as of December 31, 2020.
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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 December 31, 2020.
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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 established two new loan facilities intended
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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 of its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion. The Bank did not participate in the MSELF or MSNLF.
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On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopens and expands the PPP loan program through March 31, 2021. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans.
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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:
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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.
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We are actively working with loan customers to evaluate prudent loan modification terms.
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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.
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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.
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On March 19, 2020, we restricted branch customer activity to drive-up and appointment only services. Branch lobbies were reopened on May 20, 2020. One small branch located in an assisted living facility was permanently closed effective December 31, 2020 due to limited lobby space and COVID-19 restrictions. All business functions continue to be operational. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.
Summary of Significant and Critical Accounting Policies
The consolidated financial statements include the financial statements of Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., 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 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. The following is a summary of some of the more subjective and complex accounting policies of the Company. 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 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders.
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.
Many of the Company’s assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The collectability 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 collectability. 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 Consolidated Financial Statements.
There are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain of the principles prescribed by those standards. These judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).
The disclosure requirements for derivatives and hedging activities are intended to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses, on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
The Company has an overall interest rate risk management strategy that has, in prior years, incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. When using derivative instruments, the Company is exposed to credit and market risk. If the
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counterparty fails to perform, credit risk is equal to the extent of the fair-value gain in the derivative. The Company minimized the credit risk in derivative instruments by entering into transactions with high-quality counterparties that were reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of December 31, 2020 or 2019.
Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the accompanying consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Results of Operations
Summary. The Company reported earnings of $11.4 million or $1.95 basic and diluted net earnings per share for the year ended December 31, 2020, as compared to $14.1 million or $2.37 basic net earnings per share and $2.36 diluted net earnings per share for the same period one year ago. The decrease in year-to-date net earnings is primarily attributable to 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, as discussed below.
The Company reported earnings of $14.1 million or $2.37 basic net earnings per share and $2.36 diluted net earnings per share for the year ended December 31, 2019, as compared to $13.4 million or $2.23 basic net earnings per share and $2.22 diluted net earnings per share for the same period one year ago. The increase in year-to-date net earnings is primarily attributable to an increase in net interest income and an increase in non-interest income, which were partially offset by an increase in the provision for loan losses and an increase in non-interest expense.
The return on average assets in 2020 was 0.83%, as compared to 1.23% in 2019 and 1.22% in 2018. The return on average shareholders’ equity was 8.04% in 2020, as compared to 10.45% in 2019 and 10.81% in 2018.
Net Interest Income. Net interest income, the major component of the Company’s net income, is the amount by which interest and fees generated by interest-earning assets exceed the total cost of funds used to carry them. Net interest income is affected by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned and rates paid. Net interest margin is calculated by dividing tax-equivalent net interest income by average interest-earning assets, and represents the Company’s net yield on its interest-earning assets.
Net interest income for 2020 was $44.1 million, as compared to $45.8 million in 2019. The decrease in net interest income was primarily due to a $1.6 million decrease in interest income and a $79,000 increase in interest expense. The decrease in interest income was primarily due to a $987,000 decrease in interest income on loans resulting from the 1.50% reduction in the Prime Rate in March 2020. The increase in interest expense was primarily due to an increase in average outstanding balances of interest-bearing liabilities, which was partially offset by a decrease in rates paid on interest-bearing liabilities. Net interest income increased to $45.8 million in 2019 from $43.2 million in 2018.
Table 1 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 years ended December 31, 2020, 2019 and 2018. 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 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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Table 1- Average Balance Table

| December 31, 2020 | December 31, 2019 | December 31, 2018
(Dollars in thousands) | Average Balance | Interest | Yield / Rate | Average Balance | Interest | Yield / Rate | Average Balance | Interest | Yield / Rate
Interest-earning assets: |  |  |  |  |  |  |  |  |
Loans | $935,970 | 42,314 | 4.52% | 834,517 | 43,301 | 5.19% | 777,098 | 38,654 | 4.97%
Investments - taxable | 132,468 | 2,299 | 1.74% | 77,945 | 2,254 | 2.89% | 71,093 | 1,936 | 2.72%
Investments - nontaxable* | 75,609 | 3,634 | 4.81% | 113,117 | 4,293 | 3.80% | 142,832 | 5,508 | 3.86%
Federal funds sold | 91,166 | 204 | 0.22% | 19,078 | 331 | 1.73% | - | - | 0.00%
Other | 36,551 | 127 | 0.35% | 11,073 | 213 | 1.92% | 16,461 | 304 | 1.85%
Total interest-earning assets | 1,271,764 | 48,578 | 3.82% | 1,055,730 | 50,392 | 4.77% | 1,007,484 | 46,402 | 4.61%
Cash and due from banks | 34,569 |  |  | 36,227 |  |  | 41,840 |  |
Other assets | 67,742 |  |  | 57,880 |  |  | 51,704 |  |
Allowance for loan losses | (8,433) |  |  | (6,499) |  |  | (6,321) |  |
Total assets | $1,365,642 |  |  | 1,143,338 |  |  | 1,094,707 |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |
NOW, MMDA & savings deposits | $584,177 | 1,962 | 0.34% | 495,509 | 1,596 | 0.32% | 484,180 | 769 | 0.16%
Time deposits | 103,694 | 947 | 0.91% | 105,458 | 909 | 0.86% | 112,398 | 472 | 0.42%
FHLB borrowings | 60,820 | 357 | 0.59% | 19,625 | 205 | 1.04% | - | - | 0.00%
Trust preferred securities | 15,478 | 370 | 2.39% | 20,619 | 844 | 4.09% | 20,619 | 790 | 3.83%
Other | 29,019 | 200 | 0.69% | 34,781 | 203 | 0.58% | 47,968 | 115 | 0.24%
Total interest-bearing liabilities | 793,188 | 3,836 | 0.48% | 675,992 | 3,757 | 0.56% | 665,165 | 2,146 | 0.32%
Demand deposits | 427,148 |  |  | 331,680 |  |  | 306,544 |  |
Other liabilities | 4,019 |  |  | 996 |  |  | (799) |  |
Shareholders' equity | 141,287 |  |  | 134,670 |  |  | 123,797 |  |
Total liabilities and shareholder's equity | $1,365,642 |  |  | 1,143,338 |  |  | 1,094,707 |  |
Net interest spread |  | $44,742 | 3.34% |  | $46,635 | 4.21% |  | $44,256 | 4.29%
Net yield on interest-earning assets |  |  | 3.52% |  |  | 4.42% |  |  | 4.39%
Taxable equivalent adjustment |  |  |  |  |  |  |  |  |
Investment securities |  | $620 |  |  | $791 |  |  | $1,052 |
Net interest income |  | $44,122 |  |  | $45,844 |  |  | $43,204 |

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $19.2 million in 2020, $32.0 million in 2019 and $38.0 million in 2018. A tax rate of 2.50% was used to calculate the tax equivalent yields on these securities in 2020, 2019 and 2018.
Changes in interest income and interest expense can result from variances in both volume and rates. Table 2 describes 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 net interest income due to both volume and rate changes have been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes in each.
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Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis

| December 31, 2020 | December 31, 2019
(Dollars in thousands) | Changes in average volume | Changes in average rates | Total Increase (Decrease) | Changes in average volume | Changes in average rates | Total Increase (Decrease)
Interest income: |  |  |  |  |  |
Loans: Net of unearned income | $4,925 | (5,912) | (987) | $2,918 | 1,729 | 4,647
Investments - taxable | 1,261 | (1,216) | 45 | 192 | 126 | 318
Investments - nontaxable | (1,613) | 954 | (659) | (1,137) | (78) | (1,215)
Federal funds sold | 706 | (833) | (127) | 166 | 165 | 331
Other | 290 | (376) | (86) | (102) | 12 | (90)
Total interest income | 5,569 | (7,383) | (1,814) | 2,037 | 1,954 | 3,991
Interest expense: |  |  |  |  |  |
NOW, MMDA & savings deposits | 292 | 74 | 366 | 27 | 800 | 827
Time deposits | (16) | 54 | 38 | (44) | 481 | 437
FHLB borrowings | 336 | (184) | 152 | 103 | 102 | 205
Trust preferred securities | (167) | (307) | (474) | - | 54 | 54
Other | (37) | 34 | (3) | (54) | 142 | 88
Total interest expense | 408 | (329) | 79 | 32 | 1,579 | 1,611
Net interest income | $5,161 | (7,054) | (1,893) | $2,005 | 375 | 2,380

Net interest income on a tax equivalent basis totaled $44.7 million in 2020, as compared to $46.6 million in 2019. The net interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on interest-bearing liabilities, was 3.34% in 2020, as compared to a net interest rate spread of 4.21% in 2019. The net yield on interest-earning assets was 3.52% in 2020 and 4.42% in 2019.
Tax equivalent interest income decreased $1.8 million in 2020 primarily due to a decrease in rates on interest earning assets. The yield on interest-earning assets was 3.82% in 2020, as compared to 4.77% in 2019.
Interest expense increased $79,000 in 2020, as compared to 2019. The increase in interest expense was primarily due to an increase in average outstanding balances of interest-bearing liabilities, which was partially offset by a decrease in rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased by $117.2 million to $793.2 million in 2020, as compared to $676.0 million in 2019. The cost of funds decreased to 0.48% in 2020 from 0.56% in 2019.
In 2019, net interest income on a tax equivalent basis was $46.6 million, as compared to $44.3 million in 2018. The net interest spread was 4.21% in 2019, as compared to 4.29% in 2018. The net yield on interest-earning assets was 4.42% in 2019, as compared to 4.39% in 2018.
Provision for Loan Losses. Provisions for loan losses are charged to income in order to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on factors such as management’s judgment as to losses within the Bank’s loan portfolio, including the valuation of impaired loans, loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies and management’s assessment of the quality of the loan portfolio and general economic climate.
The provision for loan losses for the year ended December 31, 2020 was $4.3 million, compared to $863,000 for the year ended December 31, 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 reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk,
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and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.
Table 3 presents a summary of net charge off activity for the years ended December 31, 2020, 2019, 2018, 2017 and 2016.
Table 3 - Net Charge-off Analysis

| Net charge-offs/(recoveries) | Net charge-offs/(recoveries) as a percent of average loans outstanding
| Years ended December 31, | Years ended December 31,
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | 2020 | 2019 | 2018 | 2017 | 2016
Real estate loans |  |  |  |  |  |  |  |  |  |
Construction and land development | $(31) | (24) | 43 | (14) | (3) | -0.03% | -0.03% | 0.05% | -0.02% | -0.01%
Single-family residential | (5) | (24) | 10 | 164 | 220 | 0.00% | -0.01% | 0.00% | 0.07% | 0.09%
Single-family residential - |  |  |  |  |  |  |  |  |  |
Banco de la Gente non-traditional | - | - | - | - | - | 0.00% | 0.00% | 0.00% | 0.00% | 0.00%
Commercial | (63) | (48) | 348 | (21) | 299 | -0.02% | -0.02% | 0.13% | -0.01% | 0.12%
Multifamily and farmland | - | - | 4 | 66 | - | 0.00% | 0.00% | 0.01% | 0.23% | 0.00%
Total real estate loans | (99) | (96) | 405 | 195 | 516 | -0.01% | -0.01% | 0.06% | 0.03% | 0.09%
Loans not secured by real estate |  |  |  |  |  |  |  |  |  |
Commercial loans | 869 | 306 | 22 | 163 | (25) | 0.54% | 0.31% | 0.02% | 0.19% | -0.03%
Farm loans | - | - | - | - | - | 0.00% | 0.00% | 0.00% | 0.00% | 0.00%
Consumer loans (1) | 254 | 418 | 284 | 319 | 342 | 3.57% | 4.95% | 3.11% | 3.10% | 3.38%
All other loans | 7 | - | - | - | - | 0.20% | 0.00% | 0.00% | 0.00% | 0.00%
Total loans | $1,031 | 628 | 711 | 677 | 833 | 0.11% | 0.07% | 0.09% | 0.09% | 0.12%
Provision for (reduction of) loan losses |  |  |  |  |  |  |  |  |  |
for the period | $4,259 | 863 | 790 | (507) | (1,206) |  |  |  |  |
Allowance for loan losses at end of period | $9,908 | 6,680 | 6,445 | 6,366 | 7,550 |  |  |  |  |
Total loans at end of period | $948,639 | 849,874 | 804,023 | 759,764 | 723,811 |  |  |  |  |
Non-accrual loans at end of period | $3,758 | 3,553 | 3,314 | 3,711 | 3,825 |  |  |  |  |
Allowance for loan losses as a percent of |  |  |  |  |  |  |  |  |  |
total loans outstanding at end of period | 1.04% | 0.79% | 0.80% | 0.84% | 1.04% |  |  |  |  |
Non-accrual loans as a percent of |  |  |  |  |  |  |  |  |  |
total loans outstanding at end of period | 0.40% | 0.42% | 0.41% | 0.49% | 0.53% |  |  |  |  |

(1) The loss ratio for consumer loans is elevated because overdraft charge-offs related to DDA and NOW accounts are reported in consumer loan charge-offs and recoveries. The net overdraft charge-offs are not considered material and are therefore not shown separately.
Please see the section below entitled “Allowance for Loan Losses” for a more complete discussion of the Bank’s policy for addressing potential loan losses.
Non-Interest Income. Non-interest income was $22.9 million for the year ended December 31, 2020, compared to $17.7 million for the year ended December 31, 2019. The increase in non-interest income is primarily attributable to a $2.4 million increase in gains on sale of securities, a $2.3 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $1.2 million increase in mortgage banking income due to increased mortgage loan volume, which were partially offset by a $1.0 million decrease in service charges and fees primarily due to service charge and fee concessions associated with the COVID-19 pandemic.
Non-interest income was $17.7 million for the year ended December 31, 2019, as compared to $16.2 million for the year ended December 31, 2018. The increase in non-interest income is primarily attributable to a $1.3 million increase in appraisal management fee income due to an increase in the volume of appraisals and a $413,000 increase in mortgage banking income due to an increase in mortgage loan volume.
The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary. No investment impairments were deemed other-than-temporary in 2020, 2019 or 2018.
Table 4 presents a summary of non-interest income for the years ended December 31, 2020, 2019 and 2018.
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Table 4 - Non-Interest Income

(Dollars in thousands) | 2020 | 2019 | 2018
Service charges | $3,528 | 4,576 | 4,355
Other service charges and fees | 742 | 714 | 705
Gain on sale of securities | 2,639 | 226 | 15
Mortgage banking income | 2,469 | 1,264 | 851
Insurance and brokerage commissions | 897 | 877 | 824
Gain/(loss) on sale and write-down of other real estate | (47) | (11) | 17
Visa debit card income | 4,237 | 4,145 | 3,911
Appraisal management fee income | 6,754 | 4,484 | 3,206
Miscellaneous | 1,695 | 1,464 | 2,282
Total non-interest income | $22,914 | 17,739 | 16,166

Non-Interest Expense. Non-interest expense was $48.9 million for the year ended December 31, 2020, compared to $45.5 million for the year ended December 31, 2019. The increase in non-interest expense was primarily attributable to a $1.9 million increase in appraisal management fee expense due to an increase in the volume of appraisals and a $570,000 increase in other non-interest expense. The increase in other non-interest expense is primarily due to a $1.1 million FHLB borrowings prepayment penalty in December 2020.
Non-interest expense was $45.5 million for the year ended December 31, 2019, as compared to $42.6 million for the year ended December 31, 2018. The increase in non-interest expense was primarily due to a $1.7 million increase in salaries and benefits expense and a $961,000 increase in appraisal management fee expense. The increase in salaries and benefits expense was primarily attributable to an increase in salary expense primarily due to annual salary increases, an increase in incentive compensation expense, an increase in insurance costs and an increase in commission expense primarily due to an increase in mortgage loan production. The increase in appraisal management fee expense was primarily due to an increase in the volume of appraisals.
Table 5 presents a summary of non-interest expense for the years ended December 31, 2020, 2019 and 2018.
Table 5 - Non-Interest Expense

(Dollars in thousands) | 2020 | 2019 | 2018
Salaries and employee benefits | $23,538 | 23,238 | 21,530
Occupancy expense | 7,933 | 7,364 | 7,170
Office supplies | 528 | 467 | 503
FDIC deposit insurance | 263 | 119 | 328
Visa debit card expense | 1,012 | 890 | 994
Professional services | 502 | 517 | 513
Postage | 190 | 294 | 249
Telephone | 794 | 802 | 678
Director fees and expense | 360 | 394 | 312
Advertising | 787 | 1,021 | 922
Consulting fees | 1,078 | 972 | 1,012
Taxes and licenses | 295 | 287 | 288
Foreclosure/OREO expense | 20 | 28 | 58
Internet banking expense | 729 | 681 | 603
FHLB advance prepayment penalty | 1,100 | - | -
Appraisal management fee expense | 5,274 | 3,421 | 2,460
Other operating expense | 4,528 | 5,022 | 4,954
Total non-interest expense | $48,931 | 45,517 | 42,574

Income Taxes. The Company reported income tax expense of $2.5 million, $3.1 million and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company’s effective tax rates were 17.98%, 18.23% and 16.39% in 2020, 2019 and 2018, respectively.
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,
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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 December 31, 2020, such unfunded commitments to extend credit were $299.0 million, while commitments in the form of standby letters of credit totaled $4.7 million.
The Company uses several funding sources to meet its liquidity requirements. The primary funding source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposits 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 December 31, 2020, the Company’s core deposits totaled $1.2 billion, or 98% of total deposits.
The Bank’s five largest deposit relationships, including securities sold under agreements to repurchase, amounted to $122.0 million and $121.9 million at December 31, 2020 and 2019, respectively. These balances represent 9.78% of total deposits and securities sold under agreements to repurchase combined at December 31, 2020, as compared to 12.30% of total deposits and securities sold under agreements to repurchase combined at December 31, 2019. Total deposits for the five largest relationships referenced above amounted to $108.9 million, or 8.92% of total deposits at December 31, 2020, as compared to $107.7 million, or 11.14% of total deposits at December 31, 2019. Total securities sold under agreements to repurchase for the five largest relationships referenced above amounted to $13.1 million, or 49.86% of total securities sold under agreements to repurchase at December 31, 2020, as compared to $14.2 million, or 58.76% of total securities sold under agreements to repurchase at December 31, 2019.
The other sources of funding for the Company are through large denomination certificates of deposit, including brokered deposits, federal funds purchased, securities under agreement to repurchase and FHLB borrowings. The Bank is also able to borrow from the FRB on a short-term basis. The Bank’s policies include the ability to access wholesale funding up to 40% of total assets. The Bank’s wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits and internet certificates of deposit. The Company’s ratio of wholesale funding to total assets was 0.88% as of December 31, 2020.
The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with no balances outstanding at December 31, 2020. At December 31, 2020, the carrying value of loans pledged as collateral totaled approximately $165.1 million. The remaining availability under the line of credit with the FHLB was $111.4 million at December 31, 2020. The Bank had no borrowings from the FRB at December 31, 2020. The FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2020, the carrying value of loans pledged as collateral to the FRB totaled approximately $469.5 million. Availability under the line of credit with the FRB was $340.0 million at December 31, 2020.
The Bank also had the ability to borrow up to $100.5 million for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2020.
The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits with banks, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 28.12%, 18.20% and 16.09% at December 31, 2020, 2019 and 2018, respectively. The minimum required liquidity ratio as defined in the Bank’s Asset/Liability and Interest Rate Risk Management Policy for on balance sheet liquidity was 10% at December 31, 2020, 2019 and 2018.
As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash provided by operating activities was approximately $9.2 million during 2020. Net cash used in investing activities was $149.0 million during 2020 and net cash provided by financing activities was $249.0 million during 2020.
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 done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income. Table 6 presents an interest rate sensitivity analysis for the interest-earning assets and interest-bearing liabilities for the year ended December 31, 2020.
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Table 6 - Interest Sensitivity Analysis

(Dollars in thousands) | Immediate | 1-3 months | 4-12 months | Total Within One Year | Over One Year & Non-sensitive | Total
Interest-earning assets: |  |  |  |  |  |
Loans | $255,956 | 8,929 | 19 | 264,904 | 683,735 | 948,639
Mortgage loans held for sale | 9,139 | - | - | 9,139 | - | 9,139
Investment securities available for sale | - | 3,302 | 7,403 | 10,705 | 234,544 | 245,249
Interest-bearing deposit accounts | 118,843 | - | - | 118,843 | - | 118,843
Other interest-earning assets | - | - | - | - | 4,619 | 4,619
Total interest-earning assets | 383,938 | 12,231 | 7,422 | 403,591 | 922,898 | 1,326,489
Interest-bearing liabilities: |  |  |  |  |  |
NOW, savings, and money market deposits | 657,834 | - | - | 657,834 | - | 657,834
Time deposits | 9,805 | 10,104 | 37,565 | 57,474 | 48,798 | 106,272
Securities sold under |  |  |  |  |  |
agreement to repurchase | 26,201 | - | - | 26,201 | - | 26,201
Trust preferred securities | - | 15,464 | - | 15,464 | - | 15,464
Total interest-bearing liabilities | 693,840 | 25,568 | 37,565 | 756,973 | 48,798 | 805,771
Interest-sensitive gap | $(309,902) | (13,337) | (30,143) | (353,382) | 874,100 | 520,718
Cumulative interest-sensitive gap | $(309,902) | (323,239) | (353,382) | (353,382) | 520,718 |
| 55.34% | 47.84% | 19.76% | 53.32% | 1891.26% |

The Company manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Committee (“ALCO”) of the Bank. The 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 (“AFS”) securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. At December 31, 2020, rate sensitive assets and rate sensitive liabilities totaled $1.3 billion and $793.2 million, respectively.
Included in the rate sensitive assets are $232.7 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the Federal Open Market Committee (“FOMC”). The Bank utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At December 31, 2020, the Bank had $144.0 million in loans with interest rate floors. The floors were in effect on $117.4 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.83% higher than the indexed rate on the promissory notes without interest rate floors.
An analysis of the Company’s financial condition and growth can be made by examining the changes and trends in interest-earning assets and interest-bearing liabilities. A discussion of these changes and trends follows.
Analysis of Financial Condition
Investment Securities. The composition of the investment securities portfolio reflects the Company’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.
All of the Company’s investment securities are held in the AFS category. At December 31, 2020 the market value of AFS securities totaled $245.2 million, as compared to $195.7 million and $194.6 million at December 31, 2019 and 2018, respectively. Table 7 presents the fair value of the AFS securities held at December 31, 2020, 2019 and 2018.
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Table 7 - Summary of Investment Portfolio

(Dollars in thousands) | 2020 | 2019 | 2018
U. S. Government sponsored enterprises | $7,507 | 28,397 | 34,634
State and political subdivisions | 92,428 | 88,143 | 107,591
Mortgage-backed securities | 145,314 | 78,956 | 52,103
Trust preferred securities | - | 250 | 250
Total securities | $245,249 | 195,746 | 194,578

The Company’s investment portfolio consists of U.S. Government sponsored enterprise securities, municipal securities, U.S. Government sponsored enterprise mortgage-backed securities, corporate bonds, trust preferred securities and equity securities. AFS securities averaged $200.8 million in 2020, $185.3 million in 2019 and $209.7 million in 2018. Table 8 presents the book value of AFS securities held by the Company by maturity category at December 31, 2020. Yield information does not give effect to changes in fair value that are reflected as a component of shareholders’ equity. Yields are calculated on a tax equivalent basis. Yields and interest income on tax-exempt investments 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.
Table 8 - Maturity Distribution and Weighted Average Yield on Investments

|  |  | After One Year | After 5 Years |  |  |  |
| One Year or Less | Through 5 Years | Through 10 Years | After 10 Years | Totals
(Dollars in thousands) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield
Book value: |  |  |  |  |  |  |  |  |  |
U.S. Government |  |  |  |  |  |  |  |  |  |
sponsored enterprises | $- | - | 3,314 | 3.02% | 1,110 | 0.89% | 3,083 | 1.99% | 7,507 | 2.50%
State and political subdivisions | 10,704 | 3.38% | 12,684 | 2.40% | 64,716 | 2.46% | 4,324 | 3.52% | 92,428 | 2.56%
Mortgage-backed securities | - | - | - | - | 14,442 | 1.77% | 130,872 | 2.05% | 145,314 | 2.01%
Total securities | $10,704 | 3.38% | 15,998 | 2.95% | 80,268 | 1.87% | 138,279 | 2.44% | 245,249 | 2.06%

Loans. The loan portfolio is the largest category of the Company’s earning assets and is comprised of commercial loans, real estate mortgage loans, real estate construction loans and consumer loans. 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 in North Carolina.
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 December 31, 2020, the Company had $104.2 million in residential mortgage loans, $96.6 million in home equity loans and $476.7 million in commercial mortgage loans, which include $375.0 million secured by commercial property and $101.7 million secured by residential property. Residential mortgage loans include $26.9 million in non-traditional mortgage loans from the former Banco division of the Bank. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.
At December 31, 2020, the Bank had $94.1 million in construction and land development loans. Table 9 presents a breakout of these loans.
Table 9 - Construction and Land Development Loans

(Dollars in thousands) | Number of Loans | Balance Outstanding | Non-accrual Balance
Land acquisition and development - commercial purposes | 36 | $7,509 | -
Land acquisition and development - residential purposes | 161 | 20,444 | -
1 to 4 family residential construction | 93 | 18,897 | -
Commercial construction | 32 | 47,274 | -
Total acquisition, development and construction | 322 | $94,124 | -

The mortgage loans originated in the traditional banking offices are generally 15 to 30-year fixed rate loans with attributes that prevent the loans from being sellable in the secondary market. These factors may include higher loan-to-value ratio, limited documentation on income, non-conforming appraisal or non-conforming property type.
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These loans are generally made to existing Bank customers and have been originated throughout the Bank’s seven county service area, with no geographic concentration.
The composition of the Bank’s loan portfolio at December 31 is presented in Table 10.

Table 10 - Loan Portfolio |  |  |  |  |  |  |  |  |  |
| 2020 | 2019 | 2018 | 2017 | 2016
(Dollars in thousands) | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans
Real estate loans |  |  |  |  |  |  |  |  |  |
Construction and land development | $94,124 | 9.92% | 92,596 | 10.90% | 94,178 | 11.71% | 84,987 | 11.19% | 61,749 | 8.53%
Single-family residential | 272,325 | 28.71% | 269,475 | 31.71% | 252,983 | 31.47% | 246,703 | 32.47% | 240,700 | 33.25%
Single-family residential- Banco de la |  |  |  |  |  |  |  |  |  |
Gente non-traditional | 26,883 | 2.83% | 30,793 | 3.62% | 34,261 | 4.26% | 37,249 | 4.90% | 40,189 | 5.55%
Commercial | 332,971 | 35.10% | 291,255 | 34.27% | 270,055 | 33.59% | 248,637 | 32.73% | 247,521 | 34.20%
Multifamily and farmland | 48,880 | 5.15% | 48,090 | 5.66% | 33,163 | 4.12% | 28,937 | 3.81% | 21,047 | 2.91%
Total real estate loans | 775,183 | 81.72% | 732,209 | 86.16% | 684,640 | 85.15% | 646,513 | 85.10% | 611,206 | 84.44%
Loans not secured by real estate |  |  |  |  |  |  |  |  |  |
Commercial loans | 161,740 | 17.05% | 100,263 | 11.80% | 97,465 | 12.12% | 89,022 | 11.71% | 87,596 | 12.11%
Farm loans | 855 | 0.09% | 1,033 | 0.12% | 926 | 0.12% | 1,204 | 0.16% | - | 0.00%
Consumer loans | 7,113 | 0.75% | 8,432 | 0.99% | 9,165 | 1.14% | 9,888 | 1.30% | 9,832 | 1.36%
All other loans | 3,748 | 0.40% | 7,937 | 0.93% | 11,827 | 1.47% | 13,137 | 1.73% | 15,177 | 2.10%
Total loans | 948,639 | 100.00% | 849,874 | 100.00% | 804,023 | 100.00% | 759,764 | 100.00% | 723,811 | 100.00%
Less: Allowance for loan losses | 9,908 |  | 6,680 |  | 6,445 |  | 6,366 |  | 7,550 |
Net loans | $938,731 |  | 843,194 |  | 797,578 |  | 753,398 |  | 716,261 |

As of December 31, 2020, gross loans outstanding were $948.6 million, as compared to $849.9 million at December 31, 2019. Average loans represented 74% and 79% of average total earning assets for the years ended December 31, 2020 and 2019, respectively. The Bank had $9.1 million and $4.4 million in mortgage loans held for sale as of December 31, 2020 and 2019, respectively.
TDR loans modified in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8 million and $4.3 million at December 31, 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 December 31, 2020 and December 31, 2019.
On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of December 31, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of December 31, 2020 amounted to $99.0 million. PPP loans outstanding amounted to $75.8 million at December 31, 2020. PPP loans are reported in Commercial loans not secured by real estate in Table 10 above. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of December 31, 2020. The Bank has recognized $1.4 million PPP loan fee income as of December 31, 2020. PPP loan fee income is reported in interest and fees on loans in the Consolidated Statements of Earnings on page A-31.
The Bank has continued to modify payments on loans due to the COVID-19 pandemic. At September 30, 2020, loans totaling $119.7 million had payment modifications due to the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. Payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.
Table 11 identifies the maturities of all loans as of December 31, 2020 and addresses the sensitivity of these loans to changes in interest rates.
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Table 11 - Maturity and Repricing Data for Loans

(Dollars in thousands) | Within one year or less | After one year through five years | After five years | Total loans
Real estate loans |  |  |  |
Construction and land development | $34,977 | 23,058 | 36,089 | 94,124
Single-family residential | 120,291 | 78,787 | 73,247 | 272,325
Single-family residential- Banco de la Gente |  |  |  |
stated income | 12,497 | - | 14,386 | 26,883
Commercial | 70,231 | 158,119 | 104,621 | 332,971
Multifamily and farmland | 10,289 | 22,011 | 16,580 | 48,880
Total real estate loans | 248,285 | 281,975 | 244,923 | 775,183
Loans not secured by real estate |  |  |  |
Commercial loans | 36,055 | 105,289 | 20,396 | 161,740
Farm loans | 776 | 79 | - | 855
Consumer loans | 3,776 | 2,638 | 699 | 7,113
All other loans | 1,947 | 1,369 | 432 | 3,748
Total loans | $290,839 | 391,350 | 266,450 | 948,639
Total fixed rate loans | $25,935 | 357,413 | 266,450 | 649,798
Total floating rate loans | 264,904 | 33,937 | - | 298,841
Total loans | $290,839 | 391,350 | 266,450 | 948,639

In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. At December 31, 2020, outstanding loan commitments totaled $299.0 million. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additional information regarding commitments is provided below in the section entitled “Commitments and Contingencies” and in Note 11 to the Consolidated Financial Statements.
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.
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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 as well as a sample of commercial relationships with exposures below $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank’s Board of Directors.
Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.
Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance for loan losses. The provision for loan losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.
The allowance for loan losses is comprised of three components: specific reserves, general reserves and unallocated reserves. After a loan has been identified as impaired, management measures impairment. When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.
The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.
The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.
There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.
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.
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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.
Net charge-offs for 2020, 2019 and 2018 were $1.0 million, $628,000 and $711,000, respectively. The ratio of net charge-offs to average total loans was 0.11% in 2020, 0.07% in 2018 and 0.09% in 2018. The years ended December 31, 2018 and 2019 saw net charge-offs at historically low levels. The current level of past due and non-accrual loans currently indicate that net charge-offs may not remain near these historical lows. The allowance for loan losses was $9.9 million or 1.04% of total loans outstanding at December 31, 2020. For December 31, 2019 and 2018, the allowance for loan losses amounted to $6.7 million or 0.79% of total loans outstanding and $6.4 million, or 0.80% of total loans outstanding, respectively.
Table 12 presents the percentage of loans assigned to each risk grade at December 31, 2020 and 2019.

Table 12 - Loan Risk Grade Analysis |  |
| Percentage of Loans
| By Risk Grade
Risk Grade | 2020 | 2019
Risk Grade 1 (Excellent Quality) | 1.18% | 1.16%
Risk Grade 2 (High Quality) | 20.45% | 24.46%
Risk Grade 3 (Good Quality) | 65.70% | 62.15%
Risk Grade 4 (Management Attention) | 9.75% | 10.02%
Risk Grade 5 (Watch) | 2.20% | 1.45%
Risk Grade 6 (Substandard) | 0.72% | 0.76%
Risk Grade 7 (Doubtful) | 0.00% | 0.00%
Risk Grade 8 (Loss) | 0.00% | 0.00%

Table 13 presents an analysis of the allowance for loan losses, including charge-off activity.
Table 13 - Analysis of Allowance for Loan Losses

(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016
Allowance for loan losses at beginning | $6,680 | 6,445 | 6,366 | 7,550 | 9,589
Loans charged off: |  |  |  |  |
Commercial | 903 | 389 | 54 | 194 | 146
Real estate - mortgage | 72 | 43 | 574 | 315 | 593
Real estate - construction | 5 | 21 | 53 | - | 7
Consumer | 434 | 623 | 452 | 473 | 492
Total loans charged off | 1,414 | 1,076 | 1,133 | 982 | 1,238
Recoveries of losses previously charged off: |  |  |  |  |
Commercial | 34 | 83 | 32 | 31 | 170
Real estate - mortgage | 141 | 115 | 212 | 106 | 74
Real estate - construction | 36 | 45 | 10 | 14 | 10
Consumer | 172 | 205 | 168 | 154 | 151
Total recoveries | 383 | 448 | 422 | 305 | 405
Net loans charged off | 1,031 | 628 | 711 | 677 | 833
Provision for loan losses | 4,259 | 863 | 790 | (507) | (1,206)
Allowance for loan losses at end of year | $9,908 | 6,680 | 6,445 | 6,366 | 7,550
Loans charged off net of recoveries, as |  |  |  |  |
a percent of average loans outstanding | 0.11% | 0.07% | 0.09% | 0.09% | 0.12%
Allowance for loan losses as a percent |  |  |  |  |
of total loans outstanding at end of year | 1.04% | 0.79% | 0.80% | 0.84% | 1.04%

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Non-performing Assets. Non-performing assets were $3.9 million or 0.27% of total assets at December 31, 2020, compared to $3.6 million or 0.31% of total assets at December 31, 2019. Non-performing assets include $3.5 million in commercial and residential mortgage loans, $226,000 in other loans and $128,000 in other real estate owned at December 31, 2020, compared to $3.4 million in commercial and residential mortgage loans and $154,000 in other loans at December 31, 2019. Other real estate owned totaled $128,000 at December 31, 2020. The Bank had no other real estate owned at December 31, 2019. The Bank had no repossessed assets as of December 31, 2020 and 2019.
At December 31, 2020, the Bank had non-performing loans, defined as non-accrual and accruing loans past due more than 90 days, of $3.8 million or 0.40% of total loans. Non-performing loans at December 31, 2019 were $3.6 million or 0.42% of total loans.
Management continually monitors the loan portfolio to ensure that all loans potentially having a material adverse impact on future operating results, liquidity or capital resources have been classified as non-performing. Should economic conditions deteriorate, the inability of distressed customers to service their existing debt could cause higher levels of non-performing loans. Management expects the level of non-accrual loans to continue to be in-line with the level of non-accrual loans at December 31, 2020 and 2019.
It is the general policy of the Bank to stop accruing interest income when a loan is placed on non-accrual status and any interest previously accrued but not collected is reversed against current income. Generally, a loan is placed on non-accrual status when it is over 90 days past due and there is reasonable doubt that all principal will be collected.
A summary of non-performing assets at December 31 for each of the years presented is shown in Table 14.

Table 14 - Non-performing Assets |  |  |  |  |
(Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016
Non-accrual loans | $3,758 | 3,553 | 3,314 | 3,711 | 3,825
Loans 90 days or more past due and still accruing | - | - | - | - | -
Total non-performing loans | 3,758 | 3,553 | 3,314 | 3,711 | 3,825
All other real estate owned | 128 | - | 27 | 118 | 283
Repossessed assets | - | - | - | - | -
Total non-performing assets | $3,886 | 3,553 | 3,341 | 3,829 | 4,108
TDR loans not included in above, |  |  |  |  |
(not 90 days past due or on nonaccrual) | $1,610 | 2,533 | 3,173 | 2,543 | 3,337
As a percent of total loans at year end |  |  |  |  |
Non-accrual loans | 0.40% | 0.42% | 0.41% | 0.49% | 0.53%
Loans 90 days or more past due and still accruing | 0.00% | 0.00% | 0.00% | 0.00% | 0.00%
Total non-performing assets |  |  |  |  |
as a percent of total assets at year end | 0.27% | 0.31% | 0.31% | 0.35% | 0.38%
Total non-performing loans |  |  |  |  |
as a percent of total loans at year-end | 0.40% | 0.42% | 0.41% | 0.49% | 0.53%

Deposits. The Company primarily uses deposits to fund its loan and investment portfolios. The Company offers a variety of deposit accounts to individuals and businesses. Deposit accounts include checking, savings, money market and time deposits. As of December 31, 2020, total deposits were $1.2 billion, as compared to $966.5 million at December 31, 2019. Core deposits, which include demand deposits, savings accounts and non-brokered certificates of deposits of denominations less than $250,000, amounted to $1.2 billion at December 31, 2020, as compared to $932.2 million at December 31, 2019.
Time deposits in amounts of $250,000 or more totaled $25.8 million and $34.3 million at December 31, 2020 and 2019, respectively. At December 31, 2020, brokered deposits amounted to $12.4 million, as compared to $22.3 million at December 31, 2019. Certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) included in brokered deposits amounted to $4.3 million and $3.1 million as of December 31, 2020 and 2019, respectively. Brokered deposits are generally considered to be more susceptible to withdrawal as a result of interest rate changes and to be a less stable source of funds, as compared to deposits from the local market. Brokered deposits outstanding as of December 31, 2020 have a weighted average rate of 1.43% with a weighted average original term of 32 months.
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Table 15 is a summary of the maturity distribution of time deposits in amounts of $250,000 or more as of December 31, 2020.
Table 15 - Maturities of Time Deposits of $250,000 or greater

(Dollars in thousands) | 2020
Three months or less | $3,658
Over three months through six months | 3,297
Over six months through twelve months | 3,871
Over twelve months | 14,945
Total | $25,771

Borrowed Funds. The Company has access to various short-term borrowings, including the purchase of federal funds and borrowing arrangements from the FHLB and other financial institutions. There were no FHLB borrowings outstanding at December 31, 2020 and 2019. Average FHLB borrowings for 2020 and 2019 were $60.8 million and $19.6 million, respectively. The maximum amount of outstanding FHLB borrowings was $70.0 million in 2020. Additional information regarding FHLB borrowings is provided in Note 7 to the Consolidated Financial Statements.
The Bank had no borrowings from the FRB at December 31, 2020 and 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 December 31, 2020, the carrying value of loans pledged as collateral totaled approximately $469.5 million.
Securities sold under agreements to repurchase were $26.2 million at December 31, 2020, as compared to $24.2 million at December 31, 2019.
Junior subordinated debentures were $15.5 million and $15.6 million as of December 31, 2020 and 2019, respectively.
Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations and other commitments as of December 31, 2020 are summarized in Table 16 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.
Table 16 - Contractual Obligations and Other Commitments

(Dollars in thousands) | Within One Year | One to Three Years | Three to Five Years | Five Years or More | Total
Contractual Cash Obligations |  |  |  |  |
Junior subordinated debentures | $- | - | - | 15,464 | 15,464
Operating lease obligations | 601 | 842 | 629 | 1,011 | 3,083
Total | $601 | 842 | 629 | 16,475 | 18,547
Other Commitments |  |  |  |  |
Commitments to extend credit | $117,428 | 31,300 | 15,293 | 135,018 | 299,039
Standby letters of credit |  |  |  |  |
and financial guarantees written | 4,745 | - | - | - | 4,745
Income tax credits | 54 | 74 | 12 | 44 | 184
Total | $122,227 | 31,374 | 15,305 | 135,062 | 303,968

The Company enters into derivative contracts 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. Therefore, the derivative amounts recorded on the balance sheet do not represent the amounts that may ultimately be paid under
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these contracts. Further discussions of derivative instruments are included above in the section entitled “Asset Liability and Interest Rate Risk Management” beginning on page A-11 and in Notes 1, 11 and 16 to the Consolidated Financial Statements. There were no derivatives at December 31, 2020 or 2019.
Capital Resources. Shareholders’ equity was $139.9 million, or 9.89% of total assets, as of December 31, 2020, as compared to $134.1 million, or 11.61% of total assets, as of December 31, 2019.
Average shareholders’ equity as a percentage of total average assets is one measure used to determine capital strength. Average shareholders’ equity as a percentage of total average assets was 9.89%, 11.61% and 11.31% for 2020, 2019 and 2018, respectively. The return on average shareholders’ equity was 8.04% at December 31, 2020, as compared to 10.45% and 10.81% at December 31, 2019 and December 31, 2018, respectively. Total cash dividends paid on common stock were $4.4 million, $3.9 million and $3.1 million during 2020, 2019 and 2018, 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.
In 2019, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $5 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 $2.5 million, or 90,354 shares of its common stock, under this stock repurchase program as of December 31, 2019.
In 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 December 31, 2020.
In 2013, the FRB approved its final rule on the Basel III capital standards, which implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which became effective January 1, 2015, include new risk-based capital and leverage ratios, which were phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk-based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 and was phased in through 2019 (increasing by 0.625% on January 1, 2016 and each subsequent January 1, until it reached 2.5% on January 1, 2019). This resulted in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained earnings that could be utilized for such actions.
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 in trust preferred securities at December 31, 2020 and 2019. The Company’s Tier 1 capital ratio was 15.07% and 15.37% at December 31, 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 16.07% and 16.08% at December 31, 2020 and December 31, 2019, respectively. The Company’s common equity Tier 1 capital consists of common stock and retained earnings. The Company’s common equity Tier 1 capital ratio was 13.56% and 13.79% at December 31, 2020 and December 31, 2019, respectively. Financial institutions are also required to maintain a leverage ratio of Tier 1 capital to total
A-22
average assets of 4.0% or greater. The Company’s Tier 1 leverage capital ratio was 10.24% and 11.91% at December 31, 2020 and December 31, 2019, respectively.
The Bank’s Tier 1 risk-based capital ratio was 14.85% and 15.09% at December 31, 2020 and December 31, 2019, respectively. The total risk-based capital ratio for the Bank was 15.85% and 15.79% at December 31, 2020 and December 31, 2019, respectively. The Bank’s common equity Tier 1 capital ratio was 14.85% and 15.09% at December 31, 2020 and December 31, 2019, respectively. The Bank’s Tier 1 leverage capital ratio was 10.04% and 11.61% at December 31, 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 December 31, 2020.
The Company’s key equity ratios as of December 31, 2020, 2019 and 2018 are presented in Table 17.
Table 17 - Equity Ratios

| 2020 | 2019 | 2018
Return on average assets | 0.83% | 1.23% | 1.22%
Return on average equity | 8.04% | 10.45% | 10.81%
Dividend payout ratio | 38.67% | 28.00% | 23.41%
Average equity to average assets | 10.35% | 11.78% | 11.31%

Quarterly Financial Data. The Company’s consolidated quarterly operating results for the years ended December 31, 2020 and 2019 are presented in Table 18.
Table 18

(Dollars in thousands, except per share amounts) | First | Second | Third | Fourth | First | Second | Third | Fourth
Total interest income | $12,250 | 11,638 | 11,868 | 12,202 | $12,183 | 12,375 | 12,430 | 12,613
Total interest expense | 1,041 | 912 | 942 | 941 | 757 | 781 | 994 | 1,225
Net interest income | 11,209 | 10,726 | 10,926 | 11,261 | 11,426 | 11,594 | 11,436 | 11,388
Provision for loan losses | 1,521 | 1,417 | 522 | 799 | 178 | 77 | 422 | 186
Other income | 4,595 | 5,239 | 7,132 | 5,948 | 4,120 | 4,385 | 4,708 | 4,526
Other expense | 11,449 | 11,452 | 11,914 | 14,116 | 10,916 | 11,244 | 11,267 | 12,090
Income before income taxes | 2,834 | 3,096 | 5,622 | 2,294 | 4,452 | 4,658 | 4,455 | 3,638
Income tax expense | 467 | 535 | 1,113 | 374 | 785 | 845 | 834 | 672
Net earnings | 2,367 | 2,561 | 4,509 | 1,920 | 3,667 | 3,813 | 3,621 | 2,966
Basic net earnings per share | $0.40 | 0.44 | 0.78 | 0.33 | $0.61 | 0.64 | 0.62 | 0.50
Diluted net earnings per share | $0.40 | 0.44 | 0.78 | 0.33 | $0.61 | 0.64 | 0.61 | 0.50

A-23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.
The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline (increase) in interest rates may adversely (positively) impact net market values and interest income. Management seeks to manage the risk through the utilization of its investment securities and off-balance sheet derivative instruments. During the years ended December 31, 2020, 2019 and 2018, the Company used interest rate contracts to manage market risk as discussed above in the section entitled “Asset Liability and Interest Rate Risk Management.”
Table 19 presents in tabular form the contractual balances and the estimated fair value of the Company’s on-balance sheet financial instruments at their expected maturity dates for the period ended December 31, 2020. The expected maturity categories take into consideration historical prepayment experience as well as management’s expectations based on the interest rate environment at December 31, 2020. For core deposits without contractual maturity (i.e. interest-bearing checking, savings, and money market accounts), the table presents principal cash flows based on management’s judgment concerning their most likely runoff or repricing behaviors.
Table 19 - Market Risk Table

(Dollars in thousands) |  |  |  |  |  |  |  |
Loans Receivable | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value
Fixed rate | $38,515 | 125,843 | 62,042 | 81,749 | 87,779 | 273,142 | 669,070 | 655,184
Average interest rate | 4.69% | 2.53% | 5.18% | 4.93% | 4.37% | 4.29% |  |
Variable rate | $57,892 | 20,336 | 22,247 | 14,608 | 15,784 | 157,841 | 288,708 | 288,708
Average interest rate | 3.92% | 4.34% | 4.13% | 4.04% | 4.00% | 4.26% |  |
Total |  |  |  |  |  |  | 957,778 | 943,892
Investment Securities |  |  |  |  |  |  |  |
Interest bearing deposits | $118,843 | - | - | - | - | - | 118,843 | 118,843
Average interest rate | 0.11% | - | - | - | - | - |  |
Securities available for sale | $9,977 | 7,391 | 3,347 | 632 | 1,062 | 222,840 | 245,249 | 245,249
Average interest rate | 4.42% | 4.35% | 4.08% | 2.63% | 3.03% | 3.24% |  |
Nonmarketable equity securities | $- | - | - | - | - | 4,155 | 4,155 | 4,155
Average interest rate | - | - | - | - | - | 3.42% |  |
Debt Obligations |  |  |  |  |  |  |  |
Deposits | $57,902 | 19,395 | 14,815 | 10,926 | 3,821 | 1,114,227 | 1,221,086 | 1,216,503
Average interest rate | 0.29% | 0.60% | 0.76% | 1.15% | 0.93% | 0.05% |  |
Securities sold under agreement |  |  |  |  |  |  |  |
to repurchase | $26,201 | - | - | - | - | - | 26,201 | 26,201
Average interest rate | 0.39% | - | - | - | - | - |  |
Junior subordinated debentures | $- | - | - | - | - | 15,464 | 15,464 | 15,464
Average interest rate | - | - | - | - | - | 1.85% |  |

A-24
Table 20 presents the simulated impact to net interest income under varying interest rate scenarios and the theoretical impact of rate changes over a twelve-month period referred to as “rate ramps.” The table shows the estimated theoretical impact on the Company’s tax equivalent net interest income from hypothetical rate changes of plus and minus 1%, 2% and 3%, as compared to the estimated theoretical impact of rates remaining unchanged. The table also shows the simulated impact to market value of equity under varying interest rate scenarios and the theoretical impact of immediate and sustained rate changes referred to as “rate shocks” of plus and minus 1%, 2% and 3%, as compared to the theoretical impact of rates remaining unchanged. The prospective effects of the hypothetical interest rate changes are based upon various assumptions, including relative and estimated levels of key interest rates. This type of modeling has limited usefulness because it does not allow for the strategies management would utilize in response to sudden and sustained rate changes. Also, management does not believe that rate changes of the magnitude presented are likely in the forecast period presented.
Table 20 - Interest Rate Risk

(Dollars in thousands) |  |
| Estimated Resulting Theoretical Net Interest Income
Hypothetical rate change (ramp over 12 months) | Amount | % Change
+3% | $44,228 | 4.08%
+2% | $43,925 | 3.37%
+1% | $43,302 | 1.90%
0% | $42,494 | 0.00%
-1% | $42,159 | -0.79%
-2% | $42,107 | -0.91%
-3% | $42,105 | -0.92%

| Estimated Resulting Theoretical Market Value of Equity
Hypothetical rate change (immediate shock) | Amount | % Change
+3% | $179,805 | 37.72%
+2% | $176,642 | 35.30%
+1% | $160,149 | 22.67%
0% | $130,555 | 0.00%
-1% | $88,296 | -32.37%
-2% | $83,689 | -35.90%
-3% | $86,198 | -33.98%

A-25
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2020, 2019 and 2018
INDEX

| PAGE(S)
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements | A-27- A-28
Financial Statements |
Consolidated Balance Sheets at December 31, 2020 and 2019 | A-29
Consolidated Statements of Earnings for the years ended December 31, 2020, 2019 and 2018 | A-30
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 | A-31
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 and 2018 | A-32
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 | A-33 - A-34
Notes to Consolidated Financial Statements | A-35 - A-71

A-26
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Peoples Bancorp of North Carolina, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
elliottdavis.com
A-27
Allowance for Loan Losses - Qualitative Factors
As discussed in Note 3 to the Company’s financial statements, the Company had a gross loan portfolio of approximately $948.6 million and associated allowance for loan losses of approximately $9.9 million as of December 31, 2020. As described by the Company in Note 1, the allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of the Company’s historical loan loss experience, the amount of past due and non-performing loans, specific known risks, underlying estimated values of collateral securing loans, current and anticipated economic conditions, and other factors which management believes represents the best estimate of the allowance for loan losses.
We identified the Company’s estimate of qualitative factors applied to adjust the historical loss experience of the allowance for loan losses as a critical audit matter. The principal considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included the following:
●
We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan portfolio, current economic conditions, and other risk factors used in development of the qualitative factors for collectively evaluated loans.
●
We evaluated the reasonableness of assumptions and data used by the Company in developing the qualitative factors by comparing these data points to internally developed and third-party sources, and other audit evidence gathered.
●
Analytical procedures were performed to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment.
/s/ Elliott Davis, PLLC
We have served as the Company's auditor since 2015.
Charlotte, North Carolina
March 19, 2021
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 2020 and December 31, 2019
(Dollars in thousands)

| December 31, | December 31,
Assets | 2020 | 2019
| (Audited) | (Audited)
Cash and due from banks, including reserve requirements |  |
of $0 at 12/31/20 and $13,210 at 12/31/19 | $42,737 | 48,337
Interest-bearing deposits | 118,843 | 720
Federal funds sold | - | 3,330
Cash and cash equivalents | 161,580 | 52,387
Investment securities available for sale | 245,249 | 195,746
Other investments | 4,155 | 4,231
Total securities | 249,404 | 199,977
Mortgage loans held for sale | 9,139 | 4,417
Loans | 948,639 | 849,874
Less allowance for loan losses | (9,908) | (6,680)
Net loans | 938,731 | 843,194
Premises and equipment, net | 18,600 | 18,604
Cash surrender value of life insurance | 16,968 | 16,319
Other real estate | 128 | -
Right of use lease asset | 3,423 | 3,622
Accrued interest receivable and other assets | 16,882 | 16,362
Total assets | $1,414,855 | 1,154,882
Liabilities and Shareholders' Equity |  |
Deposits: |  |
Noninterest-bearing demand | $456,980 | 338,004
NOW, MMDA & savings | 657,834 | 516,757
Time, $250,000 or more | 25,771 | 34,269
Other time | 80,501 | 77,487
Total deposits | 1,221,086 | 966,517
Securities sold under agreements to repurchase | 26,201 | 24,221
Junior subordinated debentures | 15,464 | 15,619
Lease liability | 3,471 | 3,647
Accrued interest payable and other liabilities | 8,734 | 10,758
Total liabilities | 1,274,956 | 1,020,762
Commitments |  |
Shareholders' equity: |  |
Preferred stock, no par value; authorized |  |
5,000,000 shares; no shares issued and outstanding | - | -
Common stock, no par value; authorized |  |
20,000,000 shares; issued and outstanding 5,787,504 shares |  |
at December 31, 2020 and 5,912,300 shares at December 31, 2019 | 56,871 | 59,813
Retained earnings | 77,628 | 70,663
Accumulated other comprehensive income | 5,400 | 3,644
Total shareholders' equity | 139,899 | 134,120
Total liabilities and shareholders' equity | $1,414,855 | 1,154,882

See accompanying Notes to Consolidated Financial Statements.
A-29
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands, except per share amounts)

| 2020 | 2019 | 2018
Interest income: |  |  |
Interest and fees on loans | $42,314 | 43,301 | 38,654
Interest on due from banks | 127 | 213 | 304
Interest on federal funds sold | 204 | 331 | -
Interest on investment securities: |  |  |
U.S. Government sponsored enterprises | 2,361 | 2,670 | 2,333
States and political subdivisions | 2,691 | 2,915 | 3,877
Other | 261 | 171 | 182
Total interest income | 47,958 | 49,601 | 45,350
Interest expense: |  |  |
NOW, MMDA & savings deposits | 1,962 | 1,596 | 769
Time deposits | 947 | 909 | 472
FHLB borrowings | 357 | 205 | -
Junior subordinated debentures | 370 | 844 | 790
Other | 200 | 203 | 115
Total interest expense | 3,836 | 3,757 | 2,146
Net interest income | 44,122 | 45,844 | 43,204
Provision for loan losses | 4,259 | 863 | 790
Net interest income after provision for loan losses | 39,863 | 44,981 | 42,414
Non-interest income: |  |  |
Service charges | 3,528 | 4,576 | 4,355
Other service charges and fees | 742 | 714 | 705
Gain on sale of securities | 2,639 | 226 | 15
Mortgage banking income | 2,469 | 1,264 | 851
Insurance and brokerage commissions | 897 | 877 | 824
Appraisal management fee income | 6,754 | 4,484 | 3,206
Gain (loss) on sales and write-downs of |  |  |
other real estate, net | (47) | (11) | 17
Miscellaneous | 5,932 | 5,609 | 6,193
Total non-interest income | 22,914 | 17,739 | 16,166
Non-interest expense: |  |  |
Salaries and employee benefits | 23,538 | 23,238 | 21,530
Occupancy | 7,933 | 7,364 | 7,170
Professional fees | 1,580 | 1,490 | 1,525
Advertising | 787 | 1,021 | 922
Debit card expense | 1,012 | 890 | 994
FDIC insurance | 263 | 119 | 328
Appraisal management fee expense | 5,274 | 3,421 | 2,460
Other | 8,544 | 7,974 | 7,645
Total non-interest expense | 48,931 | 45,517 | 42,574
Earnings before income taxes | 13,846 | 17,203 | 16,006
Income tax expense | 2,489 | 3,136 | 2,624
Net earnings | $11,357 | 14,067 | 13,382
Basic net earnings per share | $1.95 | 2.37 | 2.23
Diluted net earnings per share | $1.95 | 2.36 | 2.22
Cash dividends declared per share | $0.75 | 0.66 | 0.52

See accompanying Notes to Consolidated Financial Statements.
A-30
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

| 2020 | 2019 | 2018
Net earnings | $11,357 | 14,067 | 13,382
Other comprehensive income (loss): |  |  |
Unrealized holding gains (losses) on securities |  |  |
available for sale | 4,919 | 3,677 | (3,370)
Reclassification adjustment for gains on |  |  |
securities available for sale |  |  |
included in net earnings | (2,639) | (226) | (15)
Total other comprehensive gain (loss), |  |  |
before income taxes | 2,280 | 3,451 | (3,385)
Income tax expense (benefit) related to other |  |  |
comprehensive gain (loss): |  |  |
Unrealized holding gain (losses) on securities |  |  |
available for sale | 1,130 | 845 | (774)
Reclassification adjustment for gains on |  |  |
securities available for sale |  |  |
included in net earnings | (606) | (52) | (4)
Total income tax expense (benefit) related to |  |  |
other comprehensive gain (loss) | 524 | 793 | (778)
Total other comprehensive gain (loss), |  |  |
net of tax | 1,756 | 2,658 | (2,607)
Total comprehensive income | $13,113 | 16,725 | 10,775

See accompanying Notes to Consolidated Financial Statements.
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

|  |  |  | Accumulated |
| Common | Common |  | Other |
| Stock | Stock | Retained | Comprehensive |
| Shares | Amount | Earnings | Income | Total
Balance, December 31, 2017 | 5,995,256 | $62,096 | 50,286 | 3,593 | 115,975
Cash dividends declared on |  |  |  |  |
common stock | - | - | (3,133) | - | (3,133)
Net earnings |  |  | 13,382 |  | 13,382
Change in accumulated other | - | - | - | (2,607) | (2,607)
comprehensive income due to |  |  |  |  |
Balance, December 31, 2018 | 5,995,256 | $62,096 | 60,535 | 986 | 123,617
Common stock repurchase | (90,354) | (2,490) | - | - | (2,490)
Cash dividends declared on |  |  |  |  |
common stock | - | - | (3,939) | - | (3,939)
Restricted stock units exercised | 7,398 | 207 |  |  | 207
Net earnings | - | - | 14,067 | - | 14,067
Change in accumulated other |  |  |  |  |
comprehensive income, |  |  |  |  |
net of tax | - | - | - | 2,658 | 2,658
Balance, December 31, 2019 | 5,912,300 | $59,813 | 70,663 | 3,644 | 134,120
Common stock repurchase | (126,800) | (2,999) | - | - | (2,999)
Cash dividends declared on |  |  |  |  |
common stock | - | - | (4,392) | - | (4,392)
Restricted stock units exercised | 2,004 | 57 |  |  | 57
Net earnings | - | - | 11,357 | - | 11,357
Change in accumulated other |  |  |  |  |
comprehensive income, |  |  |  |  |
net of tax | - | - | - | 1,756 | 1,756
Balance, December 31, 2020 | 5,787,504 | $56,871 | 77,628 | 5,400 | 139,899

See accompanying Notes to Consolidated Financial Statements.
A-32
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

| 2020 | 2019 | 2018
Cash flows from operating activities: |  |  |
Net earnings | $11,357 | 14,067 | 13,382
Adjustments to reconcile net earnings to |  |  |
net cash provided by operating activities: |  |  |
Depreciation, amortization and accretion | 4,183 | 3,964 | 4,571
Provision for loan losses | 4,259 | 863 | 790
Deferred income taxes | (560) | 164 | 78
Gain on sale of investment securities | (2,639) | (226) | (15)
Gain on sale of other real estate | - | (6) | (17)
Write-down of other real estate | 47 | 17 | -
(Gain) loss on sale and writedowns of premises and equipment | - | 239 | (544)
Restricted stock expense | 27 | 270 | 85
Proceeds from sales of loans held for sale | 112,426 | 56,364 | 35,922
Origination of loans held for sale | (117,148) | (60,101) | (35,745)
Change in: |  |  |
Cash surrender value of life insurance | (380) | (383) | (384)
Right of use lease asset | 199 | 787 | -
Other assets | (382) | 952 | (3,695)
Lease liability | (176) | (762) | -
Other liabilities | (2,051) | (3,012) | 2,759
Net cash provided by operating activities | 9,162 | 13,197 | 17,187
Cash flows from investing activities: |  |  |
Purchases of investment securities available for sale | (127,893) | (54,212) | (34,692)
Proceeds from sales, calls and maturities of investment securities |  |  |
available for sale | 62,408 | 40,561 | 48,241
Proceeds from paydowns of investment securities available for sale | 19,169 | 14,489 | 15,556
Purchases of other investments | (45) | (45) | (2,611)
Proceeds from paydowns of other investment securities | 176 | 176 | 117
Net change in FHLB stock | (55) | (1) | (4)
Net change in loans | (99,971) | (46,505) | (45,094)
Purchases of premises and equipment | (2,492) | (2,835) | (1,742)
Purchases of bank owned life insurance | (269) | - | -
Proceeds from sale of premises and equipment | - | 149 | 1,410
Proceeds from sale of other real estate and repossessions | - | 42 | 232
Net cash used by investing activities | (148,972) | (48,181) | (18,587)
Cash flows from financing activities: |  |  |
Net change in deposits | 254,569 | 89,304 | (29,739)
Net change in securities sold under agreement to repurchase | 1,980 | (33,874) | 20,338
Proceeds from FHLB borrowings | 70,000 | 184,500 | -
Repayments of FHLB borrowings | (70,000) | (184,500) | -
Proceeds from FRB borrowings | 1 | 1 | 1
Repayments of FRB borrowings | (1) | (1) | (1)
Proceeds from Fed Funds Purchased | 7,011 | 100,252 | 4,277
Repayments of Fed Funds Purchased | (7,011) | (100,252) | (4,277)
Repayments of Junior Subordinated Debentures | (155) | (5,000) | -
Common stock repurchased | (2,999) | (2,490) | -
Cash dividends paid on common stock | (4,392) | (3,939) | (3,133)
Net cash (used) provided by financing activities | 249,003 | 44,001 | (12,534)
Net change in cash and cash equivalents | 109,193 | 9,017 | (13,934)
Cash and cash equivalents at beginning of period | 52,387 | 43,370 | 57,304
Cash and cash equivalents at end of period | $161,580 | 52,387 | 43,370

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PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

| 2020 | 2019 | 2018
Supplemental disclosures of cash flow information: |  |  |
Cash paid during the year for: |  |  |
Interest | $3,856 | 3,750 | 2,128
Income taxes | $2,781 | 3,206 | 1,163
Noncash investing and financing activities: |  |  |
Change in unrealized gain on investment securities |  |  |
available for sale, net | $1,756 | 2,658 | (2,607)
Transfer of loans to other real estate | $175 | 26 | 124
Issuance of accrued restricted stock units | $57 | 207 | -
Recognition of lease right of use asset and lease liability | $942 | 4,401 | -

See accompanying Notes to Consolidated Financial Statements.
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
Organization
Peoples Bancorp of North Carolina, Inc. (“Bancorp”) received regulatory approval to operate as a bank holding company on July 22, 1999, and became effective August 31, 1999. Bancorp is primarily regulated by the Board of Governors of the Federal Reserve System, and serves as the one-bank holding company for Peoples Bank (the “Bank”).
The Bank commenced business in 1912 upon receipt of its banking charter from the North Carolina Commissioner of Banks (the “Commissioner”). The Bank is primarily regulated by the Commissioner and the Federal Deposit Insurance Corporation (the “FDIC”) and undergoes periodic examinations by these regulatory agencies. The Bank, whose main office is in Newton, North Carolina, provides a full range of commercial and consumer banking services primarily in Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties in North Carolina.
Peoples Investment Services, Inc. (“PIS”) is a wholly owned subsidiary of the Bank and began operations in 1996 to provide investment and trust services through agreements with an outside party.
Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in 1997 to provide real estate appraisal and property management services to individuals and commercial customers of the Bank.
Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in the area where the property is located. In 2019, the Company launched PB Insurance Agency, which is part of CBRES.
PB Real Estate Holdings, LLC (“PBREH”) is a wholly owned subsidiary of the Bank and began operation in 2015. PBREH acquires, manages and disposes of real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.
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.
Principles of Consolidation
The consolidated financial statements include the financial statements of Bancorp and its wholly owned subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
The accounting principles followed by the Company, and the methods of applying these principles, conform with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in the banking industry. In preparing the financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ significantly from these estimates. Material estimates common to the banking industry that are particularly susceptible to significant change in the near term include, but are not limited to, the determination of the allowance for loan losses and valuation of real estate acquired in connection with or in lieu of foreclosure on loans.
Cash and Cash Equivalents
Cash, due from banks, interest-bearing deposits and federal funds sold are considered cash and cash equivalents for cash flow reporting purposes.
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Investment Securities
There are three classifications the Company is able to classify its investment securities: trading, available for sale, or held to maturity. Trading securities are bought and held principally for sale in the near term. Held to maturity securities are those securities for which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held to maturity are classified as available for sale. At December 31, 2020 and 2019, the Company classified all of its investment securities as available for sale.
Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.
Management evaluates investment securities for other-than-temporary impairment on a quarterly basis. A decline in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in value attributed to non-credit related factors is recognized in comprehensive income.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Other Investments
Other investments include equity securities with no readily determinable fair value. These investments are carried at cost.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The recognition of certain loan origination fee income and certain loan origination costs is deferred when such loans are originated and amortized over the life of the loan.
A loan is impaired when, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.
Accrual of interest is discontinued on a loan when management believes, after considering economic conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest previously accrued but not collected is reversed against current period earnings.
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; 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
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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 or equal to $1.0 million as well as a sample of commercial relationships with exposures below $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation and report is shared with management and the Bank’s Board of Directors.
Management considers certain commercial loans with weak credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk.
Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in estimating the allowance for loan losses. The provision for loan losses charged or credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.
The allowance for loan losses is comprised of three components: specific reserves, general reserves and unallocated reserves. After a loan has been identified as impaired, management measures impairment. When the measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.
The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves are based upon historical net charge-offs using the greater of the last two, three, four, or five years’ loss experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank considers information derived from its loan risk ratings and external data related to industry and general economic trends in establishing reserves. Qualitative factors applied in the Company’s Allowance for Loan and Lease Losses (“ALLL”) model include the impact to the economy from the COVID-19 pandemic and reserves on loans with payment modifications made in 2020 as a result of the COVID-19 pandemic. At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million: the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. These loan balances associated with COVID-19 related modifications have been grouped into their own pool within the ALLL model as they have a higher likelihood of risk, and a higher reserve rate has been applied to that pool. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified.
The unallocated allowance is determined through management’s assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance.
There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the year ended December 31, 2020 as compared to the year ended
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December 31, 2019. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate that loss levels may vary from the previous estimates.
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.
PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA.
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.
Mortgage Banking Activities
Mortgage banking income represents income from the sale of mortgage loans and fees received from borrowers and loan investors related to the Bank’s origination of single-family residential mortgage loans.
Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $578,000, $729,000 and $866,000 at December 31, 2020, 2019 and 2018, respectively.
The Bank originates certain fixed rate mortgage loans and commits these loans for sale. The commitments to originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative contracts. The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in the financial statements.
Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are capitalized. The range of estimated useful lives for premises and equipment are generally as follows:

Buildings and improvements | 10 - 50 years
Furniture and equipment | 3 - 10 years

Other Real Estate
Foreclosed assets include all assets received in full or partial satisfaction of a loan. Foreclosed assets are reported at fair value less estimated selling costs. Any write-downs at the time of foreclosure are charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management, and a valuation allowance is established if fair value less estimated selling costs declines below carrying value. Costs relating to the development and improvement of the property are capitalized. Revenues and expenses from operations are included in other expenses. Changes in the valuation allowance are included in loss on sale and write-down of other real estate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the
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extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial reporting bases and the tax bases of the Company’s assets and liabilities results in a deferred tax asset, an evaluation of the probability of being able to realize the future benefits indicated by such asset is required. A valuation allowance is provided for the portion of the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. In assessing the realizability of a deferred tax asset, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax planning strategies.
Tax effects from an uncertain tax position can be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more likely than not recognition threshold is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Previously recognized tax positions that no longer meet the more likely than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company assessed the impact of this guidance and determined that it did not have a material impact on the Company’s financial position, results of operations or disclosures.
Derivative Financial Instruments and Hedging Activities
In the normal course of business, the Company enters into derivative contracts to manage interest rate risk by modifying the characteristics of the related balance sheet instruments in order to reduce the adverse effect of changes in interest rates. All material derivative financial instruments are recorded at fair value in the financial statements. The fair value of derivative contracts related to the origination of fixed rate mortgage loans and the commitments to sell these loans to a third party is immaterial and has no effect on the recorded amounts in the financial statements.
The disclosure requirements for derivatives and hedging activities have the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The disclosure requirements include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
On the date a derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a trading instrument. Changes in the fair value of instruments used as fair value hedges are accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. Changes in the fair value of the effective portion of cash flow hedges are accounted for in other comprehensive income rather than earnings. Changes in the fair value of instruments that are not intended as a hedge are accounted for in the earnings of the period of the change.
If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the difference between a hedged item’s then carrying amount and its face amount is recognized into income over the original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the hedge designation removed, related amounts accumulated in other accumulated comprehensive income are reclassified into earnings over the original hedge period during which the hedged item affects income.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
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The Company formally documents all hedging relationships, including an assessment that the derivative instruments are expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged items.
Advertising Costs
Advertising costs are expensed as incurred.
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 December 31, 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 December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2009 Plan was $89,000.
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 December 31, 2020, the total unrecognized compensation expense related to the restricted stock unit grants under the 2020 Plan was $146,000.
The Company recognized compensation expense for restricted stock units granted under the 2009 Plan and 2020 Plan of $27,000 for the year ended December 31, 2020. The Company recognized compensation expense for restricted stock units granted under the 2009 Plan of $270,000 and $85,000 for the years ended December 31, 2019 and 2018, respectively.
Net Earnings Per Share
Net earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. The average market price during the year is used to compute equivalent shares.
The reconciliations of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the years ended December 31, 2020, 2019 and 2018 are as follows:
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For the year ended December 31, 2020

| Net Earnings (Dollars in thousands) | Weighted Average Number of Shares | Per Share Amount
Basic earnings per share | $11,357 | 5,808,121 | $1.95
Effect of dilutive securities: |  |  |
Restricted stock units | - | 14,203 |
Diluted earnings per share | $11,357 | 5,822,324 | $1.95

For the year ended December 31, 2019

| Net Earnings (Dollars in thousands) | Weighted Average Number of Shares | Per Share Amount
Basic earnings per share | $14,067 | 5,941,873 | $2.37
Effect of dilutive securities: |  |  |
Restricted stock units | - | 25,438 |
Diluted earnings per share | $14,067 | 5,967,311 | $2.36

For the year ended December 31, 2018

| Net Earnings (Dollars in thousands) | Weighted Average Number of Shares | Per Share Amount
Basic earnings per share | $13,382 | 5,995,256 | $2.23
Effect of dilutive securities: |  |  |
Restricted stock units | - | 20,240 |
Diluted earnings per share | $13,382 | 6,015,496 | $2.22

Revenue Recognition
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.
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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 $896,000, $876,000 and $823,000 for the years ended December 31, 2020, 2019 and 2018, 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 $4.2 million, $4.1 million and $3.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was $828,000, $692,000 and $597,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $6.8 million, $4.5 million and $3.2 million for the years ended December 31, 2020, 2019 and 2018, 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 year ended December 31, 2020 derived from contracts in which services are transferred at a point in time was approximately $8.1 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.
Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable on the balance sheet. Most contracts call for payment by a charge or deduction to the respective customer account but there are some that require a receipt of payment from the customer. For fee per transaction contracts, the customers are billed as the transactions are processed. The Company has no contracts in which customers are billed in advance for services to be performed. These types of contracts would create contract liabilities or deferred revenue, as the customers pay in advance for services. There are no contract liabilities or accounts receivables balances that are material to the Company’s balance sheet.
Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASU 2014-09. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied as the service is provided to the customer at a point in time. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts within the scope of ASU 2014-09 contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated.
Significant Judgements. All of the Company’s contracts create performance obligations that are satisfied at a point in time excluding some immaterial deposit revenues. Revenue is recognized as services are billed to the customers. Variable consideration does exist for contracts related to the Company’s contract with its registered investment advisor as some revenues earned pursuant to that contract are based on market values of accounts at the end of the period.
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Recent Accounting Pronouncements
The following tables provide a summary of Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) that the Company has recently adopted.
Recently Adopted Accounting Guidance

ASU | Description | Effective Date | Effect on Financial Statements or Other Significant Matters
ASU 2016-02: Leases | Increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. | January 1, 2019 | See section titled "ASU 2016-02" below for a description of the effect on the Company’s results of operations, financial position and disclosures.
ASU 2017-08: Premium Amortization on Purchased Callable Debt Securities | Amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium. | January 1, 2019 | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-11: Leases (Topic 842): Targeted Improvements | Intended to reduce costs and ease implementation of ASU 2016-02. | January 1, 2019 | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-20: Narrow- Scope Improvements for Lessors | Provides narrow-scope improvements for lessors, that provide relief in the accounting for sales, use and similar taxes, the accounting for other costs paid by a lessee that may benefit a lessor, and variable payments when contracts have lease and non-lease components. | January 1, 2019 | See comments for ASU 2016-02 below.
ASU 2019-07: Codification Updates to SEC Sections | Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules. | Effective upon issuance | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU | Description | Effective Date | Effect on Financial Statements or Other Significant Matters
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) | Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement. | January 1, 2020 | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606 | Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard. | January 1, 2020 Early adoption permitted | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements | Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard. | January 1, 2020 | The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 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.
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Initially transition from Topic 840 to Topic 842 required a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11, which, among other things, provided an additional transition method that would allow entities to not apply the initial guidance of ASU 2016-02 to the comparative periods presented in the financial statements and instead recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company chose the transition method of adoption provided by ASU 2018-11, therefore, the Company has applied this standard to all existing leases as of the adoption date of January 1, 2019, recording a ROU asset and a lease liability and a cumulative-effect adjustment to the opening balance of retained earnings (if applicable) in the period of adoption. With this transition method, comparative prior period disclosures will be under the previous accounting guidance for leases (Topic 840). This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of and reason for the change, which is solely a result of the adoption of the required standard.
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 previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.
The following tables provide a summary of ASU’s issued by the FASB that the Company has not adopted as of December 31, 2020, which may impact the Company’s financial statements.
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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 | Description | Effective Date | Effect on Financial Statements or Other Significant Matters
ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses | Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic. | See ASU 2019-10 below. | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments | Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. | See ASU 2019-10 below. | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief | Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. | See ASU 2019-10 below. | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates | Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, 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.

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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 | Description | Effective Date | Effect on Financial Statements or Other Significant Matters
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update) | Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard. | Effective upon issuance | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments | Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326. | January 1, 2023 | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. | March 12, 2020 through December 31, 2022 | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-06: Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | Guidance to improve financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. | January 1, 2022 | The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
Reclassification
Certain amounts in the 2019 and 2018 consolidated financial statements have been reclassified to conform to the 2020 presentation.
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Investment Securities
Investment securities available for sale at December 31, 2020 and 2019 are as follows:
(Dollars in thousands)

| December 31, 2020
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value
Mortgage-backed securities | $143,095 | 2,812 | 593 | 145,314
U.S. Government |  |  |  |
sponsored enterprises | 7,384 | 331 | 208 | 7,507
State and political subdivisions | 87,757 | 4,758 | 87 | 92,428
Total | $238,236 | 7,901 | 888 | 245,249

(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 debt securities with unrealized losses at December 31, 2020 and 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)

| December 31, 2020
| Less than 12 Months | 12 Months or More | Total
| Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses
Mortgage-backed securities | $80,827 | 565 | 4,762 | 28 | 85,589 | 593
U.S. Government |  |  |  |  |  |
sponsored enterprises | - | - | 4,193 | 208 | 4,193 | 208
State and political subdivisions | 7,126 | 87 | - | - | 7,126 | 87
Total | $87,953 | 652 | 8,955 | 236 | 96,908 | 888

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(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 December 31, 2020, unrealized losses in the investment securities portfolio relating to debt securities totaled $888,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the December 31, 2020 tables above, six out of 86 securities issued by state and political subdivisions contained unrealized losses and 29 out of 68 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations on each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.
The Company periodically evaluates its investments for any impairment which would be deemed other-than-temporary. No investment impairments were deemed other-than-temporary in 2020, 2019 or 2018.
The amortized cost and estimated fair value of investment securities available for sale at December 31, 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.

December 31, 2020 |  |
(Dollars in thousands) |  |
| Amortized Cost | Estimated Fair Value
Due within one year | $10,576 | 10,705
Due from one to five years | 15,236 | 15,997
Due from five to ten years | 62,014 | 65,826
Due after ten years | 7,315 | 7,407
Mortgage-backed securities | 143,095 | 145,314
Total | $238,236 | 245,249

During 2020, proceeds from sales of securities available for sale were $56.3 million and resulted in net gains of $2.6 million. During 2019, proceeds from sales of securities available for sale were $20.7 million and resulted in net gains of $226,000. During 2018, proceeds from sales of securities available for sale were $36.0 million and resulted in gross gains of $15,000.
Securities with a fair value of approximately $77.3 million and $66.0 million at December 31, 2020 and 2019, respectively, were pledged to secure public deposits, FHLB borrowings and for other purposes as required by law.
GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. 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 December 31, 2020 and 2019.
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(Dollars in thousands)

| December 31, 2020
| Fair Value Measurements | Level 1 Valuation | Level 2 Valuation | Level 3 Valuation
Mortgage-backed securities | $145,314 | - | 145,314 | -
U.S. Government |  |  |  |
sponsored enterprises | $7,507 | - | 7,507 | -
State and political subdivisions | $92,428 | - | 92,428 | -

(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 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.
The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the year ended December 31, 2020.
(Dollars in thousands)

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

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Loans
Major classifications of loans at December 31, 2020 and 2019 are summarized as follows:
(Dollars in thousands)

| December 31, 2020 | December 31, 2019
Real estate loans: |  |
Construction and land development | $94,124 | 92,596
Single-family residential | 272,325 | 269,475
Single-family residential - |  |
Banco de la Gente non-traditional | 26,883 | 30,793
Commercial | 332,971 | 291,255
Multifamily and farmland | 48,880 | 48,090
Total real estate loans | 775,183 | 732,209
Loans not secured by real estate: |  |
Commercial loans | 161,740 | 100,263
Farm loans | 855 | 1,033
Consumer loans | 7,113 | 8,432
All other loans | 3,748 | 7,937
Total loans | 948,639 | 849,874
Less allowance for loan losses | 9,908 | 6,680
Total net loans | $938,731 | 843,194

The above table includes deferred fees, net of deferred costs, totaling $1.4 million at December 31, 2020 including $2.6 million in deferred PPP loan fees. The above table includes deferred costs, net of deferred fees, totaling $1.5 million at December 31, 2019.
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 and Wake 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 December 31, 2020, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.
●
Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of December 31, 2020, single-family residential loans comprised approximately 32% of the Bank’s total loan portfolio, including Banco single-family residential non-traditional 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 December 31, 2020, commercial real estate loans comprised approximately 35% of the Bank’s total loan portfolio.
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●
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 December 31, 2020, commercial loans comprised approximately 17% of the Bank’s total loan portfolio, including $75.8 million in 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 the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
On March 27, 2020, President Trump signed the CARES Act, which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the PPP. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The Bank originated $64.5 million in PPP loans during the initial round of PPP funding. A second round of PPP funding, signed into law by President Trump on April 24, 2020, provided $320 billion additional funding for the PPP. As of December 31, 2020, the Bank had originated $34.5 million in PPP loans during the second round of PPP funding. Total PPP loans originated as of December 31, 2020 amounted to $99.0 million. PPP loans outstanding amounted to $75.8 million at December 31, 2021. The Bank has received $4.0 million in fees from the SBA for PPP loans originated as of December 31, 2020. The Bank has recognized $1.4 million PPP loan fee income as of December 31, 2020.
The following tables present an age analysis of past due loans, by loan type, as of December 31, 2020 and 2019:
December 31, 2020
(Dollars in thousands)

| Loans 30-89 Days Past Due | Loans 90 or More Days Past Due | Total Past Due Loans | Total Current Loans | Total Loans | Accruing Loans 90 or More Days Past Due
Real estate loans: |  |  |  |  |  |
Construction and land development | $298 | - | 298 | 93,826 | 94,124 | -
Single-family residential | 3,660 | 270 | 3,930 | 268,395 | 272,325 | -
Single-family residential - |  |  |  |  |  |
Banco de la Gente non-traditional | 3,566 | 105 | 3,671 | 23,212 | 26,883 | -
Commercial | 36 | - | 36 | 332,935 | 332,971 | -
Multifamily and farmland | - | - | - | 48,880 | 48,880 | -
Total real estate loans | 7,560 | 375 | 7,935 | 767,248 | 775,183 | -
Loans not secured by real estate: |  |  |  |  |  |
Commercial loans | - | - | - | 161,740 | 161,740 | -
Farm loans | - | - | - | 855 | 855 | -
Consumer loans | 45 | 2 | 47 | 7,066 | 7,113 | -
All other loans | - | - | - | 3,748 | 3,748 | -
Total loans | $7,605 | 377 | 7,982 | 940,657 | 948,639 | -

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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 the Bank’s non-accrual loans as of December 31, 2020 and 2019:
(Dollars in thousands)

| December 31, 2020 | December 31, 2019
Real estate loans: |  |
Construction and land development | $- | -
Single-family residential | 1,266 | 1,378
Single-family residential - |  |
Banco de la Gente non-traditional | 1,709 | 1,764
Commercial | 440 | 256
Multifamily and farmland | 117 | -
Total real estate loans | 3,532 | 3,398
Loans not secured by real estate: |  |
Commercial loans | 212 | 122
Consumer loans | 14 | 33
Total | $3,758 | 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 TDR loans in the residential mortgage loan portfolio, which are individually evaluated for impairment. Impaired loans collectively evaluated for impairment totaled $5.8 million and $5.3 million at December 31, 2020 and 2019, respectively. Accruing impaired loans were $21.3 million at December 31, 2020 and December 31, 2019. Interest income recognized on accruing impaired loans was $1.2 million and $1.3 million for the years ended December 31, 2020 and 2019, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.
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The following tables present the Bank’s impaired loans as of December 31, 2020, 2019 and 2018:
December 31, 2020
(Dollars in thousands)

| Unpaid Contractual Principal Balance | Recorded Investment With No Allowance | Recorded Investment With Allowance | Recorded Investment in Impaired Loans | Related Allowance | Average Outstanding Impaired Loans | YTD Interest Income Recognized
Real estate loans: |  |  |  |  |  |  |
Construction and land development | $108 | - | 108 | 108 | 4 | 134 | 8
Single-family residential | 5,302 | 379 | 4,466 | 4,845 | 33 | 4,741 | 262
Single-family residential - |  |  |  |  |  |  |
Banco de la Gente non-traditional | 13,417 | - | 12,753 | 12,753 | 862 | 13,380 | 798
Commercial | 2,999 | 1,082 | 1,891 | 2,973 | 14 | 2,940 | 139
Multifamily and farmland | 119 | - | 117 | 117 | - | 29 | 6
Total impaired real estate loans | 21,945 | 1,461 | 19,335 | 20,796 | 913 | 21,224 | 1,213
Loans not secured by real estate: |  |  |  |  |  |  |
Commercial loans | 515 | 211 | 244 | 455 | 5 | 564 | 32
Consumer loans | 41 | - | 37 | 37 | 1 | 60 | 5
Total impaired loans | $22,501 | 1,672 | 19,616 | 21,288 | 919 | 21,848 | 1,250

December 31, 2019
(Dollars in thousands)

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

December 31, 2018
(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 | $281 | - | 279 | 279 | 5 | 327 | 19
Single-family residential | 5,059 | 422 | 4,188 | 4,610 | 32 | 6,271 | 261
Single-family residential - |  |  |  |  |  |  |
Banco de la Gente non-traditional | 16,424 | - | 15,776 | 15,776 | 1,042 | 14,619 | 944
Commercial | 1,995 | - | 1,925 | 1,925 | 17 | 2,171 | 111
Total impaired real estate loans | 23,759 | 422 | 22,168 | 22,590 | 1,096 | 23,388 | 1,335
Loans not secured by real estate: |  |  |  |  |  |  |
Commercial loans | 251 | 89 | 1 | 90 | - | 96 | -
Consumer loans | 116 | - | 113 | 113 | 2 | 137 | 7
Total impaired loans | $24,126 | 511 | 22,282 | 22,793 | 1,098 | 23,621 | 1,342

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at December 31, 2020 and 2019 are presented below. The Company’s valuation methodology is discussed in Note 16.
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(Dollars in thousands)

| Fair Value Measurements December 31, 2020 | Level 1 Valuation | Level 2 Valuation | Level 3 Valuation
Mortgage loans held for sale | $9,139 | - | - | 9,139
Impaired loans | $20,369 | - | - | 20,369
Other real estate | $128 | - | - | 128

(Dollars in thousands)

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

(Dollars in thousands)

| Fair Value December 31, 2020 | Fair Value December 31, 2019 | Valuation Technique | Significant Unobservable Inputs | General Range of Significant Unobservable Input Values
Mortgage loans held for sale | $9,139 | 4,417 | Rate lock commitment | N/A | N/A
Impaired loans | $20,369 | 20,347 | Appraised value and discounted cash flows | Discounts to reflect current market conditions and ultimate collectability | 0 - 25%
Other real estate | $128 | - | Appraised value | Discounts to reflect current market conditions and estimated costs to sell | 0 - 25%

The following table presents changes in the allowance for loan losses for the year ended December 31, 2020. PPP loans are excluded from the allowance for loan losses as PPP loans are 100 percent guaranteed by the SBA.
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(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
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |
Beginning balance | $694 | 1,274 | 1,073 | 1,305 | 120 | 688 | - | 138 | 1,388 | 6,680
Charge-offs | (5) | (65) | - | (7) | - | (903) | - | (434) | - | (1,414)
Recoveries | 36 | 70 | - | 70 | - | 34 | - | 173 | - | 383
Provision | 471 | 564 | (21) | 844 | 2 | 1,526 | - | 251 | 622 | 4,259
Ending balance | $1,196 | 1,843 | 1,052 | 2,212 | 122 | 1,345 | - | 128 | 2,010 | 9,908
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $1 | 4 | 844 | 8 | - | - | - | - | - | 857
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | 1,195 | 1,839 | 208 | 2,204 | 122 | 1,345 | - | 128 | 2,010 | 9,051
Ending balance | $1,196 | 1,843 | 1,052 | 2,212 | 122 | 1,345 | - | 128 | 2,010 | 9,908
Loans: |  |  |  |  |  |  |  |  |  |
Ending balance | $94,124 | 272,325 | 26,883 | 332,971 | 48,880 | 161,740 | 855 | 10,861 | - | 948,639
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $7 | 1,558 | 11,353 | 2,118 | - | 212 | - | - | - | 15,248
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $94,117 | 270,767 | 15,530 | 330,853 | 48,880 | 161,528 | 855 | 10,861 | - | 933,391

Changes in the allowance for loan losses for the year ended December 31, 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
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |
Beginning balance | $813 | 1,325 | 1,177 | 1,278 | 83 | 626 | - | 161 | 982 | 6,445
Charge-offs | (21) | (42) | - | (1) | - | (389) | - | (623) | - | (1,076)
Recoveries | 45 | 66 | - | 49 | - | 83 | - | 205 | - | 448
Provision | (143) | (75) | (104) | (21) | 37 | 368 | - | 395 | 406 | 863
Ending balance | $694 | 1,274 | 1,073 | 1,305 | 120 | 688 | - | 138 | 1,388 | 6,680
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $2 | 6 | 925 | 4 | - | - | - | - | - | 937
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | 692 | 1,268 | 148 | 1,301 | 120 | 688 | - | 138 | 1,388 | 5,743
Ending balance | $694 | 1,274 | 1,073 | 1,305 | 120 | 688 | - | 138 | 1,388 | 6,680
Loans: |  |  |  |  |  |  |  |  |  |
Ending balance | $92,596 | 269,475 | 30,793 | 291,255 | 48,090 | 100,263 | 1,033 | 16,369 | - | 849,874
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $10 | 1,697 | 12,899 | 1,365 | - | 92 | - | - | - | 16,063
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $92,586 | 267,778 | 17,894 | 289,890 | 48,090 | 100,171 | 1,033 | 16,369 | - | 833,811

Changes in the allowance for loan losses for the year ended December 31, 2018 were as follows:
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(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
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |
Beginning balance | $804 | 1,812 | 1,280 | 1,193 | 72 | 574 | - | 155 | 476 | 6,366
Charge-offs | (53) | (116) | - | (453) | (5) | (54) | - | (452) | - | (1,133)
Recoveries | 10 | 106 | - | 105 | 1 | 32 | - | 168 | - | 422
Provision | 52 | (477) | (103) | 433 | 15 | 74 | - | 290 | 506 | 790
Ending balance | $813 | 1,325 | 1,177 | 1,278 | 83 | 626 | - | 161 | 982 | 6,445
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $- | - | 1,023 | 15 | - | - | - | - | - | 1,038
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | 813 | 1,325 | 154 | 1,263 | 83 | 626 | - | 161 | 982 | 5,407
Ending balance | $813 | 1,325 | 1,177 | 1,278 | 83 | 626 | - | 161 | 982 | 6,445
Loans: |  |  |  |  |  |  |  |  |  |
Ending balance | $94,178 | 252,983 | 34,261 | 270,055 | 33,163 | 97,465 | 926 | 20,992 | - | 804,023
Ending balance: individually |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $96 | 1,779 | 14,310 | 1,673 | - | 89 | - | - | - | 17,947
Ending balance: collectively |  |  |  |  |  |  |  |  |  |
evaluated for impairment | $94,082 | 251,204 | 19,951 | 268,382 | 33,163 | 97,376 | 926 | 20,992 | - | 786,076

The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:
●
Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
●
Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the 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 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.
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The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of December 31, 2020 and 2019.

December 31, 2020 |  |  |  |  |  |  |  |  |
(Dollars in thousands) |  |  |  |  |  |  |  |  |
| Real Estate Loans |  |  |  |  |
| Construction and Land Development | Single-Family Residential | Single-Family Residential - Banco de la Gente non-traditional | Commercial | Multifamily and Farmland | Commercial | Farm | Consumer | All Other | Total
1- Excellent Quality | $228 | 9,867 | - | - | - | 406 | - | 678 | - | 11,179
2- High Quality | 9,092 | 121,331 | - | 40,569 | 22 | 19,187 | - | 2,237 | 1,563 | 194,001
3- Good Quality | 76,897 | 115,109 | 10,170 | 241,273 | 44,890 | 128,727 | 832 | 3,826 | 1,477 | 623,201
4- Management Attention | 4,917 | 20,012 | 12,312 | 39,370 | 3,274 | 11,571 | 23 | 336 | 708 | 92,523
5- Watch | 2,906 | 2,947 | 1,901 | 10,871 | 694 | 1,583 | - | 6 | - | 20,908
6- Substandard | 84 | 3,059 | 2,500 | 888 | - | 266 | - | 30 | - | 6,827
7- Doubtful | - | - | - | - | - | - | - | - | - | -
8- Loss | - | - | - | - | - | - | - | - | - | -
Total | $94,124 | 272,325 | 26,883 | 332,971 | 48,880 | 161,740 | 855 | 7,113 | 3,748 | 948,639

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

TDR loans modified in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8 million and $4.3 million at December 31, 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 December 31, 2020 and December 31, 2019.
There were no new TDR modifications during the years ended December 31, 2020 and 2019.
There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the payment default occurring during the years ended December 31, 2020 and 2019. TDR loans are deemed to be in default if they become past due by 90 days or more.
At December 31, 2020, the balance of loans with existing modifications as a result of COVID-19 was $18.3 million, the balance of loans under the terms of a first modification was $12.6 million, and the balance of outstanding loans under the terms of a second modification was $5.7 million. The Company continues to track all loans that are currently modified or have been modified under COVID-19. At December 31, 2020, the balance for all loans that are currently modified or were modified during 2020 but have returned to their original terms was $119.6 million. Of all loans modified as a result of COVID-19, $101.3 million of these loans have returned to their original terms; however, the effects of stimulus in the current environment are still unknown, and additional losses may be currently present in loans that are currently modified and that were once modified. These payment modifications are primarily interest only payments for three to nine months. Loan payment modifications associated with the COVID-19 pandemic are not classified as TDR due to Section 4013 of the CARES Act, which provides that a qualified loan modification is exempt by law from classification as a TDR pursuant to GAAP.
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(4)
Premises and Equipment
Major classifications of premises and equipment at December 31, 2020 and 2019 are summarized as follows:

(Dollars in thousands) |  |
| 2020 | 2019
Land | $3,970 | 3,690
Buildings and improvements | 18,804 | 18,034
Furniture and equipment | 26,565 | 24,743
Construction in process | 10 | 395
Total premises and equipment | 49,349 | 46,862
Less accumulated depreciation | 30,749 | 28,258
Total net premises and equipment | $18,600 | 18,604

The Company recognized depreciation expense totaling $2.5 million for the year ended December 31, 2020 and $2.3 million for the years ended December 31, 2019 and 2018.
The Company had no gains or losses on the sale of or write-downs on premises and equipment for the year ended December 31, 2020. The Company has $239,000 net losses on the sale of and write-downs on premises and equipment for the year ended December 31, 2019.
(5)
Leases
The Company leases various office spaces for banking and operational facilities and equipment under operating lease arrangements.
Total rent expense was approximately $880,000, $949,000 and $785,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, the Company had operating ROU assets of $3.4 million and operating lease liabilities of $3.5 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 the standard, 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 December 31, 2020.

(Dollars in thousands) |
| December 31, 2020
Operating lease cost $ | 855
Other information: |
Cash paid for amounts included in the measurement of lease liabilities | 833
Operating cash flows from operating leases | -
Right-of-use assets obtained in exchange for new lease liabilities - operating leases | 942
Weighted-average remaining lease term - operating leases | 6.95
Weighted-average discount rate - operating leases | 2.69%

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The following table presents lease maturities as of December 31, 2020.

(Dollars in thousands) |
Maturity Analysis of Operating Lease Liabilities: | December 31, 2020
2021 | $754
2022 | 588
2023 | 567
2024 | 489
2025 | 433
Thereafter | 1,041
Total | 3,872
Less: Imputed Interest | (401)
Operating Lease Liability | $3,471

(6)
Time Deposits
At December 31, 2020, the scheduled maturities of time deposits are as follows:

(Dollars in thousands) |
2021 | $57,475
2022 | 19,235
2023 | 14,815
2024 | 10,926
2025 and thereafter | 3,821
Total | $106,272

At December 31, 2020 and 2019, the Bank had approximately $12.4 million and $22.3 million, respectively, in time deposits purchased through third party brokers, including certificates of deposit participated through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers. CDARS balances totaled $4.3 million and $3.1 million as of December 31, 2020 and 2019, respectively. The weighted average rate of brokered deposits as of December 31, 2020 and 2019 was 1.43% and 1.96%, respectively.
(7)
Federal Home Loan Bank and Federal Reserve Bank Borrowings
The Bank had no borrowings from the FHLB at December 31, 2020 and 2019. FHLB borrowings are collateralized by a blanket assignment on all residential first mortgage loans, home equity lines of credit and loans secured by multi-family real estate that the Bank owns. At December 31, 2020, the carrying value of loans pledged as collateral totaled approximately $165.1 million. The remaining availability under the line of credit with the FHLB was $111.4 million at December 31, 2020. The Bank incurred a $1.1 million prepayment penalty on the prepayment of a $70.0 million FHLB advance in 2020.
The Bank is required to purchase and hold certain amounts of FHLB stock in order to obtain FHLB borrowings. No ready market exists for the FHLB stock, and it has no quoted market value. The stock is redeemable at $100 per share subject to certain limitations set by the FHLB. The Bank owned $1.0 million and $983,000 of FHLB stock, included in other investments, at December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the Bank had no borrowings from the Federal Reserve Bank (“FRB”). FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At December 31, 2020, the carrying value of loans pledged as collateral totaled approximately $469.5 million. Availability under the line of credit with the FRB was $340.0 million at December 31, 2020.
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(8)
Junior Subordinated Debentures
In June 2006, the Company formed a second 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. 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 assets 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 interest 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 all the documents entered into in connection with the trust preferred securities is that the Company is liable to make the distributions and other payments required on the trust preferred securities.
These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.
The Company redeemed $5.0 million of outstanding trust preferred securities in December 2019.
(9)
Income Taxes
The provision for income taxes is summarized as follows:

(Dollars in thousands) |  |  |
| 2020 | 2019 | 2018
Current expense | $3,049 | 2,972 | 2,546
Deferred income tax expense | (560) | 164 | 78
Total income tax | $2,489 | 3,136 | 2,624

The differences between the provision for income taxes and the amount computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:

(Dollars in thousands) |  |  |
| 2020 | 2019 | 2018
Tax expense at statutory rate | $2,908 | 3,613 | 3,361
State income tax, net of federal income tax effect | 261 | 351 | 358
Tax-exempt interest income | (649) | (802) | (990)
Increase in cash surrender value of life insurance | (80) | (81) | (81)
Nondeductible interest and other expense | 46 | 40 | 23
Other | 3 | 15 | (47)
Total | $2,489 | 3,136 | 2,624

The following summarizes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities. The net deferred tax asset is included as a component of other assets at December 31, 2020 and 2019.
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(Dollars in thousands) |  |
| 2020 | 2019
Deferred tax assets: |  |
Allowance for loan losses | $2,276 | 1,535
Accrued retirement expense | 1,190 | 1,150
Restricted stock | 190 | 217
Accrued bonuses | - | 265
Interest income on nonaccrual loans | 1 | 2
Lease liability | 798 | 838
Total gross deferred tax assets | 4,455 | 4,007
Deferred tax liabilities: |  |
Deferred loan fees | 284 | 343
Accumulated depreciation | 873 | 873
Prepaid expenses | 5 | 7
ROU Asset | 787 | 832
Other | 41 | 47
Unrealized gain on available for sale securities | 1,611 | 1,087
Total gross deferred tax liabilities | 3,601 | 3,189
Net deferred tax asset | $854 | 818

The Company has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded that it has no liability related to uncertain tax positions.
The Company’s Federal income tax filings for years 2017 through 2020 were at year end 2020 open to audit under statutes of limitations by the Internal Revenue Service. The Company’s North Carolina income tax returns are currently under audit for tax year 2014-2016, tax years 2017, 2018 and 2019 are open to audit under the statutes of limitations by the North Carolina Department of Revenue.
(10)
Related Party Transactions
The Company conducts transactions with its directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. It is the policy of the Company that loan transactions with directors and officers are made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following is a summary of activity for related party loans for 2020 and 2019:

(Dollars in thousands) |  |
| 2020 | 2019
Beginning balance | $3,472 | 3,192
New loans | 4,189 | 5,716
Repayments | (5,809) | (5,436)
Ending balance | $1,852 | 3,472

At December 31, 2020 and 2019, the Company had deposit relationships with related parties of approximately $44.5 million and $30.4 million, respectively.
A director of the Company has a membership interest in a company that previously leased two branch facilities to the Bank. The Bank purchased these branch facilities in September 2020.The Bank’s lease payments for these facilities totaled $173,000 and $231,000 for the years ended December 31, 2020 and 2019, respectively.
(11)
Commitments and Contingencies
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
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The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.

(Dollars in thousands) |  |
| Contractual Amount
| 2020 | 2019
Financial instruments whose contract amount represent credit risk: |  |
Commitments to extend credit | $299,039 | 276,338
Standby letters of credit and financial guarantees written | $4,745 | 3,558

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and because they may expire without being drawn upon, the total commitment amount of $303.8 million does not necessarily represent future cash requirements.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to businesses in the Bank’s delineated market area. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds real estate, equipment, automobiles and customer deposits as collateral supporting those commitments for which collateral is deemed necessary.
In the normal course of business, the Company is a party (both as plaintiff and defendant) to a number of lawsuits. In the opinion of management and counsel, none of these cases should have a material adverse effect on the financial position of the Company.
Bancorp and the Bank have employment agreements with certain key employees. The agreements, among other things, include salary, bonus, incentive compensation, and change in control provisions.
The Company has $110.5 million available for the purchase of overnight federal funds from five correspondent financial institutions as of December 31, 2020.
At December 31, 2017, the Bank committed to invest $3.0 million in an income tax credit partnership owning and developing two multifamily housing developments in Charlotte, North Carolina, with $1.5 million allocated to each property. The Bank has funded $2.8 million of this commitment at December 31, 2020.
(12)
Employee and Director Benefit Programs
The Company has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain minimum age and service requirements. Under the 401(k) plan, the Company matched employee contributions to a maximum of 4.00% of annual compensation in 2018, 2019 and 2020. The Company’s contribution pursuant to this formula was approximately $692,000, $691,000 and $670,000 for the years ended December 31, 2020, 2019 and 2018, respectively. Investments of the 401(k) plan are determined by a committee comprised of senior management. No investments in Company stock have been made by the 401(k) plan. Contributions to the 401(k) plan are vested immediately.
In December 2001, the Company initiated a postretirement benefit plan to provide retirement benefits to key officers and its Board of Directors and to provide death benefits for their designated beneficiaries. Under the postretirement benefit plan, the Company purchased life insurance contracts on the lives of the key officers and each director. The increase in cash surrender value of the contracts constitutes the Company’s contribution to the postretirement benefit plan each year. Postretirement benefit plan participants are to be paid annual benefits for a specified number of years commencing upon retirement. Expenses incurred for benefits relating to the postretirement benefit plan were approximately $388,000, $361,000 and $423,000 for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company is currently paying medical benefits for certain retired employees. The Company did not incur any postretirement medical benefits expense in 2020, 2019 and 2018 due to an excess accrual balance.
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The following table sets forth the change in the accumulated benefit obligation for the Company’s two postretirement benefit plans described above:

(Dollars in thousands) |  |
| 2020 | 2019
Benefit obligation at beginning of period | $4,700 | 4,566
Service cost | 323 | 299
Interest cost | 63 | 58
Benefits paid | (216) | (223)
Benefit obligation at end of period | $4,870 | 4,700

The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2020 and 2019 are shown in the following two tables:

(Dollars in thousands) |  |
| 2020 | 2019
Benefit obligation $ | 4,870 | 4,700
Fair value of plan assets | - | -

(Dollars in thousands) |  |
| 2020 | 2019
Funded status | $(4,870) | (4,700)
Unrecognized prior service cost/benefit | - | -
Unrecognized net actuarial loss | - | -
Net amount recognized | $(4,870) | (4,700)
Unfunded accrued liability | $(4,870) | (4,700)
Intangible assets | - | -
Net amount recognized | $(4,870) | (4,700)

Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2020, 2019 and 2018 consisted of the following:

(Dollars in thousands) |  |  |
| 2020 | 2019 | 2018
Service cost | $323 | 299 | 362
Interest cost | 63 | 58 | 70
Net periodic cost | $386 | 357 | 432
Weighted average discount rate assumption |  |  |
used to determine benefit obligation | 5.49% | 5.49% | 5.49%

The Company paid benefits under the two postretirement plans totaling $216,000 and $223,000 during the years ended December 31, 2020 and 2019, respectively. Information about the expected benefit payments for the Company’s two postretirement benefit plans is as follows:
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(Dollars in thousands) |
Year ending December 31, |
2021 | $353
2022 | $342
2023 | $342
2024 | $354
2025 | $370
Thereafter | $8,345

(13)
Regulatory Matters
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of capital in relation to both on- and off-balance sheet items at various risk weights. Total capital consists of two tiers of capital. Tier 1 capital includes common shareholders’ equity and trust preferred securities less adjustments for intangible assets. Tier 2 capital consists of the allowance for loan losses, up to 1.25% of risk-weighted assets and other adjustments. Management believes, as of December 31, 2020, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2020, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank’s category.
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.
The Company’s and the Bank’s actual capital amounts and ratios are presented below:
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(Dollars in thousands) |  |  |  |  |  |
| Actual | Minimum Regulatory Capital Ratio | Minimum Ratio plus Capital Conservation Buffer
| Amount | Ratio | Amount | Ratio | Amount | Ratio
As of December 31, 2020: |  |  |  |  |  |
Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $159,407 | 16.07% | 79,372 | 8.00% | N/A | N/A
Bank | $157,106 | 15.85% | 79,283 | 8.00% | 104,059 | 10.50%
Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $149,499 | 15.07% | 59,529 | 6.00% | N/A | N/A
Bank | $147,198 | 14.85% | 59,462 | 6.00% | 84,238 | 8.50%
Tier 1 Capital (to Average Assets) |  |  |  |  |  |
Consolidated | $149,499 | 10.24% | 58,378 | 4.00% | N/A | N/A
Bank | $147,198 | 10.04% | 58,662 | 4.00% | 58,662 | 4.00%
Common Equity Tier 1 (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $134,499 | 13.56% | 44,647 | 4.50% | N/A | N/A
Bank | $147,198 | 14.85% | 44,597 | 4.50% | 69,373 | 7.00%

(Dollars in thousands) |  |  |  |  |  |
| Actual | Minimum Regulatory Capital Ratio | Minimum Ratio plus Capital Conservation Buffer
| Amount | Ratio | Amount | Ratio | Amount | Ratio
As of December 31, 2019: |  |  |  |  |  |
Total Capital (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $152,156 | 16.08% | 75,710 | 8.00% | N/A | N/A
Bank | $149,266 | 15.79% | 75,602 | 8.00% | 99,228 | 10.50%
Tier 1 Capital (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $145,476 | 15.37% | 56,783 | 6.00% | N/A | N/A
Bank | $142,586 | 15.09% | 56,702 | 6.00% | 80,328 | 8.50%
Tier 1 Capital (to Average Assets) |  |  |  |  |  |
Consolidated | $145,476 | 11.91% | 48,872 | 4.00% | N/A | N/A
Bank | $142,586 | 11.61% | 49,106 | 4.00% | 49,106 | 4.00%
Common Equity Tier 1 (to Risk-Weighted Assets) |  |  |  |  |  |
Consolidated | $130,476 | 13.79% | 42,587 | 4.50% | N/A | N/A
Bank | $142,586 | 15.09% | 42,526 | 4.50% | 66,152 | 7.00%

(14)
Shareholders’ Equity
Shareholders’ equity was $139.9 million, or 9.89% of total assets, at December 31, 2020, compared to 134.1 million, or 11.61% of total assets, at December 31, 2019. The increase in shareholders’ equity is primarily due to an increase in retained earnings due to net income.
Annualized return on average equity for the year ended December 31, 2020 was 8.01% compared to 10.45% for the year ended December 31, 2019. Total cash dividends paid on common stock were $4.4 million and $3.9 million for the years ended December 31, 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 shares of preferred stock.
In 2019, the Company’s Board of Directors authorized a stock repurchase program, whereby up to $5 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.
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The Company has repurchased approximately $2.5 million, or 90,354 shares of its common stock, under this stock repurchase program as of December 31, 2019.
In 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 December 31, 2020.
(15)
Other Operating Income and Expense
Miscellaneous non-interest income for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands) |  |  |
| 2020 | 2019 | 2018
Visa debit card income | $4,237 | 4,145 | 3,911
Bank owned life insurance income | 380 | 383 | 384
Gain (loss) on sale of premises and equipment | - | (239) | 544
Other | 1,315 | 1,320 | 1,354
| $5,932 | 5,609 | 6,193

Other non-interest expense for the years ended December 31, 2020, 2019 and 2018 included the following items:

(Dollars in thousands) |  |  |
| 2020 | 2019 | 2018
ATM expense | $567 | 579 | 542
Consulting | 1,078 | 972 | 1,012
Data processing | 635 | 616 | 466
Deposit program expense | 426 | 515 | 586
Dues and subscriptions | 538 | 421 | 421
FHLB advance prepayment penalty | 1,100 | - | -
Internet banking expense | 729 | 681 | 603
Office supplies | 538 | 467 | 503
Telephone | 794 | 802 | 678
Other | 2,139 | 2,921 | 2,834
| $8,544 | 7,974 | 7,645

(16)
Fair Value of Financial Instruments
The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial instruments held by the Company since purchase, origination, or issuance.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
●
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
●
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
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●
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
Cash and Cash Equivalents
For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of fair value. Cash and cash equivalents are reported in the Level 1 fair value category.
Investment Securities Available for Sale
Fair values of investment securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available. If quoted prices are not available, fair value is determined using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment securities with quoted market prices are reported in the Level 1 fair value category. Fair value measurements obtained from independent pricing services are reported in the Level 2 fair value category. All other fair value measurements are reported in the Level 3 fair value category.
Other Investments
For other investments, the carrying value is a reasonable estimate of fair value. Other investments are reported in the Level 3 fair value category.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.
Loans
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. 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.
Other Real Estate
The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Other real estate is reported in the Level 3 fair value category.
Deposits
The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 2 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 2 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.
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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 fair value presentation for recurring assets is presented in Note 2. There were no recurring liabilities at December 31, 2020 and 2019. The fair value presentation for non-recurring assets is presented in Note 3. There were no non-recurring liabilities at December 31, 2020 and 2019. The carrying amount and estimated fair value of the Company’s financial instruments at December 31, 2020 and 2019 are as follows:

(Dollars in thousands) |  |  |  |  |
|  | Fair Value Measurements at December 31, 2020
| Carrying Amount | Level 1 | Level 2 | Level 3 | Total
Assets: |  |  |  |  |
Cash and cash equivalents | $161,580 | 161,580 | - | - | 161,580
Investment securities available for sale | $245,249 | - | 245,249 | - | 245,249
Other investments | $4,155 | - | - | 4,155 | 4,155
Mortgage loans held for sale | $9,139 | - | - | 9,139 | 9,139
Loans, net | $938,731 | - | - | 924,845 | 924,845
Cash surrender value of life insurance | $16,968 | - | 16,968 | - | 16,968
Liabilities: |  |  |  |  |
Deposits | $1,221,086 | - | - | 1,216,503 | 1,216,503
Securities sold under agreements |  |  |  |  |
to repurchase | $26,201 | - | 26,201 | - | 26,201
Junior subordinated debentures | $15,464 | - | 15,464 | - | 15,464

(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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(17)
Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements
Balance Sheets
December 31, 2020 and 2019
(Dollars in thousands)

Assets | 2020 | 2019
Cash | $664 | 1,187
Interest-bearing time deposit | 1,000 | 1,000
Investment in subsidiaries | 152,598 | 146,230
Investment in PEBK Capital Trust II | 464 | 619
Investment securities available for sale | - | 250
Other assets | 650 | 476
Total assets | $155,376 | 149,762
Liabilities and Shareholders' Equity |  |
Junior subordinated debentures | $15,464 | 15,619
Liabilities | 13 | 23
Shareholders' equity | 139,899 | 134,120
Total liabilities and shareholders' equity | $155,376 | 149,762

Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

Revenues: | 2020 | 2019 | 2018
Interest and dividend income | $7,539 | 12,850 | 4,544
Total revenues | 7,539 | 12,850 | 4,544
Expenses: |  |  |
Interest | 370 | 844 | 790
Other operating expenses | 625 | 629 | 678
Total expenses | 995 | 1,473 | 1,468
Income before income tax benefit and equity in |  |  |
undistributed earnings of subsidiaries | 6,544 | 11,377 | 3,076
Income tax benefit | 201 | 299 | 299
Income before equity in undistributed |  |  |
earnings of subsidiaries | 6,745 | 11,676 | 3,375
Equity in undistributed earnings of subsidiaries | 4,612 | 2,391 | 10,007
Net earnings | $11,357 | 14,067 | 13,382

A-69
Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)

| 2020 | 2019 | 2018
Cash flows from operating activities: |  |  |
Net earnings | $11,357 | 14,067 | 13,382
Adjustments to reconcile net earnings to net |  |  |
cash provided by operating activities: |  |  |
Equity in undistributed earnings of subsidiaries | (4,612) | (2,391) | (10,007)
Change in: |  |  |
Other assets | (19) | 57 | 13
Other liabilities | (10) | (13) | 6
Net cash provided by operating activities | 6,716 | 11,720 | 3,394
Cash flows from investing activities: |  |  |
Proceeds from calls and maturities of investment securities |  |  |
available for sale | 250 | - | -
Net cash provided by investing activities | 250 | - | -
Cash flows from financing activities: |  |  |
Repayment of junior subordinated debentures | (155) | (5,000) | -
Cash dividends paid on common stock | (4,392) | (3,939) | (3,133)
Stock repurchase | (2,999) | (2,490) | -
Proceeds from exercise of restricted stock units | 57 | 207 | -
Net cash used by financing activities | (7,489) | (11,222) | (3,133)
Net change in cash | (523) | 498 | 261
Cash at beginning of year | 1,187 | 689 | 428
Cash at end of year | $664 | 1,187 | 689
Noncash investing and financing activities: |  |  |
Change in unrealized gain on investment securities |  |  |
available for sale, net | $1,756 | 2,658 | (2,607)

(18)
Quarterly Data

| 2020 | 2019
(Dollars in thousands, except per share amounts) | First | Second | Third | Fourth | First | Second | Third | Fourth
Total interest income | $12,250 | 11,638 | 11,868 | 12,202 | $12,183 | 12,375 | 12,430 | 12,613
Total interest expense | 1,041 | 912 | 942 | 941 | 757 | 781 | 994 | 1,225
Net interest income | 11,209 | 10,726 | 10,926 | 11,261 | 11,426 | 11,594 | 11,436 | 11,388
Provision for loan losses | 1,521 | 1,417 | 522 | 799 | 178 | 77 | 422 | 186
Other income | 4,595 | 5,239 | 7,132 | 5,948 | 4,120 | 4,385 | 4,708 | 4,526
Other expense | 11,449 | 11,452 | 11,914 | 14,116 | 10,916 | 11,244 | 11,267 | 12,090
Income before income taxes | 2,834 | 3,096 | 5,622 | 2,294 | 4,452 | 4,658 | 4,455 | 3,638
Income tax expense | 467 | 535 | 1,113 | 374 | 785 | 845 | 834 | 672
Net earnings | 2,367 | 2,561 | 4,509 | 1,920 | 3,667 | 3,813 | 3,621 | 2,966
Basic net earnings per share | $0.40 | 0.44 | 0.78 | 0.33 | $0.61 | 0.64 | 0.62 | 0.50
Diluted net earnings per share | $0.40 | 0.44 | 0.78 | 0.33 | $0.61 | 0.64 | 0.61 | 0.50

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(19)
Subsequent Events
The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued.
On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reopened and expanded the PPP loan program through March 31, 2021. The changes to the PPP program allow new borrowers to apply for a loan under the original PPP loan program and the creation of an additional PPP loan for eligible borrowers. The Economic Aid Act also revises certain PPP requirements, including aspects of loan forgiveness on existing PPP loans. As of March 12, 2021, the Bank had originated $17.9 million in PPP loans under the expanded PPP loan program. The Bank expects to receive approximately $967,000 in fees from the SBA for PPP loans originated under the expanded PPP loan program as of March 12, 2021.
The outstanding balance of PPP loans originated in 2020 was $55.7 million at March 12, 2021, as compared to $75.8 million at December 31, 2020. The decrease from December 31, 2020 to March 12, 2021 was primarily due to PPP loans being forgiven by the SBA.
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DIRECTORS AND OFFICERS OF THE COMPANY
DIRECTORS
Robert C. Abernethy – Chairman
Chairman of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples Bank;
President, Secretary and Treasurer, Carolina Glove Company, Inc. (glove manufacturer)
Secretary and Assistant Treasurer, Midstate Contractors, Inc. (paving company)
James S. Abernethy
Vice President, Carolina Glove Company, Inc. (glove manufacturer)
President and Assistant Secretary, Midstate Contractors, Inc. (paving company)
Vice President, Secretary and Chairman of the Board of Directors, Alexander Railroad Company
Douglas S. Howard
Vice President and Treasurer, Denver Equipment Company of Charlotte, Inc.
John W. Lineberger, Jr.
President, Lincoln Bonded Warehouse Company (commercial warehousing facility)
Gary E. Matthews
President and Director, Matthews Construction Company, Inc. (general contractor)
Billy L. Price, Jr. MD
Practitioner of Internal Medicine, BL Price Jr. Medical Consultants, PLLC
Larry E. Robinson
Shareholder, Director, Chairman of the Board and Chief Executive Officer, The Blue Ridge Distributing Co., Inc. (beer and wine distributor)
Director and member of the Board of Directors, United Beverages of North Carolina, LLC (beer distributor)
William Gregory (Greg) Terry
President, Hole-In-One Advantage, LLC
Director/Consultant, Drum & Willis-Reynolds Funeral Homes and Crematory
Dan Ray Timmerman, Sr.
Chairman of the Board and Chief Executive Officer, Timmerman Manufacturing, Inc. (wrought iron furniture, railings and gates manufacturer)
Benjamin I. Zachary
President, Treasurer, General Manager and Director, Alexander Railroad Company
OFFICERS
Lance A. Sellers
President and Chief Executive Officer
Jeffrey N. Hooper
Executive Vice President, Chief Financial Officer, Corporate Treasurer and Assistant Corporate Secretary
William D. Cable, Sr.
Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer
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