PEOPLES BANCORP OF NORTH CAROLINA INC

On October 19, 2018, the Bank received a draft audit report from the North Carolina Department of Revenue (“NCDOR”) setting forth certain proposed adjustments to the North Carolina income tax returns for the Bank for the tax years January 1, 2014 through December 31, 2016. The NCDOR sought to disallow certain tax credits taken by the Bank in tax years January 1, 2014 through December 31, 2016 from an investment made by the Bank. The total proposed adjustments sought by the NCDOR as of the date of the draft audit report (including additional tax, penalties and interest up to the date of the draft audit report) was approximately $1.4 million. The Bank disagreed with the NCDOR’s adjustments and the disallowance of certain tax credits, and contested the proposed adjustments and the disallowance of such tax credits. During the second quarter of 2019, the Bank paid NCDOR $1.2 million in taxes and interest associated with the proposed adjustments noted above. This payment stopped the accrual of interest during the period while the proposed adjustments and disallowance are being contested, and the NCDOR waived associated penalties. In connection with the Bank’s investment related to the subject tax credits the Bank obtained a Tax Credit Guaranty Agreement from State Tax Credit Exchange, LLC dated September 10, 2014. The Bank has been informed that a potential settlement is being negotiated and being finalized that will withdraw the NCDOR’s disallowance of the tax credits. At this time the settlement is not final.

In the opinion of management, the Company is not involved in any other material pending legal proceedings other than routine proceedings occurring in the ordinary course of business.