UNITED
STATES
SECURITIES AND
EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31,
2017
Peoples Bancorp of
North Carolina,
Inc.
(Exact Name of Registrant as Specified in Its
Charter)
North Carolina
(State or Other Jurisdiction of
Incorporation)
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000-27205
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56-2132396
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(Commission File
No.)
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(IRS Employer Identification
No.)
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518 West C Street, Newton, North
Carolina
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28658
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(Address of Principal Executive
Offices)
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(Zip Code)
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(828)
464-5620
(Registrant’s Telephone Number,
Including Area Code)
Securities Registered Pursuant to
Section 12(b) of the Act:
None
Securities Registered Pursuant to
Section 12(g) of the Act:
Common
Stock, no par value
(title of
class)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
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Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Indicate by check
mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Indicate by check
mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference inPart III of this
Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
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Large Accelerated
Filer
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☐
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Accelerated
Filer
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☒
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Non-Accelerated
Filer
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☐
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Smaller Reporting
Company
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☐
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
prices of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
$132,203,074 based on the closing price of such common stock on
June 30, 2017, which was $28.73 per share.
Indicate
the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable
date.
5,995,256 shares of common stock, outstanding at February 28,
2018.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Annual Report of
Peoples Bancorp of North Carolina, Inc. for the year ended December
31, 2017 (the “Annual Report”), which will be included
as Appendix A to the Proxy Statement for the 2018 Annual Meeting of
Shareholders, are incorporated by reference into Part II and
included as Exhibit 13 to this Form 10-K.
Portions of the Proxy Statement
for the 2018 Annual Meeting of Shareholders of Peoples Bancorp of
North Carolina, Inc. to be held on May 3, 2018 (the “Proxy
Statement”), are incorporated by reference into Part
III.
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and
business of Peoples Bancorp of North Carolina, Inc. (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 Peoples 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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PEOPLES BANCORP OF NORTH CAROLINA, INC.
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FORM 10-K CROSS REFERENCE INDEX
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2017
Form
10-K
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Notice of
2018
Annual
Meeting,
Proxy
Statement
and
Annual Report
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Page
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Page
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PART I
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Item 1 -
Business
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4 -
11
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N/A
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Item 1A -
Risk Factors
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11 -
18
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N/A
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Item 1B -
Unresolved Staff Comments
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18
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N/A
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Item 2 -
Properties
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19
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N/A
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Item 3 -
Legal Proceedings
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19
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N/A
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Item 4 -
Mine Safety Disclosures
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19
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N/A
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PART II
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Item 5 - Market for Registrant’s Common Equity, Related
Stockholder
Matters and Issuer Purchases of Equity
Securities
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20 -
22
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N/A
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Item 6 -
Selected Financial Data
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22
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A-3
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Item 7 - Management’s Discussion and Analysis of Financial
Condition and
Results of Operations
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23
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A-4 -
A-23
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Item 7A -
Quantitative and Qualitative Disclosures About Market
Risk
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23
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A-22 -
A-23
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Item 8 -
Financial Statements and Supplementary Data
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23
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A-24 -
A-66
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Item 9 - Changes in and Disagreements with Accountants on
Accounting
and Financial Disclosure
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23
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N/A
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Item 9A -
Controls and Procedures
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23 -
24
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N/A
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Item 9B -
Other Information
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24
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N/A
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PART III
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Item 10 -
Directors and Executive Officers and Corporate
Governance
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24
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A-67
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Item 11 -
Executive Compensation
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24
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14 -
24
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Item 12 - Security Ownership of Certain Beneficial Owners and
Management
and Related Stockholder
Matters
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24 -
25
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5 -
7
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Item 13 - Certain Relationships and Related Transactions
and
Director Independence
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25
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11 and
27
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Item 14 -
Principal Accountant Fees and Services
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25
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30
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PART IV
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Item 15 -
Exhibits and Financial Statement Schedules
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26 -
29
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N/A
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Signatures
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30
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N/A
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PART
I
ITEM 1.
BUSINESS
General
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”.
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
19 banking offices, as of December 31, 2017, located in Lincolnton,
Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite,
Hickory, Charlotte, Cornelius, Mooresville and Raleigh, North
Carolina. The Bank also operates loan production offices in Denver
and Durham, North Carolina. At December 31, 2017, the Company had
total assets of $1.1 billion, net loans of $753.4 million, deposits
of $907.0 million, total securities of $231.2 million, and
shareholders’ equity of $116.0 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 thorough 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-23 of the Annual Report, which is included in this Form
10-K as Exhibit (13).
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”).
The Company’s fiscal year
ends December 31. This Form 10-K is also being used as the
Bank’s Annual Disclosure Statement under FDIC Regulations.
This Form 10-K has not been reviewed, or confirmed for accuracy or
relevance by the FDIC.
At December 31, 2017, the Company
employed 302 full-time employees and 33 part-time employees, which
equated to 326 full-time equivalent employees.
Subsidiaries
The Bank is a subsidiary of the
Company. At December 31, 2017, 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 June 2006, the Company formed
a wholly owned Delaware statutory trust, PEBK Capital Trust II
(“PEBK Trust II”), which issued $20.0 million of
guaranteed preferred beneficial interests in the Company’s
junior subordinated deferrable interest debentures. All of the
common securities of PEBK Trust II are owned by the Company. The
proceeds from the issuance of the common securities and the trust
preferred securities were used by PEBK Trust II to purchase $20.6
million of junior subordinated debentures of the Company, which pay
a floating rate equal to three-month LIBOR plus 163 basis points.
The proceeds received by the Company from the sale of the junior
subordinated debentures were used in December 2006 to repay the
trust preferred securities issued in December 2001 by PEBK Capital
Trust, a wholly owned Delaware statutory trust of the Company, and
for general purposes. The debentures represent the sole asset of
PEBK Trust II. PEBK Trust II is not included in the consolidated
financial statements.
The trust preferred securities
issued by PEBK Trust II accrue and pay quarterly at a floating rate
of three-month LIBOR plus 163 basis points. The Company has
guaranteed distributions and other payments due on the trust
preferred securities to the extent PEBK Trust II does not have
funds with which to make the distributions and other payments. The
net combined effect of the trust preferred securities transaction
is that the Company is obligated to make the distributions and
other payments required on the trust preferred
securities.
These trust preferred securities
are mandatorily redeemable upon maturity of the debentures on June
28, 2036, or upon earlier redemption as provided in the indenture.
The Company has the right to redeem the debentures purchased by
PEBK Trust II, in whole or in part, which became effective on June
28, 2011. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the
principal amount plus any accrued but unpaid
interest.
Market
Area
The Bank’s primary market
consists of the communities in an approximate 50-mile radius around
its headquarters office in Newton, North Carolina. This area
includes Catawba County, Alexander County, Lincoln County, Iredell
County and portions of northeast Gaston County, North Carolina. The
Bank is located only 40 miles north of Charlotte, North Carolina,
and the Bank’s primary market area is and will continue to be
significantly affected by its close proximity to this major
metropolitan area.
Employment in the Bank’s
primary market area is diversified among manufacturing, retail and
wholesale trade, technology, services and utilities. Catawba
County’s largest employers include Catawba County Schools,
Frye Regional Medical Center, Catawba Valley Medical Center,
Merchant Distributors, Inc. (wholesale food distributor), Catawba
County, CommScope, Inc. (manufacturer of fiber optic cable and
accessories), Corning Optical Communications (manufacturer of fiber
optic cable and accessories), Ethan Allen (furniture manufacturer),
HSM (manufacturing) and Advance Pierre Foods (restaurants and
bakeries).
Competition
The Bank has operated in the
Catawba Valley region of North Carolina for over 100 years and is
the only financial institution headquartered in Newton, North
Carolina. Nevertheless, the Bank faces strong competition both in
attracting deposits and making loans. Its most direct competition
for deposits has historically come from other commercial banks,
credit unions and brokerage firms located in its primary market
area, including large financial institutions. One national money
center commercial bank is headquartered in Charlotte, North
Carolina. Based upon June 30, 2017 comparative data, the Bank had
23.42% of the deposits in Catawba County, placing it second in
deposit size among a total of 12 banks with branch offices in
Catawba County; 9.83% of the deposits in Lincoln County, placing it
fifth in deposit size among a total of ten banks with branch
offices in Lincoln County; and 12.26% of the deposits in Alexander
County, placing it fifth in deposit size among a total of six banks
with branch offices in Alexander County.
The Bank also faces additional
significant competition for investors’ funds from short-term
money market securities and other corporate and government
securities. The Bank’s core deposit base has grown
principally due to economic growth in the Bank’s market area
coupled with the implementation of new and competitive deposit
products. The ability of the Bank to attract and retain deposits
depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing
investment opportunities.
The Bank experiences strong
competition for loans from commercial banks and mortgage banking
companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and
quality of services it provides to borrowers. Competition is
increasing as a result of the continuing reduction of restrictions
on the interstate operations of financial
institutions.
Supervision
and Regulation
Bank holding companies and
commercial banks are extensively regulated under both federal and
state law. The following is a brief summary of certain statutes and
rules and regulations that affect or will affect the Company, the
Bank and their subsidiaries. This summary is qualified in its
entirety by reference to the particular statute and regulatory
provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to
the business of the Company, the Bank and their subsidiaries.
Supervision, regulation and examination of the Company and the Bank
by the regulatory agencies are intended primarily for the
protection of depositors rather than shareholders of the Company.
Statutes and regulations which contain wide-ranging proposals for
altering the structures, regulations and competitive relationship
of financial institutions are introduced regularly. The Company
cannot predict whether or in what form any proposed statute or
regulation will be adopted or the extent to which the business of
the Company and the Bank may be affected by such statute or
regulation.
General
.
There are a number of obligations and
restrictions imposed on bank holding companies and their depository
institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event
the depository institution becomes in danger of default or in
default. For example, to mitigate the risk of failure, bank holding
companies are required to guarantee the compliance of any insured
depository institution subsidiary that may become
“undercapitalized” with the terms of the capital
restoration plan filed by such subsidiary with its appropriate
federal banking agency up to the lesser of (i) an amount equal to
5% of the bank’s total assets at the time the bank became
undercapitalized or (ii) the amount which is necessary (or would
have been necessary) to bring the bank into compliance with all
capital standards as of the time the bank fails to comply with such
capital restoration plan. The Company, as a registered bank holding
company, is subject to the regulation of the Federal Reserve. Under
a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions
in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a
bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve’s determination that such
activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding
company.
In addition, insured depository
institutions under common control are required to reimburse the
FDIC for any loss suffered by its deposit insurance funds as a
result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest
of the deposit insurance funds. The FDIC’s claim for damages
is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured
depository institutions.
As a result of the
Company’s ownership of the Bank, the Company is also
registered under the bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and
supervision by the Commissioner.
Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”).
The Dodd-Frank Act significantly
changed bank regulation and has affected the lending, investment,
trading and operating activities of depository institutions and
their holding companies.
The Dodd-Frank Act also created a
new Consumer Financial Protection Bureau (the "Bureau") with
extensive powers to supervise and enforce consumer protection laws.
The Bureau has broad rule-making authority for a wide range of
consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices. The Bureau also has
examination and enforcement authority over all banks and savings
institutions with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets, such as
the Bank, will continue to be examined by their applicable federal
bank regulators. The Dodd-Frank Act also gave state attorneys
general the ability to enforce applicable federal consumer
protection laws.
The Dodd-Frank Act broadened the
base for FDIC assessments for deposit insurance and permanently
increased the maximum amount of deposit insurance to $250,000 per
depositor. The legislation also, among other things, requires
originators of certain securitized loans to retain a portion of the
credit risk, stipulates regulatory rate-setting for certain debit
card interchange fees, repealed restrictions on the payment of
interest on commercial demand deposits and contains a number of
reforms related to mortgage originations. The Dodd-Frank Act
increased the ability of shareholders to influence boards of
directors by requiring companies to give shareholders a non-binding
vote on executive compensation and so-called “golden
parachute” payments. The legislation also directed the
Federal Reserve to promulgate rules prohibiting excessive
compensation paid to company executives, regardless of whether the
company is publicly traded or not. Many of the provisions of the
Dodd-Frank Act are subject to delayed effective dates or require
the implementing regulations and, therefore, their impact on the
Company's and the Bank's operations cannot be fully determined at
this time. However, it is likely that the Dodd-Frank Act will
increase the regulatory burden, compliance costs and interest
expense for the Bank and the Company.
Capital
Adequacy
.
At
December 31, 2017, the Bank exceeded each of its capital
requirements with a Tier 1 leverage capital ratio of 11.69%, common
equity Tier 1 risk-based capital ratio of 15.09%, Tier 1 risk-based
capital ratio of 15.09% and total risk-based capital ratio of
15.83%. At December 31, 2017, the Company also exceeded each of its
capital requirements with a Tier 1 leverage capital ratio of
11.94%, common equity Tier 1 risk-based capital ratio of 13.00%,
Tier 1 risk-based capital ratio of 15.32% and total risk-based
capital ratio of 16.06%.
On July 2, 2013, the Federal
Reserve approved a final rule that establishes an integrated
regulatory capital framework that addresses shortcomings in certain
capital requirements. The rule, which became effective on January
1, 2015, implements in the United States the Basel III regulatory
capital reforms from the Basel Committee on Banking Supervision and
certain changes required by the Dodd-Frank Act. The final
rule:
●
established a new minimum common
equity Tier 1 risk-based capital ratio (common equity Tier 1
capital to total risk-weighted assets) of 4.5% and increased the
minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while
maintaining the minimum total risk-based capital ratio of 8.0% and
the minimum Tier 1 leverage capital ratio of
4.0%;
●
revised the rules for calculating
risk-weighted assets to enhance their risk
sensitivity;
●
phased out trust preferred
securities and cumulative perpetual preferred stock as Tier 1
capital;
●
added a requirement to maintain a
minimum conservation buffer, composed of common equity Tier 1
capital, of 2.5% of risk-weighted assets, to be applied to the new
common equity Tier 1 risk-based capital ratio, the Tier 1
risk-based capital ratio and the Total risk-based capital ratio,
which means that banking organizations, on a fully phased in basis
no later than January 1, 2019, must maintain a minimum common
equity Tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1
risk-based capital ratio of 8.5% and a minimum Total risk-based
capital ratio of 10.5%; and
●
changed the definitions of
capital categories for insured depository institutions for purposes
of the Federal Deposit Insurance Corporation Improvement Act of
1991 prompt corrective action provisions. Under these revised
definitions, to be considered well-capitalized, an insured
depository institution must have a Tier 1 leverage capital ratio of
at least 5.0%, a common equity Tier 1 risk-based capital ratio of
at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%
and a total risk-based capital ratio of at least
10.0%.
The new minimum regulatory
capital ratios and changes to the calculation of risk-weighted
assets became effective for the Bank and the Company on January 1,
2015. The required minimum conservation buffer began to be phased
in incrementally, starting at 0.625% on January 1, 2016 and
increased to 1.25% on January 1, 2017, 1.875% on January 1, 2018,
and will increase to 2.5% on January 1, 2019.
The final rule established common
equity Tier 1 capital as a new capital component. Common equity
Tier 1 capital consists of common stock instruments that meet the
eligibility criteria in the final rule, retained earnings,
accumulated other comprehensive income/loss and common equity Tier
1 minority interest. As a result, Tier 1 capital has two
components: common equity Tier 1 capital and additional Tier 1
capital. The final rule also revised the eligibility criteria for
inclusion in additional Tier 1 and Tier 2 capital. As a result of
these changes, certain non-qualifying capital instruments,
including cumulative preferred stock and trust preferred
securities, are excluded as a component of Tier 1 capital for
institutions of the size of the Company.
The final rule further requires
that certain items be deducted from common equity Tier 1 capital,
including (1) goodwill and other intangible assets, other than
mortgage servicing rights, net of deferred tax liabilities
(“DTLs”); (2) deferred tax assets that arise from
operating losses and tax credit carryforwards, net of valuation
allowances and DTLs; (3) after-tax gain-on-sale associated with a
securitization exposure; and (4) defined benefit pension fund
assets held by a depository institution holding company, net of
DTLs. In addition, banking organizations must deduct from common
equity Tier 1 capital the amount of certain assets, including
mortgage servicing assets, that exceed certain thresholds. The
final rule also allows all but the largest banking organizations to
make a one-time election not to recognize unrealized gains and
losses on available for sale debt securities in regulatory capital,
as under prior capital rules.
The final rule provides that the
failure to maintain the minimum conservation buffer will result in
restrictions on capital distributions and discretionary cash bonus
payments to executive officers. If a banking organization’s
conservation buffer is less than 0.625%, the banking organization
may not make any capital distributions or discretionary cash bonus
payments to executive officers. If the conservation buffer is
greater than 0.625% but not greater than 1.25%, capital
distributions and discretionary cash bonus payments are limited to
20% of net income for the four calendar quarters preceding the
applicable calendar quarter (net of any such capital
distributions), or eligible retained income. If the conservation
buffer is greater than 1.25% but not greater than 1.875%, the limit
is 40% of eligible retained income, and if the conservation buffer
is greater than 1.875% but not greater than 2.5%, the limit is 60%
of eligible retained income. The preceding thresholds for the
conservation buffer and related restrictions represent the fully
phased in rules effective no later than January 1, 2019. Such
thresholds will be phased in incrementally throughout the phase in
period, with the lowest thresholds having become effective January
1, 2016.
Dividend and Repurchase
Limitations
.
Federal
regulations provide that the Company must obtain Federal Reserve
approval prior to repurchasing its common stock for consideration
in excess of 10% of its net worth during any twelve-month period
unless the Company (i) both before and after the redemption
satisfies capital requirements for a “well capitalized”
bank holding company; (ii) received a one or two rating in its last
examination; and (iii) is not the subject of any unresolved
supervisory issues.
The ability of the Company to pay
dividends or repurchase shares may be dependent upon the
Company’s receipt of dividends from the Bank. North Carolina
commercial banks, such as the Bank, are subject to legal
limitations on the amounts of dividends they are permitted to pay.
Also, an insured depository institution, such as the Bank, is
prohibited from making capital distributions, including the payment
of dividends, if, after making such distribution, the institution
would become “undercapitalized” (as such term is
defined in the applicable law and regulations).
Deposit
Insurance
.
The
assessment paid by each Deposit Insurance Fund member institution
is based on its relative risks of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate
is based on the institution’s capitalization risk category
and supervisory subgroup category. An institution’s
capitalization risk category is based on the FDIC’s
determination of whether the institution is well capitalized,
adequately capitalized or less than adequately
capitalized.
An institution’s
supervisory subgroup category is based on the FDIC’s
assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will
be required. The FDIC may terminate insurance of deposits upon a
finding that an institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.
The Dodd-Frank Act expanded the
base for FDIC insurance assessments, requiring that assessments be
based on the average consolidated total assets less tangible equity
capital of a financial institution. On February 7, 2011, the FDIC
approved a final rule to implement the foregoing provision of the
Dodd-Frank Act. Among other things, the final rule revises the
assessment rate schedule to provide assessments ranging from five
to 35 basis points, with the initial assessment rates subject to
adjustments which could increase or decrease the total base
assessment rates. The FDIC has three possible adjustments to an
institution’s initial base assessment rate: (i) a decrease of
up to five basis points (or 50% of the initial base assessment
rate) for long-term unsecured debt, including senior unsecured debt
and subordinated debt; (ii) an increase for holding long-term
unsecured or subordinated debt issued by other insured depository
institutions known as the Depository Institution Debt Adjustment
and (iii) for institutions not well rated and well capitalized, an
increase not to exceed ten basis points for brokered deposits in
excess of ten percent of domestic deposits.
Federal Home Loan Bank
System
.
The Federal
Home Loan Bank (“FHLB”) system provides a central
credit facility for member institutions. As a member of the FHLB of
Atlanta, the Bank is required to own capital stock in the FHLB of
Atlanta in an amount at least equal to 0.20% (or 20 basis points)
of the Bank’s total assets at the end of each calendar year,
plus 4.5% of its outstanding advances (borrowings) from the FHLB of
Atlanta under the new activity-based stock ownership requirement.
On December 31, 2017, the Bank was in compliance with this
requirement.
Community
Reinvestment.
Under the Community Reinvestment Act (“CRA”), as
implemented by regulations of the FDIC, an insured institution has
a continuing and affirmative obligation consistent with its safe
and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for
financial institutions, nor does it limit an institution’s
discretion to develop, consistent with the CRA, the types of
products and services that it believes are best suited to its
particular community. The CRA requires the federal banking
regulators, in connection with their examinations of insured
institutions, to assess the institutions’ records of meeting
the credit needs of their communities, using the ratings of
“outstanding,” “satisfactory,” “needs
to improve,” or “substantial noncompliance,” and
to take that record into account in its evaluation of certain
applications by those institutions. All institutions are required
to make public disclosure of their CRA performance ratings. The
Bank received a “satisfactory” rating in its last CRA
examination, which was conducted during February
2017.
Changes in Control.
The BHCA prohibits the Company from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or
merging or consolidating with another bank or financial holding
company or savings bank holding company without prior approval of
the Federal Reserve. Similarly, Federal Reserve approval (or, in
certain cases, non-objection) must be obtained prior to any person
acquiring control of the Company. Control is deemed to exist if,
among other things, a person acquires 25% or more of any class of
voting stock of the Company or controls in any manner the election
of a majority of the directors of the Company. Control is presumed
to exist if a person acquires 10% or more of any class of voting
stock and the stock is registered under Section 12 of the
Securities Exchange Act of 1934, as amended from time to time (the
“Exchange Act”), or the acquiror will be the largest
shareholder after the acquisition.
Federal Securities
Law
.
The Company
has registered its common stock with the Securities and Exchange
Commission (“SEC”) pursuant to Section 12(g) of the
Exchange Act. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual
and periodic reporting and other requirements of the Exchange Act
are applicable to the Company.
Transactions with
Affiliates.
Under current federal law,
depository institutions are subject to the restrictions contained
in Section 22(h) of the Federal Reserve Act with respect to loans
to directors, executive officers and principal shareholders. Under
Section 22(h), loans to directors, executive officers and
shareholders who own more than 10% of a depository institution (18%
in the case of institutions located in an area with less than
30,000 in population), and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the
institution’s loans-to-one-borrower limit (as discussed
below). Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive
officers and shareholders who own more than 10% of an institution,
and their respective affiliates, unless such loans are approved in
advance by a majority of the board of directors of the institution.
Any “interested” director may not participate in the
voting. The FDIC has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further,
pursuant to Section 22(h), the Federal Reserve requires that loans
to directors, executive officers, and principal shareholders be
made on terms substantially the same as offered in comparable
transactions with non-executive employees of the Bank. The FDIC has
imposed additional limits on the amount a bank can loan to an
executive officer.
Loans to One
Borrower.
The
Bank is subject to the loans-to-one-borrower limits imposed by
North Carolina law, which are substantially the same as those
applicable to national banks. Under these limits, no loans and
extensions of credit to any borrower outstanding at one time and
not fully secured by readily marketable collateral shall exceed 15%
of the Bank’s total equity capital. At December 31, 2016,
this limit was $20.4 million. This limit is increased by an
additional 10% of the Bank’s total equity capital, or $34.1
million as of December 31, 2017, for loans and extensions of credit
that are fully secured by readily marketable
collateral.
Gramm-Leach-Bliley
Act.
The federal Gramm-Leach-Bliley Act (the “GLB
Act”) dramatically changed various federal laws governing the
banking, securities and insurance industries. The GLB Act expanded
opportunities for banks and bank holding companies to provide
services and engage in other revenue-generating activities that
previously were prohibited. In doing so, it increased competition
in the financial services industry, presenting greater
opportunities for our larger competitors, which were more able to
expand their service and products than smaller, community-oriented
financial institutions, such as the Bank.
USA Patriot Act of
2001
.
The
Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act (the “Patriot Act”) was enacted
in response to the terrorist attacks that occurred in New York,
Pennsylvania and Washington, D.C. on September 11, 2001.
The
Patriot Act was intended to strengthen the ability of U.S. law
enforcement and the intelligence community to work cohesively to
combat terrorism on a variety of fronts. The impact of the Patriot
Act on financial institutions of all kinds has been significant and
wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various
regulations, including standards for verifying customer
identification at account opening, and rules to promote cooperation
among financial institutions, regulators, and law enforcement
entities in identifying parties that may be involved in terrorism
or money laundering.
Interstate Banking and
Branching.
The BHCA was amended by the Interstate Banking
Act. The Interstate Banking Act provides that adequately
capitalized and managed financial and bank holding companies are
permitted to acquire banks in any state. State law prohibiting
interstate banking or discriminating against out-of-state banks is
preempted. States are not permitted to enact laws opting out of
this provision; however, states are allowed to adopt a minimum age
restriction requiring that target banks located within the state be
in existence for a period of years, up to a maximum of five years,
before a bank may be subject to the Interstate Banking Act. The
Interstate Banking Act, as amended by the Dodd-Frank Act,
establishes deposit caps which prohibit acquisitions that result in
the acquiring company controlling 30% or more of the deposits of
insured banks and thrift institutions held in the state in which
the target maintains a breach or 10% or more of the deposits
nationwide. States have the authority to waive the 30% deposit cap.
State-level deposit caps are not preempted as long as they do not
discriminate against out-of-state companies, and the federal
deposit caps apply only to initial entry
acquisitions.
Sarbanes-Oxley Act of
2002
.
The
Sarbanes-Oxley Act of 2002 mandates for public companies a variety
of reforms intended to address corporate and accounting fraud and
provides for the establishment of the Public Company Accounting
Oversight Board (the “PCAOB”) which enforces auditing,
quality control and independence standards for firms that audit
SEC-reporting companies. The Sarbanes-Oxley Act imposes higher
standards for auditor independence and restricts the provision of
consulting services by auditing firms to companies they audit and
requires that certain audit partners be rotated periodically. It
also requires chief executive officers and chief financial
officers, or their equivalents, to certify the accuracy of periodic
reports filed with the SEC, subject to civil and criminal penalties
if they knowingly or willfully violate this certification
requirement, and increases the oversight and authority of audit
committees of publicly traded companies.
Limits on Rates Paid on
Deposits and Brokered Deposits
. FDIC regulations limit
the ability of insured depository institutions to accept, renew or
roll-over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having
the same type of charter in such depository institution’s
normal market area. Under these regulations, “well
capitalized” depository institutions may accept, renew or
roll-over such deposits without restriction, “adequately
capitalized” depository institutions may accept, renew or
roll-over such deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and
“undercapitalized” depository institutions may not
accept, renew, or roll-over such deposits. Definitions of
“well capitalized,” “adequately
capitalized” and “undercapitalized” are the same
as the definitions adopted by federal banking agencies to implement
the prompt corrective action provisions discussed
above.
Other.
Additional regulations require
annual examinations of all insured depository institutions by the
appropriate federal banking agency and establish operational and
managerial, asset quality, earnings and stock valuation standards
for insured depository institutions, as well as compensation
standards.
The Bank is subject to
examination by the FDIC and the Commissioner. In addition, the Bank
is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer
credit, equal credit and fair credit reporting laws and laws
relating to branch banking. The Bank, as an insured North Carolina
commercial bank, is prohibited from engaging as a principal in
activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant
risk to the appropriate deposit insurance fund and (ii) the Bank
is, and continues to be, in compliance with all applicable capital
standards.
Future
Requirements
. Statutes and regulations, which contain
wide-ranging proposals for altering the structures, regulations and
competitive relationships of financial institutions, are introduced
regularly. Neither the Company nor the Bank can predict whether or
what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company or the Bank may be
affected by such statute or regulation.
Consent
Order
On August 31, 2015, the FDIC and
the North Carolina Office of the Commissioner issued a Consent
Order (the “Order”) in connection with compliance by
the Bank with the Bank Secrecy Act and its implementing regulations
(collectively, the “BSA”). The Order was issued
pursuant to the consent of the Bank. In consenting to the issuance
of the Order, the Bank did not admit or deny any unsafe or unsound
banking practices or violations of law or
regulation.
The Order required the Bank to
take certain affirmative actions to comply with its obligations
under the BSA, including, without limitation, strengthening its
Board of Directors’ oversight of BSA activities; reviewing,
enhancing, adopting and implementing a revised BSA compliance
program; completing a BSA risk assessment; developing a revised
system of internal controls designed to ensure full compliance with
the BSA; reviewing and revising customer due diligence and risk
assessment processes, policies and procedures; developing, adopting
and implementing effective BSA training programs; assessing BSA
staffing needs and resources and appointing a qualified BSA
officer; establishing an independent BSA testing program; ensuring
that all reports required by the BSA are accurately and properly
filed and engaging an independent firm to review past account
activity to determine whether suspicious activity was properly
identified and reported.
During the third quarter of 2017
the Bank received notice that the Order was terminated effective
August 30, 2017.
Available
Information
The Company makes its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports available free
of charge on its internet website www.peoplesbanknc.com as soon as
reasonably practicable after the reports are electronically filed
with the SEC. The Company’s Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q are also available on its internet
website in interactive data format using the eXtensible Business
Reporting Language (XBRL), which allows financial statement
information to be downloaded directly into spreadsheets, analyzed
in a variety of ways using commercial off-the-shelf software and
used within investment models in other software formats. Any
materials that the Company files with the SEC may be read and/or
copied at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. These filings are also accessible on the
SEC’s website at www.sec.gov.
Additionally, the Company’s
corporate governance policies, including the charters of the Audit
and Enterprise Risk, Compensation, and Governance Committees, and
the Code of Business Conduct and Ethics may also be found the
Company’s website (www.peoplesbanknc.com). A written copy of
the foregoing corporate governance policies is available upon
written request to the Company.
ITEM 1A.
RISK FACTORS
The following are potential risks
that management considers material and that could affect the future
operating results and financial condition of the Bank and the
Company. The risks are not listed in any particular order of
importance, and there is the potential that there are other risks
that have either not been identified or that management believed to
be immaterial but which could in fact adversely affect the
operating results and financial condition of the Bank and the
Company.
If any of the following risks
actually occur, the Company’s financial condition and results
of operations could be materially and adversely affected. If this
were to happen, the value of the Company’s common stock could
decline significantly, and you could lose all or part of your
investment.
Our business
could be adversely affected by current conditions in the financial
markets and economic conditions generally.
Our business is subject to
periodic fluctuations based on national, regional and local
economic conditions. These fluctuations are not predictable, cannot
be controlled, and may have a material adverse impact on our
operations and financial condition. Sustained weakness or weakening
in business and economic conditions generally or specifically in
the principal markets in which we do business could have one or
more of the following adverse effects on our
business:
●
a
decrease in the demand for loans or other products and services
offered by us;
●
a
decrease in the value of our loans or other assets secured by
consumer or commercial real estate;
●
a
decrease in deposit balances due to overall reductions in the
accounts of customers;
●
an
impairment of certain intangible assets or investment
securities;
●
a
decreased ability to raise additional capital on terms acceptable
to us or at all; or
●
an
increase in the number of borrowers who become delinquent, file for
protection under bankruptcy laws or default on their loans or other
obligations to us. An increase in the number of delinquencies,
bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs and provision for credit
losses, which would reduce our earnings.
Financial
reform legislation enacted by Congress and resulting regulations
have increased, and are expected to continue to increase our costs
of operations.
Congress enacted the Dodd-Frank
Act in 2010. This law has significantly changed the structure of
the bank regulatory system and affects the lending, deposit,
investment, trading and operating activities of financial
institutions and their holding companies. The Dodd-Frank Act
requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies
and reports for Congress. The federal agencies are given
significant discretion in drafting the implementing rules and
regulations. Although some of these regulations have been
promulgated, additional regulations are expected to be issued in
2018.
It is difficult to quantify what
specific impact the Dodd-Frank Act and related regulations have had
on the Company to date and what impact yet to be written
regulations will have on us in the future. However, it is expected
that at a minimum they will increase our operating and compliance
costs and could increase our interest expense.
Notwithstanding the foregoing, on
February 3, 2017, the President of the United States issued an
executive order identifying “core principles” for the
administration’s financial services regulatory policy and
directing the Secretary of the Treasury, in consultation with the
heads of other financial regulatory agencies, to evaluate how the
current regulatory framework promotes or inhibits the principles
and what actions have been, and are being, taken to promote the
principles. In response to the executive order, on June 12, 2017,
October 6, 2017 and October 26, 2017, respectively, the U.S.
Department of the Treasury issued the first three of four reports
recommending a number of comprehensive changes in the current
regulatory system for U.S. depository institutions, the U.S.
capital markets and the U.S. asset management and insurance
industries that may serve to reduce the impact of existing and
future regulations on our operations. There can be no
assurance that such regulations will be implemented or that they
will reduce the impact of existing and future regulations on our
operations.
Increases in
FDIC insurance premiums may adversely affect the Company’s
net income and profitability.
The Company is generally unable
to control the amount of premiums that the Bank is required to pay
for FDIC insurance. If there are bank or financial institution
failures that exceed the FDIC’s expectations, the Bank may be
required to pay higher FDIC premiums than those currently in force.
Any future increases or required prepayments of FDIC insurance
premiums may adversely impact the Company’s earnings and
financial condition.
Market
developments may adversely affect our industry, business and
results of operations.
Significant declines in the
housing market, with falling home prices and increasing
foreclosures and unemployment, resulted in significant write-downs
of asset values by many financial institutions, including
government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities
but spreading to credit default swaps and other derivative
securities, caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases, to fail. As a consequence, the Company experienced
significant challenges, its credit quality deteriorated and its net
income and results of operations were adversely impacted.
Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers including other financial
institutions. Although to date the Company and the Bank remain
“well capitalized,” we are part of the financial system
and a systemic lack of available credit, a lack of confidence in
the financial sector, increased volatility in the financial markets
and/or reduced business activity could materially adversely affect
our business, financial condition and results of
operations.
Loss of key
personnel could adversely impact results.
The success of the Bank has been
and will continue to be greatly influenced by the ability to retain
the services of existing senior management. The Bank has benefited
from consistency within its senior management team, with its top
three executives averaging 19 years of service with the Bank. The
Company has entered into employment contracts with each of these
top management officials. Nevertheless, the unexpected loss of the
services of any of the key management personnel, or the inability
to recruit and retain qualified personnel in the future, could have
an adverse impact on the business and financial results of the
Bank.
A significant
amount of the Bank’s business is concentrated in lending
which is secured by property located in the Catawba Valley and
surrounding areas.
In addition to the financial
strength and cash flow characteristics of the borrower in each
case, the Bank often secures its loans with real estate collateral.
The real estate collateral in each case provides an alternate
source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If the
Bank is required to liquidate the collateral securing a loan during
a period of reduced real estate values to satisfy the debt, the
Bank’s earnings and capital could be adversely
affected.
Additionally, with most of the
Bank’s loans concentrated in the Catawba Valley and
surrounding areas, a decline in local economic conditions could
adversely affect the values of the Bank’s real estate
collateral. Consequently, a decline in local economic conditions
may have a greater effect on the Bank’s earnings and capital
than on the earnings and capital of larger financial institutions
whose real estate loan portfolios are geographically
diverse.
Our allowance
for loan losses may be insufficient and could therefore reduce
earnings.
The risk of credit losses on
loans varies with, among other things, general economic conditions,
the creditworthiness of the borrower over the term of the loan and,
in the case of a collateralized loan, the value and marketability
of the collateral for the loan. Management maintains an allowance
for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular
reviews of delinquencies and loan portfolio quality. Management
believes it has established the allowance in accordance with U.S.
Generally Accepted Accounting Principles (“GAAP”) and
in consideration of the current economic environment. 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. If
management’s assumptions and judgments prove to be incorrect
and the allowance for loan losses is inadequate to absorb future
losses, or if the bank regulatory authorities require the Bank to
increase the allowance for loan losses as a part of their
examination process, the Bank’s earnings and capital could be
significantly and adversely affected. For further discussion
related to our process for determining the appropriate level of the
allowance for loan losses, see “Allowance for Loan
Losses” within “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results and
Operation” of the Annual Report, which is included in this
Form 10-K as Exhibit (13).
Changes in
interest rates affect profitability and assets.
Changes in prevailing interest
rates may hurt the Bank’s business. The Bank derives its
income primarily from the difference or “spread”
between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings
and other interest-bearing liabilities. In general, the larger the
spread, the more the Bank earns. When market rates of interest
change, the interest the Bank receives on its assets and the
interest the Bank pays on its liabilities will fluctuate. This can
cause decreases in the “spread” and can adversely
affect the Bank’s income. Changes in market interest rates
could reduce the value of the Bank’s financial assets.
Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decrease in value as interest rates rise.
In addition, interest rates affect how much money the Bank lends.
For example, when interest rates rise, the cost of borrowing
increases and the loan originations tend to decrease. If the Bank
is unsuccessful in managing the effects of changes in interest
rates, the financial condition and results of operations could
suffer.
We measure
interest rate risk under various rate scenarios using specific
criteria and assumptions. A summary of this process, along with the
results of our net interest income simulations, is presented within
“Item 7A. Quantitative and Qualitative Disclosures About
Market Risk” of the Annual Report which is included in this
Form 10-K as Exhibit (13).
The Bank faces
strong competition from other banks and financial institutions
which can hurt its business.
The financial services industry
is highly competitive. The Bank competes against commercial banks,
savings banks, savings and loan associations, credit unions,
mortgage banks, brokerage firms, investment advisory firms,
insurance companies and other financial institutions. Many of these
entities are larger organizations with significantly greater
financial, management and other resources than the Bank has.
Moreover, one national money center commercial bank is
headquartered in Charlotte, North Carolina, only 40 miles from the
Bank’s primary market area.
While
management believes it can and does successfully compete with other
financial institutions in our market, we may face a competitive
disadvantage as a result of our smaller size and lack of geographic
diversification.
Changes in
technology may impact the Bank’s
business.
The Bank uses various
technologies in its business and the banking industry is undergoing
rapid technological changes. The effective use of technology
increases efficiency and enables financial institutions to reduce
costs. The Bank’s future success will depend in part on its
ability to address the needs of its customers by using technology
to provide products and services that will satisfy customer demands
for convenience as well as create additional efficiencies in the
Bank’s operations. The Bank’s competitors may have
substantially greater resources to invest in technological
improvements.
We may be subject to examinations by taxing authorities which could
adversely affect our results of operations.
In the
normal course of business, we may be subject to examinations from
federal and state taxing authorities regarding the amount of taxes
due in connection with investments we have made and the businesses
in which we are engaged. Recently, federal and state taxing
authorities have become increasingly aggressive in challenging tax
positions taken by financial institutions. The challenges made by
taxing authorities may result in adjustments to the timing or
amount of taxable income or deductions or the allocation of income
among tax jurisdictions. If any such challenges are made and are
not resolved in our favor, they could have an adverse effect on our
financial condition and results of operations.
Changes in our
accounting policies or in accounting standards could materially
affect how we report our financial results and
condition.
Our accounting policies are
fundamental to understanding our financial results and condition.
Some of these policies require use of estimates and assumptions
that may affect the value of our assets or liabilities and
financial results. Some of our accounting policies are critical
because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be
reported under different conditions or using different
assumptions.
From time to time the Financial
Accounting Standards Board (“FASB”) and the SEC change
the financial accounting and reporting standards or the
interpretation of those standards that govern the preparation of
our external financial statements. These changes are beyond our
control, can be hard to predict and could materially impact how we
report our results of operations and financial condition. We could
be required to apply a new or revised standard retroactively,
resulting in our restating prior period financial statements in
material amounts.
Our internal
controls may be ineffective.
Management regularly reviews and
updates our internal controls, disclosure controls and procedures,
and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure
or circumvention of our controls and procedures or failure to
comply with regulations related to controls and procedures could
have a material adverse effect on our business, results of
operations, and financial condition.
Impairment of
investment securities or deferred tax assets could require charges
to earnings, which could result in a negative impact on our results
of operations.
In assessing the impairment of
investment securities, management considers the length of time and
extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issues, and the
intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated
recovery of fair value in the near term. In assessing the future
ability of the Company to realize the deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. The impact of each
of these impairment matters could have a material adverse effect on
our business, results of operations, and financial
condition.
We rely on
other companies to provide key components of our business
infrastructure.
Third party vendors provide key
components of our business infrastructure such as internet
connections, network access and core application processing. While
we have selected these third party vendors carefully, we do not
control their actions. Any problems caused by these third parties,
including as a result of their not providing us their services for
any reason or their performing their services poorly, could
adversely affect our ability to deliver products and services to
our customers and otherwise to conduct our business. Replacing
these third party vendors could also entail significant delay and
expense.
Our
information systems may experience an interruption or breach in
security.
We rely heavily on communications
and information systems to conduct our business. Any failure,
interruption, or breach in security or operational integrity of
these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan,
and other systems. While we have policies and procedures designed
to prevent or limit the effect of these possible events, there can
be no assurance that any such failure, interruption or security
breach will not occur or, if any does occur, that it can be
sufficiently remediated.
There have been increasing
efforts on the part of third parties, including through
cyber-attacks, to breach data security at financial institutions or
with respect to financial transactions. There have been several
recent instances involving financial services and consumer-based
companies reporting the unauthorized disclosure of client or
customer information or the destruction or theft of corporate data.
In addition, because the techniques used to cause such security
breaches change frequently, often are not recognized until launched
against a target and may originate from less regulated and remote
areas around the world, we may be unable to proactively address
these techniques or to implement adequate preventative measures.
The ability of our customers to bank remotely, including online and
through mobile devices, requires secure transmission of
confidential information and increases the risk of data security
breaches.
The occurrence of any failures,
interruptions, or security breaches of our information systems
could damage our reputation, result in a loss of customer business,
subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could
have a material adverse effect on our financial condition, results
of operations and business.
Liquidity is
essential to our businesses.
Our liquidity could be impaired
by an inability to access the capital markets or unforeseen
outflows of cash. This situation may arise due to circumstances
that we may be unable to control, such as a general market
disruption or an operational problem that affects third parties or
us. Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger unfavorable contractual
obligations.
Negative
publicity could damage our reputation
Reputation risk, or the risk to
our earnings and capital from negative public opinion, is inherent
in our business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse
legal and regulatory consequences. Negative public opinion could
result from our actual or alleged conduct in any number of
activities, including lending practices, corporate governance,
regulatory compliance, mergers and acquisitions, and disclosure,
sharing or inadequate protection of customer information, and from
actions taken by government regulators and community organizations
in response to that conduct.
Financial
services companies depend on the accuracy and completeness of
information about customers and counterparties.
In deciding whether to extend
credit or enter into other transactions, we may rely on information
furnished by or on behalf of customers and counterparties,
including financial statements, credit reports, and other financial
information. We may also rely on representations of those
customers, counterparties, or other third parties, such as
independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, financial advisors and consultants, credit reports, or
other financial information could cause us to enter into
unfavorable transactions, which could have a material adverse
effect on our financial condition and results of
operations.
If our
non-performing assets increase, our earnings will
suffer.
Our non-performing assets
adversely affect our net income in various ways. We do not record
interest income on non-accrual loans or real estate owned. We must
reserve for probable losses, which is established through a current
period charge to the provision for loan losses as well as from time
to time, as appropriate, the write down of the value of properties
in our other real estate owned portfolio to reflect changing market
values. Additionally, there are legal fees associated with the
resolution of problem assets as well as carrying costs such as
taxes, insurance and maintenance related to our other real estate
owned. Further, the resolution of non-performing assets requires
the active involvement of management, which can distract them from
more profitable activity. Finally, if our estimate for the recorded
allowance for loan losses proves to be incorrect and our allowance
is inadequate, we will have to increase the allowance
accordingly.
Our loan
portfolio includes loans with a higher risk of
loss.
We originate commercial real
estate loans, commercial loans, construction and land development
loans, and residential mortgage loans primarily within our market
area. Commercial real estate, commercial, and construction and land
development loans tend to involve larger loan balances to a single
borrower or groups of related borrowers and are most susceptible to
a risk of loss during a downturn in the business cycle. These loans
also have historically had greater credit risk than other loans for
the following reasons:
●
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, 2017, commercial real estate loans comprised
approximately 33% of the Bank’s total loan
portfolio.
●
Commercial Loans.
Repayment is
generally dependent upon the successful operation of the
borrower’s business. In addition, the collateral securing the
loans may depreciate over time, be difficult to appraise, be
illiquid, or fluctuate in value based on the success of the
business. As of December 31, 2017, commercial loans comprised
approximately 12% of the Bank’s total loan
portfolio.
●
Construction and land development
loans.
The risk of loss is largely dependent on our 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 our estimate is
inaccurate or if actual construction costs exceed estimates, the
value of the property securing our 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,
2017, construction and land development loans comprised
approximately 11% of the Bank’s total loan
portfolio.
●
Single-family residential loans
.
Declining home sales volumes, decreased real estate values and
higher than normal levels of unemployment could contribute to
losses on these loans. As of December 31, 2017, single-family
residential loans comprised approximately 37% of the Bank’s
total loan portfolio, including Banco single-family residential
stated income loans which were approximately 5% of the Bank’s
total loan portfolio.
Because we
engage in lending secured by real estate and may be forced to
foreclose on the collateral property and own the underlying real
estate, we may be subject to the increased costs associated with
the ownership of real property, which could result in reduced net
income.
Since we originate loans secured
by real estate, we may have to foreclose on the collateral property
to protect our investment and may thereafter own and operate such
property, in which case we are exposed to the risks inherent in the
ownership of real estate. The amount that we, as a mortgagee, may
realize after a default is dependent upon factors outside of our
control, including, but not limited to:
●
general or local economic
conditions;
●
environmental cleanup
liability;
●
operating expenses of the
mortgaged properties;
●
supply of and demand for rental
units or properties;
●
ability to obtain and maintain
adequate occupancy of the properties;
●
governmental rules, regulations
and fiscal policies; and
Certain expenditures associated
with the ownership of real estate, principally real estate taxes
and maintenance costs, may adversely affect the income from the
real estate. Therefore, the cost of operating real property may
exceed the rental income earned from such property, and we may have
to advance funds in order to protect our investment or we may be
required to dispose of the real property at a
loss.
We are subject to extensive regulation and
oversight,
and depending
upon the findings and determinations of our regulatory authorities,
we may be required to make adjustments to our business, operations
or financial position and could become subject to formal or
informal regulatory action.
We are subject to extensive
regulation and supervision, including examination by federal and
state banking regulators. Federal and state regulators have the
ability to impose substantial sanctions, restrictions and
requirements on us if they determine, upon conclusion of their
examination or otherwise, violations of laws with which we must
comply or weaknesses or failures with respect to general standards
of safety and soundness, including, for example, in respect of any
financial concerns that the regulators may identify and desire for
us to address. Such enforcement may be formal or informal and can
include directors’ resolutions, memoranda of understanding,
consent orders, civil money penalties and termination of deposit
insurance and bank closure. Enforcement actions may be taken
regardless of the capital levels of the institution, and regardless
of prior examination findings. In particular, institutions that are
not sufficiently capitalized in accordance with regulatory
standards may also face capital directives or prompt corrective
actions. Enforcement actions may require certain corrective steps
(including staff additions or changes), impose limits on activities
(such as lending, deposit taking, acquisitions, paying dividends or
branching), prescribe lending parameters (such as loan types,
volumes and terms) and require additional capital to be raised, any
of which could adversely affect our financial condition and results
of operations. The imposition of regulatory sanctions, including
monetary penalties, may have a material impact on our financial
condition and results of operations and/or damage our reputation.
In addition, compliance with any such action could distract
management’s attention from normal operations, cause us to
incur significant expenses, restrict us from engaging in
potentially profitable activities and limit our ability to raise
capital.
We will become
subject to more stringent capital requirements, which may adversely
impact our return on equity, require us to raise additional
capital, or constrain us from paying dividends or repurchasing
shares.
In July 2013,
the Federal Reserve and the FDIC approved new rules that
substantially amend the regulatory risk-based capital rules
applicable to the Bank. The final rule implements the “Basel
III” regulatory capital reforms and changes required by the
Dodd-Frank Act.
The final rule includes new
minimum risk-based capital and leverage ratios, which became
effective for the Bank and the Company on January 1, 2015, and
revises the definition of what constitutes “capital”
for purposes of calculating those ratios. The new minimum capital
requirements are: (i) a new common equity tier 1 capital ratio of
4.5%; (ii) a tier 1 to risk-based assets capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged
from current rules); and (iv) a tier 1 leverage ratio of 4%. These
rules also establish a “capital conservation buffer” of
2.5%, and will result in the following minimum ratios: (i) a common
equity tier 1 capital ratio of 7.0%, (ii) a tier 1 to risk-based
assets capital ratio of 8.5%, and (iii) a total capital ratio of
10.5%. The new capital conservation buffer requirement is being
phased in beginning in January 2016 at 0.625% of risk-weighted
assets and increases each year until fully implemented in January
2019. An institution will 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 will establish a maximum percentage of eligible
retained income that can be utilized for such
actions.
The application of more stringent
capital requirements for the Bank could, among other things, result
in lower returns on equity, require the raising of additional
capital, and result in regulatory actions constraining us from
paying dividends or repurchasing shares if we were to be unable to
comply with such requirements.
The trading volume in our common stock is less than that of larger
public companies which can cause price
volatility.
The trading
history of our common stock has been characterized by relatively
low trading volume. The value of a shareholder’s investment
may be subject to sudden decreases due to the volatility of the
price of our common stock, which trades on the NASDAQ Global
Market.
The market
price of our common stock may be volatile and subject to
fluctuations in response to numerous factors, including, but not
limited to, the factors discussed in other risk factors and the
following:
●
actual or
anticipated fluctuation in our operating
results;
●
changes in
interest rates;
●
changes in
the legal or regulatory environment in which we
operate;
●
press
releases, announcements or publicity relating to us or our
competitors or relating to trends in our
industry;
●
changes in
expectations as to our future financial performance, including
financial estimates or recommendations by securities analysts and
investors;
●
future sales
of our common stock;
●
changes in
economic conditions in our market, general conditions in the
U.S. economy, financial markets or the banking
industry; and
●
other
developments affecting our competitors or us.
These factors may adversely
affect the trading price of our common stock, regardless of our
actual operating performance, and could prevent a shareholder from
selling common stock at or above the current market price. These
factors may also adversely affect the Company’s ability to
raise capital in the open market if needed. In addition, the
Company cannot say with any certainty that a more active and liquid
trading market for its common stock will
develop.
Our stock
price can be volatile
.
Stock price
volatility may make it more difficult for you to resell your common
stock when you want and at prices you find attractive. Our stock
price can fluctuate significantly in response to a variety of
factors including, among other things:
●
actual or anticipated variations
in quarterly results of operations;
●
recommendations by securities
analysts;
●
operating results and stock price
performance of other companies that investors deem comparable to
us;
●
news reports relating to trends,
concerns, and other issues in the financial services
industry;
●
perceptions in the marketplace
regarding us and/or our competitors;
●
new
technology used or services offered by
competitors;
●
significant acquisitions or
business combinations, strategic partnerships, joint ventures, or
capital commitments by or involving us or our competitors;
and
●
changes in government
regulations.
Our common
stock is not FDIC insured.
The Company’s common
stock is not a savings or deposit account or other obligation of
any bank and is not insured by the FDIC or any other governmental
agency and is subject to investment risk, including the possible
loss of principal. Investment in our common stock is inherently
risky for the reasons described in this “Risk Factors”
section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company.
As a result, holders of our common stock may lose some or all of
their investment.
We may reduce
or eliminate dividends on our common stock.
Although we have historically
paid a quarterly cash dividend to the holders of our common stock,
holders of our common stock are not entitled to receive dividends.
Downturns in the domestic and global economies could cause our
Board of Directors to consider, among other things, reducing or
eliminating dividends paid on our common stock. This could
adversely affect the market price of our common stock. Furthermore,
as a bank holding company, our ability to pay dividends is subject
to the guidelines of the Federal Reserve regarding capital adequacy
and dividends before declaring or paying any dividends. Dividends
also may be limited as a result of safety and soundness
considerations.
We may need
additional access to capital, which it may be unable to obtain on
attractive terms or at all.
We may need to incur additional
debt or equity financing in the future to make strategic
acquisitions or investments, for future growth or to fund losses or
additional provision for loan losses in the future. Our ability to
raise additional capital, if needed, will depend in part on
conditions in the capital markets at that time, which are outside
our control, and on our financial performance. Accordingly, we may
be unable to raise additional capital, if and when needed, on terms
acceptable to it, or at all. If we cannot raise additional capital
when needed, our ability to further expand our operations through
internal growth and acquisitions could be materially impaired and
our stock price negatively affected.
Our articles
of incorporation, as amended, amended and restated bylaws, and
certain banking laws may have an anti-takeover
effect.
Provisions of our articles of
incorporation, as amended, amended and restated bylaws, and federal
banking laws, including regulatory approval requirements, could
make it more difficult for a third party to acquire us, even if
doing so would be perceived to be beneficial to our shareholders.
The combination of these provisions may prohibit a non-negotiated
merger or other business combination, which, in turn, could
adversely affect the market price of our common
stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM 2.
PROPERTIES
At December 31, 2017, the Company
and the Bank conducted their business from the headquarters office
in Newton, North Carolina, its Banco administrative office and its
19 other branch offices in Lincolnton, Hickory, Newton, Catawba,
Conover, Claremont, Maiden, Denver, Triangle, Hiddenite, Charlotte,
Cornelius, Mooresville and Raleigh, North Carolina. The Bank also
operates loan production offices in Denver and Durham North
Carolina. The following table sets forth certain information
regarding the Bank’s properties at December 31,
2017.
|
Owned
Corporate
Office
518 West C
Street
Newton, North Carolina
28658
420 West A
Street
Newton, North Carolina
28658
2619 North Main
Avenue
Newton, North Carolina
28658
213 1st Street,
West
Conover, North Carolina
28613
3261 East Main
Street
Claremont, North Carolina
28610
6125 Highway 16
South
Denver, North Carolina
28037
5153 N.C. Highway
90E
Hiddenite, North Carolina
28636
200 Island Ford
Road
Maiden, North Carolina
28650
3310 Springs Road
NE
Hickory, North Carolina
28601
142 South Highway
16
Denver, North Carolina
28037
106 North Main
Street
Catawba, North Carolina
28609
2050 Catawba Valley
Boulevard
Hickory, North Carolina
28601
800 E. Arrowood
Road
Charlotte, North Carolina
28217
1074 River
Highway
Mooresville, North Carolina
28117
|
Leased
1333 2nd Street
NE
Hickory, North Carolina
28601
1910 East Main
Street
Lincolnton, North Carolina
28092
760 Highway 27
West
Lincolnton, North Carolina
28092
102 Leonard
Avenue
Newton, North Carolina
28658
6350 South
Boulevard
Charlotte, North Carolina
28217
4451 Central
Avenue
Suite A
Charlotte, North Carolina
28205
3752/3754 Highway 16
North
Denver, North Carolina
28037
9624-I Bailey
Road
Cornelius, North Carolina
28031
3023-10 Capital
Boulevard
Raleigh, North Carolina
27604
2530 Meridian
Parkway
Durham, North Carolina
27713
|
ITEM 3.
LEGAL PROCEEDINGS
In the opinion of management, the
Company is not involved in any material pending legal proceedings
other than routine proceedings occurring in the ordinary course of
business.
ITEM 4.
MINE SAFETY DISCLOSURES
Not
applicable.
PART
II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock
is listed on the NASDAQ Global Market, under the symbol
“PEBK.” Market makers for the Company’s shares
include Raymond James Financial, Inc. and Hovde Group,
LLC.
Although the payment of dividends
by the Company is subject to certain requirements and limitations
of North Carolina corporate law, neither the Commissioner nor the
FDIC have promulgated any regulations specifically limiting the
right of the Company to pay dividends and repurchase shares.
However, the ability of the Company to pay dividends and repurchase
shares may be dependent upon, among other things, the
Company’s receipt of dividends from the Bank. The
Bank’s ability to pay dividends is limited. North Carolina
commercial banks, such as the Bank, are subject to legal
limitations on the amount of dividends they are permitted to pay.
Dividends may be paid by the Bank from undivided profits, which are
determined by deducting and charging certain items against actual
profits, including any contributions to surplus required by North
Carolina law. Also, an insured depository institution, such as the
Bank, is prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the
institution would become “undercapitalized” (as such
term is defined in the applicable law and regulations). Based on
its current financial condition, the Bank does not expect that this
provision will have any impact on the Bank’s ability to pay
dividends. See Supervision and Regulation under Item 1
Business.
As of March 9, 2018, the Company
had 662 shareholders of record, not including the number of persons
or entities
whose
stock is held in nominee or street name through various brokerage
firms or banks. The closing market price for the Company’s
common stock was $29.31 on March 9, 2018.
The following table presents
certain market and dividend information for the last two fiscal
years. Over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark down or commission and may not
necessarily represent actual transactions. Stock prices and cash
dividends per share have been adjusted for the 10% stock dividend
paid on December 15, 2017.
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
$
20.38
|
28.54
|
0.11
|
|
|
|
|
|
|
Second
Quarter
|
$
19.65
|
29.91
|
0.11
|
|
|
|
|
|
|
Third
Quarter
|
$
26.00
|
36.12
|
0.11
|
|
|
|
|
|
|
Fourth
Quarter
|
$
27.73
|
34.55
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
$
16.62
|
17.59
|
0.07
|
|
|
|
|
|
|
Second
Quarter
|
$
16.74
|
18.05
|
0.09
|
|
|
|
|
|
|
Third
Quarter
|
$
17.51
|
20.70
|
0.09
|
|
|
|
|
|
|
Fourth
Quarter
|
$
18.00
|
24.45
|
0.09
|
STOCK
PERFORMANCE GRAPH
The following graph compares the
Company’s cumulative shareholder return on its common stock
with a NASDAQ index and with a southeastern bank index. The graph
was prepared by S&P Global Market Intelligence, using data as
of December 31, 2017.
COMPARISON OF SIX-YEAR CUMULATIVE
TOTAL RETURNS
Performance Report
for
Peoples Bancorp of North Carolina,
Inc.
|
|
Period Ending
|
|
Index
|
|
|
|
|
|
|
|
Peoples
Bancorp of North Carolina, Inc.
|
100.00
|
157.33
|
201.73
|
220.12
|
290.70
|
397.96
|
|
NASDAQ
Composite Index
|
100.00
|
140.12
|
160.78
|
171.97
|
187.22
|
242.71
|
|
SNL
Southeast Bank Index
|
100.00
|
135.52
|
152.63
|
150.24
|
199.45
|
246.72
|
|
|
|
|
|
|
|
|
|
Source: S&P Global Market Intelligence
|
|
|
|
|
|
|
|
© 2017
|
|
|
|
|
|
|
The information required by Item
201(d) concerning securities authorized for issuance under equity
compensation plans is set forth in Item 12 hereof
.
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
(2)
|
Maximum
Number
(or
Approximate
Dollar Value)
of
Shares that
May
Yet Be
Purchased
Under the Plans
or
Programs
(3)
|
|
|
|
|
|
|
|
|
January 1 - 31,
2017
|
1,113
|
|
$24.09
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
February 1 - 28,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
March 1 - 31,
2017
|
323
|
|
25.23
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
April 1 - 30,
2017
|
639
|
|
27.40
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
May 1 - 31,
2017
|
413
|
|
25.58
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
June 1 - 30,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
July 1 - 31,
2017
|
853
|
|
34.13
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
August 1 - 31,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
September 1 - 30,
2017
|
217
|
|
27.73
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
October 1 - 31,
2017
|
669
|
|
30.87
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
November 1 - 30,
2017
|
347
|
|
30.67
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
December 1 - 31,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
|
4,574
|
|
$28.30
|
-
|
|
|
(1) The Company
purchased 4,574 shares on the open market in the year ended
December 31, 2017 for its deferred compensation plan. All purchases
were funded by participant contributions to the plan. Number
of shares purchased and average price paid per share have been
adjusted for the 10% stock dividend paid in December
2017.
|
|
|
|
|
|
|
|
|
(2) Reflects shares
purchased under the 2016 Stock Repurchase Plan authorized by the
Company's Board of Directors in 2016.
|
|
|
|
|
|
|
|
|
(3) Reflects dollar
value of shares that may yet be purchased under the Stock
Repurchase Plan authorized by the Company's Board of Directors in
2016.
|
ITEM
6. SELECTED FINANCIAL
DATA
The information required by this
Item is set forth in the section captioned "Selected Financial
Data" on page A-3 of the Annual Report, which Annual Report is
included in this Form 10-K as Exhibit (13). The section captioned
"Selected Financial Data" on page A-3 of the Annual Report is
incorporated herein by reference.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this
Item is set forth in the section captioned
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on pages
A-4 through A-23 of the Annual
Report, which section is included in this Form 10-K as Exhibit
(13), and which section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” is incorporated herein by
reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this
Item is set forth in the section captioned “Quantitative and
Qualitative Disclosures About Market Risk” on page A-22 of
the Annual Report, which Annual Report is included in this Form
10-K as Exhibit (13), and which section captioned
“Quantitative and Qualitative Disclosures About Market
Risk” is incorporated herein by
reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The consolidated financial
statements of the Company and supplementary data are set forth on
pages A-24 through A-66 of the Annual Report, which Annual Report
is included in this Form 10-K as Exhibit (13). The consolidated
financial statements of the Company and supplementary data set
forth on pages A-24 through A-66 of the Annual Report are
incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
The Company’s management,
under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer of the Company,
has concluded, based on their evaluation as of the end of the
period covered by this Report, that the Company’s disclosure
controls and procedures (as defined in Rule 13A-15(e) promulgated
under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in the reports filed or
submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
applicable rules and forms and include controls and procedures
designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the
Company’s management including the Chief Executive Officer
and the Chief Financial Officer of the Company as appropriate to
allow timely decisions regarding required
disclosure.
Changes in
Internal Controls over Financial Reporting
There have been no changes in
internal control over financial reporting during the quarter ended
December 31, 2017 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Management’s
Annual Report on Internal Controls over Financial
Reporting
The Company’s management is
responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the company, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States of America, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017. In making this
assessment, management used the criteria established in
“Internal Control – Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based on our assessment and those criteria,
management believes that the Company maintained effective internal
control over financial reporting as of December 31,
2017.
Elliott Davis, PLLC, an
independent, registered public accounting firm, has audited the
Company’s consolidated financial statements as of and for the
year ended December 31, 2017, and audited the Company’s
effectiveness of internal control over financial reporting as of
December 31, 2017, as stated in their report, which is included in
Item 8 hereof.
ITEM
9B. OTHER INFORMATION
None
PART
III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this
Item is set forth under the sections captioned “Director
Nominees”, “Executive Officers of the Company “,
“Security Ownership Of Certain Beneficial Owners and
Management, “Section 16(a) Beneficial Ownership Reporting
Compliance”, “Code of Business Conduct and
Ethics”, “Board Committees – Governance
Committee” and “Board Committees – Audit and
Enterprise Risk Committee” contained in the Proxy Statement,
which sections are incorporated herein by
reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this
Item is set forth under the section captioned “Compensation
Discussion and Analysis”, “Summary Compensation
Table”, “Grants of Plan-Based Awards”,
“Outstanding Equity Awards at Fiscal Year End”,
“Option Exercises and Stock Vested”, “Pension
Benefits”, “Nonqualified Deferred Compensation”,
“Employment Agreements”, “Potential Payments upon
Termination or Change in Control”, “Omnibus Stock
Option and Long Term Incentive Plan”, “Director
Compensation”, “Compensation Committee –
Compensation Committee Interlocks and Insider Participation”
and “Compensation Committee – Compensation Committee
Report” contained in the Proxy Statement, which sections are
incorporated herein by reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
For the information required by
the Item see the section captioned “Security Ownership of
Certain Beneficial Owners and Management” contained in the
Proxy Statement, which section is incorporated herein by
reference.
The following table presents the
number of shares of Company common stock to be issued upon the
exercise of outstanding options, warrants and rights; the
weighted-average price of the outstanding options, warrants and
rights and the number of options, warrants and rights remaining
that may be issued under the Company’s Omnibus Plan described
under the section captioned “Omnibus Stock Option and Long
Term Incentive Plan” contained in the Proxy
Statement.
|
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding option,
warrants and rights
(1), (2), (3)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(4)
|
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)) (5), (6)
|
|
|
|
|
|
|
Equity
compensation plans
approved
by security holders
|
25,801
|
$
30.69
|
284,658
|
|
Equity
compensation plans not
approved
by security holders
|
-
|
-
|
-
|
|
Total
|
25,801
|
$
30.69
|
284,658
|
|
(1) Includes 16,583 restricted
stock units granted on February 19, 2015 (adjusted for the 10%
stock dividend paid December 15, 2017) under the Omnibus Plan.
These restricted stock grants vest on February 19,
2019.
|
|
|
|
(2) Includes 5,104 restricted
stock units granted on February 18, 2016 (adjusted for the 10%
stock dividend paid December 15, 2017) under the Omnibus Plan.
These restricted stock grants vest on February 20,
2020.
|
|
|
|
(3) Includes 4,144 restricted
stock units granted on March 1, 2017 (adjusted for the 10% stock
dividend paid December 15, 2017) under the Omnibus Plan. These
restricted stock grants vest on March 1, 2021.
|
|
|
|
(4) The exercise price used for
the grants of restricted stock units under the Omnibus Plan is
$30.69, the closing price for the Company’s stock on December
31, 2017.
|
|
|
|
(5) Reflects shares currently
reserved for possible issuance under the Omnibus Plan.
|
|
|
|
(6) Adjusted for the 10% stock
dividend paid December 15, 2017.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
See the sections captioned
“Indebtedness of and Transactions with Management and
Directors” and “Board Leadership Structure and Risk
Oversight” contained in the Proxy Statement, which sections
are incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
See the section captioned
“Proposal 2 - Ratification of Selection of Independent
Registered Public Accounting Firm” contained in the Proxy
Statement, which section is incorporated herein by
reference.
PART
IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
15(a)1.
Consolidated Financial Statements
(contained in the Annual Report attached hereto as Exhibit (13) and
incorporated herein by reference)
(a)
Reports of Independent Registered
Public Accounting Firm
(b)
Consolidated Balance Sheets as of
December 31, 2017 and 2016
(c)
Consolidated Statements of
Earnings for the Years Ended December 31, 2017, 2016 and
2015
(d)
Consolidated Statements of
Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
(e)
Consolidated Statements of
Changes in Shareholders’ Equity for the Years Ended December
31, 2017, 2016 and 2015
(f)
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2017, 2016 and
2015
(g)
Notes to Consolidated Financial
Statements
15(a)2.
Consolidated Financial Statement
Schedules
All
schedules have been omitted, as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
Articles of Amendment dated
December 19, 2008, regarding the Series A Preferred Stock,
incorporated by reference to Exhibit (3)(1) to the Form 8-K filed
with the Securities and Exchange Commission on December 29,
2008
Articles of Amendment dated
February 26, 2010 incorporated by reference to Exhibit (3)(2) to
the Form 10-K filed with the Securities and Exchange Commission on
March 25, 2010
Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit (3)(i) to the Form
8-A filed with the Securities and Exchange Commission on September
2, 1999
Second Amended and Restated
Bylaws of the Registrant, incorporated by reference to Exhibit
(3)(ii) to the Form 8-K filed with the Securities and Exchange
Commission on June 24, 2015
Specimen Stock Certificate,
incorporated by reference to Exhibit (4) to the Form 8-A filed with
the Securities and Exchange Commission on September 2,
1999
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Tony W.
Wolfe dated December 18, 2008, incorporated by reference to
Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and
Exchange Commission on December 29, 2008
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Joseph F.
Beaman, Jr. dated December 18, 2008, incorporated by reference
to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities
and Exchange Commission on December 29, 2008
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and William D.
Cable, Sr. dated December 18, 2008, incorporated by reference
to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities
and Exchange Commission on December 29, 2008
Employment Agreement dated
January 22, 2015 between the Registrant and William D. Cable, Sr.,
incorporated by reference to Exhibit (10)(c) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Lance A.
Sellers dated December 18, 2008, incorporated by reference to
Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and
Exchange Commission on December 29, 2008
Employment Agreement dated
January 22, 2015 between the Registrant and Lance A. Sellers,
incorporated by reference to Exhibit (10)(a) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Peoples Bancorp of North
Carolina, Inc. Omnibus Stock Ownership and Long Term Incentive Plan
incorporated by reference to Exhibit (10)(f) to the Form 10-K filed
with the Securities and Exchange Commission on March 30,
2000
Amendment No. 1 to the Peoples
Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long
Term Incentive Plan incorporated by reference to Exhibit (10)(e)(i)
to the Form 10-K filed with the Securities and Exchange Commission
on March 15, 2007
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and A. Joseph
Lampron, Jr. dated December 18, 2008, incorporated by
reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the
Securities and Exchange Commission on December 29,
2008
Employment Agreement dated
January 22, 2015 between the Registrant and A. Joseph Lampron, Jr.,
incorporated by reference to Exhibit (10)(b) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Peoples Bank Directors’ and
Officers’ Deferral Plan, incorporated by reference to Exhibit
(10)(h) to the Form 10-K filed with the Securities and Exchange
Commission on March 28, 2002
Rabbi Trust for the Peoples Bank
Directors’ and Officers’ Deferral Plan, incorporated by
reference to Exhibit (10)(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
Description of Service
Recognition Program maintained by Peoples Bank, incorporated by
reference to Exhibit (10)(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 27,
2003
Capital Securities Purchase Agreement dated as of
June 26, 2006, by and among the Registrant, PEBK Capital Trust II
and Bear, Sterns Securities Corp., incorporated by reference to
Exhibit (10)(j) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
Amended and Restated Trust
Agreement of PEBK Capital Trust II, dated as of June 28, 2006,
incorporated by reference to Exhibit (10)(k) to the Form 10-Q filed
with the Securities and Exchange Commission on November 13,
2006
Guarantee Agreement of the
Registrant dated as of June 28, 2006, incorporated by reference to
Exhibit (10)(l) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
Indenture, dated as of June 28,
2006, by and between the Registrant and LaSalle Bank National
Association, as Trustee, relating to Junior Subordinated Debt
Securities Due September 15, 2036, incorporated by reference to
Exhibit (10)(m) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
Form of Amended and Restated
Director Supplemental Retirement Agreement between Peoples Bank and
Directors Robert C. Abernethy, James S. Abernethy, Douglas S.
Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L
Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman,
Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit
(10)(n) to the Form 8-K filed with the Securities and Exchange
Commission on December 29, 2008
2009 Omnibus Stock Ownership and
Long Term Incentive Plan incorporated by reference to Exhibit
(10)(o) to the Form 10-K filed with the Securities and Exchange
Commission on March 20, 2009
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and Lance A. Sellers dated February 16,
2018
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and A. Joseph Lampron, Jr. dated February 16,
2018
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and William D. Cable, Jr. dated February 16,
2018
Statement regarding computation
of per share earnings
Statement regarding computation
of ratios
2017 Annual Report of Peoples
Bancorp of North Carolina, Inc.
Code of Business Conduct and
Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by
reference to Exhibit (14) to the Form 10-K filed with the
Securities and Exchange Commission on March 25,
2005
Letter from Porter Keadle Moore,
LLC, regarding change in certifying accountant, dated June 23,
2015, which is incorporated by reference to Exhibit 16.1 of the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 23, 2015
Subsidiaries of the
Registrant
Consent of Elliott Davis,
PLLC
Certification of principal
executive officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002
Certification of principal
financial officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002
Certification Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit
(101)
The
following materials from the Company’s 10-K Report for
the annual period ended December 31, 2017, formatted in XBRL:
(i) the Condensed Consolidated Balance Sheets, (ii) the
Condensed Consolidated Statements of Earnings, (iii) the Condensed
Consolidated Statements of Comprehensive Income, (iv) the Condensed
Consolidated Statements of Changes in Shareholders’ Equity,
(v) the Condensed Consolidated Statements of Cash Flows, and
(vi) the Notes to the Condensed Consolidated Financial
Statements, tagged as blocks of text.*
*Furnished, not
filed.
|
SIGNATURES
|
|
|
|
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA,
INC.
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Lance A.
Sellers
|
|
|
|
|
Lance A.
Sellers
|
|
|
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
Date: March 15,
2018
|
|
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ Lance A.
Sellers
|
|
President and Chief Executive
Officer
|
|
March 15,
2018
|
|
Lance A.
Sellers
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
|
|
|
|
/s/ James S.
Abernethy
|
|
Director
|
|
March 15,
2018
|
|
James S.
Abernethy
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Robert C.
Abernethy
|
|
Chairman of the Board and
Director
|
|
March 15,
2018
|
|
Robert C.
Abernethy
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Douglas S.
Howard
|
|
Director
|
|
March 15,
2018
|
|
Douglas S.
Howard
|
|
|
|
|
|
|
|
|
|
|
|
/s/ A. Joseph Lampron,
Jr.
|
|
Executive Vice President and
Chief
|
|
March 15,
2018
|
|
A. Joseph Lampron,
Jr.
|
|
Financial Officer (Principal
Financial
|
|
|
|
|
|
and Principal Accounting
Officer)
|
|
|
|
|
|
|
|
|
|
/s/ John W. Lineberger,
Jr.
|
|
Director
|
|
March 15,
2018
|
|
John W. Lineberger,
Jr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Gary E.
Matthews
|
|
Director
|
|
March 15,
2018
|
|
Gary E.
Matthews
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Billy L. Price, Jr.,
M.D.
|
|
Director
|
|
March 15,
2018
|
|
Billy L. Price, Jr.,
M.D.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Larry E.
Robinson
|
|
Director
|
|
March 15,
2018
|
|
Larry E.
Robinson
|
|
|
|
|
|
|
|
|
|
|
|
/s/ William Gregory
Terry
|
|
Director
|
|
March 15,
2018
|
|
William Gregory
Terry
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dan Ray Timmerman,
Sr.
|
|
Director
|
|
March 15,
2018
|
|
Dan Ray Timmerman,
Sr.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Benjamin I.
Zachary
|
|
Director
|
|
March 15,
2018
|
|
Benjamin I.
Zachary
|
|
|
|
|
EXHIBIT (13)
The
Annual Report to Security Holders is Appendix A to the Proxy
Statement for the 2018 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”.
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 19 banking offices, as of December
31, 2017, located in Lincolnton, Newton, Denver, Catawba, Conover,
Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius,
Mooresville and Raleigh, North Carolina. The Bank also operates
loan production offices in Denver and Durham, North Carolina. At
December 31, 2017, the Company had total assets of $1.1 billion,
net loans of $753.4 million, deposits of $907.0 million, total
securities of $231.2 million, and shareholders’ equity of
$116.0 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 thorough 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-23 of the Annual Report, which is included in this Form 10-K as
Exhibit (13).
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”).
The
Company’s fiscal year ends December 31. This Form 10-K is
also being used as the Bank’s Annual Disclosure Statement
under FDIC Regulations. This Form 10-K has not been reviewed, or
confirmed for accuracy or relevance by the FDIC.
At
December 31, 2017, the Company employed 302 full-time employees and
33 part-time employees, which equated to 326 full-time equivalent
employees.
Subsidiaries
The
Bank is a subsidiary of the Company. At December 31, 2017, 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
June 2006, the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust II (“PEBK Trust II”), which
issued $20.0 million of guaranteed preferred beneficial interests
in the Company’s junior subordinated deferrable interest
debentures. All of the common securities of PEBK Trust II are owned
by the Company. The proceeds from the issuance of the common
securities and the trust preferred securities were used by PEBK
Trust II to purchase $20.6 million of junior subordinated
debentures of the Company, which pay a floating rate equal to
three-month LIBOR plus 163 basis points. The proceeds received by
the Company from the sale of the junior subordinated debentures
were used in December 2006 to repay the trust preferred securities
issued in December 2001 by PEBK Capital Trust, a wholly owned
Delaware statutory trust of the Company, and for general purposes.
The debentures represent the sole asset of PEBK Trust II. PEBK
Trust II is not included in the consolidated financial
statements.
The
trust preferred securities issued by PEBK Trust II accrue and pay
quarterly at a floating rate of three-month LIBOR plus 163 basis
points. The Company has guaranteed distributions and other payments
due on the trust preferred securities to the extent PEBK Trust II
does not have funds with which to make the distributions and other
payments. The net combined effect of the trust preferred securities
transaction is that the Company is obligated to make the
distributions and other payments required on the trust preferred
securities.
These
trust preferred securities are mandatorily redeemable upon maturity
of the debentures on June 28, 2036, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the
debentures purchased by PEBK Trust II, in whole or in part, which
became effective on June 28, 2011. As specified in the indenture,
if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount plus any accrued but unpaid
interest.
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.
|
|
Dollars in Thousands Except Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Operations
|
|
|
|
|
|
|
Interest income
|
$
41,949
|
39,809
|
38,666
|
38,420
|
36,696
|
|
Interest expense
|
2,377
|
3,271
|
3,484
|
4,287
|
5,353
|
|
Net interest income
|
39,572
|
36,538
|
35,182
|
34,133
|
31,343
|
|
Provision for loan losses
|
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
2,584
|
|
Net interest income after provision
|
|
|
|
|
|
|
for loan losses
|
40,079
|
37,744
|
35,199
|
34,832
|
28,759
|
|
Non-interest income
|
12,838
|
13,976
|
13,312
|
12,164
|
12,652
|
|
Non-interest expense
|
38,702
|
39,982
|
35,778
|
35,671
|
32,841
|
|
Earnings before income taxes
|
14,215
|
11,738
|
12,733
|
11,325
|
8,570
|
|
Income tax expense
|
3,947
|
2,561
|
3,100
|
1,937
|
1,879
|
|
Net earnings
|
10,268
|
9,177
|
9,633
|
9,388
|
6,691
|
|
Dividends and accretion of preferred stock
|
-
|
-
|
-
|
-
|
656
|
|
Net earnings available to common
|
|
|
|
|
|
|
shareholders
|
$
10,268
|
9,177
|
9,633
|
9,388
|
6,035
|
|
|
|
|
|
|
|
|
Selected Year-End Balances
|
|
|
|
|
|
|
Assets
|
$
1,092,166
|
1,087,991
|
1,038,481
|
1,040,494
|
1,034,684
|
|
Investment securities available for sale
|
229,321
|
249,946
|
268,530
|
281,099
|
297,890
|
|
Net loans
|
753,398
|
716,261
|
679,502
|
640,809
|
607,459
|
|
Mortgage loans held for sale
|
857
|
5,709
|
4,149
|
1,375
|
497
|
|
Interest-earning assets
|
996,509
|
999,201
|
977,079
|
956,900
|
925,736
|
|
Deposits
|
906,952
|
892,918
|
832,175
|
814,700
|
799,361
|
|
Interest-bearing liabilities
|
679,922
|
698,120
|
679,937
|
722,991
|
735,111
|
|
Shareholders' equity
|
$
115,975
|
107,428
|
104,864
|
98,665
|
83,719
|
|
Shares outstanding
|
5,995,256
|
5,417,800
|
5,510,538
|
5,612,588
|
5,613,495
|
|
|
|
|
|
|
|
|
Selected Average Balances
|
|
|
|
|
|
|
Assets
|
$
1,098,992
|
1,076,604
|
1,038,594
|
1,036,486
|
1,023,609
|
|
Investment securities available for sale
|
234,278
|
252,725
|
266,830
|
287,371
|
293,770
|
|
Net loans
|
741,655
|
703,484
|
669,628
|
631,025
|
614,532
|
|
Interest-earning assets
|
998,821
|
985,236
|
952,251
|
949,537
|
950,451
|
|
Deposits
|
895,129
|
856,313
|
816,628
|
808,399
|
787,640
|
|
Interest-bearing liabilities
|
700,559
|
705,291
|
707,611
|
731,786
|
741,228
|
|
Shareholders' equity
|
$
116,883
|
113,196
|
106,644
|
96,877
|
100,241
|
|
Shares outstanding (1)
|
5,988,183
|
5,417,800
|
5,510,538
|
5,612,588
|
5,613,495
|
|
|
|
|
|
|
|
|
Profitability Ratios
|
|
|
|
|
|
|
Return on average total assets
|
0.93
%
|
0.85
%
|
0.93
%
|
0.91
%
|
0.65
%
|
|
Return on average shareholders' equity
|
8.78
%
|
8.11
%
|
9.03
%
|
9.69
%
|
6.67
%
|
|
Dividend payout ratio (2)
|
25.67
%
|
22.95
%
|
16.34
%
|
10.89
%
|
11.17
%
|
|
|
|
|
|
|
|
|
Liquidity and Capital Ratios (averages)
|
|
|
|
|
|
|
Loan to deposit
|
82.85
%
|
82.15
%
|
82.00
%
|
78.06
%
|
78.02
%
|
|
Shareholders' equity to total assets
|
10.64
%
|
10.51
%
|
10.27
%
|
9.35
%
|
9.79
%
|
|
|
|
|
|
|
|
|
Per share of Common Stock (1)
|
|
|
|
|
|
|
Basic net earnings
|
$
1.71
|
1.53
|
1.57
|
1.52
|
0.98
|
|
Diluted net earnings
|
$
1.69
|
1.50
|
1.56
|
1.51
|
0.97
|
|
Cash dividends
|
$
0.44
|
0.35
|
0.25
|
0.16
|
0.11
|
|
Book value
|
$
19.34
|
18.03
|
17.30
|
15.98
|
13.55
|
|
|
|
|
|
|
|
|
(1) Average shares outstanding and per share computations have been
restated to reflect a 10% stock dividend paid during the fourth
quarter of 2017.
|
|
|
|
|
|
|
|
(2) As a percentage of net earnings available to common
shareholders.
|
|
|
|
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-24
through A-66.
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, 2017,
2016 and 2015. 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,
Union, Wake and Durham 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.
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
Federal Reserve maintained the Federal Funds rate at 0.25% from
December 2008 to December 2015 before increasing the Fed Funds rate
to 0.50% on December 16, 2015, 0.75% on December 14, 2016, 1.00% on
March 15, 2017, 1.25% on June 14, 2017 and 1.50% on December 13,
2017. These increases had a positive impact on earnings in 2016 and
2017 and should continue to have a positive impact on the
Bank’s net interest income in future periods.
The
Company plans to open a full service branch in Cary, North Carolina
during the third quarter of 2018. The Company does not have
specific plans for additional offices in 2018 but will continue to
look for growth opportunities in nearby markets and may expand if
considered a worthwhile opportunity.
On
August 31, 2015, the FDIC and the North Carolina Office of the
Commissioner of Banks (“Commissioner”) issued a Consent
Order (the “Order”) in connection with compliance by
the Bank with the Bank Secrecy Act and its implementing regulations
(collectively, the “BSA”). The Order was issued
pursuant to the consent of the Bank. In consenting to the issuance
of the Order, the Bank did not admit or deny any unsafe or unsound
banking practices or violations of law or regulation.
The
Order required the Bank to take certain affirmative actions to
comply with its obligations under the BSA, including, without
limitation, strengthening its Board of Directors’ oversight
of BSA activities; reviewing, enhancing, adopting and implementing
a revised BSA compliance program; completing a BSA risk assessment;
developing a revised system of internal controls designed to ensure
full compliance with the BSA; reviewing and revising customer due
diligence and risk assessment processes, policies and procedures;
developing, adopting and implementing effective BSA training
programs; assessing BSA staffing needs and resources and appointing
a qualified BSA officer; establishing an independent BSA testing
program; ensuring that all reports required by the BSA are
accurately and properly filed and engaging an independent firm to
review past account activity to determine whether suspicious
activity was properly identified and reported.
During
the third quarter of 2017 the Bank received notice that the Order
was terminated effective August 30, 2017.
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 2017 Annual Report to Shareholders which is
Appendix A to the Proxy Statement for the May 3, 2018 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 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, 2017 or
2016.
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 $10.3 million or $1.71 basic net earnings per share and $1.69
diluted net earnings per share for the year ended December 31,
2017, as compared to $9.2 million or $1.53 basic net earnings per
share and $1.50 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 a
decrease in non-interest expense, which were partially offset by a
decrease in non-interest income and a decrease in the credit to the
provision for loan losses, as discussed below. Earnings for the
year ended December 31, 2017 were reduced by a charge to income tax
expense of $588,000 due to the revaluation of deferred taxes as
required due to the passing of the Tax Cuts and Jobs Act
(“TCJA”) in December, 2017. Without this charge to
earnings, the Company would have had net earnings totaling $10.9
million for the year ended December 31, 2017.
The
Company reported earnings of $9.2 million or $1.53 basic net
earnings per share and $1.50 diluted net earnings per
share
for the year ended
December 31, 2016, as compared to $9.6 million or $1.57 basic net
earnings per share and $1.56 diluted net earnings per share for the
for the year ended December 31, 2015. The decrease in year-to-date
net earnings is primarily attributable to an increase in
non-interest expense, which was partially offset by an increase in
net interest income, an increase in the credit to the provision for
loan losses and an increase in non-interest income, as discussed
below.
The
return on average assets in 2017 was 0.93%, compared to 0.85% in
2016 and 0.93% in 2015. The return on average shareholders’
equity was 8.78% in 2017 compared to 8.11% in 2016 and 9.03% in
2015.
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 2017 was $39.6 million compared to $36.5
million in 2016. The increase in net interest income was primarily
due to a $2.1 million increase in interest income, which was
primarily attributable to an increase in the average outstanding
balance of loans and a 0.75% increase in the prime rate since
December 2016, combined with a $894,000 decrease in interest
expense, which was primarily attributable to a decrease in the
average outstanding balances of Federal Home Loan Bank
(“FHLB”) borrowings during the year ended December 31,
2017, as compared to the same period one year ago. Net interest
income increased to $36.5 million in 2016 from $35.2 million in
2015.
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, 2017, 2016 and 2015. 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 35.98% for securities that are both federal and state tax exempt
and an effective tax rate of 32.98% 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.
|
Table 1- Average Balance Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
December 31, 2016
|
December 31, 2015
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
$
741,655
|
34,888
|
4.70
%
|
703,484
|
32,452
|
4.61
%
|
669,628
|
31,098
|
4.64
%
|
|
Investments
- taxable
|
64,341
|
1,693
|
2.63
%
|
78,575
|
1,925
|
2.45
%
|
89,998
|
2,240
|
2.49
%
|
|
Investments
- nontaxable*
|
173,069
|
7,314
|
4.23
%
|
178,379
|
7,577
|
4.25
%
|
181,382
|
7,634
|
4.21
%
|
|
Other
|
19,756
|
219
|
1.11
%
|
24,798
|
123
|
0.50
%
|
11,243
|
26
|
0.23
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
998,821
|
44,114
|
4.42
%
|
985,236
|
42,077
|
4.27
%
|
952,251
|
40,998
|
4.31
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
due from banks
|
53,805
|
|
|
44,732
|
|
|
42,483
|
|
|
|
Other
assets
|
53,557
|
|
|
59,537
|
|
|
59,222
|
|
|
|
Allowance
for loan losses
|
(
7,191
)
|
|
|
(
8,884
)
|
|
|
(
10,678
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
1,098,992
|
|
|
1,080,621
|
|
|
1,043,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, MMDA
& savings deposits
|
$
481,455
|
598
|
0.12
%
|
447,582
|
495
|
0.11
%
|
418,358
|
432
|
0.10
%
|
|
Time
deposits
|
132,626
|
466
|
0.35
%
|
150,641
|
586
|
0.39
%
|
173,622
|
870
|
0.50
%
|
|
FHLB
borrowings
|
16,329
|
662
|
4.05
%
|
42,903
|
1,661
|
3.87
%
|
49,840
|
1,735
|
3.48
%
|
|
Trust
preferred securities
|
20,619
|
590
|
2.86
%
|
20,619
|
485
|
2.35
%
|
20,619
|
402
|
1.95
%
|
|
Other
|
49,530
|
61
|
0.12
%
|
43,546
|
44
|
0.10
%
|
45,172
|
45
|
0.10
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
700,559
|
2,377
|
0.34
%
|
705,291
|
3,271
|
0.46
%
|
707,611
|
3,484
|
0.49
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
281,048
|
|
|
258,091
|
|
|
224,648
|
|
|
|
Other
liabilities
|
502
|
|
|
4,043
|
|
|
4,375
|
|
|
|
Shareholders'
equity
|
116,883
|
|
|
113,196
|
|
|
106,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholder's equity
|
$
1,098,992
|
|
|
1,080,621
|
|
|
1,043,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
$
41,737
|
4.08
%
|
|
$
38,806
|
3.81
%
|
|
$
37,514
|
3.82
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest-earning assets
|
|
|
4.18
%
|
|
|
3.94
%
|
|
|
3.94
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
2,165
|
|
|
$
2,268
|
|
|
$
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
39,572
|
|
|
$
36,538
|
|
|
$
35,182
|
|
|
|
*
Includes U.S. Government
agency securities that are non-taxable for state income tax
purposes of $40.3 million in 2017, $38.7 million in 2016 and $37.3
million in 2015. The tax rates of 3.00%, 4.00% and 5.00% were used
to calculate the tax equivalent yields on these securities in 2017,
2016 and 2015, respectively
.
|
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 interest due to both volume and rate have
been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the changes in
each.
|
Table 2 - Rate/Volume Variance Analysis-Tax Equivalent
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
December 31, 2016
|
|
(Dollars in thousands)
|
Changes
in average
volume
|
|
Total
Increase
(Decrease)
|
Changes
in average
volume
|
|
Total
Increase
(Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
Loans: Net of unearned income
|
$
1,778
|
658
|
2,436
|
1,566
|
(
212
)
|
1,354
|
|
|
|
|
|
|
|
|
|
Investments - taxable
|
(
362
)
|
130
|
(
232
)
|
(
282
)
|
(
33
)
|
(
315
)
|
|
Investments - nontaxable
|
(
225
)
|
(
38
)
|
(
263
)
|
(
127
)
|
70
|
(
57
)
|
|
Other
|
(40
)
|
136
|
96
|
50
|
47
|
97
|
|
Total interest income
|
1,151
|
886
|
2,037
|
1,207
|
(
128
)
|
1,079
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
NOW, MMDA & savings deposits
|
40
|
63
|
103
|
31
|
32
|
63
|
|
Time deposits
|
(
66
)
|
(
54
)
|
(
120
)
|
(
103
)
|
(
181
)
|
(
284
)
|
|
FHLB / FRB Borrowings
|
(
1,053
)
|
54
|
(
999
)
|
(
255
)
|
181
|
(
74
)
|
|
Trust Preferred Securities
|
-
|
105
|
105
|
0
|
83
|
83
|
|
Other
|
7
|
10
|
17
|
(
1
)
|
0
|
(1
)
|
|
Total interest expense
|
(
1,072
)
|
178
|
(
894
)
|
(
328
)
|
115
|
(
213
)
|
|
Net interest income
|
$
2,223
|
708
|
2,931
|
1,535
|
(
243
)
|
1,292
|
Net
interest income on a tax equivalent basis totaled $41.7 million in
2017 as compared to $38.8 million in 2016. The interest rate
spread, which represents the rate earned on interest-earning assets
less the rate paid on interest-bearing liabilities, was 4.08% in
2017, as compared to a net interest spread of 3.81% in 2016. The
net yield on interest-earning assets was 4.18% in 2017 and 3.94% in
2016.
Tax
equivalent interest income increased $2.0 million in 2017 primarily
due to
an increase in
interest income resulting from an increase in the average
outstanding principal balance of loans, which was partially offset
by
a decrease in the
average outstanding balance of investment securities. The average
outstanding principal balance of loans increased $38.2 million to
$741.7 million in 2017 compared to $703.5 million in 2016. The
average outstanding balance of investment securities decreased
$19.6 million to $237.4 million in 2017 compared to $257.0 million
in 2016. The yield on interest-earning assets was 4.42% in 2017
compared to 4.27% in 2016.
Interest expense
decreased $894,000 in 2017 compared to 2016. The decrease in
interest expense is primarily due to a decrease in the average
outstanding balance of FHLB borrowings and time deposits. Average
interest-bearing liabilities decreased by $4.7 million to $700.6
million in 2017 compared to $705.3 million in 2016. The cost of
funds decreased to 0.34% in 2017 from 0.46% in 2016.
In
2016 net interest income on a tax equivalent basis was $38.8
million compared to $37.5 million in 2015. The net interest spread
was 3.81% in 2016 compared to 3.82% in 2015. The net yield on
interest-earning assets was 3.94% in 2016 and 2015.
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, 2017 was
a credit of $507,000, as compared to a credit of $1.2 million for
the year ended December 31, 2016. The decrease in the credit to the
provision for loan losses is primarily attributable to a $36.0
million increase in loans from December 31, 2016 to December 31,
2017. The credits to provision for loan losses for the years ended
December 31, 2017, 2016 and 2015 resulted from, and were considered
appropriate as part of, management’s assessment and estimate
of the risks in the total loan portfolio and determination of the
total allowance for loan losses. The primary factors contributing
to the decrease in the allowance for loan losses at December 31,
2017 to $6.4 million from $7.6 million at December 31, 2016 were
the continuing positive trends in indicators of potential losses on
loans, primarily non-accrual loans and the reduction in net
charge-offs since 2013, as shown in Table 3 below:
Table 3 - Net Charge-off Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs/(recoveries)
|
Net charge-offs/(recoveries) as a percent
of average loans outstanding
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$
(14
)
|
(3
)
|
153
|
456
|
400
|
-0.02
%
|
-0.01
%
|
0.25
%
|
0.78
%
|
0.58
%
|
|
Single-family
residential
|
164
|
220
|
584
|
237
|
1,613
|
0.07
%
|
0.09
%
|
0.27
%
|
0.12
%
|
0.82
%
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
|
|
|
Banco de la
Gente stated income
|
-
|
-
|
95
|
174
|
131
|
0.00
%
|
0.00
%
|
0.21
%
|
0.36
%
|
0.26
%
|
|
Commercial
|
(21
)
|
299
|
308
|
119
|
395
|
-0.01
%
|
0.12
%
|
0.13
%
|
0.05
%
|
0.20
%
|
|
Multifamily
and farmland
|
66
|
-
|
-
|
-
|
-
|
0.23
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Total real
estate loans
|
195
|
516
|
1,140
|
986
|
2,539
|
0.03
%
|
0.09
%
|
0.20
%
|
0.18
%
|
0.48
%
|
|
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
Loans not
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
163
|
(25
)
|
(64
)
|
376
|
458
|
(0.03
%)
|
(0.03
%)
|
(0.07
%)
|
0.53
%
|
0.73
%
|
|
Farm
loans
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Consumer loans
(1)
|
319
|
342
|
400
|
358
|
509
|
3.10
%
|
3.38
%
|
4.00
%
|
3.63
%
|
5.27
%
|
|
All other
loans
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Total
loans
|
$
677
|
833
|
1,476
|
1,720
|
3,506
|
0.09
%
|
0.12
%
|
0.22
%
|
0.27
%
|
0.57
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction of)
provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
for the
period
|
$
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
2,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses at end of period
|
$
6,366
|
7,550
|
9,589
|
11,082
|
13,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at
end of period
|
$
759,764
|
723,811
|
689,091
|
651,891
|
620,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans at end of period
|
$
3,711
|
3,825
|
8,432
|
10,728
|
13,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.84
%
|
1.04
%
|
1.39
%
|
1.70
%
|
2.17
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.49
%
|
0.53
%
|
1.22
%
|
1.65
%
|
2.23
%
|
|
|
|
|
|
|
(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.
|
Another factor
considered in taking a credit to provision expense in the years
ended December 31, 2017, 2016 and 2015 was the decline in the
construction and land development portfolio. The balance
outstanding was $85.0 million at December 31, 2017 and $61.8
million at December 31, 2016, compared to the maximum balance of
$213.7 million at December 31, 2008. 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 $12.8 million for the year ended December 31, 2017,
compared to $14.0 million for the year ended December 31, 2016. The
decrease in non-interest income is primarily attributable to a
$729,000 decrease in gains on the sale of securities, a $341,000
decrease in service charges and fees and a $238,000 decrease in
mortgage banking income during the year ended December 31, 2017, as
compared to the year ended December 31, 2016.
Non-interest
income was $14.0 million for the year ended December 31, 2016,
compared to $13.3 million for the year ended December 31, 2015. The
increase in non-interest income is primarily attributable to
$729,000 in gains on the sale of securities during the year ended
December 31, 2016 and a $298,000 increase in mortgage banking
income during the year ended December 31, 2016, as compared to the
year ended December 31, 2015.
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 2017, 2016 or
2015.
Table
4 presents a summary of non-interest income for the years ended
December 31, 2017, 2016 and 2015.
|
Table 4 - Non-Interest Income
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Service charges
|
$
4,453
|
$
4,497
|
4,647
|
|
Other service charges and fees
|
593
|
890
|
931
|
|
Gain on sale of securities
|
-
|
729
|
-
|
|
Mortgage banking income
|
1,190
|
1,428
|
1,130
|
|
Insurance and brokerage commissions
|
761
|
632
|
714
|
|
Gain/(loss) on sale and write-down of other real
estate
|
(239
)
|
64
|
245
|
|
Visa debit card income
|
3,757
|
3,589
|
3,452
|
|
Net appraisal management fee income
|
780
|
886
|
635
|
|
Miscellaneous
|
1,543
|
1,261
|
1,558
|
|
Total non-interest income
|
$
12,838
|
$
13,976
|
13,312
|
Non-Interest Expense.
Non-interest
expense was $38.7 million for the year ended December 31, 2017, as
compared to $40.0 million for the year ended December 31, 2016. The
decrease in non-interest expense was primarily due to a $1.2
million decrease in professional fees and a $878,000 decrease in
other non-interest expense, which were partially offset by a
$794,000 increase in salaries and benefits expense during the year
ended December 31, 2017, as compared to the year ended December 31,
2016. The decrease in professional fees is primarily due to a $1.5
million decrease in consulting fees resulting from the termination
of the Order. The decrease in other non-interest expense is
primarily due to a $752,000 decrease in FHLB prepayment penalties
and the increase in salaries and benefits expense is primarily due
to an increase in the number of full-time equivalent employees,
annual salary increases and an increase in expenses associated with
restricted stock units due to an increase in the Company’s
stock price.
Non-interest
expense was $40.0 million for the year ended December 31, 2016, as
compared to $35.8 million for the year ended December 31, 2015. The
increase in non-interest expense included: (1) a $979,000 increase
in salaries and benefits expense resulting primarily from an
increase in the number of full-time equivalent employees, salary
increases and an increase in expenses associated with restricted
stock units, (2) a $971,000 increase in professional fees primarily
due to a $1.2 million increase in consulting fees due to expenses
associated with the Order, (3) a $477,000 increase in occupancy
expense primarily due to a $588,000 increase in equipment
maintenance expense and (4) a $1.5 million increase in non-interest
expenses other than salary, employee benefits and occupancy
expenses primarily due to a $756,000 increase in penalties
associated with the prepayment of FHLB borrowings during the year
ended December 31, 2016, as compared to the year ended December 31,
2015.
Table
5 presents a summary of non-interest expense for the years ended
December 31, 2017, 2016 and 2015.
|
Table 5 - Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Salaries and employee benefits
|
$
20,058
|
$
19,264
|
18,285
|
|
Occupancy expense
|
6,701
|
6,765
|
6,288
|
|
Office supplies
|
517
|
465
|
422
|
|
FDIC deposit insurance
|
347
|
494
|
681
|
|
Visa debit card expense
|
1,248
|
1,141
|
988
|
|
Professional services
|
1,236
|
182
|
564
|
|
Postage
|
258
|
224
|
249
|
|
Telephone
|
855
|
754
|
588
|
|
Director fees and expense
|
317
|
326
|
304
|
|
Advertising
|
1,195
|
1,136
|
784
|
|
Consulting fees
|
785
|
2,257
|
904
|
|
Taxes and licenses
|
263
|
272
|
301
|
|
Foreclosure/OREO expense
|
46
|
120
|
398
|
|
Internet banking expense
|
720
|
710
|
671
|
|
FHLB advance prepayment penalty
|
508
|
1,260
|
504
|
|
Other operating expense
|
3,648
|
4,612
|
3,847
|
|
Total non-interest expense
|
$
38,702
|
$
39,982
|
35,778
|
Income Taxes.
The Company reported
income tax expense of $3.9 million, $2.6 million and $3.1 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company’s effective tax rates were 28.03%, 21.82% and
24.35% in 2017, 2016 and 2015, respectively. Income tax expense for
the year ended December 31, 2017 includes $588,000 additional tax
expense due to the revaluation of the Company’s deferred tax
asset as a result of the TCJA, which reduced the Company’s
federal corporate tax rate from 34% to 21% effective January 1,
2018. The Company’s revaluation of its deferred tax asset is
subject to further refinement as additional information becomes
available and further analysis is completed in connection with the
preparation of the Company’s audited financial statements.
The Company does not anticipate future cash expenditures as a
result of the reduction to the deferred tax asset. Based on 2017
earnings before income taxes, the Company expects the federal
corporate tax rate reduction will reduce its 2018 income tax
expense by approximately $1 million.
Liquidity.
The objectives of the
Company’s liquidity policy are to provide for the
availability of adequate funds to meet the needs of loan demand,
deposit withdrawals, maturing liabilities and to satisfy regulatory
requirements. Both deposit and loan customer cash needs can
fluctuate significantly depending upon business cycles, economic
conditions and yields and returns available from alternative
investment opportunities. In addition, the Company’s
liquidity is affected by off-balance sheet commitments to lend in
the form of unfunded commitments to extend credit and standby
letters of credit. As of December 31, 2017, such unfunded
commitments to extend credit were $234.0 million, while commitments
in the form of standby letters of credit totaled $3.3
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, 2017, the
Company’s core deposits totaled $887.5 million, or 98% of
total deposits.
The
other sources of funding for the Company are through large
denomination certificates of deposit, including brokered deposits,
federal funds purchased, securities under 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
0.47% as of December 31, 2017.
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, 2017. At December 31, 2017, the carrying value of loans pledged
as collateral totaled approximately $137.5 million. The remaining
availability under the line of credit with the FHLB was $87.2
million at December 31, 2017. The Bank had no borrowings from the
FRB at December 31, 2017. 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, 2017, the
carrying value of loans pledged as collateral to the FRB totaled
approximately $408.5 million.
The
Bank also had the ability to borrow up to $79.5 million for the
purchase of overnight federal funds from six correspondent
financial institutions as of December 31, 2017.
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 20.62%, 24.78% and 26.10% at December
31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015.
As
disclosed in the Company’s Consolidated Statements of Cash
Flows included elsewhere herein, net cash provided by operating
activities was approximately $18.6 million during 2017. Net cash
used in investing activities was $24.1 million during 2017 and net
cash used by financing activities was $7.3 million during
2017.
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, 2017.
Table 6 - Interest Sensitivity Analysis
|
(Dollars in thousands)
|
|
|
|
|
Over One
Year & Non-
sensitive
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
Loans
|
$
293,233
|
19,664
|
14,404
|
327,301
|
432,463
|
759,764
|
|
Mortgage loans held for sale
|
857
|
-
|
-
|
857
|
-
|
857
|
|
Investment securities available for sale
|
-
|
10,444
|
16,791
|
27,235
|
202,086
|
229,321
|
|
Interest-bearing deposit accounts
|
4,118
|
-
|
-
|
4,118
|
-
|
4,118
|
|
Other interest-earning assets
|
-
|
-
|
-
|
-
|
2,449
|
2,449
|
|
Total interest-earning assets
|
298,208
|
30,108
|
31,195
|
359,511
|
636,998
|
996,509
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
NOW, savings, and money market deposits
|
498,445
|
-
|
-
|
498,445
|
-
|
498,445
|
|
Time deposits
|
10,833
|
20,616
|
50,668
|
82,117
|
40,984
|
123,101
|
|
FHLB borrowings
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Securities sold under
|
|
|
|
|
|
|
|
agreement to repurchase
|
37,757
|
-
|
-
|
37,757
|
-
|
37,757
|
|
Trust preferred securities
|
-
|
20,619
|
-
|
20,619
|
-
|
20,619
|
|
Total interest-bearing liabilities
|
547,035
|
41,235
|
50,668
|
638,938
|
40,984
|
679,922
|
|
|
|
|
|
|
|
|
|
Interest-sensitive gap
|
$
(248,827
)
|
(11,127
)
|
(19,473
)
|
(279,427
)
|
596,014
|
316,587
|
|
|
|
|
|
|
|
|
|
Cumulative interest-sensitive gap
|
$
(248,827
)
|
(259,954
)
|
(279,427
)
|
(279,427
)
|
316,587
|
|
|
|
|
|
|
|
|
|
Interest-earning assets as a percentage of interest-bearing
liabilities
|
54.51
%
|
73.02
%
|
61.57
%
|
56.27
%
|
1554.26
%
|
|
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, 2017, rate sensitive assets and
rate sensitive liabilities totaled $996.5 million and $679.9
million, respectively.
Included in the
rate sensitive assets are $280.3 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, 2017, the Bank had $163.5 million in loans with
interest rate floors. The floors were in effect on $22.1 million of
these loans pursuant to the terms of the promissory notes on these
loans. The weighted average rate on these loans is 0.70% 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,
2017, the market value of AFS securities totaled $229.3 million,
compared to $249.9 million and $268.5 million at December 31, 2016
and 2015, respectively. Table 7 presents the fair value of the AFS
securities held at December 31, 2017, 2016 and 2015.
Table 7 - Summary of Investment Portfolio
|
|
|
|
|
|
U. S. Government sponsored enterprises
|
$
40,380
|
38,222
|
38,417
|
|
State and political subdivisions
|
133,570
|
141,856
|
148,245
|
|
Mortgage-backed securities
|
53,609
|
67,585
|
77,887
|
|
Corporate bonds
|
1,512
|
1,533
|
1,906
|
|
Trust preferred securities
|
250
|
750
|
750
|
|
Equity securities
|
-
|
-
|
1,325
|
|
Total securities
|
$
229,321
|
249,946
|
268,530
|
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 $234.3 million in 2017, $252.7 million in
2016 and $266.8 million in 2015. Table 8 presents the market value
of AFS securities held by the Company by maturity category at
December 31, 2017. 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 35.98% for securities that are both federal
and state tax exempt and an effective tax rate of 32.98% for
federal tax exempt securities.
Table 8 - Maturity Distribution and Weighted Average Yield on
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Book value:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
sponsored enterprises
|
$
2,460
|
(1.16
%)
|
11,523
|
2.10
%
|
22,236
|
2.44
%
|
4,285
|
3.19
%
|
40,504
|
1.74
%
|
|
State and political subdivisions
|
14,624
|
3.67
%
|
85,116
|
3.16
%
|
25,306
|
3.06
%
|
4,230
|
3.72
%
|
129,276
|
3.40
%
|
|
Mortgage-backed securities
|
9,469
|
3.00
%
|
19,989
|
2.97
%
|
12,448
|
2.96
%
|
11,218
|
3.12
%
|
53,124
|
2.81
%
|
|
Corporate bonds
|
500
|
5.58
%
|
-
|
-
|
1,000
|
2.59
%
|
-
|
-
|
1,500
|
1.48
%
|
Trust preferred securities
|
|
-
|
-
|
-
|
-
|
-
|
250
|
8.11
%
|
250
|
8.11
%
|
|
|
|
2.78
%
|
116,628
|
2.90
%
|
60,990
|
2.85
%
|
19,983
|
3.52
%
|
224,654
|
3.51
%
|
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, Union, Wake and Durham counties in North
Carolina.
Although the Bank
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, 2017,
the Bank had $104.2 million in residential mortgage loans, $100.8
million in home equity loans and $353.5 million in commercial
mortgage loans, which include $277.5 million secured by commercial
property and $76.0 million secured by residential property.
Residential mortgage loans include $66.9 million made to customers
in the Company’s traditional banking offices and $37.3
million in mortgage loans originated in Banco's banking offices.
All residential mortgage loans are originated as fully amortizing
loans, with no negative amortization.
At
December 31, 2017, the Bank had $85.0 million in construction and
land development loans. Table 9 presents a breakout of these
loans.
|
Table 9 - Construction and Land Development Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land acquisition and development - commercial purposes
|
41
|
$
6,970
|
-
|
|
Land acquisition and development - residential
purposes
|
195
|
20,113
|
14
|
|
1 to 4 family residential construction
|
109
|
20,403
|
-
|
|
Commercial construction
|
36
|
37,501
|
-
|
|
Total acquisition, development and construction
|
381
|
$
84,987
|
14
|
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. These loans are generally made to existing Bank
customers and have been originated throughout the Bank’s
eight county service area, with no geographic
concentration.
Banco
single family residential stated income loans originated from 2005
to 2009 were primarily adjustable rate mortgage loans that adjust
annually after the end of the first five years of the loan. The
loans are tied to the one-year treasury-bill index and, if they
were to adjust at December 31, 2017, would have a reduction in the
interest rate on the loan. The underwriting on these loans includes
both full income verification and no income verification, with
loan-to-value ratios of up to 95% without private mortgage
insurance. A majority of these loans would be considered subprime
loans, as they were underwritten using stated income rather than
fully documented income verification. No other loans in the
Bank’s portfolio would be considered subprime. The majority
of these loans have been originated within the Charlotte, North
Carolina metro area (Mecklenburg County). Total losses on this
portfolio, since the first loans were originated in 2004, have
amounted to approximately $3.7 million
through December 31,
2017.
The
composition of the Bank’s loan portfolio at December 31 is
presented in Table 10.
Table 10 - Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
2014
|
2013
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$
84,987
|
11.19
%
|
61,749
|
8.53
%
|
65,791
|
9.55
%
|
57,617
|
8.84
%
|
63,742
|
10.27
%
|
|
Single-family
residential
|
246,703
|
32.47
%
|
240,700
|
33.25
%
|
220,690
|
32.03
%
|
206,417
|
31.66
%
|
195,975
|
31.56
%
|
|
Single-family
residential- Banco de la
|
|
|
|
|
|
|
|
|
|
|
|
Gente stated
income
|
37,249
|
4.90
%
|
40,189
|
5.55
%
|
43,733
|
6.35
%
|
47,015
|
7.21
%
|
49,463
|
7.97
%
|
|
Commercial
|
248,637
|
32.73
%
|
247,521
|
34.20
%
|
228,526
|
33.16
%
|
228,558
|
35.06
%
|
209,287
|
33.70
%
|
|
Multifamily
and farmland
|
28,937
|
3.81
%
|
21,047
|
2.91
%
|
18,080
|
2.62
%
|
12,400
|
1.90
%
|
11,801
|
1.90
%
|
|
Total real
estate loans
|
646,513
|
85.10
%
|
611,206
|
84.44
%
|
576,820
|
83.71
%
|
552,007
|
84.68
%
|
530,268
|
85.39
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
89,022
|
11.71
%
|
87,596
|
12.11
%
|
91,010
|
13.22
%
|
76,262
|
11.71
%
|
68,047
|
10.97
%
|
|
Farm
loans
|
1,204
|
0.16
%
|
-
|
0.00
%
|
3
|
0.00
%
|
7
|
0.00
%
|
19
|
0.00
%
|
|
Consumer
loans
|
9,888
|
1.30
%
|
9,832
|
1.36
%
|
10,027
|
1.46
%
|
10,060
|
1.54
%
|
9,593
|
1.54
%
|
|
All other
loans
|
13,137
|
1.73
%
|
15,177
|
2.10
%
|
11,231
|
1.63
%
|
13,555
|
2.08
%
|
13,033
|
2.10
%
|
|
Total loans
|
759,764
|
100.00
%
|
723,811
|
100.00
%
|
689,091
|
100.00
%
|
651,891
|
100.00
%
|
620,960
|
100.00
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Allowance for loan losses
|
6,366
|
|
7,550
|
|
9,589
|
|
11,082
|
|
13,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
$
753,398
|
|
716,261
|
|
679,502
|
|
640,809
|
|
607,459
|
|
As of
December 31, 2017, gross loans outstanding were $759.8 million,
compared to $723.8 million at December 31, 2016. Average loans
represented 74% and 71% of total earning assets for the years ended
December 31, 2017 and 2016, respectively. The Bank had $857,000 and
$5.7 million in mortgage loans held for sale as of December 31,
2017 and 2016, respectively.
Troubled debt
restructured (“TDR”) loans modified in 2016, past due
TDR loans and non-accrual TDR loans totaled $4.5 million and $5.9
million at December 31, 2017 and December 31, 2016, 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 $21,000 and $81,000 in performing loans
classified as TDR loans at December 31, 2017 and December 31, 2016,
respectively.
Table
11 identifies the maturities of all loans as of December 31, 2017
and addresses the sensitivity of these loans to changes in interest
rates.
|
Table 11 - Maturity and Repricing Data for Loans
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
After one year
through five
years
|
|
|
|
Real estate loans
|
|
|
|
|
|
Construction and land development
|
$
54,526
|
18,138
|
12,323
|
84,987
|
|
Single-family residential
|
111,059
|
81,167
|
54,477
|
246,703
|
|
Single-family residential- Banco de la Gente
|
|
|
|
|
|
stated income
|
16,260
|
-
|
20,989
|
37,249
|
|
Commercial
|
85,234
|
120,600
|
42,803
|
248,637
|
|
Multifamily and farmland
|
5,623
|
8,559
|
14,755
|
28,937
|
|
Total real estate loans
|
272,702
|
228,464
|
145,347
|
646,513
|
|
|
|
|
|
|
|
Loans not secured by real estate
|
|
|
|
|
|
Commercial loans
|
52,434
|
23,631
|
12,957
|
89,022
|
|
Farm loans
|
886
|
318
|
-
|
1,204
|
|
Consumer loans
|
5,033
|
4,471
|
384
|
9,888
|
|
All other loans
|
6,422
|
4,337
|
2,378
|
13,137
|
|
Total loans
|
$
337,477
|
261,221
|
161,066
|
759,764
|
|
|
|
|
|
|
|
Total fixed rate loans
|
$
10,176
|
218,755
|
161,066
|
389,997
|
|
Total floating rate loans
|
327,301
|
42,466
|
-
|
369,767
|
|
|
|
|
|
|
|
Total loans
|
$
337,477
|
261,221
|
161,066
|
759,764
|
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, 2017, outstanding loan
commitments totaled $237.3 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 “Contractual
Obligations and Off-Balance Sheet Arrangements” and in Note
10 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;
●
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 regarding the
risk assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
As an
additional measure, the Bank engages an independent third party to
review the underwriting, documentation and risk grading analyses.
This independent third party reviews and evaluates loan
relationships greater than $1.0 million, excluding loans in
default, and loans in process of litigation or liquidation. The
third party’s evaluation and report is shared with management
and the Bank’s Board of Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses
the information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The
allowance for loan losses is comprised of three components:
specific reserves, general reserves and unallocated reserves. After
a loan has been identified as impaired, management measures
impairment. When the measure of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on management’s
current evaluation of the Bank’s loss exposure for each
credit, given the appraised value of any underlying collateral.
Loans for which specific reserves are provided are excluded from
the general allowance calculations as described below.
The
general allowance reflects reserves established under GAAP for
collective loan impairment. These reserves are based upon
historical net charge-offs using the greater of the last two,
three, four or five years’ loss experience. This charge-off
experience may be adjusted to reflect the effects of current
conditions. The Bank considers information derived from its loan
risk ratings and external data related to industry and general
economic trends in establishing reserves.
The
unallocated allowance is determined through management’s
assessment of probable losses that are in the portfolio but are not
adequately captured by the other two components of the allowance,
including consideration of current economic and business conditions
and regulatory requirements. The unallocated allowance also
reflects management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
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, 2017 as compared to the
year ended December 31, 2016. 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, stated income mortgage loans from the Banco offices 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 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. These
loans were made as stated income loans rather than full
documentation loans because the customer may not have had complete
documentation on the income supporting the loan.
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 2017, 2016 and 2015 were $677,000, $833,000 and
$1.5 million, respectively. The ratio of net charge-offs to average
total loans was 0.09%
in 2017, 0.12% in 2016 and 0.22%
in 2015. The Bank strives to proactively work with its customers to
identify potential problems. If found, the Bank works to quickly
recognize identifiable losses and to establish a plan, with the
borrower, if possible, to have the loans paid off. This process of
early identification increased the levels of charge-offs and
provision for loan losses in 2009 through 2013 as compared to
historical periods prior to 2009. The years ended December 31,
2015, 2016 and 2017 saw a return of net charge-offs to pre-crisis
levels. Management expects this to continue in 2018. The allowance
for loan losses was $6.4 million or 0.84% of total loans
outstanding at December 31, 2017. For December 31, 2016 and 2015,
the allowance for loan losses amounted to $7.6 million or 1.04% of
total loans outstanding and $9.6 million, or 1.39% of total loans
outstanding, respectively.
Table
12 presents the percentage of loans assigned to each risk grade at
December 31, 2017 and 2016.
|
Table 12 - Loan Risk Grade Analysis
|
|
|
|
|
|
|
|
|
|
Risk Grade
|
|
|
|
Risk Grade 1 (Excellent Quality)
|
1.31
%
|
2.28
%
|
|
Risk Grade 2 (High Quality)
|
26.23
%
|
26.82
%
|
|
Risk Grade 3 (Good Quality)
|
60.69
%
|
54.43
%
|
|
Risk Grade 4 (Management Attention)
|
8.19
%
|
11.99
%
|
|
Risk Grade 5 (Watch)
|
2.54
%
|
3.07
%
|
|
Risk Grade 6 (Substandard)
|
1.04
%
|
1.41
%
|
|
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)
|
|
|
|
|
|
|
Allowance for loan losses at beginning
|
$
7,550
|
$
9,589
|
11,082
|
13,501
|
14,423
|
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
Commercial
|
194
|
146
|
38
|
430
|
502
|
|
Real estate - mortgage
|
315
|
593
|
1,064
|
789
|
2,441
|
|
Real estate - construction
|
-
|
7
|
197
|
884
|
777
|
|
Consumer
|
473
|
492
|
545
|
534
|
652
|
|
Total loans charged off
|
982
|
1,238
|
1,844
|
2,637
|
4,372
|
|
|
|
|
|
|
|
|
Recoveries of losses previously charged off:
|
|
|
|
|
|
|
Commercial
|
31
|
170
|
101
|
54
|
44
|
|
Real estate - mortgage
|
106
|
74
|
77
|
259
|
302
|
|
Real estate - construction
|
14
|
10
|
45
|
428
|
377
|
|
Consumer
|
154
|
151
|
145
|
176
|
143
|
|
Total recoveries
|
305
|
405
|
368
|
917
|
866
|
|
Net loans charged off
|
677
|
833
|
1,476
|
1,720
|
3,506
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
2,584
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
$
6,366
|
$
7,550
|
9,589
|
11,082
|
13,501
|
|
|
|
|
|
|
|
|
Loans charged off net of recoveries, as
|
|
|
|
|
|
|
a percent of average loans outstanding
|
0.09
%
|
0.12
%
|
0.22
%
|
0.27
%
|
0.57
%
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent
|
|
|
|
|
|
|
of total loans outstanding at end of year
|
0.84
%
|
1.04
%
|
1.39
%
|
1.70
%
|
2.17
%
|
Non-performing
Assets.
Non-performing assets
were $3.8 million or 0.35% of total assets at December 31, 2017,
compared to $4.1 million or 0.38% of total assets at December 31,
2016. Non-performing loans include $3.6 million in commercial and
residential mortgage loans, $14,000 in construction and land
development loans and $112,000 in other loans at December 31, 2017,
as compared to $3.7 million in commercial and residential mortgage
loans, $21,000 in construction and land development loans and
$55,000 in other loans at December 31, 2016.
Other
real estate owned totaled $118,000 and $283,000
as of December 31, 2017 and 2016, respectively. The Bank had no
repossessed assets as of December 31, 2017 and
2016.
At
December 31, 2017, the Bank had non-performing loans, defined as
non-accrual and accruing loans past due more than 90 days, of $3.7
million or 0.49% of total loans. Non-performing loans at December
31, 2016 were $3.8 million or 0.53% 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 more
in-line with the levels at December 31, 2017 as opposed to the
level of non-accruals experienced in 2012.
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)
|
|
|
|
|
|
|
Non-accrual loans
|
$
3,711
|
$
3,825
|
8,432
|
10,728
|
13,836
|
|
Loans 90 days or more past due and still accruing
|
-
|
-
|
17
|
-
|
882
|
|
Total non-performing loans
|
3,711
|
3,825
|
8,449
|
10,728
|
14,718
|
|
All other real estate owned
|
118
|
283
|
739
|
2,016
|
1,679
|
|
Repossessed assets
|
-
|
-
|
-
|
-
|
-
|
|
Total non-performing assets
|
$
3,829
|
$
4,108
|
9,188
|
12,744
|
16,397
|
|
|
|
|
|
|
|
|
TDR loans not included in above,
|
|
|
|
|
|
|
(not 90 days past due or on nonaccrual)
|
2,543
|
3,337
|
5,102
|
7,217
|
7,953
|
|
|
|
|
|
|
|
|
As a percent of total loans at year end
|
|
|
|
|
|
|
Non-accrual loans
|
0.49
%
|
0.53
%
|
1.22
%
|
1.65
%
|
2.23
%
|
|
Loans 90 days or more past due and still accruing
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.14
%
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
|
|
|
|
as a percent of total assets at year end
|
0.35
%
|
0.38
%
|
0.88
%
|
1.22
%
|
1.58
%
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
as a percent of total loans at year-end
|
0.49
%
|
0.53
%
|
1.23
%
|
1.65
%
|
2.37
%
|
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, 2017, total deposits were $907.0
million, compared to $892.9 million at December 31, 2016.
Core deposits, which
include demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000,
amounted to $887.5 million at December 31, 2017, compared to $865.4
million at December 31, 2016.
Time
deposits in amounts of $250,000 or more totaled $18.8 million and
$26.8 million at December 31, 2017 and 2016, respectively. At
December 31, 2017, brokered deposits amounted to $5.2 million as
compared to $7.2 million at December 31, 2016. Certificates of
deposit participated through the Certificate of Deposit Account
Registry Service ("CDARS") included in brokered deposits amounted
to $5.2 million and $7.2 million as of December 31, 2017 and 2016,
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,
2017 have a weighted average rate of 0.07% with a weighted average
original term of 30 months.
Table
15 is a summary of the maturity distribution of time deposits in
amounts of $250,000 or more as of December 31, 2017.
|
Table 15 - Maturities of Time Deposits of $250,000 or
greater
|
|
|
|
|
|
|
|
|
Three months or less
|
$
6,718
|
|
Over three months through six months
|
2,368
|
|
Over six months through twelve months
|
3,245
|
|
Over twelve months
|
6,425
|
|
Total
|
$
18,756
|
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. At December 31, 2017 there were no FHLB borrowings
outstanding compared to $20 million outstanding at December 31,
2016. Average FHLB borrowings for 2017 and 2016 were $16.3 million
and $42.9 million, respectively. The maximum amount of outstanding
FHLB borrowings was $20.0 million in 2017 and $43.5 million in
2016.
Additional
information regarding FHLB borrowings is provided in Note 6 to the
Consolidated Financial Statements.
The
Bank had no borrowings from the FRB at December 31, 2017 and 2016.
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, 2017, the carrying value of loans pledged as
collateral totaled approximately $408.5 million.
Securities sold
under agreements to repurchase were $37.8 million at December 31,
2017, as compared to $36.4 million at December 31,
2016.
Junior
subordinated debentures were $20.6 million as of December 31, 2017
and 2016.
Contractual Obligations and Off-Balance Sheet
Arrangements.
The Company’s contractual obligations
and other commitments as of December 31, 2017 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)
|
|
|
|
|
|
|
Contractual Cash Obligations
|
|
|
|
|
|
|
Junior subordinated debentures
|
$
-
|
-
|
-
|
20,619
|
20,619
|
|
Operating lease obligations
|
716
|
1,375
|
1,032
|
1,739
|
4,862
|
|
Total
|
$
716
|
1,375
|
1,032
|
22,358
|
25,481
|
|
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
|
Commitments to extend credit
|
$
68,087
|
24,552
|
28,864
|
112,469
|
233,972
|
|
Standby letters of credit
|
|
|
|
|
|
|
and financial guarantees written
|
3,325
|
-
|
-
|
-
|
3,325
|
|
Income tax credits
|
1,746
|
511
|
66
|
74
|
2,397
|
|
Total
|
$
73,158
|
25,063
|
28,930
|
112,543
|
239,694
|
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 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, 10 and 15
to the Consolidated Financial Statements. There were no
derivatives at December 31, 2017 or 2016.
Capital Resources
. Shareholders’
equity was $116.0 million, or 10.62% of total assets, as of
December 31, 2017, compared to $107.4 million, or 9.87% of total
assets, as of December 31, 2016. The increase in
shareholders’ equity is primarily due to an increase in
retained earnings due to net income.
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 10.64%, 10.51% and 10.27% for 2017, 2016 and 2015,
respectively. The return on average shareholders’ equity was
8.78% at December 31, 2017 as compared to 8.11% and 9.03% at
December 31, 2016 and December 31, 2015, respectively. Total cash
dividends paid on common stock were $2.6 million, $2.1 million and
$1.6 million during 2017, 2016 and 2015, respectively. The Company
did not pay any dividends on preferred stock during 2017 and
2016.
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
2016, the Company’s Board of Directors authorized a stock
repurchase program, pursuant to which up to $2.0 million was
allocated to repurchase the Company’s common stock. Any
purchases under the Company’s stock repurchase program were
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
were determined by the Company’s management, based on its
evaluation of market conditions and other factors. The Company has
repurchased approximately $2.0 million, or 92,738 shares of its
common stock, under this program as of December 31,
2017.
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 are being 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 at 0.625% and is being phased in through 2019 (increasing by
0.625% on each subsequent January 1, until it reaches 2.5% on
January 1, 2019). This will result 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 at December 31, 2017 and December 31,
2016 includes $20.0 million in trust preferred securities. The
Company’s Tier 1 capital ratio was 15.32% and 15.20% at
December 31, 2017 and December 31, 2016, 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 16.06% and
16.12% at December 31, 2017 and December 31, 2016, 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 13.00% and 12.75% at December 31, 2017 and
December 31, 2016, respectively. Financial institutions are also
required to maintain a leverage ratio of Tier 1 capital to total
average assets of 4.0% or greater. The Company’s Tier 1
leverage capital ratio was 11.94% and 11.19% at December 31, 2017
and December 31, 2016, respectively.
The
Bank’s Tier 1 risk-based capital ratio was 15.09% and 14.85%
at December 31, 2017 and December 31, 2016, respectively. The total
risk-based capital ratio for the Bank was 15.83% and 15.78% at
December 31, 2017 and December 31, 2016, respectively. The
Bank’s common equity Tier 1 capital ratio was 15.09% and
14.85% at December 31, 2017 and December 31, 2016, respectively.
The Bank’s Tier 1 leverage capital ratio was 11.69% and
10.88% at December 31, 2017 and December 31, 2016,
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,
2017.
The
Company’s key equity ratios as of December 31, 2017, 2016 and
2015 are presented in Table 17.
|
Table 17 - Equity Ratios
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
|
Return on average assets
|
0.93%
|
0.85%
|
0.93%
|
|
Return on average equity
|
8.78%
|
8.11%
|
9.03%
|
|
Dividend payout ratio
|
25.67%
|
22.95%
|
16.34%
|
|
Average equity to average assets
|
10.64%
|
10.51%
|
10.27%
|
Quarterly Financial Data.
The
Company’s consolidated quarterly operating results for the
years ended December 31, 2017 and 2016 are presented in Table
18.
Table 18 - Quarterly Financial Data
|
|
|
|
|
(Dollars in thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
$
10,064
|
10,461
|
10,698
|
10,726
|
$
9,905
|
9,815
|
9,982
|
10,107
|
|
Total interest
expense
|
598
|
622
|
650
|
507
|
809
|
813
|
828
|
821
|
|
Net interest income
|
9,466
|
9,839
|
10,048
|
10,219
|
9,096
|
9,002
|
9,154
|
9,286
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction of)
provision for loan losses
|
(236
)
|
49
|
(218
)
|
(102
)
|
(216
)
|
(531
)
|
(360
)
|
(99
)
|
|
Other
income
|
2,876
|
3,281
|
3,504
|
3,177
|
3,324
|
3,572
|
3,414
|
3,666
|
|
Other
expense
|
9,795
|
9,335
|
9,351
|
10,169
|
9,492
|
9,109
|
9,598
|
11,783
|
|
Income before income taxes
|
2,783
|
3,736
|
4,419
|
3,329
|
3,144
|
3,996
|
3,330
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
578
|
925
|
1,177
|
1,319
|
691
|
1,032
|
872
|
(34
)
|
|
Net earnings
|
2,205
|
2,811
|
3,242
|
2,010
|
2,453
|
2,964
|
2,458
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$
0.36
|
0.47
|
0.54
|
0.34
|
$
0.41
|
0.49
|
0.41
|
0.22
|
|
Diluted net earnings per share
|
$
0.36
|
0.46
|
0.53
|
0.34
|
$
0.40
|
0.48
|
0.40
|
0.22
|
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, 2017,
2016 and 2015, 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, 2017. 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, 2017. 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
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
$
52,783
|
60,232
|
55,592
|
59,385
|
52,546
|
132,608
|
413,146
|
394,729
|
|
Average
interest rate
|
4.85
%
|
4.59
%
|
4.75
%
|
4.63
%
|
4.84
%
|
5.03
%
|
|
|
|
Variable
rate
|
$
73,910
|
42,857
|
35,356
|
30,777
|
30,195
|
134,380
|
347,475
|
348,331
|
|
Average
interest rate
|
5.20
%
|
5.02
%
|
4.96
%
|
5.00
%
|
5.08
%
|
4.33
%
|
|
|
|
Total
|
|
|
|
|
|
|
760,621
|
743,060
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
|
|
|
|
|
|
|
|
|
Interest
bearing cash
|
$
4,118
|
-
|
-
|
-
|
-
|
-
|
4,118
|
4,118
|
|
Average
interest rate
|
1.27
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Securities
available for sale
|
$
33,796
|
22,819
|
23,487
|
25,952
|
42,326
|
80,941
|
229,321
|
229,321
|
|
Average
interest rate
|
4.50
%
|
4.39
%
|
4.20
%
|
4.63
%
|
4.51
%
|
4.19
%
|
|
|
|
Nonmarketable
equity securities
|
$
-
|
-
|
-
|
-
|
-
|
1,830
|
1,830
|
1,830
|
|
Average
interest rate
|
-
|
-
|
-
|
-
|
-
|
4.08
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
84,604
|
21,001
|
13,403
|
3,870
|
3,150
|
780,924
|
906,952
|
894,932
|
|
Average
interest rate
|
0.23
%
|
0.47
%
|
0.58
%
|
0.74
%
|
0.81
%
|
0.09
%
|
|
|
|
Securities
sold under agreement
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
$
37,757
|
-
|
-
|
-
|
-
|
-
|
37,757
|
37,757
|
|
Average
interest rate
|
0.14
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Junior
subordinated debentures
|
$
-
|
-
|
-
|
-
|
-
|
20,619
|
20,619
|
20,619
|
|
Average
interest rate
|
-
|
-
|
-
|
-
|
-
|
3.00
%
|
|
|
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)
|
|
|
|
+3
%
|
$
45,209
|
4.16
%
|
|
+2
%
|
$
45,082
|
3.87
%
|
|
+1
%
|
$
44,466
|
2.45
%
|
|
0
%
|
$
43,402
|
0.00
%
|
|
-1
%
|
$
42,056
|
-3.10
%
|
|
-2
%
|
$
41,413
|
-4.58
%
|
|
-3
%
|
$
41,315
|
-4.81
%
|
|
|
Estimated Resulting Theoretical
Market Value of Equity
|
Hypothetical rate change (immediate shock)
|
|
|
|
|
$
169,602
|
9.73
%
|
|
+2
%
|
$
174,677
|
13.02
%
|
|
+1
%
|
$
170,472
|
10.30
%
|
|
0
%
|
$
154,559
|
0.00
%
|
|
-1
%
|
$
129,973
|
-15.91
%
|
|
-2
%
|
$
94,534
|
-38.84
%
|
|
-3
%
|
$
77,557
|
-49.82
%
|
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
|
Consolidated Financial Statements
|
|
December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
INDEX
|
|
|
|
|
|
PAGE(S)
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
|
A-25 - A-27
|
|
|
|
|
Financial Statements
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2017 and
2016
|
A-28
|
|
|
|
|
Consolidated Statements of Earnings for the years ended December
31, 2017, 2016 and 2015
|
A-29
|
|
|
|
|
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2017, 2016 and 2015
|
A-30
|
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2017, 2016 and 2015
|
A-31
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2017, 2016 and 2015
|
A-32 - A-33
|
|
|
|
|
Notes to Consolidated Financial Statements
|
A-34 - A-66
|
Report of Independent Registered Public Accounting
Firm
To the
Shareholders and Board of Directors of Peoples Bancorp of North
Carolina, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of People
Bancorp of North Carolina, Inc. and Subsidiaries (the Company) as
of December 31, 2017 and 2016, 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, 2017, and the related notes to the consolidated
financial statements (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2017 and 2016, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December
31, 2017, based on criteria established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013, and our report
dated March 15, 2017 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial
reporting.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the 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 audits to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the consolidated
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 consolidated 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 consolidated financial statements. We
believe that our audits provide a reasonable basis for our
opinion.
/s/ Elliott Davis, PLLC
We have
served as the Company's auditor since 2015.
Charlotte,
North Carolina
March
15, 2018
Elliott
Davis PLLC | www.elliottdavis.com
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 Internal Control Over Financial
Reporting
We have
audited Peoples Bancorp of North Carolina, Inc.’s (the
Company) internal control over financial reporting as of December
31, 2017, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 2013. In our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31, 2017, based on criteria established in
Internal Control – Integrated
Framework
issued by COSO in 2013.
We have
also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2017
and 2016, 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,
2017, and the related notes to the consolidated financial
statements and our report dated March 15, 2018 expressed an
unqualified opinion.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting in
the accompanying Management’s Annual Report on Internal
Controls over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm
registered with the 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 audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Elliott
Davis PLLC | www.elliottdavis.com
Definition and Limitations of Internal Control Over Financial
Reporting
A
company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/
Elliott Davis, PLLC
Charlotte,
North Carolina
March
15, 2018
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Balance Sheets
|
December 31, 2017 and December 31, 2016
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash and due from banks, including reserve
requirements
|
$
53,186
|
53,613
|
|
of $7,472 at 12/31/17 and $6,075 at 12/31/16
|
|
|
|
Interest-bearing deposits
|
4,118
|
16,481
|
|
Cash and cash equivalents
|
57,304
|
70,094
|
|
|
|
|
|
Investment securities available for sale
|
229,321
|
249,946
|
|
Other investments
|
1,830
|
2,635
|
|
Total securities
|
231,151
|
252,581
|
|
|
|
|
|
Mortgage loans held for sale
|
857
|
5,709
|
|
|
|
|
|
Loans
|
759,764
|
723,811
|
|
Less allowance for loan losses
|
(6,366
)
|
(7,550
)
|
|
Net loans
|
753,398
|
716,261
|
|
|
|
|
|
Premises and equipment, net
|
19,911
|
16,452
|
|
Cash surrender value of life insurance
|
15,552
|
14,952
|
|
Other real estate
|
118
|
283
|
|
Accrued interest receivable and other assets
|
13,875
|
11,659
|
|
Total assets
|
$
1,092,166
|
1,087,991
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing demand
|
$
285,406
|
271,851
|
|
NOW, MMDA & savings
|
498,445
|
477,054
|
|
Time, $250,000 or more
|
18,756
|
26,771
|
|
Other time
|
104,345
|
117,242
|
|
Total deposits
|
906,952
|
892,918
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
37,757
|
36,434
|
|
FHLB borrowings
|
-
|
20,000
|
|
Junior subordinated debentures
|
20,619
|
20,619
|
|
Accrued interest payable and other liabilities
|
10,863
|
10,592
|
|
Total liabilities
|
976,191
|
980,563
|
|
|
|
|
|
Commitments (Note 10)
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
Series A preferred stock, $1,000 stated value;
authorized
|
|
|
|
5,000,000 shares; no shares issued and outstanding
|
-
|
-
|
|
Common stock, no par value; authorized
|
|
|
|
20,000,000 shares; issued and outstanding 5,995,256
shares
|
|
|
|
at December 31, 2017 and 5,417,800 shares at December 31,
2016
|
62,096
|
44,187
|
|
Retained earnings
|
50,286
|
60,254
|
|
Accumulated other comprehensive income
|
3,593
|
2,987
|
|
Total shareholders' equity
|
115,975
|
107,428
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
1,092,166
|
1,087,991
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Statements of Earnings
|
For the Years Ended December 31, 2017, 2016 and 2015
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
Interest and fees on loans
|
$
34,888
|
32,452
|
31,098
|
|
Interest on due from banks
|
219
|
123
|
26
|
|
Interest on investment securities:
|
|
|
|
|
U.S. Government sponsored enterprises
|
2,404
|
2,531
|
2,616
|
|
States and political subdivisions
|
4,236
|
4,454
|
4,600
|
|
Other
|
202
|
249
|
326
|
|
Total interest income
|
41,949
|
39,809
|
38,666
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
NOW, MMDA & savings deposits
|
598
|
495
|
432
|
|
Time deposits
|
466
|
586
|
870
|
|
FHLB borrowings
|
662
|
1,661
|
1,735
|
|
Junior subordinated debentures
|
590
|
485
|
402
|
|
Other
|
61
|
44
|
45
|
|
Total interest expense
|
2,377
|
3,271
|
3,484
|
|
|
|
|
|
|
Net interest income
|
39,572
|
36,538
|
35,182
|
|
|
|
|
|
|
(Reduction of) provision for loan losses
|
(507
)
|
(1,206
)
|
(17
)
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
40,079
|
37,744
|
35,199
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
Service charges
|
4,453
|
4,497
|
4,647
|
|
Other service charges and fees
|
593
|
890
|
931
|
|
Other than temporary impairment losses
|
-
|
-
|
-
|
|
Gain on sale of securities
|
-
|
729
|
-
|
|
Mortgage banking income
|
1,190
|
1,428
|
1,130
|
|
Insurance and brokerage commissions
|
761
|
632
|
714
|
|
Gain (loss) on sales and write-downs of
|
|
|
|
|
|
(239
)
|
64
|
245
|
|
Miscellaneous
|
6,080
|
5,736
|
5,645
|
|
Total non-interest income
|
12,838
|
13,976
|
13,312
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
Salaries and employee benefits
|
20,058
|
19,264
|
18,285
|
|
Occupancy
|
6,701
|
6,765
|
6,288
|
|
Professional fees
|
1,236
|
2,439
|
1,468
|
|
Advertising
|
1,195
|
1,136
|
784
|
|
Debit card expense
|
1,248
|
1,141
|
988
|
|
FDIC insurance
|
347
|
494
|
681
|
|
Other
|
7,917
|
8,743
|
7,284
|
|
Total non-interest expense
|
38,702
|
39,982
|
35,778
|
|
|
|
|
|
|
Earnings before income taxes
|
14,215
|
11,738
|
12,733
|
|
|
|
|
|
|
Income tax expense
|
3,947
|
2,561
|
3,100
|
|
|
|
|
|
|
Net earnings
|
$
10,268
|
9,177
|
9,633
|
|
|
|
|
|
|
Basic net earnings per share
|
$
1.71
|
1.53
|
1.57
|
|
Diluted net earnings per share
|
$
1.69
|
1.50
|
1.56
|
|
Cash dividends declared per share
|
$
0.44
|
0.35
|
0.25
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Statements of Comprehensive Income
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
10,268
|
9,177
|
9,633
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
Unrealized holding gains (losses) on securities
|
|
|
|
|
available for sale
|
(355
)
|
(3,274
)
|
93
|
|
Reclassification adjustment for gains on
|
|
|
|
|
securities available for sale
|
|
|
|
|
included in net earnings
|
-
|
(729
)
|
-
|
|
|
|
|
|
|
Total other comprehensive income (loss),
|
|
|
|
|
before income taxes
|
(355
)
|
(4,003
)
|
93
|
|
|
|
|
|
|
Income tax (benefit) expense related to other
|
|
|
|
|
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on securities
|
|
|
|
|
available for sale
|
(354
)
|
(1,196
)
|
36
|
|
Reclassification adjustment for gains on
|
|
|
|
|
securities available for sale
|
|
|
|
|
included in net earnings
|
-
|
(284
)
|
-
|
|
|
|
|
|
|
Total income tax expense (benefit) related to
|
|
|
|
|
other comprehensive income (loss)
|
(354
)
|
(1,480
)
|
36
|
|
|
|
|
|
|
Total other comprehensive income (loss),
|
|
|
|
|
net of tax
|
(1)
|
(2,523
)
|
57
|
|
|
|
|
|
|
Total comprehensive income
|
$
10,267
|
6,654
|
9,690
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Statements of Changes in Shareholders'
Equity
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014
|
5,612,588
|
$
48,088
|
45,124
|
5,453
|
98,665
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
repurchase
|
(102,050
)
|
(1,917
)
|
-
|
-
|
(1,917
)
|
|
Cash dividends declared on
|
|
|
|
|
|
|
common stock
|
-
|
-
|
(1,574
)
|
-
|
(1,574
)
|
|
Net earnings
|
-
|
-
|
9,633
|
-
|
9,633
|
|
Change in accumulated other
|
|
|
|
|
|
|
comprehensive income,
|
|
|
|
|
|
|
net of tax
|
-
|
-
|
-
|
57
|
57
|
|
Balance, December 31, 2015
|
5,510,538
|
$
46,171
|
53,183
|
5,510
|
104,864
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
|
|
|
repurchase
|
(92,738
)
|
(1,984
)
|
-
|
-
|
(1,984
)
|
|
Cash dividends declared on
|
|
|
|
|
|
|
common stock
|
-
|
-
|
(2,106
)
|
-
|
(2,106
)
|
|
Net earnings
|
-
|
-
|
9,177
|
-
|
9,177
|
|
Change in accumulated other
|
|
|
|
|
|
|
comprehensive income,
|
|
|
|
|
|
|
net of tax
|
-
|
-
|
-
|
(2,523
)
|
(2,523
)
|
|
Balance, December 31, 2016
|
5,417,800
|
$
44,187
|
60,254
|
2,987
|
107,428
|
|
|
|
|
|
|
|
|
Cash dividends declared on
|
|
|
|
|
|
|
common stock
|
-
|
-
|
(2,629
)
|
-
|
(2,629
)
|
|
10% stock dividend
|
544,844
|
16,994
|
(17,000
)
|
-
|
(6
)
|
|
Restricted stock units exercised
|
32,612
|
915
|
-
|
-
|
915
|
|
Net earnings
|
-
|
-
|
10,268
|
-
|
10,268
|
|
Change in accumulated other
|
|
|
|
|
|
|
comprehensive income due to
|
|
|
|
|
|
|
Tax Cuts and Jobs Act
|
-
|
-
|
(607
)
|
607
|
-
|
|
Change in accumulated other
|
|
|
|
|
|
|
comprehensive income,
|
|
|
|
|
|
|
net of tax
|
-
|
-
|
-
|
(1
)
|
(1
)
|
|
Balance, December 31, 2017
|
5,995,256
|
$
62,096
|
50,286
|
3,593
|
115,975
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
|
|
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Statements of Cash Flows
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
Net earnings
|
$
10,268
|
9,177
|
9,633
|
|
Adjustments to reconcile net earnings to
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
Depreciation, amortization and accretion
|
5,018
|
5,423
|
6,053
|
|
Reduction of provision for loan losses
|
(507
)
|
(1,206
)
|
(17
)
|
|
Deferred income taxes
|
(2,120
)
|
1,097
|
673
|
|
Gain on sale of investment securities
|
-
|
(729)
|
-
|
|
Gain on sale of other real estate
|
-
|
(81
)
|
(363
)
|
|
Write-down of other real estate
|
239
|
17
|
118
|
|
Restricted stock expense
|
592
|
932
|
487
|
|
Proceeds from sales of loans held for sale
|
59,193
|
67,764
|
50,770
|
|
Origination of loans held for sale
|
(54,341
)
|
(69,324
)
|
(53,544
)
|
|
Change in:
|
|
|
|
|
Cash surrender value of life insurance
|
(600
)
|
(406
)
|
(421
)
|
|
Other assets
|
258
|
(636
)
|
(408
)
|
|
Other liabilities
|
594
|
211
|
882
|
|
Net cash provided by operating activities
|
18,594
|
12,239
|
13,863
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of investment securities available for sale
|
(10,014
)
|
(12,707
)
|
(19,220
)
|
|
Proceeds from sales, calls and maturities of investment
securities
|
|
|
|
|
available for sale
|
10,162
|
4,053
|
5,475
|
|
Proceeds from paydowns of investment securities available for
sale
|
17,202
|
20,675
|
22,732
|
|
Purchases of other investments
|
(45
)
|
(255
)
|
(6
)
|
|
FHLB stock redemption
|
850
|
1,256
|
401
|
|
Net change in loans
|
(36,748
)
|
(36,116
)
|
(43,441
)
|
|
Purchases of premises and equipment
|
(5,557
)
|
(1,610
)
|
(2,354
)
|
|
Proceeds from sale of other real estate and
repossessions
|
44
|
1,083
|
6,287
|
|
Net cash used by investing activities
|
(24,106
)
|
(23,621
)
|
(30,126
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Net change in deposits
|
14,034
|
60,743
|
17,475
|
|
Net change in securities sold under agreement to
repurchase
|
1,323
|
8,560
|
(20,556
)
|
|
Proceeds from FHLB borrowings
|
1
|
6,000
|
20,001
|
|
Repayments of FHLB borrowings
|
(20,001
)
|
(29,500
)
|
(26,501
)
|
|
Proceeds from FRB borrowings
|
1
|
1
|
1
|
|
Repayments of FRB borrowings
|
(1
)
|
(1
)
|
(1
)
|
|
Proceeds from Fed Funds Purchased
|
187
|
9,112
|
5,192
|
|
Repayments of Fed Funds Purchased
|
(187
)
|
(9,112
)
|
(5,192
)
|
|
Common stock repurchased
|
-
|
(1,984)
|
(1,917)
|
|
Cash dividends paid in lieu of fractional shares
|
(6)
|
-
|
-
|
|
Cash dividends paid on common stock
|
(2,629
)
|
(2,106
)
|
(1,574
)
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
(7,278
)
|
41,713
|
(13,072
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
(12,790
)
|
30,331
|
(29,335
)
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
70,094
|
39,763
|
69,098
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
57,304
|
70,094
|
39,763
|
PEOPLES BANCORP OF NORTH CAROLINA, INC.
|
Consolidated Statements of Cash Flows, continued
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
Interest
|
$
2,526
|
3,415
|
3,518
|
|
Income taxes
|
$
2,408
|
2,028
|
2,278
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
Change in unrealized (loss) gain on investment
securities
|
|
|
|
|
available for sale, net
|
$
(1
)
|
(2,523
)
|
57
|
|
Transfer of loans to other real estate and
repossessions
|
$
118
|
563
|
4,825
|
|
Issuance of accrued restricted stock units
|
$
(915
)
|
-
|
-
|
|
Financed portion of sale of other real estate
|
$
-
|
-
|
60
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
|
|
|
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, Union, Wake and Durham counties in North
Carolina.
Peoples Investment
Services, Inc. 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.
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, Peoples Investment
Services, Inc., 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 and interest-bearing deposits are considered cash
and cash equivalents for cash flow reporting purposes.
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, 2017 and 2016, 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 an annual 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.
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.
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;
●
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 regarding the
risk assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
As an
additional measure, the Bank engages an independent third party to
review the underwriting, documentation and risk grading analyses.
This independent third party reviews and evaluates loan
relationships greater than $1.0 million, excluding loans in
default, and loans in process of litigation or liquidation. The
third party’s evaluation and report is shared with management
and the Bank’s Board of Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses
the information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The
allowance for loan losses is comprised of three components:
specific reserves, general reserves and unallocated reserves. After
a loan has been identified as impaired, management measures
impairment. When the measure of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on management’s
current evaluation of the Bank’s loss exposure for each
credit, given the appraised value of any underlying collateral.
Loans for which specific reserves are provided are excluded from
the general allowance calculations as described below.
The
general allowance reflects reserves established under GAAP for
collective loan impairment. These reserves are based upon
historical net charge-offs using the greater of the last two,
three, four or five years’ loss experience. This charge-off
experience may be adjusted to reflect the effects of current
conditions. The Bank considers information derived from its loan
risk ratings and external data related to industry and general
economic trends in establishing reserves.
The
unallocated allowance is determined through management’s
assessment of probable losses that are in the portfolio but are not
adequately captured by the other two components of the allowance,
including consideration of current economic and business conditions
and regulatory requirements. The unallocated allowance also
reflects management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
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, 2017 as compared to the
year ended December 31, 2016. 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, stated income mortgage loans from the Banco offices 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 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. These
loans were made as stated income loans rather than full
documentation loans because the customer may not have had complete
documentation on the income supporting the loan.
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 net gains 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 $1.0 million, $1.4 million and $1.6
million at December 31, 2017, 2016 and 2015,
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.
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 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 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.
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
“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
284,658 shares are currently reserved for possible issuance under
the Plan. All stock-based rights under the Plan must be granted or
awarded by May 7, 2019 (i.e., ten years from the Plan effective
date).
The
Company granted 32,465 restricted stock units under the Plan at a
grant date fair value of $7.18 per share during the first quarter
of 2012, of which 5,891 restricted stock units were forfeited by
the executive officers of the Company as required by the agreement
with the U.S. Department of the Treasury (“UST”) in
conjunction with the Company’s participation in the Capital
Purchase Program (“CPP”) under the Troubled Asset
Relief Program (“TARP”). In July 2012, the Company
granted 5,891 restricted stock units at a grant date fair value of
$7.50 per share. The Company granted 29,475 restricted stock units
under the Plan at a grant date fair value of $10.82 per share
during the second quarter of 2013. The Company granted 23,162
restricted stock units under the Plan at a grant date fair value of
$14.27 per share during the first quarter of 2014. The Company
granted 16,583 restricted stock units under the 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
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 Plan at a grant date fair value of $25.00 per share
during the first quarter of 2017. The number of restricted stock
units granted and grant date fair values have been restated to
reflect the 10% stock dividend during 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 (five
years from the grant date for the 2012 grants, four years from the
grant date for the 2013, 2015, 2016 and 2017 grants and three years
from the grant date for the 2014 grants). The amount of expense
recorded each period reflects the changes in the Company’s
stock price during such period. As of December 31, 2017, the total
unrecognized compensation expense related to the restricted stock
unit grants under the Plan was $319,000.
The
Company recognized compensation expense for restricted stock units
granted under the Plan of $592,000, $932,000 and $487,000 for the
years ended December 31, 2017, 2016 and 2015,
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,
2017, 2016 and 2015 are as follows:
|
For the year ended
December 31, 2017
|
|
|
|
|
|
Net
Earnings
(Dollars
in
thousands)
|
Weighted
Average
Number
of
Shares
|
|
|
Basic earnings per share
|
$
10,268
|
5,988,183
|
$
1.71
|
|
Effect of dilutive securities:
|
|
|
|
|
Restricted stock units
|
-
|
74,667
|
|
|
Diluted earnings per share
|
$
10,268
|
6,062,850
|
$
1.69
|
|
For the year ended
December 31, 2016
|
|
|
|
|
|
Net
Earnings
(Dollars
in
thousands)
|
Weighted
Average
Number
of
Shares
|
|
|
Basic earnings per share
|
$
9,177
|
6,024,970
|
$
1.53
|
|
Effect of dilutive securities:
|
|
|
|
|
Restricted stock units
|
-
|
77,807
|
|
Diluted earnings per share
|
$
9,177
|
6,102,777
|
$
1.50
|
|
For the year ended
December 31, 2015
|
|
|
|
|
|
Net
Earnings
(Dollars
in
thousands)
|
Weighted
Average
Number
of
Shares
|
|
|
Basic earnings per share
|
$
9,633
|
6,115,159
|
$
1.57
|
|
Effect of dilutive securities:
|
|
|
|
|
Restricted stock units
|
-
|
52,749
|
|
|
Diluted earnings per share
|
$
9,633
|
6,167,908
|
$
1.56
|
In
November 2017, the Board of Directors of the Company declared a
cash dividend in the amount of $0.12 per share and a 10% stock
dividend. The cash dividend was paid based on the number of shares
held by shareholders on the record date of December 4, 2017. As a
result of the stock dividend, each shareholder received one new
share of stock for every ten shares of stock they held as of the
record date of December 4, 2017. The payable date for the cash
dividend and stock dividend was December 15, 2017. All previously
reported per share amounts have been restated to reflect this stock
dividend.
Recent Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2014-09,
(Topic 606):
Revenue from
Contracts with Customers
. ASU No. 2014-09 provides guidance
on the
recognition
of revenue from contracts with customers. The core principle of the
new guidance is that an entity should recognize revenue to reflect
the transfer of goods and services to customers in an amount equal
to the consideration the entity receives or expects to receive. ASU
No. 2014-09 is effective for reporting periods beginning after
December 15, 2017.
The
Company will apply ASU No. 2014-09 using a modified retrospective
approach. The Company’s revenue is comprised of net interest
income and noninterest income. The scope of ASU No. 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 will not be affected. The Company is
currently assessing its revenue contracts related to revenue
streams that are within the scope of ASU No. 2014-09. The
Company’s accounting policies will not change materially
since the principles of revenue recognition from ASU No. 2014-09
are largely consistent with existing guidance and the
Company’s current practices. The Company has not identified
material changes to the timing or amount of revenue recognition.
However, the Company does anticipate that it will make changes to
its revenue-related disclosures. The Company will provide
qualitative disclosures of its performance obligations related to
its revenue recognition and will continue to evaluate
disaggregation for significant categories of revenue within the
scope of ASU No. 2014-09.
In
February 2016, FASB issued ASU No. 2016-02, (Topic 842):
Leases
. ASU No. 2016-02
increases transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. ASU No.
2016-02 is effective for annual periods, and interim periods within
those annual periods, beginning after December 15,
2018.
The
Company expects to adopt ASU No. 2016-02 using the modified
retrospective method and practical expedients for transition. The
practical expedients allow the Company to largely account for its
existing leases consistent with current guidance except for the
incremental balance sheet recognition for lessees. The Company has
started an initial evaluation of its leasing contracts and
activities and has started developing its methodology to estimate
the right-of use assets and lease liabilities, which is based on
the present value of lease payments (the December 31, 2017 future
minimum lease payments were $4.8 million). While the Company does
not expect there to be a material change in the timing of expense
recognition, it is too early in the evaluation process to determine
if there will be a material change to the timing of expense
recognition. The Company is evaluating its existing disclosures and
may need to provide additional information as a result of adoption
of ASU No. 2016-02.
In
June 2016, FASB issued ASU No. 2016-13, (Topic 326):
Measurement of Credit Losses on Financial
Instruments
. ASU No. 2016-13 provides guidance to change the
accounting for credit losses and modify the impairment model for
certain debt securities. ASU No. 2016-13 is effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2019. Early adoption is permitted for all
organizations for periods beginning after December 15,
2018.
The
Company will apply the amendments to ASU No. 2016-13 through a
cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption. While early adoption is
permitted beginning in the first quarter of 2019, the Company does
not expect to elect that option. The Company is evaluating the
impact of ASU
No.
2016-13 on its consolidated financial statements. The Company
anticipates that ASU No. 2016-13 will have no material impact on
the recorded allowance for loan losses given the change to
estimated losses over the contractual life of the loans adjusted
for expected prepayments. 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.
In
January 2017, FASB issued ASU No. 2017-01, (Topic 805):
Clarifying the Definition of a
Business.
ASU No. 2017-01 adds guidance to assist companies
and other reporting organizations with evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU No. 2017-01 is effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2017. The adoption of this guidance is not
expected to have a material impact on the Company’s results
of operations, financial position or disclosures.
In
January 2017, FASB issued ASU No. 2017-04, (Topic 350):
Simplifying the Test for Goodwill
Impairment
. ASU No. 2017-04 provides guidance
to simplify the accounting related
to goodwill impairment. ASU No. 2017-04 is effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2019. The adoption of this guidance is not
expected to have a material impact on the Company’s results
of operations, financial position or disclosures.
In
February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20):
Clarifying the Scope of Asset
Derecognition Guidance and Accounting for Partial Sales of
Nonfinancial Assets
. ASU No. 2017-05 clarifies the scope of
established guidance on nonfinancial asset derecognition (issued as
part of the new revenue standard, ASU No. 2014-09,
Revenue from Contracts with
Customers
), as well as the accounting for partial sales of
nonfinancial assets. ASU No. 2017-05 is effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2017. The adoption of this guidance is not
expected to have a material impact on the Company’s results
of operations, financial position or disclosures.
In
March 2017, FASB issued ASU No. 2017-07, (Topic 715):
Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Costs
.
ASU No. 2017-07 amended the requirements related to the income
statement presentation of the components of net periodic
benefit cost for an entity’s sponsored defined
benefit pension and other postretirement plans. ASU No.
2017-07 is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017. The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
In
March 2017, FASB issued ASU No. 2017-08, (Subtopic 310-20):
Premium Amortization on Purchased
Callable Debt Securities.
ASU No. 2017-08 amended the
requirements related to the amortization period for certain
purchased callable debt securities held at a premium. ASU No.
2017-08 is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2018. The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
In May
2017, FASB issued ASU No. 2017-09, (Topic 718):
Scope of Modification Accounting
. ASU
No. 2017-09 amended
the
requirements related to changes to the terms or conditions of a
share-based payment award. ASU No. 2017-09 is effective for annual
periods, and interim periods within those annual periods, beginning
after December 15, 2017. The adoption of this guidance is not
expected to have a material impact on the Company’s results
of operations, financial position or disclosures.
In
September 2017, FASB issued ASU No. 2017-13,
Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840), and
Leases (Topic
842). ASU No. 2017-13 updated the Revenue from
Contracts with Customers and the Leases Topics of the Accounting
Standards Codification. The amendments incorporate into the
Accounting Standards Codification recent SEC guidance about certain
public business entities (PBEs) electing to use the non-PBE
effective dates solely to adopt the FASB’s new standards on
revenue and leases. ASU No. 2017-13 was effective upon issuance.
The Company is currently in the process of evaluating the impact of
adoption of this guidance, however it does not expect these
amendments to have a material impact on the Company’s results
of operations, financial position or disclosures.
In
November 2017, FASB issued ASU No. 2017-14,
Income Statement—Reporting
Comprehensive, Income (Topic 220), Revenue Recognition (Topic 605),
and Revenue from Contracts with Customers (Topic 606)
. ASU
No. 2017-14 incorporates into the Accounting Standards Codification
recent Securities Exchange Commission ("SEC") guidance related to
revenue recognition. ASU No. 2017-14 was effective upon issuance.
The Company
is
currently in the process of evaluating the impact of adoption of
this guidance, however it does not expect these amendments to have
a material impact on the Company’s results of operations,
financial position or disclosures.
In
February 2018, FASB issued ASU 2018-02,
Income Statement (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income
. ASU No. 2018-02 requires companies to
reclassify the stranded effects in other comprehensive income to
retained earnings as a result of the change in the tax rates under
the Tax Cuts and Jobs Act. The Company has opted to early adopt
this pronouncement by retrospective application to each period in
which the effect of the change in the tax rate under the Tax Cuts
and Jobs Act is recognized. The impact of the reclassification from
other comprehensive income to retained earnings is
$607,000.
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 2015 and 2016 consolidated financial statements have been
reclassified to conform to the 2017 presentation.
(2)
Investment Securities
Investment
securities available for sale at December 31, 2017 and 2016 are as
follows:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
53,124
|
814
|
329
|
53,609
|
|
U.S. Government
|
|
|
|
|
|
sponsored enterprises
|
40,504
|
140
|
264
|
40,380
|
|
State and political subdivisions
|
129,276
|
4,310
|
16
|
133,570
|
|
Corporate bonds
|
1,500
|
12
|
-
|
1,512
|
|
Trust preferred securities
|
250
|
-
|
-
|
250
|
|
Total
|
$
224,654
|
5,276
|
609
|
229,321
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
66,654
|
1,221
|
290
|
67,585
|
|
U.S. Government
|
|
|
|
|
|
sponsored enterprises
|
38,188
|
308
|
274
|
38,222
|
|
State and political subdivisions
|
137,832
|
4,176
|
152
|
141,856
|
|
Corporate bonds
|
1,500
|
33
|
-
|
1,533
|
|
Trust preferred securities
|
750
|
-
|
-
|
750
|
|
Total
|
$
244,924
|
5,738
|
716
|
249,946
|
The
current fair value and associated unrealized losses on investments
in debt securities with unrealized losses at December 31, 2017 and
2016 are summarized in the tables below, with the length of time
the individual securities have been in a continuous loss
position.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
8,701
|
75
|
11,259
|
254
|
19,960
|
329
|
|
U.S. Government
|
|
|
|
|
|
|
|
sponsored enterprises
|
12,661
|
98
|
10,067
|
166
|
22,728
|
264
|
|
State and political subdivisions
|
798
|
2
|
1,501
|
14
|
2,299
|
16
|
|
Total
|
$
22,160
|
175
|
22,827
|
434
|
44,987
|
609
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
15,594
|
290
|
-
|
-
|
15,594
|
290
|
|
U.S. Government
|
|
|
|
|
|
|
|
sponsored enterprises
|
10,120
|
94
|
9,562
|
180
|
19,682
|
274
|
|
State and political subdivisions
|
10,441
|
123
|
561
|
29
|
11,002
|
152
|
|
Total
|
$
36,155
|
507
|
10,123
|
209
|
46,278
|
716
|
At
December 31, 2017, unrealized losses in the investment securities
portfolio relating to debt securities totaled $609,000. The
unrealized losses on these debt securities arose due to changing
interest rates and are considered to be temporary. From the
December 31, 2017 tables above, four out of 159 securities issued
by state and political subdivisions contained unrealized losses and
27 out of 78 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 2017,
2016 or 2015.
The
amortized cost and estimated fair value of investment securities
available for sale at December 31, 2017, 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, 2017
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Due within one year
|
$
17,584
|
17,682
|
|
Due from one to five years
|
96,639
|
99,547
|
|
Due from five to ten years
|
48,542
|
49,578
|
|
Due after ten years
|
8,765
|
8,905
|
|
Mortgage-backed securities
|
53,124
|
53,609
|
|
Equity securities
|
-
|
-
|
|
Total
|
$
224,654
|
229,321
|
No
securities available for sale were sold during the year ended
December 31, 2017. During 2016, proceeds from sales of securities
available for sale were $1.5 million and resulted in gross gains of
$729,000. No securities available for sale were sold during the
year ended December 31, 2015.
Securities with a
fair value of approximately $105.6 million and $95.6 million at
December 31, 2017 and 2016, respectively, were pledged to secure
public deposits, Federal Home Loan Bank of Atlanta
(“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,
2017 and 2016.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
53,609
|
-
|
53,609
|
-
|
|
U.S. Government
|
|
|
|
|
|
sponsored enterprises
|
$
40,380
|
-
|
40,380
|
-
|
|
State and political subdivisions
|
$
133,570
|
-
|
133,570
|
-
|
|
Corporate bonds
|
$
1,512
|
-
|
1,512
|
-
|
|
Trust preferred securities
|
$
250
|
-
|
-
|
250
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
$
67,585
|
-
|
67,585
|
-
|
|
U.S. Government
|
|
|
|
|
|
sponsored enterprises
|
$
38,222
|
-
|
38,222
|
-
|
|
State and political subdivisions
|
$
141,856
|
-
|
141,856
|
-
|
|
Corporate bonds
|
$
1,533
|
-
|
1,533
|
-
|
|
Trust preferred securities
|
$
750
|
-
|
-
|
750
|
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,
2017.
|
(Dollars in thousands)
|
|
|
|
Investment
Securities
Available
for Sale
|
|
|
|
|
Balance, beginning of period
|
$
750
|
|
Change in book value
|
-
|
|
Change in gain/(loss) realized and unrealized
|
-
|
|
Purchases/(sales and calls)
|
(500
)
|
|
Transfers in and/or (out) of Level 3
|
-
|
|
Balance, end of period
|
$
250
|
|
|
|
|
Change in unrealized gain/(loss) for assets still held in Level
3
|
$
-
|
Major
classifications of loans at December 31, 2017 and 2016 are
summarized as follows:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
Construction and land development
|
$
84,987
|
61,749
|
|
Single-family residential
|
246,703
|
240,700
|
|
Single-family residential -
|
|
|
|
Banco de la Gente stated income
|
37,249
|
40,189
|
|
Commercial
|
248,637
|
247,521
|
|
Multifamily and farmland
|
28,937
|
21,047
|
|
Total real estate loans
|
646,513
|
611,206
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
Commercial loans
|
89,022
|
87,596
|
|
Farm loans
|
1,204
|
-
|
|
Consumer loans
|
9,888
|
9,832
|
|
All other loans
|
13,137
|
15,177
|
|
|
|
|
|
Total loans
|
759,764
|
723,811
|
|
|
|
|
|
Less allowance for loan losses
|
6,366
|
7,550
|
|
|
|
|
|
Total net loans
|
$
753,398
|
716,261
|
The
above table includes deferred costs, net of deferred fees, totaling
$1.6 million and $1.4 million at December 31, 2017 and 2016,
respectively.
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,
Union, Wake and Durham counties of North Carolina. Although the
Bank has a diversified loan portfolio, a substantial portion of the
loan portfolio is collateralized by improved and unimproved real
estate, the value of which is dependent upon the real estate
market. Risk characteristics of the major components of the
Bank’s loan portfolio are discussed below:
●
Construction and
land development loans – The risk of loss is largely
dependent on the initial estimate of whether the property’s
value at completion equals or exceeds the cost of property
construction and the availability of take-out financing. During the
construction phase, a number of factors can result in delays or
cost overruns. If the estimate is inaccurate or if actual
construction costs exceed estimates, the value of the property
securing the loan may be insufficient to ensure full repayment when
completed through a permanent loan, sale of the property, or by
seizure of collateral. As of December 31, 2017, construction and
land development loans comprised approximately 11% of the
Bank’s total loan portfolio.
●
Single-family
residential loans – Declining home sales volumes, decreased
real estate values and higher than normal levels of unemployment
could contribute to losses on these loans. As of December 31, 2017,
single-family residential loans comprised approximately 37% of the
Bank’s total loan portfolio, including Banco single-family
residential stated income loans which were approximately 5% 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, 2017, commercial real estate loans comprised
approximately 33% of the Bank’s total loan
portfolio.
●
Commercial loans
– Repayment is generally dependent upon the successful
operation of the borrower’s business. In addition, the
collateral securing the loans may depreciate over time, be
difficult to appraise, be illiquid, or fluctuate in value based on
the success of the business. As of December 31, 2017, commercial
loans comprised approximately 12% of the Bank’s total loan
portfolio.
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.
The
following tables present an age analysis of past due loans, by loan
type, as of December 31, 2017 and 2016:
|
December 31, 2017
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Loans
30-89
Days
Past
Due
|
Loans 90
or
More
Days
Past
Due
|
|
|
|
Accruing
Loans 90 or
More Days
Past Due
|
|
Real estate loans:
|
|
|
|
|
|
|
|
Construction and land development
|
$
277
|
-
|
277
|
84,710
|
84,987
|
-
|
|
Single-family residential
|
3,241
|
193
|
3,434
|
243,269
|
246,703
|
-
|
|
Single-family residential -
|
|
|
|
|
|
|
|
Banco de la Gente stated income
|
4,078
|
465
|
4,543
|
32,706
|
37,249
|
-
|
|
Commercial
|
588
|
-
|
588
|
248,049
|
248,637
|
-
|
|
Multifamily and farmland
|
-
|
12
|
12
|
28,925
|
28,937
|
-
|
|
Total real estate loans
|
8,184
|
670
|
8,854
|
637,659
|
646,513
|
-
|
|
|
|
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
Commercial loans
|
53
|
100
|
153
|
88,869
|
89,022
|
-
|
|
Farm loans
|
-
|
-
|
-
|
1,204
|
1,204
|
-
|
|
Consumer loans
|
113
|
5
|
118
|
9,770
|
9,888
|
-
|
|
All other loans
|
-
|
-
|
-
|
13,137
|
13,137
|
-
|
|
Total loans
|
$
8,350
|
775
|
9,125
|
750,639
|
759,764
|
-
|
|
|
|
|
|
|
|
|
|
December 31, 2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Loans
30-89
Days
Past
Due
|
Loans 90
or
More
Days
Past
Due
|
|
|
|
Accruing
Loans 90
or
More
Days
Past
Due
|
|
Real estate loans:
|
|
|
|
|
|
|
|
Construction and land development
|
$
-
|
10
|
10
|
61,739
|
61,749
|
-
|
|
Single-family residential
|
4,890
|
80
|
4,970
|
235,730
|
240,700
|
-
|
|
Single-family residential -
|
|
|
|
|
|
|
|
Banco de la Gente stated income
|
5,250
|
249
|
5,499
|
34,690
|
40,189
|
-
|
|
Commercial
|
342
|
126
|
468
|
247,053
|
247,521
|
-
|
|
Multifamily and farmland
|
471
|
-
|
471
|
20,576
|
21,047
|
-
|
|
Total real estate loans
|
10,953
|
465
|
11,418
|
599,788
|
611,206
|
-
|
|
|
|
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
Commercial loans
|
273
|
-
|
273
|
87,323
|
87,596
|
-
|
|
Farm loans
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Consumer loans
|
68
|
6
|
74
|
9,758
|
9,832
|
-
|
|
All other loans
|
3
|
-
|
3
|
15,174
|
15,177
|
-
|
|
Total loans
|
$
11,297
|
471
|
11,768
|
712,043
|
723,811
|
-
|
The
following table presents the Bank’s non-accrual loans as of
December 31, 2017 and 2016:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Real
estate loans:
|
|
|
|
Construction and land development
|
$
14
|
22
|
|
Single-family residential
|
1,634
|
1,662
|
|
Single-family residential -
|
|
|
|
Banco de la Gente stated income
|
1,543
|
1,340
|
|
Commercial
|
396
|
669
|
|
Multifamily and farmland
|
12
|
78
|
|
Total real estate loans
|
3,599
|
3,771
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
Commercial loans
|
100
|
21
|
|
|
12
|
33
|
|
Total
|
$
3,711
|
3,825
|
At
each reporting period, the Bank determines which loans are
impaired. Accordingly, the Bank’s impaired loans are reported
at their estimated fair value on a non-recurring basis. An
allowance for each impaired loan that is collateral-dependent is
calculated based on the fair value of its collateral. The fair
value of the collateral is based on appraisals performed by REAS, a
subsidiary of the Bank. REAS is staffed by certified appraisers
that also perform appraisals for other companies. Factors,
including the assumptions and techniques utilized by the appraiser,
are considered by management. If the recorded investment in the
impaired loan exceeds the measure of fair value of the collateral,
a valuation allowance is recorded as a component of the allowance
for loan losses. An allowance for each impaired loan that is not
collateral dependent is calculated based on the present value of
projected cash flows. If the recorded investment in the impaired
loan exceeds the present value of projected cash flows, a valuation
allowance is recorded as a component of the allowance for loan
losses. Impaired loans under $250,000 are not individually
evaluated for impairment with the exception of the Bank’s
troubled debt restructured (“TDR”) loans in the
residential mortgage loan portfolio, which are individually
evaluated for impairment. Impaired loans collectively evaluated for
impairment totaled $4.9 million and $5.9 million at December 31,
2017 and 2016, respectively. Accruing impaired loans were $24.6
million and $23.5 million at December 31, 2017 and December 31,
2016, respectively. Interest income recognized on accruing impaired
loans was $1.4 million and $1.2 million for the years ended
December 31, 2017 and 2016, respectively. No interest income is
recognized on non-accrual impaired loans subsequent to their
classification as non-accrual.
The
following tables present the Bank’s impaired loans as of
December 31, 2017, 2016 and 2015:
|
December 31, 2017
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With
No
Allowance
|
Recorded
Investment
With
Allowance
|
Recorded
Investment
in
Impaired
Loans
|
|
Average
Outstanding
Impaired
Loans
|
YTD
Interest
Income
Recognized
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction and land development
|
$
282
|
-
|
277
|
277
|
6
|
253
|
17
|
|
Single-family residential
|
5,226
|
1,135
|
3,686
|
4,821
|
41
|
5,113
|
265
|
|
Single-family residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente stated income
|
17,360
|
-
|
16,805
|
16,805
|
1,149
|
16,867
|
920
|
|
Commercial
|
2,761
|
807
|
1,661
|
2,468
|
1
|
3,411
|
148
|
|
Multifamily and farmland
|
78
|
-
|
12
|
12
|
-
|
28
|
-
|
|
Total impaired real estate loans
|
25,707
|
1,942
|
22,441
|
24,383
|
1,197
|
25,672
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
Commercial loans
|
264
|
100
|
4
|
104
|
-
|
149
|
3
|
|
Consumer loans
|
158
|
-
|
154
|
154
|
2
|
194
|
9
|
|
Total impaired loans
|
$
26,129
|
2,042
|
22,599
|
24,641
|
1,199
|
26,015
|
1,362
|
|
December 31, 2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With
No
Allowance
|
Recorded
Investment
With
Allowance
|
Recorded
Investment
in
Impaired
Loans
|
|
Average
Outstanding
Impaired
Loans
|
YTD
Interest
Income
Recognized
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction and land development
|
$
282
|
-
|
278
|
278
|
11
|
330
|
13
|
|
Single-family residential
|
5,354
|
703
|
4,323
|
5,026
|
47
|
7,247
|
164
|
|
Single-family residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente stated income
|
18,611
|
-
|
18,074
|
18,074
|
1,182
|
17,673
|
861
|
|
Commercial
|
3,750
|
1,299
|
2,197
|
3,496
|
166
|
4,657
|
152
|
|
Multifamily and farmland
|
78
|
-
|
78
|
78
|
-
|
78
|
-
|
|
Total impaired real estate loans
|
28,075
|
2,002
|
24,950
|
26,952
|
1,406
|
29,985
|
1,190
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
Commercial loans
|
27
|
-
|
27
|
27
|
-
|
95
|
-
|
|
Consumer loans
|
211
|
-
|
202
|
202
|
3
|
222
|
8
|
|
Total impaired loans
|
$
28,313
|
2,002
|
25,179
|
27,181
|
1,409
|
30,302
|
1,198
|
December 31, 2015
(Dollars in thousands)
|
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With
No
Allowance
|
Recorded
Investment
With
Allowance
|
Recorded
Investment
in
Impaired
Loans
|
|
Average
Outstanding
Impaired
Loans
|
YTD
Interest
Income
Recognized
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction and land development
|
$
643
|
216
|
226
|
442
|
12
|
705
|
18
|
|
Single-family residential
|
8,828
|
1,489
|
6,805
|
8,294
|
189
|
10,852
|
224
|
|
Single-family residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente stated income
|
20,375
|
-
|
19,215
|
19,215
|
1,143
|
18,414
|
921
|
|
Commercial
|
4,556
|
-
|
4,893
|
4,893
|
179
|
5,497
|
89
|
|
Multifamily and farmland
|
96
|
-
|
83
|
83
|
-
|
93
|
6
|
|
Total impaired real estate loans
|
34,498
|
1,705
|
31,222
|
32,927
|
1,523
|
35,561
|
1,258
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by real estate:
|
|
|
|
|
|
|
|
|
Commercial loans
|
180
|
-
|
161
|
161
|
3
|
132
|
5
|
|
Consumer loans
|
286
|
-
|
260
|
260
|
4
|
283
|
11
|
|
Total impaired loans
|
$
34,964
|
1,705
|
31,643
|
33,348
|
1,530
|
35,976
|
1,274
|
The
fair value measurements for mortgage loans held for sale, impaired
loans and other real estate on a non-recurring basis at December
31, 2017 and 2016 are presented below. The Company’s
valuation methodology is discussed in Note 15.
|
(Dollars in thousands)
|
|
|
|
|
|
|
Fair
Value
Measurements
December 31,
2017
|
|
|
|
|
Mortgage loans held for sale
|
$
857
|
-
|
-
|
857
|
|
Impaired loans
|
$
23,442
|
-
|
-
|
23,442
|
|
Other real estate
|
$
118
|
-
|
-
|
118
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Fair
Value
Measurements
December 31,
2016
|
|
|
|
|
Mortgage loans held for sale
|
$
5,709
|
-
|
-
|
5,709
|
|
Impaired loans
|
$
25,772
|
-
|
-
|
25,772
|
|
Other real estate
|
$
283
|
-
|
-
|
283
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Fair
Value
December 31,
2017
|
Fair
Value
December 31,
2016
|
Valuation
Technique
|
Significant
Unobservable
Inputs
|
General
Range
of
Significant
Unobservable
Input
Values
|
|
Mortgage loans held for sale
|
$
857
|
5,709
|
Rate lock
commitment
|
N/A
|
N/A
|
|
Impaired loans
|
$
23,442
|
25,772
|
Appraised value
and discounted
cash flows
|
Discounts to
reflect current
market conditions
and ultimate
collectability
|
0
- 25%
|
|
Other real estate
|
$
118
|
283
|
Appraised value
|
Discounts to
reflect current
market conditions
and estimated
costs to sell
|
0
- 25%
|
Changes in
the allowance for loan losses for the year ended December 31, 2017
were as follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and Land
Development
|
Single-
Family
Residential
|
Single-
Family
Residential
- Banco
de
la
Gente
Stated
Income
|
|
|
|
|
|
|
|
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
|
-
|
(249
)
|
-
|
-
|
(66
)
|
(194
)
|
-
|
(473
)
|
-
|
(982
)
|
|
|
14
|
85
|
-
|
21
|
-
|
31
|
-
|
154
|
-
|
305
|
|
|
(362
)
|
(150
)
|
(97
)
|
(421
)
|
86
|
62
|
-
|
270
|
105
|
(507
)
|
|
Ending
balance
|
$
804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
-
|
-
|
1,093
|
37
|
-
|
-
|
-
|
-
|
-
|
1,130
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
804
|
1,812
|
187
|
1,156
|
72
|
574
|
-
|
155
|
476
|
5,236
|
|
Ending
balance
|
$
804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
84,987
|
246,703
|
37,249
|
248,637
|
28,937
|
89,022
|
1,204
|
23,025
|
-
|
759,764
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
98
|
1,855
|
15,460
|
2,251
|
-
|
100
|
-
|
-
|
-
|
19,764
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
$
84,889
|
244,848
|
21,789
|
246,386
|
28,937
|
88,922
|
1,204
|
23,025
|
-
|
740,000
|
Changes in the
allowance for loan losses for the year ended December 31, 2016 were
as follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and Land
Development
|
Single-
Family
Residential
|
Single-
Family
Residential
- Banco
de
la
Gente
Stated
Income
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
2,185
|
2,534
|
1,460
|
1,917
|
-
|
842
|
-
|
172
|
479
|
9,589
|
|
|
(7
)
|
(275
)
|
-
|
(318
)
|
-
|
(146
)
|
-
|
(492
)
|
-
|
(1,238
)
|
|
|
10
|
55
|
-
|
19
|
-
|
170
|
-
|
151
|
-
|
405
|
|
|
(1,036
)
|
(188
)
|
(83
)
|
(25
)
|
52
|
(191
)
|
-
|
373
|
(108
)
|
(1,206
)
|
|
Ending balance
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
-
|
-
|
1,160
|
159
|
-
|
-
|
-
|
-
|
-
|
1,319
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
1,152
|
2,126
|
217
|
1,434
|
52
|
675
|
-
|
204
|
371
|
6,231
|
|
Ending balance
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
61,749
|
240,700
|
40,189
|
247,521
|
21,047
|
87,596
|
-
|
25,009
|
-
|
723,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
-
|
935
|
16,718
|
3,648
|
-
|
-
|
-
|
-
|
-
|
21,301
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
$
61,749
|
239,765
|
23,471
|
243,873
|
21,047
|
87,596
|
-
|
25,009
|
-
|
702,510
|
Changes in the
allowance for loan losses for the year ended December 31, 2015 were
as follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and Land
Development
|
Single-
Family
Residential
|
Single-
Family
Residential
- Banco
de
la
Gente
Stated
Income
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
2,785
|
2,566
|
1,610
|
1,902
|
7
|
1,098
|
-
|
233
|
881
|
11,082
|
|
|
(198
)
|
(618
)
|
(117
)
|
(329
)
|
-
|
(37
)
|
-
|
(545
)
|
-
|
(1,844
)
|
|
|
45
|
34
|
22
|
21
|
-
|
101
|
-
|
145
|
-
|
368
|
|
|
(447
)
|
552
|
(55
)
|
323
|
(7
)
|
(320
)
|
-
|
339
|
(402
)
|
(17
)
|
|
Ending balance
|
$
2,185
|
2,534
|
1,460
|
1,917
|
-
|
842
|
-
|
172
|
479
|
9,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
-
|
96
|
1,115
|
171
|
-
|
-
|
-
|
-
|
-
|
1,382
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
2,185
|
2,438
|
345
|
1,746
|
-
|
842
|
-
|
172
|
479
|
8,207
|
|
Ending balance
|
$
2,185
|
2,534
|
1,460
|
1,917
|
-
|
842
|
-
|
172
|
479
|
9,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
65,791
|
220,690
|
43,733
|
228,526
|
18,080
|
91,010
|
3
|
21,258
|
-
|
689,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
|
$
216
|
2,636
|
17,850
|
4,212
|
-
|
-
|
-
|
-
|
-
|
24,914
|
|
Ending balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
|
$
65,575
|
218,054
|
25,883
|
224,314
|
18,080
|
91,010
|
3
|
21,258
|
-
|
664,177
|
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.
The
following tables present the credit risk profile of each loan type
based on internally assigned risk grades as of December 31, 2017
and 2016.
December 31,
2017
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
Construction
and Land
Development
|
Single-
Family
Residential
|
Single-
Family
Residential
- Banco
de
la
Gente
Stated
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent
Quality
|
$
152
|
8,590
|
-
|
-
|
-
|
446
|
-
|
791
|
-
|
9,979
|
|
2- High
Quality
|
20,593
|
120,331
|
-
|
34,360
|
561
|
17,559
|
-
|
3,475
|
2,410
|
199,289
|
|
3- Good
Quality
|
53,586
|
89,120
|
14,955
|
196,439
|
25,306
|
65,626
|
1,085
|
5,012
|
9,925
|
461,054
|
|
4- Management
Attention
|
4,313
|
20,648
|
15,113
|
13,727
|
1,912
|
5,051
|
119
|
562
|
802
|
62,247
|
|
5-
Watch
|
6,060
|
4,796
|
3,357
|
3,671
|
1,146
|
223
|
-
|
23
|
-
|
19,276
|
|
6-
Substandard
|
283
|
3,218
|
3,824
|
440
|
12
|
117
|
-
|
25
|
-
|
7,919
|
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
$
84,987
|
246,703
|
37,249
|
248,637
|
28,937
|
89,022
|
1,204
|
9,888
|
13,137
|
759,764
|
December 31,
2016
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
Construction
and Land
Development
|
Single-
Family
Residential
|
Single-
Family
Residential
- Banco
de
la
Gente
Stated
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent Quality
|
$
-
|
14,996
|
-
|
-
|
-
|
541
|
-
|
959
|
-
|
16,496
|
|
2- High Quality
|
9,784
|
109,809
|
-
|
39,769
|
2,884
|
26,006
|
-
|
3,335
|
2,507
|
194,094
|
|
3- Good Quality
|
33,633
|
82,147
|
16,703
|
176,109
|
14,529
|
55,155
|
-
|
4,842
|
10,921
|
394,039
|
|
4- Management Attention
|
10,892
|
25,219
|
15,580
|
24,753
|
2,355
|
5,586
|
-
|
619
|
1,749
|
86,753
|
|
5- Watch
|
7,229
|
4,682
|
3,943
|
4,906
|
1,201
|
246
|
-
|
31
|
-
|
22,238
|
|
6- Substandard
|
211
|
3,847
|
3,963
|
1,984
|
78
|
62
|
-
|
42
|
-
|
10,187
|
|
7- Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8- Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4
|
-
|
4
|
|
|
$
61,749
|
240,700
|
40,189
|
247,521
|
21,047
|
87,596
|
-
|
9,832
|
15,177
|
723,811
|
TDR
loans modified in 2017, past due TDR loans and non-accrual TDR
loans totaled $4.5 million and $5.9 million at December 31, 2017
and December 31, 2016, 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
$21,000 and $81,000 in performing loans classified as TDR loans at
December 31, 2017 and December 31, 2016, respectively.
The
following table presents an analysis of loan modifications during
the year ended December 31, 2017:
|
Year ended December 31, 2017
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Real estate loans:
|
|
|
|
|
Single-family residential
|
2
|
$
22
|
22
|
|
Total TDR loans
|
2
|
$
22
|
22
|
During
the year ended December 31, 2017, two loans were modified that were
considered to be new TDR loans. The interest rate was modified on
these TDR loans.
The
following table presents an analysis of loan modifications during
the year ended December 31, 2016:
|
Year ended December 31, 2016
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Pre-Modification
Outstanding
Recorded
Investment
|
Post-Modification
Outstanding
Recorded
Investment
|
|
Real estate loans:
|
|
|
|
|
Single-family residential
|
3
|
$
124
|
121
|
|
Total TDR loans
|
3
|
$
124
|
121
|
During
the year ended December 31, 2016, three loans were modified that
were considered to be new TDR loans. The interest rate was modified
on these TDR loans.
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, 2017 and 2016. TDR loans are deemed to
be in default if they become past due by 90 days or
more.
(4) Premises
and Equipment
Major
classifications of premises and equipment at December 31, 2017 and
2016 are summarized as follows:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
$
3,700
|
3,670
|
|
Buildings and improvements
|
19,312
|
16,398
|
|
Furniture and equipment
|
21,115
|
19,996
|
|
Construction in process
|
847
|
-
|
|
|
|
|
|
Total premises and equipment
|
44,974
|
40,064
|
|
|
|
|
|
Less accumulated depreciation
|
25,063
|
23,612
|
|
|
|
|
|
Total net premises and equipment
|
$
19,911
|
16,452
|
The
Company recognized approximately $2.1 million in depreciation
expense for the year ended December 31, 2017. Depreciation expense
was approximately $2.1 million and $2.4 million for the years ended
December 31, 2016 and 2015, respectively.
(5) Time
Deposits
At
December 31, 2017, the scheduled maturities of time deposits are as
follows:
|
(Dollars in thousands)
|
|
|
|
|
|
2018
|
$
81,684
|
|
2019
|
21,064
|
|
2020
|
13,343
|
|
2021
|
3,903
|
|
2022 and thereafter
|
3,107
|
|
|
|
|
Total
|
$
123,101
|
At
December 31, 2017 and 2016, the Bank had approximately $5.2 million
and $7.2 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 $5.2 million and $7.2 million as of December 31,
2017 and 2016, respectively
. The weighted average rate of
brokered deposits as of December 31, 2017 and 2016 was 0.07% and
0.05%, respectively.
(6) Federal Home
Loan Bank and Federal Reserve Bank Borrowings
The
Bank had no borrowing from the FHLB at December 31, 2017. The Bank
had borrowings from the FHLB totaling $20 million at December 31,
2016. 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, 2017, the carrying value of loans pledged as
collateral totaled approximately $137.5 million. The remaining
availability under the line of credit with the FHLB was $87.2
million at December 31, 2017.
Borrowings from
the FHLB outstanding at December 31, 2016 consisted of the
following:
|
December 31, 2016
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 17, 2018
|
N/A
|
4.050%
|
Adjustable Rate Hybrid
|
$
5,000
|
|
|
|
|
|
|
|
October 17, 2018
|
N/A
|
4.065%
|
Adjustable Rate Hybrid
|
5,000
|
|
|
|
|
|
|
|
October 17, 2018
|
N/A
|
4.120%
|
Adjustable Rate Hybrid
|
5,000
|
|
|
|
|
|
|
|
May 8, 2018
|
N/A
|
2.683%
|
|
5,000
|
|
|
|
|
|
$
20,000
|
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 $978,000 and $1.8 million of FHLB stock,
included in other investments, at December 31, 2017 and 2016,
respectively.
The
Bank prepaid FHLB borrowings totaling $20.0 million in 2017 with
prepayment penalties totaling $508,000. The Bank prepaid FHLB
borrowings totaling $23.5 million in 2016 with prepayment penalties
totaling $1.3 million.
As of
December 31, 2017 and 2016, 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,
2017, the carrying value of loans pledged as collateral totaled
approximately $408.5 million. Availability under the line of credit
with the FRB was $315.2 million at December 31, 2017.
(7) 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.
(8) Income
Taxes
On
December 22, 2017, the President of the United States signed into
law the Tax Cuts and Jobs Act (“TCJA”). The TCJA
includes a number of changes to existing U.S. tax laws that impact
the Company, most notably a reduction of the U.S. corporate income
tax rate from 34 percent to 21 percent for tax years beginning
after December 31, 2017.
The
Company recognized the income tax effects of the TCJA in its 2017
financial statements in accordance with Staff Accounting Bulletin
No. 118, which provides SEC staff guidance for the application of
Accounting Standards Codification ("ASC") Topic 740,
Income Taxes
, in the reporting period
in which the TCJA was signed into law. As such, the Company’s
financial results reflect the income tax effects of the TCJA for
which the accounting under ASC Topic 740 is complete and
provisional amounts for those specific income tax effects of the
TCJA for which the accounting under ASC Topic 740 is incomplete but
a reasonable estimate could be determined. The Company did not
identify items for which the income tax effects of the TCJA have
not been completed and a reasonable estimate could not be
determined as of December 31, 2017.
The
provision for income taxes is summarized as follows:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current expense
|
$
1,827
|
1,464
|
2,427
|
|
Deferred income tax expense
|
2,120
|
1,097
|
673
|
|
Total income tax
|
$
3,947
|
2,561
|
3,100
|
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)
|
|
|
|
|
|
|
|
|
|
Tax expense at statutory rate (34%)
|
$
4,833
|
3,991
|
4,329
|
|
State income tax, net of federal income tax effect
|
307
|
339
|
494
|
|
Tax-exempt interest income
|
(1,594
)
|
(1,681
)
|
(1,682
)
|
|
Increase in cash surrender value of life insurance
|
(136
)
|
(138
)
|
(143
)
|
|
Nondeductible interest and other expense
|
46
|
78
|
103
|
|
Impact of Tax Cuts and Jobs Act
|
588
|
-
|
-
|
|
Other
|
(97
)
|
(28
)
|
(1
)
|
|
Total
|
$
3,947
|
2,561
|
3,100
|
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, 2017 and
2016.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
1,463
|
2,717
|
|
Accrued retirement expense
|
1,073
|
1,616
|
|
Other real estate
|
-
|
-
|
|
Federal credit carryforward
|
88
|
326
|
|
State credit carryforward
|
-
|
14
|
|
Restricted stock
|
243
|
745
|
|
Accrued bonuses
|
171
|
216
|
|
Interest income on nonaccrual loans
|
5
|
27
|
|
Other than temporary impairment
|
9
|
14
|
|
Other
|
-
|
23
|
|
Total gross deferred tax assets
|
3,052
|
5,698
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Deferred loan fees
|
365
|
797
|
|
Accumulated depreciation
|
498
|
532
|
|
Prepaid expenses
|
14
|
78
|
|
Other
|
28
|
23
|
|
Unrealized gain on available for sale securities
|
1,072
|
1,807
|
|
Total gross deferred tax liabilities
|
1,977
|
3,237
|
|
|
|
|
|
Net deferred tax asset
|
$
1,075
|
2,461
|
The
Company measures deferred tax assets and liabilities using enacted
tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid. Accordingly, the
Company’s deferred tax assets and liabilities were remeasured
to reflect the reduction in the U.S. corporate income tax rate from
34 percent to 21 percent, resulting in a $588,000 increase in
income tax expense for the year ended December 31, 2017 and a
corresponding $588,000 decrease in net deferred tax assets as of
December 31, 2017.
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 income tax filings for years 2014 through 2017 were
at year end 2017 open to audit under statutes of limitations by the
Internal Revenue Service and the North Carolina Department of
Revenue.
(9) 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 2017 and
2016:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Beginning balance
|
$
4,503
|
5,674
|
|
New loans
|
5,879
|
6,048
|
|
Repayments
|
(6,703
)
|
(7,219
)
|
|
Ending balance
|
$
3,679
|
4,503
|
At
December 31, 2017 and 2016, the Company had deposit relationships
with related parties of approximately $26.6 million and $27.8
million, respectively.
A
director of the Company is an officer and partial owner of the
construction company that renovated the Bank’s Corporate
Center located at 518 West C Street, Newton, North Carolina during
2017. During 2017 the
Company
paid a total of approximately $2.6 million to this construction
company for such renovation work. During 2016 the Company
paid a total of approximately $209,000 to this construction company
for such renovation work.
(10) Commitments and
Contingencies
The
Company leases various office spaces for banking and operational
facilities and equipment under operating lease arrangements. Future
minimum lease payments required for all operating leases having a
remaining term in excess of one year at December 31, 2017 are as
follows:
|
(Dollars in thousands)
|
|
|
|
|
|
Year ending December
31,
|
|
|
2018
|
$
716
|
|
2019
|
697
|
|
2020
|
678
|
|
2021
|
663
|
|
2022
|
369
|
|
Thereafter
|
1,739
|
|
Total minimum obligation
|
$
4,862
|
Total
rent expense was approximately $756,000, $752,000 and $702,000 for
the years ended December 31, 2017, 2016 and 2015,
respectively.
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.
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)
|
|
|
|
|
|
|
|
|
|
|
Financial instruments whose contract amount represent credit
risk:
|
|
|
|
|
|
|
|
Commitments to extend credit
|
$
233,972
|
195,528
|
|
|
|
|
|
Standby letters of credit and financial guarantees
written
|
$
3,325
|
3,728
|
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
$237.3 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 $79.5 million available for the purchase of overnight
federal funds from six correspondent financial institutions as of
December 31, 2017.
At
December 31, 2017, the Bank has a commitment 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
$603,000 of this commitment at December 31, 2017.
(11) 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 2015, 2016 and 2017. The Company’s contribution pursuant
to this formula was approximately $622,000, $565,000 and $539,000
for the years 2017, 2016 and 2015, 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
$411,000, $428,000 and $413,000 for the years 2017, 2016 and 2015,
respectively.
The
Company is currently paying medical benefits for certain retired
employees. The Company did not incur any postretirement medical
benefits expense in 2017, 2016 and 2015 due to an excess accrual
balance.
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)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
4,174
|
3,993
|
|
Service cost
|
348
|
346
|
|
Interest cost
|
68
|
67
|
|
Benefits paid
|
(229
)
|
(232
)
|
|
|
|
|
|
Benefit obligation at end of period
|
$
4,361
|
4,174
|
The
amounts recognized in the Company’s Consolidated Balance
Sheet as of December 31, 2017 and 2016 are shown in the following
two tables:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation $
|
4,361
|
4,174
|
|
Fair value of plan assets
|
-
|
-
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
$
(4,361
)
|
(4,174
)
|
|
Unrecognized prior service cost/benefit
|
-
|
-
|
|
Unrecognized net actuarial loss
|
-
|
-
|
|
|
|
|
|
Net amount recognized
|
$
(4,361
)
|
(4,174
)
|
|
|
|
|
|
Unfunded accrued liability
|
$
(4,361
)
|
(4,174
)
|
|
Intangible assets
|
-
|
-
|
|
|
|
|
|
Net amount recognized
|
$
(4,361
)
|
(4,174
)
|
Net
periodic benefit cost of the Company’s postretirement benefit
plans for the years ended December 31, 2017, 2016 and 2015
consisted of the following:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
348
|
346
|
334
|
|
Interest cost
|
68
|
67
|
65
|
|
|
|
|
|
|
Net periodic cost
|
$
416
|
413
|
399
|
|
|
|
|
|
|
Weighted average discount rate assumption
|
|
|
|
|
used to determine benefit obligation
|
5.49
%
|
5.47
%
|
5.47
%
|
The
Company paid benefits under the two postretirement plans totaling
$229,000 and $232,000 during the years ended December 31, 2017 and
2016, respectively. Information about the expected benefit payments
for the Company’s two postretirement benefit plans is as
follows:
|
(Dollars in thousands)
|
|
|
|
|
|
Year ending December 31,
|
|
|
2018
|
$
227
|
|
2019
|
$
304
|
|
2020
|
$
357
|
|
2021
|
$
357
|
|
2022
|
$
346
|
|
Thereafter
|
$
9,005
|
(12) 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, 2017, that the Company and
the Bank meet all capital adequacy requirements to which they are
subject.
As of
December 31, 2017, 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 Federal Reserve Board 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 are being
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 at 0.625% and is being phased in
through 2019 (increasing by 0.625% on each subsequent January 1,
until it reaches 2.5% on January 1, 2019). This will result 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:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For
Capital
Adequacy
Purposes
|
To Be
Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
138,492
|
16.06
%
|
79,758
|
9.25
%
|
N/A
|
N/A
|
|
Bank
|
$
136,299
|
15.83
%
|
79,627
|
9.25
%
|
86,084
|
10.00
%
|
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
132,126
|
15.32
%
|
62,513
|
7.25
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
15.09
%
|
62,411
|
7.25
%
|
68,867
|
8.00
%
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
132,126
|
11.94
%
|
44,255
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
11.69
%
|
44,475
|
4.00
%
|
55,594
|
5.00
%
|
|
Common Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
112,126
|
13.00
%
|
49,579
|
5.75
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
15.09
%
|
49,498
|
5.75
%
|
55,954
|
6.50
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
For
Capital
Adequacy
Purposes
|
To Be
Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
131,991
|
16.12
%
|
70,666
|
8.63
%
|
N/A
|
N/A
|
|
Bank
|
$
129,035
|
15.78
%
|
70,578
|
8.63
%
|
81,782
|
10.00
%
|
|
Tier 1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
124,441
|
15.20
%
|
54,289
|
6.63
%
|
N/A
|
N/A
|
|
Bank
|
$
121,485
|
14.85
%
|
54,222
|
6.63
%
|
65,426
|
8.00
%
|
|
Tier 1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
124,441
|
11.19
%
|
44,488
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
121,485
|
10.88
%
|
44,677
|
4.00
%
|
55,846
|
5.00
%
|
|
Common Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
104,441
|
12.75
%
|
42,007
|
5.13
%
|
N/A
|
N/A
|
|
Bank
|
$
121,485
|
14.85
%
|
41,954
|
5.13
%
|
53,158
|
6.50
%
|
On
August 31, 2015, the FDIC and the Commissioner issued a Consent
Order (the “Order”) in connection with compliance by
the Bank with the Bank Secrecy Act and its implementing regulations
(collectively, the “BSA”). The Order was issued
pursuant to the consent of the Bank. In consenting to the issuance
of the Order, the Bank did not admit or deny any unsafe or unsound
banking practices or violations of law or regulation.
The
Order required the Bank to take certain affirmative actions to
comply with its obligations under the BSA, including, without
limitation, strengthening its Board of Directors’ oversight
of BSA activities; reviewing, enhancing, adopting and implementing
a revised BSA compliance program; completing a BSA risk assessment;
developing a revised system of internal controls designed to ensure
full compliance with the BSA; reviewing and revising customer due
diligence and risk assessment processes, policies and procedures;
developing, adopting and implementing effective BSA training
programs; assessing BSA staffing needs and resources and appointing
a qualified BSA officer; establishing an independent BSA testing
program; ensuring that all reports required by the BSA are
accurately and properly filed and engaging an independent firm to
review past account activity to determine whether suspicious
activity was properly identified and reported.
During
the third quarter of 2017 the Bank received notice that the Order
was terminated effective August 30, 2017.
(13) Shareholders’
Equity
Shareholders’
equity was $116.0 million, or 10.62% of total assets, as of
December 31, 2017, compared to $107.4 million, or 9.87% of total
assets, as of December 31, 2016. 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, 2017 was 8.78%
compared to 8.11% for the year ended December 31, 2016. Total cash
dividends paid on common stock were $2.6 million and $2.1 million
for the years ended December 31, 2017 and 2016,
respectively.
The
Board of Directors, at its discretion, can issue shares of
preferred stock up to a maximum of 5,000,000 shares. The Board is
authorized to determine the number of shares, voting powers,
designations, preferences, limitations and relative rights. The
Board of Directors does not currently anticipate issuing any
additional series of preferred stock.
In
2016, the Company’s Board of Directors authorized a stock
repurchase program, pursuant to which up to $2 million was
allocated to repurchase the Company’s common stock. Any
purchases under the Company’s stock repurchase program were
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
were determined by the Company’s management, based on its
evaluation of market conditions and other factors. The Company has
repurchased approximately $2.0 million, or 92,738 shares of its
common stock, under this program as of December 31, 2017
.
(14) Other Operating Income and
Expense
Miscellaneous
non-interest income for the years ended December 31, 2017, 2016 and
2015 included the following items that exceeded one percent of
total revenues at some point during the following three-year
period:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Visa debit card income
|
$
3,757
|
3,589
|
3,452
|
|
Net appraisal management fee income
|
$
780
|
886
|
635
|
|
Insurance and brokerage commissions
|
$
761
|
632
|
714
|
Other
non-interest expense for the years ended December 31, 2017, 2016
and 2015 included the following items that exceeded one percent of
total revenues at some point during the following three-year
period:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Advertising
|
$
1,195
|
1,136
|
784
|
|
FDIC insurance
|
$
347
|
494
|
681
|
|
Visa debit card expense
|
$
1,248
|
1,140
|
988
|
|
Telephone
|
$
855
|
754
|
588
|
|
Foreclosure/OREO expense
|
$
46
|
120
|
398
|
|
Internet banking expense
|
$
720
|
710
|
671
|
|
FHLB advance prepayment penalty
|
$
508
|
1,260
|
504
|
|
Consulting
|
$
785
|
2,257
|
904
|
(15) 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.
●
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.
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, 2017 and
2016. The fair value presentation for non-recurring assets is
presented in Note 3. There were no non-recurring liabilities at
December 31, 2017 and 2016. The carrying amount and estimated fair
value of the Company’s financial instruments at December 31,
2017 and 2016 are as follows:
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2017
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
53,186
|
53,186
|
-
|
-
|
53,186
|
|
Investment securities available for sale
|
$
229,321
|
-
|
229,071
|
250
|
229,321
|
|
Other investments
|
$
1,830
|
-
|
-
|
1,830
|
1,830
|
|
Mortgage loans held for sale
|
$
857
|
-
|
-
|
857
|
857
|
|
Loans, net
|
$
753,398
|
-
|
-
|
735,837
|
735,837
|
|
Cash surrender value of life insurance
|
$
15,552
|
-
|
15,552
|
-
|
15,552
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
906,952
|
-
|
-
|
894,932
|
894,932
|
|
Securities sold under agreements
|
|
|
|
|
|
|
to repurchase
|
$
37,757
|
-
|
37,757
|
-
|
37,757
|
|
Junior subordinated debentures
|
$
20,619
|
-
|
20,619
|
-
|
20,619
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
70,094
|
70,094
|
-
|
-
|
70,094
|
|
Investment securities available for sale
|
$
249,946
|
-
|
249,196
|
750
|
249,946
|
|
Other investments
|
$
2,635
|
-
|
-
|
2,635
|
2,635
|
|
Mortgage loans held for sale
|
$
5,709
|
-
|
-
|
5,709
|
5,709
|
|
Loans, net
|
$
716,261
|
-
|
-
|
720,675
|
720,675
|
|
Cash surrender value of life insurance
|
$
14,952
|
-
|
14,952
|
-
|
14,952
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
892,918
|
-
|
-
|
884,510
|
884,510
|
|
Securities sold under agreements
|
|
|
|
|
|
|
to repurchase
|
$
36,434
|
-
|
36,434
|
-
|
36,434
|
|
FHLB borrowings
|
$
20,000
|
-
|
18,864
|
-
|
18,864
|
|
Junior subordinated debentures
|
$
20,619
|
-
|
20,619
|
-
|
20,619
|
(16) Peoples Bancorp of North
Carolina, Inc. (Parent Company Only) Condensed Financial
Statements
|
|
|
|
|
|
December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
428
|
957
|
|
Interest-bearing time deposit
|
1,000
|
1,000
|
|
Investment in subsidiaries
|
133,781
|
124,471
|
|
Investment in PEBK Capital Trust II
|
619
|
619
|
|
Investment securities available for sale
|
250
|
750
|
|
Other assets
|
546
|
275
|
|
|
|
|
|
Total assets
|
$
136,624
|
128,072
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
|
|
Junior subordinated debentures
|
$
20,619
|
20,619
|
|
Liabilities
|
30
|
25
|
|
Shareholders' equity
|
115,975
|
107,428
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
136,624
|
128,072
|
|
|
|
|
|
|
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
$
1,839
|
4,569
|
3,979
|
|
Gain on sale of securities
|
-
|
405
|
-
|
|
|
|
|
|
|
Total revenues
|
1,839
|
4,974
|
3,979
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
590
|
485
|
403
|
|
Other operating expenses
|
725
|
513
|
538
|
|
|
|
|
|
|
Total expenses
|
1,315
|
998
|
941
|
|
|
|
|
|
|
Income before income tax benefit and equity in
|
|
|
|
|
undistributed earnings of subsidiaries
|
524
|
3,976
|
3,038
|
|
|
|
|
|
|
Income tax benefit
|
434
|
178
|
262
|
|
|
|
|
|
|
Income before equity in undistributed
|
|
|
|
|
earnings of subsidiaries
|
958
|
4,154
|
3,300
|
|
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
9,310
|
5,023
|
6,333
|
|
|
|
|
|
|
Net earnings
|
$
10,268
|
9,177
|
9,633
|
|
|
|
|
|
|
|
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
10,268
|
9,177
|
9,633
|
|
Adjustments to reconcile net earnings to net
|
|
|
|
|
cash provided by operating activities:
|
|
|
|
|
Equity in undistributed earnings of subsidiaries
|
(9,310
)
|
(5,023
)
|
(6,333
)
|
|
Gain on sale of investment securities
|
-
|
(405
)
|
-
|
|
Change in:
|
|
|
|
|
Other assets
|
(272
)
|
61
|
(4
)
|
|
Accrued income
|
-
|
-
|
-
|
|
Accrued expense
|
5
|
5
|
3
|
|
Other liabilities
|
-
|
-
|
-
|
|
|
|
|
|
|
Net cash provided by operating activities
|
691
|
3,815
|
3,299
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from calls and maturities of investment
securities
|
|
|
|
|
available for sale
|
500
|
669
|
|
In kind transfer from parent to Bank
|
-
|
10
|
-
|
|
|
|
|
|
|
Net cash provided by investing activities
|
500
|
679
|
-
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid on common stock
|
(2,629
)
|
(2,106
)
|
(1,574
)
|
|
Cash in lieu stock dividend
|
(6
)
|
-
|
-
|
|
Stock repurchase
|
-
|
(1,984
)
|
(1,917
)
|
|
Proceeds from exercise of restricted stock units
|
915
|
-
|
-
|
|
|
|
|
|
|
Net cash used by financing activities
|
(1,720
)
|
(4,090
)
|
(3,491
)
|
|
|
|
|
|
|
Net change in cash
|
(529
)
|
404
|
(192
)
|
|
|
|
|
|
|
Cash at beginning of year
|
957
|
553
|
745
|
|
|
|
|
|
|
Cash at end of year
|
$
428
|
957
|
553
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
Change in unrealized gain on investment securities
|
|
|
|
|
available for sale, net
|
$
(1
)
|
(2,523
)
|
57
|
(17) Quarterly
Data
|
|
|
|
(Dollars in thousands, except per
share amounts)
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
$
10,064
|
10,461
|
10,698
|
10,726
|
$
9,905
|
9,815
|
9,982
|
10,107
|
|
Total interest
expense
|
598
|
622
|
650
|
507
|
809
|
813
|
828
|
821
|
|
Net interest income
|
9,466
|
9,839
|
10,048
|
10,219
|
9,096
|
9,002
|
9,154
|
9,286
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction of)
provision for loan losses
|
(236
)
|
49
|
(218
)
|
(102
)
|
(216
)
|
(531
)
|
(360
)
|
(99
)
|
|
Other
income
|
2,876
|
3,281
|
3,504
|
3,177
|
3,324
|
3,572
|
3,414
|
3,666
|
|
Other
expense
|
9,795
|
9,335
|
9,351
|
10,169
|
9,492
|
9,109
|
9,598
|
11,783
|
|
Income before income taxes
|
2,783
|
3,736
|
4,419
|
3,329
|
3,144
|
3,996
|
3,330
|
1,268
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
578
|
925
|
1,177
|
1,319
|
691
|
1,032
|
872
|
(34
)
|
|
Net earnings
|
2,205
|
2,811
|
3,242
|
2,010
|
2,453
|
2,964
|
2,458
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$
0.36
|
0.47
|
0.54
|
0.34
|
$
0.41
|
0.49
|
0.41
|
0.22
|
|
Diluted net earnings per share
|
$
0.36
|
0.46
|
0.53
|
0.34
|
$
0.40
|
0.48
|
0.40
|
0.22
|
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, Secretary and Treasurer, Denver Equipment 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,
DFH Holdings
Operator/General
Manager, 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
A. Joseph Lampron, Jr.
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
