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EXCEL - IDEA: XBRL DOCUMENT - PEOPLES BANCORP OF NORTH CAROLINA INCFinancial_Report.xls
EX-31.A - EXHIBIT (31)(A) - PEOPLES BANCORP OF NORTH CAROLINA INCex31_a.htm
EX-31.B - EXHIBIT (31)(B) - PEOPLES BANCORP OF NORTH CAROLINA INCex31_b.htm
EX-31 - EXHIBIT (32) - PEOPLES BANCORP OF NORTH CAROLINA INCex32.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
 
FORM 10-Q
 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:     March 31, 2015
 
OR
 
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
(State or other jurisdiction of incorporation or organization)
 
000-27205
56-2132396
(Commission File No.)
(IRS Employer Identification No.)
 
518 West C Street, Newton, North Carolina
28658
(Address of principal executive offices)
(Zip Code)
 
(828) 464-5620
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes
  X
No
   
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). 
 
Yes
  X
No
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerate Filer
   
Accelerated Filer
   
Non-Accelerated Filer
   
 
Smaller Reporting Company
X
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).
 
Yes
 
No
  X  
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
5,612,588 shares of common stock, outstanding at April 30, 2015.
 
 
 
 

 
 
 
INDEX
         
PART I.
FINANCIAL INFORMATION
PAGE(S)
 
         
Item 1.
 
Financial Statements
   
         
   
Consolidated Balance Sheets at March 31, 2015 (Unaudited) and
   
   
December 31, 2014 (Audited)
3
 
         
   
Consolidated Statements of Earnings for the three months ended March
   
   
31, 2015 and 2014 (Unaudited)
4
 
         
   
Consolidated Statements of Comprehensive Income for the three months
   
   
ended March 31, 2015 and 2014 (Unaudited)
5
 
         
   
Consolidated Statements of Cash Flows for the three months ended March
   
   
31, 2015 and 2014 (Unaudited)
6-7
 
         
   
Notes to Consolidated Financial Statements (Unaudited)
8-23
 
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition
   
   
and Results of Operations
24-36
 
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
37
 
         
Item 4T.
 
Controls and Procedures
38
 
         
PART II.
OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
39
 
Item 1A.
 
Risk Factors
39
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
39
 
Item 3.
 
Defaults upon Senior Securities
39
 
Item 5.
 
Other Information
39
 
Item 6.
 
Exhibits
39-42
 
Signatures
 
43
 
Certifications
 
44-46
 
 
 
 
Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared.  These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Factors that could cause actual results to differ  include, but are not limited to, (1) competition in the markets served by 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 environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to, those described in Peoples Bancorp of North Carolina, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014.

 
2

 
 
 
PART I.
FINANCIAL INFORMATION
     
Item 1.
Financial Statements
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
           
Consolidated Balance Sheets
           
March 31, 2015 and December 31, 2014
           
(Dollars in thousands)
 
March 31,
 
December 31,
Assets
2015
 
2014
 
(Unaudited)
 
(Audited)
           
Cash and due from banks, including reserve requirements
$ 47,730       51,213  
of $11,391 and $12,569
             
Interest-bearing deposits
  19,783       17,885  
Cash and cash equivalents
  67,513       69,098  
               
Investment securities available for sale
  282,575       281,099  
Other investments
  3,912       4,031  
Total securities
  286,487       285,130  
               
Mortgage loans held for sale
  806       1,375  
               
Loans
  660,477       651,891  
Less allowance for loan losses
  (10,843   )   (11,082 )
Net loans
  649,634       640,809  
               
Premises and equipment, net
  16,745       17,000  
Cash surrender value of life insurance
  14,229       14,125  
Other real estate
  3,424       2,016  
Accrued interest receivable and other assets
  10,617       10,941  
Total assets
$ 1,049,455       1,040,494  
               
Liabilities and Shareholders' Equity
             
               
Deposits:
             
Noninterest-bearing demand
$ 217,603       210,758  
NOW, MMDA & savings
  432,541       407,504  
Time, $250,000 or more
  36,237       47,872  
Other time
  143,579       148,566  
Total deposits
  829,960       814,700  
               
Securities sold under agreements to repurchase
  38,702       48,430  
FHLB borrowings
  50,000       50,000  
Junior subordinated debentures
  20,619       20,619  
Accrued interest payable and other liabilities
  8,660       8,080  
Total liabilities
  947,941       941,829  
               
Commitments
             
               
Shareholders' equity:
             
               
Series A preferred stock, $1,000 stated value; authorized
             
5,000,000 shares; no shares issued and outstanding
  -         -    
Common stock, no par value; authorized
             
20,000,000 shares; issued and outstanding 5,612,588
             
shares at March 31, 2015 and December 31, 2014
  48,088       48,088  
Retained earnings
  47,110       45,124  
Accumulated other comprehensive income
  6,316       5,453  
Total shareholders' equity
  101,514       98,665  
               
Total liabilities and shareholders' equity
$ 1,049,455       1,040,494  
               
See accompanying Notes to Consolidated Financial Statements.
             
 
 
 
3

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
           
Consolidated Statements of Earnings
           
Three Months Ended March 31, 2015 and 2014
           
(Dollars in thousands, except per share amounts)
           
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
           
Interest income:
         
Interest and fees on loans
$ 7,593       7,401  
Interest on due from banks
  10       12  
Interest on investment securities:
             
U.S. Government sponsored enterprises
  713       847  
State and political subdivisions
  1,163       1,177  
Other
  88       108  
Total interest income
  9,567       9,545  
               
Interest expense:
             
NOW, MMDA & savings deposits
  111       126  
Time deposits
  247       334  
FHLB borrowings
  418       545  
Junior subordinated debentures
  97       96  
Other
  11       10  
Total interest expense
  884       1,111  
               
Net interest income
  8,683       8,434  
               
Provision for (reduction of provision for) loan losses
  173       (349 )
               
Net interest income after provision for loan losses
  8,510       8,783  
               
Non-interest income:
             
Service charges
  1,134       1,129  
Other service charges and fees
  355       419  
Gain on sale of securities
  -         26  
Mortgage banking income
  239       104  
Insurance and brokerage commissions
  161       198  
Gain/(loss) on sale and write-down of
             
other real estate
  87       (162 )
Miscellaneous
  1,269       1,127  
Total non-interest income
  3,245       2,841  
               
Non-interest expense:
             
Salaries and employee benefits
  4,801       4,276  
Occupancy
  1,483       1,521  
Other
  2,464       2,326  
Total non-interest expense
  8,748       8,123  
               
Earnings before income taxes
  3,007       3,501  
               
Income tax expense
  679       923  
               
Net earnings
  2,328       2,578  
               
Basic and diluted net earnings per share
$ 0.41       0.46  
Cash dividends declared per share
$ 0.06       0.04  
               
               
See accompanying Notes to Consolidated Financial Statements.
             
 
 
 
4

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
           
Consolidated Statements of Comprehensive Income
           
Three Months Ended March 31, 2015 and 2014
           
(Dollars in thousands)
           
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
           
Net earnings
$ 2,328     2,578  
             
Other comprehensive income:
           
Unrealized holding gains on securities
           
available for sale
  1,413     3,860  
Reclassification adjustment for gains on
           
securities available for sale
           
included in net earnings
  -       (26 )
             
Total other comprehensive income,
           
before income taxes
  1,413     3,834  
             
Income tax expense related to other
           
comprehensive income:
           
             
Unrealized holding gains on securities
           
available for sale
  550     1,503  
Reclassification adjustment for gains on sales
           
of securities available for sale
           
included in net earnings
  -       (10 )
             
Total income tax expense related to
           
other comprehensive income
  550     1,493  
             
Total other comprehensive income,
           
net of tax
  863     2,341  
             
Total comprehensive income
$ 3,191     4,919  
             
See accompanying Notes to Consolidated Financial Statements.
           
 
 
 
5

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
         
Consolidated Statements of Cash Flows
         
Three Months Ended March 31, 2015 and 2014
         
(Dollars in thousands)
         
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
         
Cash flows from operating activities:
       
Net earnings
$ 2,328   2,578  
Adjustments to reconcile net earnings to
         
net cash provided (used) by operating activities:
         
Depreciation, amortization and accretion
  1,471   1,712  
Provision for (reduction of provision for) loan losses
  173   (349 )
Gain on sale of investment securities
  -     (26 )
(Gain)/loss on sale of other real estate
  (87 ) 10  
Write-down of other real estate
  -     152  
Restricted stock expense
  117   82  
Change in:
         
Mortgage loans held for sale
  569   (138 )
Cash surrender value of life insurance
  (104 ) (103 )
Other assets
  (344 ) (1,428 )
Other liabilities
  580   (9,709 )
           
Net cash provided (used) by operating activities
  4,703   (7,219 )
           
Cash flows from investing activities:
         
Purchases of investment securities available for sale
  (7,359 ) (10,566 )
Proceeds from calls, maturities and paydowns of investment securities
         
available for sale
  6,377   9,738  
Proceeds from sales of investment securities available for sale
 
-   
  677  
Purchases of FHLB stock
  (6 ) -    
FHLB stock redemption
  125   284  
Net change in loans
  (11,601 ) 500  
Purchases of premises and equipment
  (297 ) (627 )
Proceeds from sales of other real estate and repossessions
  1,283   482  
           
Net cash (used) provided by investing activities
  (11,478 ) 488  
           
Cash flows from financing activities:
         
Net change in deposits
  15,260   11,174  
Net change in securities sold under agreements to repurchase
  (9,728 ) (2,077 )
Cash dividends paid on common stock
  (342 ) (227 )
           
Net cash provided by financing activities
  5,190   8,870  
           
Net change in cash and cash equivalents
  (1,585 ) 2,139  
           
Cash and cash equivalents at beginning of period
  69,098   76,773  
           
Cash and cash equivalents at end of period
$ 67,513   78,912  
 
 
 
6

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
       
Consolidated Statements of Cash Flows, continued
       
Three Months Ended March 31, 2015 and 2014
       
(Dollars in thousands)
       
       
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
       
Supplemental disclosures of cash flow information:
     
Cash paid during the period for:
     
Interest
$ 904   1,267
Income taxes
$ -     -  
         
Noncash investing and financing activities:
       
Change in unrealized gain on investment securities
       
 available for sale, net
$ 863   2,341
Transfers of loans to other real estate and repossessions
$ 2,603   2,246
         
See accompanying Notes to Consolidated Financial Statements.
       
 
 
 
7

 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1)
    Summary of Significant Accounting Policies

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

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2014) are unaudited.  In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”).  Actual results could differ from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance.  A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2014 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 7, 2015 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements
In January 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-01, (Subtopic 225-20):  Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.  ASU No. 2015-01 eliminates the concept of extraordinary items from GAAP.  ASU No. 2015-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  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 2015, FASB issued ASU No. 2015-02, (Topic 810):  Amendments to the Consolidation Analysis.  ASU No. 2015-02 provides amendments to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities.  Stakeholders expressed concerns that GAAP might require a reporting entity to consolidate another legal entity in situations in which the reporting entity’s contractual rights do not give it the ability to act primarily on its own behalf, the reporting entity does not hold a majority of the legal entity’s voting rights, or the reporting entity is not exposed to a majority of the legal entity’s economic benefits or obligations.  ASU No. 2015-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  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 April 2015, FASB issued ASU No. 2015-03, (Subtopic 835-30):  Simplifying the Presentation of Debt Issuance Costs.  ASU No. 2015-03 provides guidance that will require debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 affects disclosures related to debt issuance costs but does not affect existing recognition and measurement guidance for these items.  ASU No. 2015-03 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  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 April 2015, FASB issued ASU No. 2015-04, (Topic 715):  Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets.  ASU No. 2015-04 simplifies the fair value measurement of defined benefit pension plans and other retirement plans for entities with a fiscal year-end that does not coincide with a month-end.   ASU No. 2015-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
 
 
8

 
 
In April 2015, FASB issued ASU No. 2015-05, (Subtopic 350-40):  Customer’s Accounting for Fees Paid in a Cloud Computing Arrangements.  ASU No. 2015-05 provides guidance on a customer’s accounting for fees paid in a cloud computing arrangement, which includes software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements.  ASU No. 2015-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.  The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

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

(2)
    Investment Securities

Investment securities available for sale at March 31, 2015 and December 31, 2014 are as follows:

(Dollars in thousands)
             
 
March 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Mortgage-backed securities
$ 86,230   2,331   8   88,553
U.S. Government
               
sponsored enterprises
  36,977   526   141   37,362
State and political subdivisions
  145,568   7,044   138   152,474
Corporate bonds
  1,957   11   5   1,963
Trust preferred securities
  750   -     -     750
Equity securities
  748   725   -     1,473
Total
$ 272,230   10,637   292   282,575
                 
(Dollars in thousands)
               
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
Mortgage-backed securities
$ 88,496   1,766   52   90,210
U.S. Government
               
sponsored enterprises
  33,766   418   136   34,048
State and political subdivisions
  145,938   6,534   226   152,246
Corporate bonds
  2,469   16   18   2,467
Trust preferred securities
  750   -     -     750
Equity securities
  748   630   -     1,378
Total
$ 272,167   9,364   432   281,099
 
The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2015 and December 31, 2014 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.
 
(Dollars in thousands)
                     
 
March 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
 Losses
 
Fair Value
 
Unrealized
Losses
Mortgage-backed securities
$ 127   -     2,954   8   3,081   8
U.S. Government
                       
sponsored enterprises
  2,549   21   9,639   120   12,188   141
State and political subdivisions
  6,328   30   6,784   108   13,112   138
Corporate bonds
  -     -     533   5   533   5
Total
$ 9,004   51   19,910   241   28,914   292
 
 
 
9

 

 
(Dollars in thousands)
                     
 
December 31, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
 
Unrealized Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Mortgage-backed securities
$ 436   1   2,963   51   3,399   52
U.S. Government
                       
sponsored enterprises
  2,996   4   9,850   132   12,846   136
State and political subdivisions
  567   1   14,998   225   15,565   226
Corporate bonds
  -     -     525   18   525   18
Total
$ 3,999   6   28,336   426   32,335   432
 
At March 31, 2015, unrealized losses in the investment securities portfolio relating to debt securities totaled $292,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the March 31, 2015 tables above, 14 out of 173 securities issued by state and political subdivisions contained unrealized losses, seven out of 82 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses, and one out of three securities issued by corporations contained unrealized losses.  These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

The amortized cost and estimated fair value of investment securities available for sale at March 31, 2015, 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.

March 31, 2015
     
(Dollars in thousands)
     
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$ 4,399   4,412
Due from one to five years
  50,121   52,794
Due from five to ten years
  111,462   115,413
Due after ten years
  19,270   19,930
Mortgage-backed securities
  86,230   88,553
Equity securities
  748   1,473
Total
$ 272,230   282,575
 
No securities available for sale were sold during the three months ended March 31, 2015.  Proceeds from sales of securities available for sale during the three months ended March 31, 2014 were $677,000 and resulted in gross gains of $26,000.
 
Securities with a fair value of approximately $85.9 million and $89.9 million at March 31, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes as required by law.
 
 
10

 
 
 
(3)
    Loans

Major classifications of loans at March 31, 2015 and December 31, 2014 are summarized as follows:

(Dollars in thousands)
     
 
March 31, 2015
 
December 31, 2014
Real estate loans:
     
Construction and land development
$ 57,247   57,617
Single-family residential
  207,113   206,417
Single-family residential -
       
Banco de la Gente stated income
  46,272   47,015
Commercial
  227,471   228,558
Multifamily and farmland
  12,331   12,400
Total real estate loans
  550,434   552,007
         
Loans not secured by real estate:
       
Commercial loans
  87,055   76,262
Farm loans
  5   7
Consumer loans
  9,857   10,060
All other loans
  13,126   13,555
         
Total loans
  660,477   651,891
         
Less allowance for loan losses
  10,843   11,082
         
Total net loans
$ 649,634   640,809
 
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 March 31, 2015, construction and land development loans comprised approximately 9% 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 March 31, 2015, single-family residential loans comprised approximately 38% of the Bank’s total loan portfolio, and include Banco de la Gente single-family residential stated income loans, which were approximately 7% 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 March 31, 2015, commercial real estate loans comprised approximately 34% 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 March 31, 2015, commercial loans comprised approximately 13% of the Bank’s total loan portfolio.
 
 
 
11

 
 
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 March 31, 2015 and December 31, 2014:

March 31, 2015
           
(Dollars in thousands)
           
 
Loans 30-89
Days Past
Due
 
Loans 90 or
More Days
Past Due
 
Total
Past Due
Loans
 
Total
Current
Loans
 
Total
Loans
 
Accruing
Loans 90 or
More Days
Past Due
Real estate loans:
                     
Construction and land development
$ 62   257   319   56,928   57,247   -  
Single-family residential
  4,313   1,286   5,599   201,514   207,113   -  
Single-family residential -
                       
Banco de la Gente stated income
  5,727   442   6,169   40,103   46,272   -  
Commercial
  1,875   381   2,256   225,215   227,471   -  
Multifamily and farmland
  -     -     -     12,331   12,331   -  
Total real estate loans
  11,977   2,366   14,343   536,091   550,434   -  
                         
Loans not secured by real estate:
                       
Commercial loans
  162   -     162   86,893   87,055   -  
Farm loans
  -     -     -     5   5   -  
Consumer loans
  97   9   106   9,751   9,857   -  
All other loans
  -     -     -     13,126   13,126   -  
Total loans
$ 12,236   2,375   14,611   645,866   660,477   -  
                         
                         
December 31, 2014
                       
(Dollars in thousands)
                       
 
Loans 30-89
Days Past
Due
 
Loans 90 or
More Days
Past Due
 
Total
Past Due
Loans
 
Total
Current
Loans
 
Total
Loans
 
Accruing
 Loans 90 or
More Days
Past Due
Real estate loans:
                       
Construction and land development
$ 294   3,540   3,834   53,783   57,617   -  
Single-family residential
  5,988   268   6,256   200,161   206,417   -  
Single-family residential -
                       
Banco de la Gente stated income
  8,998   610   9,608   37,407   47,015   -  
Commercial
  3,205   366   3,571   224,987   228,558   -  
Multifamily and farmland
  85   -     85   12,315   12,400   -  
Total real estate loans
  18,570   4,784   23,354   528,653   552,007   -  
                         
Loans not secured by real estate:
                       
Commercial loans
  241   49   290   75,972   76,262   -  
Farm loans
  -     -     -     7   7   -  
Consumer loans
  184   -     184   9,876   10,060   -  
All other loans
  -     -     -     13,555   13,555   -  
Total loans
$ 18,995   4,833   23,828   628,063   651,891   -  
 
 
 
12

 
 
The following table presents the Company’s non-accrual loans as of March 31, 2015 and December 31, 2014:

(Dollars in thousands)
     
 
March 31, 2015
 
December 31, 2014
Real estate loans:
     
Construction and land development
$ 565   3,854
Single-family residential
  3,891   2,370
Single-family residential -
       
Banco de la Gente stated income
  1,432   1,545
Commercial
  2,755   2,598
Multifamily and farmland
  99   110
Total real estate loans
  8,742   10,477
         
Loans not secured by real estate:
       
Commercial loans
  111   176
Consumer loans
  81   75
Total
$ 8,934   10,728
 
At each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers that also perform appraisals for other companies.  Factors, including the assumptions and techniques utilized by the appraiser, are considered by management.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows.  If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Accruing impaired loans were $25.9 million, $25.6 million and $28.8 million at March 31, 2015, December 31, 2014 and March 31, 2014, respectively.  Interest income recognized on accruing impaired loans was $335,000, $356,000 and $1.3 million for the three months ended March 31, 2015, the three months ended March 31, 2014 and the year ended December 31, 2014, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present the Company’s impaired loans as of March 31, 2015 and December 31, 2014:

March 31, 2015
             
(Dollars in thousands)
             
                       
 
Unpaid
Contractual
Principal
Balance
 
Recorded
 Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Recorded
Investment
in Impaired
Loans
 
Related
Allowance
 
Average
Outstanding
 Impaired
Loans
Real estate loans:
                     
Construction and land development
$ 1,174   266   647   913   35   2,554
Single-family residential
  9,169   2,092   6,496   8,588   170   8,246
Single-family residential -
                       
Banco de la Gente stated income
  20,886   -     20,310   20,310   1,179   19,764
Commercial
  4,824   1,794   2,701   4,495   256   4,423
Multifamily and farmland
  102   -   100   100   1   105
Total impaired real estate loans
  36,155   4,152   30,254   34,406   1,641   35,092
                         
Loans not secured by real estate:
                       
Commercial loans
  152   -     136   136   3   168
Consumer loans
  317   -     310   310   4   312
Total impaired loans
$ 36,624   4,152   30,700   34,852   1,648   35,572
 
 
 
13

 
 
 
December 31, 2014
           
(Dollars in thousands)
           
                       
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
With No
Allowance
 
Recorded
Investment
With
Allowance
 
Recorded
Investment
in Impaired
Loans
 
Related
Allowance
 
Average
Outstanding
Impaired
Loans
Real estate loans:
                     
Construction and land development
$ 5,481   3,639   555   4,194   31   5,248
Single-family residential
  6,717   933   5,540   6,473   154   7,430
Single-family residential -
                       
Banco de la Gente stated income
  21,243   -     20,649   20,649   1,191   19,964
Commercial
  4,752   1,485   2,866   4,351   272   4,399
Multifamily and farmland
  111   -     110   110   1   154
Total impaired real estate loans
  38,304   6,057   29,720   35,777   1,649   37,195
                         
Loans not secured by real estate:
                       
Commercial loans
  218   -     201   201   4   641
Farm loans (non RE)
          -              
Consumer loans
  318   -     313   313   5   309
All other loans (not secured by real estate)
  -     -     -     -     -     -  
Total impaired loans
$ 38,840   6,057   30,234   36,291   1,658   38,145
 
Changes in the allowance for loan losses for the three months ended March 31, 2015 and 2014 were as follows:

(Dollars in thousands)
                                       
 
Real Estate Loans
                     
 
Construction
and Land
Development
 
Single-
Family
Residential
 
Single-
Family
Residential - Banco de la
Gente
Stated
Income
 
Commercial
 
Multifamily
and
Farmland
 
Commercial
 
Farm
 
Consumer
and All
Other
 
Unallocated
 
Total
 
Three months ended March 31, 2015
                                     
Allowance for loan losses:
                                       
Beginning balance
$ 2,785   2,566   1,610   1,902   7   1,098   -   233   881   11,082  
Charge-offs
  (88 ) (291 ) (42 ) (2 ) -   -   -   (107 ) -   (530 )
Recoveries
  5   6   22   5   -   36   -   44   -   118  
Provision
  56   318   (4 ) (119 ) (1 ) 47   -   38   (162 ) 173  
Ending balance
$ 2,758   2,599   1,586   1,786   6   1,181   -   208   719   10,843  
                                           
Allowance for loan losses March 31, 2015:
                                     
Ending balance: individually
                                         
evaluated for impairment
$ -   82   1,145   245   -   -   -   -   -   1,472  
Ending balance: collectively
                                         
evaluated for impairment
  2,758   2,517   441   1,541   6   1,181   -   208   719   9,371  
Ending balance
$ 2,758   2,599   1,586   1,786   6   1,181   -   208   719   10,843  
                                           
Loans March 31, 2015:
                                         
Ending balance
$ 57,247   207,113   46,272   227,471   12,331   87,055   5   22,983   -   660,477  
                                           
Ending balance: individually
                                         
evaluated for impairment
$ 266   3,448   18,655   3,633   -   -   -   -   -   26,002  
Ending balance: collectively
                                         
evaluated for impairment
$ 56,981   203,665   27,617   223,838   12,331   87,055   5   22,983   -   634,475  
 
 
 
14

 
 
 
(Dollars in thousands)
                                       
 
Real Estate Loans
                     
 
Construction
 and Land
Development
 
Single-
Family
Residential
 
Single-
Family
Residential -
Banco de la
Gente
Stated
Income
 
Commercial
 
Multifamily
and
Farmland
 
Commercial
 
Farm
 
Consumer
and All
Other
 
Unallocated
 
Total
 
Three months ended March 31, 2014
                                     
Allowance for loan losses:
                                       
Beginning balance
$ 3,218   3,123   1,863   2,219   37   1,069   -   245   1,727   13,501  
Charge-offs
  (260 ) (22 ) (32 ) (111 ) -   (12 ) -   (138 ) -   (575 )
Recoveries
  279   9   12   60   -   5   -   36   -   401  
Provision
  (104 ) 22   (76 ) 28   (1 ) (117 ) -   87   (188 ) (349 )
Ending balance
$ 3,133   3,132   1,767   2,196   36   945   -   230   1,539   12,978  
                                           
Allowance for loan losses March 31, 2014:
                                     
Ending balance: individually
                                         
evaluated for impairment
$ -   68   1,187   174   -   -   -   -   -   1,429  
Ending balance: collectively
                                         
evaluated for impairment
  3,133   3,064   580   2,022   36   945   -   230   1,539   11,549  
Ending balance
$ 3,133   3,132   1,767   2,196   36   945   -   230   1,539   12,978  
                                           
Loans March 31, 2014:
                                         
Ending balance
$ 61,162   196,447   48,926   211,882   11,566   65,456   16   22,585   -   618,040  
                                           
Ending balance: individually
                                         
evaluated for impairment
$ 5,464   3,220   19,625   3,577   -   253   -   257   -   32,396  
Ending balance: collectively
                                         
evaluated for impairment
$ 55,698   193,227   29,301   208,305   11,566   65,203   16   22,328   -   585,644  
 
The provision for loan losses for the three months ended March 31, 2015 was an expense of $173,000, as compared to a credit of $349,000 for the three months ended March 31, 2014.  The increase in the provision for loan losses is primarily attributable to a $42.5 million increase in loans from March 31, 2014 to March 31, 2015 and a $238,000 increase in net charge-offs during the three months ended March 31, 2015, as compared to the same period one year ago.

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

·  
Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists.  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 as Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·  
Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be realized in the future.  Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.
 
 
 
15

 
 
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of March 31, 2015 and December 31, 2014:

March 31, 2015
                                     
(Dollars in thousands)
                                     
 
Real Estate Loans
                   
 
Construction
and Land
Development
 
Single-
Family
Residential
 
Single-
Family
Residential -
Banco de la
Gente
Stated
Income
 
Commercial
 
Multifamily
and
Farmland
 
Commercial
 
Farm
 
Consumer
 
All Other
 
Total
                                       
1- Excellent Quality
$ -   13,705   -   -   -   1,026   -   1,245   -   15,976
2- High Quality
  7,768   76,955   -   38,374   231   26,199   -   3,465   1,798   154,790
3- Good Quality
  26,737   74,746   20,561   140,510   8,978   47,317   5   4,494   10,392   333,740
4- Management Attention
  12,918   29,884   12,714   38,734   369   11,995   -   514   936   108,064
5- Watch
  9,176   4,619   5,677   5,706   2,653   379   -   47   -   28,257
6- Substandard
  648   7,204   7,320   4,147   100   139   -   92   -   19,650
7- Doubtful
  -   -   -   -   -   -   -   -   -   -
8- Loss
  -   -   -   -   -   -   -   -   -   -
Total
$ 57,247   207,113   46,272   227,471   12,331   87,055   5   9,857   13,126   660,477
                                         
                                         
                                         
December 31, 2014
                                       
(Dollars in thousands)
                                       
 
Real Estate Loans
                   
 
Construction
and Land
Development
 
Single-
Family
Residential
 
Single-
Family
Residential -
Banco de la
Gente
Stated
Income
 
Commercial
 
Multifamily
and
Farmland
 
Commercial
 
Farm
 
Consumer
 
All Other
 
Total
                                         
1- Excellent Quality
$ -   15,099   -   -   -   924   -   1,232   -   17,255
2- High Quality
  6,741   74,367   -   39,888   241   18,730   -   3,576   1,860   145,403
3- Good Quality
  24,641   74,453   21,022   142,141   8,376   44,649   7   4,549   8,055   327,893
4- Management Attention
  13,013   30,954   12,721   36,433   1,001   11,312   -   566   3,640   109,640
5- Watch
  9,294   5,749   5,799   6,153   2,672   383   -   46   -   30,096
6- Substandard
  3,928   5,795   7,473   3,943   110   264   -   87   -   21,600
7- Doubtful
  -   -   -   -   -   -   -   -   -   -
8- Loss
  -   -   -   -   -   -   -   4   -   4
Total
$ 57,617   206,417   47,015   228,558   12,400   76,262   7   10,060   13,555   651,891
 
Total TDR loans amounted to $5.5 million and $15.0 million at March 31, 2015 and December 31, 2014, 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 $146,000 and $1.4 million in performing loans classified as TDR loans at March 31, 2015 and December 31, 2014, respectively.

The following tables present an analysis of loan modifications during the three months ended March 31, 2015 and 2014:

Three months ended March 31, 2015
         
(Dollars in thousands)
         
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
 Investment
 
Post-Modification Outstanding
Recorded
Investment
Real estate loans
         
Single-family residential
1   $ 146   146
Total real estate TDR loans
1     146   146
             
Total TDR loans
1   $ 146   146
 
 
 
16

 
 
 
Three months ended March 31, 2014
         
(Dollars in thousands)
         
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification Outstanding
Recorded
Investment
Real estate loans
         
Construction and land development
1   $ 316   316
    Single family residential 1      737    737
Single-family residential -
           
Banco de la Gente stated income
6     497   497
Total real estate TDR loans
8     1,550   1,550
             
Total TDR loans
8   $ 1,550   1,550
 
(4)
    Net Earnings Per Share
 
Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share.  The average market price during the year is used to compute equivalent shares.

The reconciliation of the amounts used in the computation of both “basic earnings per share” and “diluted earnings per share” for the three months ended March 31, 2015 and 2014 is as follows:

For the three months ended March 31, 2015
         
 
Net Earnings
 (Dollars in
thousands)
 
Shares
 
Per Share
Amount
           
Basic earnings per share
$ 2,328   5,612,588   $ 0.41
Effect of dilutive securities:
             
Stock options
  -     38,470      
Diluted earnings per share
$ 2,328   5,651,058   $ 0.41