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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-32 - 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:     September 30, 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.
5,515,738 shares of common stock, outstanding at October 31, 2015.

 
INDEX   
       
PART I.
FINANCIAL INFORMATION
PAGE(S)
       
Item 1.
 
Financial Statements
 
       
   
Consolidated Balance Sheets at September 30, 2015 (Unaudited) and
 
   
December 31, 2014 (Audited)
3
       
   
Consolidated Statements of Earnings for the three and nine months ended
 
   
September 30, 2015 and 2014 (Unaudited)
4
       
   
Consolidated Statements of Comprehensive Income for the three and nine
 
   
months ended September 30, 2015 and 2014 (Unaudited)
5
       
   
Consolidated Statements of Changes in Shareholders' Equity for the nine
 
   
months ended September 30, 2015 and 2014 (Unaudited)
6
       
   
Consolidated Statements of Cash Flows for the nine months ended
 
   
September 30, 2015 and 2014 (Unaudited)
7-8
       
Item 2.  
Notes to Consolidated Financial Statements (Unaudited)
9-25
       
Item 3.
 
Management's Discussion  and Analysis of Financial Condition
 
   
and Results of Operations
26-39
       
Item 4T.
 
Quantitative and Qualitative Disclosures About Market Risk
40
       
 
 
Controls and Procedures
41
       
PART II.
OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
42
Item 1A.
 
Risk Factors
42
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
 
Defaults upon Senior Securities
42
Item 5.
 
Other Information
42
Item 6.
 
Exhibits
43-45
Signatures
   
46
Certifications
   
47-49

 
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    
        
September 30, 2015 and December 31, 2014    
         
(Dollars in thousands)    
   
September 30,
   
December 31,
 
Assets
 
2015
   
2014
 
   
(Unaudited)
   
(Audited)
 
         
Cash and due from banks, including reserve requirements
 
$
39,681
     
51,213
 
of $13,301 at 9/30/15 and $12,569 at 12/31/14
               
Interest-bearing deposits
   
4,944
     
17,885
 
Cash and cash equivalents
   
44,625
     
69,098
 
                 
Investment securities available for sale
   
268,821
     
281,099
 
Other investments
   
3,912
     
4,031
 
Total securities
   
272,733
     
285,130
 
                 
Mortgage loans held for sale
   
1,679
     
1,375
 
                 
Loans
   
684,800
     
651,891
 
Less allowance for loan losses
   
(10,420
)
   
(11,082
)
Net loans
   
674,380
     
640,809
 
                 
Premises and equipment, net
   
16,831
     
17,000
 
Cash surrender value of life insurance
   
14,440
     
14,125
 
Other real estate
   
2,349
     
2,016
 
Accrued interest receivable and other assets
   
10,158
     
10,941
 
Total assets
 
$
1,037,195
     
1,040,494
 
                 
Liabilities and Shareholders' Equity
               
                 
Deposits:
               
Noninterest-bearing demand
 
$
217,517
     
210,758
 
NOW, MMDA & savings
   
423,917
     
407,504
 
Time, $250,000 or more
   
31,036
     
47,872
 
Other time
   
134,091
     
148,566
 
Total deposits
   
806,561
     
814,700
 
                 
Securities sold under agreements to repurchase
   
47,240
     
48,430
 
FHLB borrowings
   
50,000
     
50,000
 
Junior subordinated debentures
   
20,619
     
20,619
 
Accrued interest payable and other liabilities
   
9,868
     
8,080
 
Total liabilities
   
934,288
     
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 5,528,538
               
shares at 9/30/15, and 5,612,588 shares at 12/31/14
   
46,512
     
48,088
 
Retained earnings
   
51,442
     
45,124
 
Accumulated other comprehensive income
   
4,953
     
5,453
 
Total shareholders' equity
   
102,907
     
98,665
 
                 
Total liabilities and shareholders' equity
 
$
1,037,195
     
1,040,494
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
3

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     
                 
Consolidated Statements of Earnings        
                 
Three and Nine Months Ended September 30, 2015 and 2014       
                 
(Dollars in thousands, except per share amounts)        
                 
   
Three months ended
   
Nine months ended
 
   
September 30,  
   
September 30,  
 
   
2015
   
2014
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Interest income:
               
Interest and fees on loans
 
$
8,089
     
7,664
     
23,015
     
22,556
 
Interest on due from banks
   
4
     
18
     
21
     
42
 
Interest on investment securities:
                               
U.S. Government sponsored enterprises
   
633
     
646
     
1,959
     
2,298
 
States and political subdivisions
   
1,145
     
1,168
     
3,465
     
3,514
 
Other
   
76
     
87
     
245
     
294
 
Total interest income
   
9,947
     
9,583
     
28,705
     
28,704
 
                                 
Interest expense:
                               
NOW, MMDA & savings deposits
   
106
     
124
     
324
     
375
 
Time deposits
   
211
     
287
     
685
     
924
 
FHLB borrowings
   
443
     
556
     
1,294
     
1,650
 
Junior subordinated debentures
   
101
     
98
     
297
     
291
 
Other
   
13
     
11
     
34
     
33
 
Total interest expense
   
874
     
1,076
     
2,634
     
3,273
 
                                 
Net interest income
   
9,073
     
8,507
     
26,071
     
25,431
 
                                 
Provision for (reduction of provision for) loan losses
   
235
     
256
     
193
     
(27
)
                                 
Net interest income after provision for loan losses
   
8,838
     
8,251
     
25,878
     
25,458
 
                                 
Non-interest income:
                               
Service charges
   
1,193
     
1,303
     
3,498
     
3,655
 
Other service charges and fees
   
173
     
213
     
718
     
892
 
Gain on sale of securities
   
-  
     
240
     
-  
     
266
 
Mortgage banking income
   
300
     
256
     
810
     
548
 
Insurance and brokerage commissions
   
179
     
161
     
544
     
521
 
Gain/(loss) on sale and write-down of
                               
  other real estate
   
80
     
(234
)
   
246
     
(384
)
Miscellaneous
   
1,341
     
1,268
     
3,992
     
3,660
 
Total non-interest income
   
3,266
     
3,207
     
9,808
     
9,158
 
                                 
Non-interest expense:
                               
Salaries and employee benefits
   
4,596
     
4,301
     
13,683
     
12,784
 
Occupancy
   
1,611
     
1,489
     
4,577
     
4,476
 
Professional fees
   
163
     
378
     
590
     
824
 
Advertising and marketing
   
172
     
196
     
576
     
555
 
Debit card expense
   
256
     
225
     
737
     
667
 
FDIC insurance
   
162
     
169
     
510
     
565
 
Other
   
1,709
     
1,783
     
5,081
     
4,860
 
Total non-interest expense
   
8,669
     
8,541
     
25,754
     
24,731
 
                                 
Earnings before income taxes
   
3,435
     
2,917
     
9,932
     
9,885
 
                                 
Income tax expense
   
942
     
475
     
2,487
     
2,313
 
                                 
Net earnings
 
$
2,493
     
2,442
     
7,445
     
7,572
 
                                 
Basic net earnings per share
 
$
0.45
     
0.43
     
1.34
     
1.35
 
Diluted net earnings per share
 
$
0.45
     
0.43
     
1.32
     
1.34
 
Cash dividends declared per share
 
$
0.08
     
0.04
     
0.20
     
0.12
 
                                 
See accompanying Notes to Consolidated Financial Statements.
                         
                                 
 
4

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     
                 
Consolidated Statements of Comprehensive Income        
                 
Three and Nine Months Ended September 30, 2015 and 2014       
                 
 (Dollars in thousands)        
                 
   
Three months ended
   
Nine months ended
 
   
September 30,  
   
September 30,  
 
   
2015
   
2014
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                 
Net earnings
 
$
2,493
     
2,442
     
7,445
     
7,572
 
                                 
Other comprehensive income (loss):
                               
Unrealized holding (losses) gains on securities
                               
available for sale
   
1,167
     
1,788
     
(819
)
   
9,374
 
Reclassification adjustment for gains on
                               
securities available for sale
                               
included in net earnings
   
-  
     
(240
)
   
-  
     
(266
)
                                 
Total other comprehensive (loss) income,
                               
before income taxes
   
1,167
     
1,548
     
(819
)
   
9,108
 
                                 
Income tax (benefit) expense related to other
                               
comprehensive (loss) income:
                               
                                 
Unrealized holding (losses) gains on securities
                               
available for sale
   
455
     
696
     
(319
)
   
3,651
 
Reclassification adjustment for gains
                               
on securities available for sale
                               
included in net earnings
   
-  
     
(93
)
   
-  
     
(104
)
                                 
Total income tax expense (benefit) related to
                               
other comprehensive income (loss)
   
455
     
603
     
(319
)
   
3,547
 
                                 
Total other comprehensive (loss) income,
                               
net of tax
   
712
     
945
     
(500
)
   
5,561
 
                                 
Total comprehensive income
 
$
3,205
     
3,387
     
6,945
     
13,133
 
                                 
See accompanying Notes to Consolidated Financial Statements.
                         
 
5

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     
                     
Consolidated Statements of Changes in Shareholders' Equity       
                     
Nine Months Ended September 30, 2015 and 2014         
                     
(Dollars in thousands)          
                     
               
Accumulated
     
               
Other
     
  Common Stock Retained Comprehensive
   
Shares
   
Amount
   
Earnings
   
Income
   
Total
 
Balance, December 31, 2014
   
5,612,588
   
$
48,088
     
45,124
     
5,453
     
98,665
 
                                         
Common stock repurchase
   
(84,050
)
   
(1,576
)
   
-
     
-
     
(1,576
)
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(1,127
)
   
-
     
(1,127
)
Net earnings
   
-
     
-
     
7,445
     
-
     
7,445
 
Change in accumulated other
                                       
comprehensive loss, net of tax
   
-
     
-
     
-
     
(500
)
   
(500
)
Balance, September 30, 2015
   
5,528,538
   
$
46,512
     
51,442
     
4,953
     
102,907
 
                                         
Balance, December 31, 2013
   
5,613,495
   
$
48,133
     
36,758
     
(1,172
)
   
83,719
 
                                         
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(682
)
   
-
     
(682
)
Stock options exercised
   
3,630
     
37
     
-
     
-
     
37
 
Net earnings
   
-
     
-
     
7,572
     
-
     
7,572
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
5,561
     
5,561
 
Balance, September 30, 2014
   
5,617,125
   
$
48,170
     
43,648
     
4,389
     
96,207
 
                                         
See accompanying Notes to Consolidated Financial Statements.
                         
 
6

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES    
         
Consolidated Statements of Cash Flows    
         
Nine Months Ended September 30, 2015 and 2014    
         
(Dollars in thousands)    
         
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
 
         
Cash flows from operating activities:
       
Net earnings
 
$
7,445
     
7,572
 
Adjustments to reconcile net earnings to
               
net cash provided by operating activities:
               
Depreciation, amortization and accretion
   
4,523
     
5,254
 
Reduction of provision for loan losses
   
193
     
(27
)
Deferred income taxes
   
100
     
-  
 
Gain on sale of investment securities
   
-  
     
(266
)
Gain on sale of other real estate
   
(275
)
   
(43
)
Write-down of other real estate
   
29
     
427
 
Restricted stock expense
   
282
     
272
 
Originations of mortgage loans held for sale
   
(38,140
)
   
(28,382
)
Sales of mortgage loans held for sale
   
37,836
     
27,992
 
Change in:
               
Cash surrender value of life insurance
   
(315
)
   
(315
)
Other assets
   
792
     
(252
)
Other liabilities
   
1,788
     
229
 
                 
Net cash provided by operating activities
   
14,258
     
12,461
 
                 
Cash flows from investing activities:
               
Purchases of investment securities available for sale
   
(13,579
)
   
(25,439
)
Proceeds from calls, maturities and paydowns of investment securities
               
available for sale
   
17,984
     
29,263
 
Proceeds from sales of investment securities available for sale
   
4,250
     
20,202
 
Purchases of FHLB stock
   
(5
)
   
-  
 
FHLB stock redemption
   
125
     
284
 
Net change in loans
   
(38,098
)
   
(34,213
)
Purchases of premises and equipment
   
(1,549
)
   
(2,927
)
Proceeds from sales of other real estate and repossessions
   
4,173
     
3,230
 
                 
Net cash used by investing activities
   
(26,699
)
   
(9,600
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
(8,139
)
   
17,434
 
Net change in securities sold under agreements to repurchase
   
(1,190
)
   
1,624
 
Proceeds from FHLB borrowings
   
20,000
     
-  
 
Repayments of FHLB borrowings
   
(20,000
)
   
-  
 
Preferred stock repurchase
   
-  
     
(12,524
)
Stock options exercised
   
-  
     
37
 
Common stock repurchased
   
(1,576
)
   
-  
 
Cash dividends paid on common stock
   
(1,127
)
   
(682
)
                 
Net cash (used) provided by financing activities
   
(12,032
)
   
5,889
 
                 
Net change in cash and cash equivalents
   
(24,473
)
   
8,750
 
                 
Cash and cash equivalents at beginning of period
   
69,098
     
76,773
 
                 
Cash and cash equivalents at end of period
 
$
44,625
     
85,523
 
 
7

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES    
         
Consolidated Statements of Cash Flows, continued    
         
Nine Months Ended September 30, 2015 and 2014    
         
(Dollars in thousands)    
         
         
   
2015
   
2014
 
   
(Unaudited)
   
(Unaudited)
 
         
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Interest
 
$
2,624
     
3,290
 
Income taxes
 
$
1,514
     
1,637
 
                 
Noncash investing and financing activities:
               
Change in unrealized gain on investment securities
               
 available for sale, net
 
$
(500
)
   
5,561
 
Transfers of loans to other real estate and repossessions
 
$
4,274
     
3,774
 
Financed portion of sales of other real estate
 
$
60
     
282
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
8

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., Real Estate Advisory Services, Inc. ("REAS") and PB Real Estate Holdings, LLC (collectively called the "Company").  All significant intercompany balances and transactions have been eliminated in consolidation.

The Bank operates four offices focused on the Latino population under the name Banco de la Gente.  These offices are operated as a division of the Bank.  Banco de la Gente offers 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 and therefore is not considered a reportable segment of the Company.

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 June 2015, FASB issued ASU No. 2015-10, Technical Corrections and Improvements.  ASU No. 2015-10 contains amendments to clarify the Accounting Standards Codification ("ASC"), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.
9

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 September 30, 2015 and December 31, 2014 are as follows:

(Dollars in thousands)
             
   
September 30, 2015    
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
75,386
     
2,098
     
18
     
77,466
U.S. Government
                             
sponsored enterprises
   
38,793
     
505
     
129
     
39,169
State and political subdivisions
   
143,094
     
5,566
     
338
     
148,322
Corporate bonds
   
1,937
     
4
     
1
     
1,940
Trust preferred securities
   
750
     
-  
     
-  
     
750
Equity securities
   
748
     
426
     
-  
     
1,174
Total
 
$
260,708
     
8,599
     
486
     
268,821
                               
(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 September 30, 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)
                     
   
September 30, 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
 
$
2,278
     
18
     
-  
     
-  
     
2,278
     
18
U.S. Government
                                             
sponsored enterprises
   
2,319
     
20
     
9,064
     
109
     
11,383
     
129
State and political subdivisions
   
15,762
     
170
     
6,668
     
168
     
22,430
     
338
Corporate bonds
   
-  
     
-  
     
526
     
1
     
526
     
1
Total
 
$
20,359
     
208
     
16,258
     
278
     
36,617
     
486
 
10

 
(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 September 30, 2015, unrealized losses in the investment securities portfolio relating to debt securities totaled $486,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the September 30, 2015 tables above, 26 out of 173 securities issued by state and political subdivisions contained unrealized losses, seven out of 79 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 September 30, 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.

September 30, 2015
 
(Dollars in thousands)
 
 
Amortized
Cost
 
Estimated
Fair Value
Due within one year
$
4,431
 
4,440
Due from one to five years
 
57,499
 
60,100
Due from five to ten years
 
107,022
 
109,524
Due after ten years
 
15,622
 
16,117
Mortgage-backed securities
 
75,386
 
77,466
Equity securities
 
748
 
1,174
Total
$
260,708
 
268,821
 
No securities available for sale were sold during the nine months ended September 30, 2015.  Proceeds from sales of securities available for sale during the nine months ended September 30, 2014 totaled $20.2 million and resulted in gross gains of $291,000 and gross losses of $25,000.

Securities with a fair value of approximately $88.9 million and $89.9 million at September 30, 2015 and December 31, 2014, respectively, were pledged to secure public deposits and for other purposes as required by law.
11

(3)     Loans

Major classifications of loans at September 30, 2015 and December 31, 2014 are summarized as follows:
 
(Dollars in thousands)
       
   
September 30, 2015
   
December 31, 2014
 
Real estate loans:
       
Construction and land development
 
$
61,748
     
57,617
 
Single-family residential
   
218,365
     
206,417
 
Single-family residential -
               
Banco de la Gente stated income
   
44,433
     
47,015
 
Commercial
   
234,003
     
228,558
 
Multifamily and farmland
   
14,003
     
12,400
 
Total real estate loans
   
572,552
     
552,007
 
                 
Loans not secured by real estate:
               
Commercial loans
   
88,931
     
76,262
 
Farm loans
   
3
     
7
 
Consumer loans
   
10,047
     
10,060
 
All other loans
   
13,267
     
13,555
 
                 
Total loans
   
684,800
     
651,891
 
                 
Less allowance for loan losses
   
10,420
     
11,082
 
                 
Total net loans
 
$
674,380
     
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 September 30, 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 September 30, 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 6% 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 September 30, 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 September 30, 2015, commercial loans comprised approximately 13% of the Bank's total loan portfolio.
 
12

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 September 30, 2015 and December 31, 2014:

September 30, 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
 
$
383
     
273
     
656
     
61,092
     
61,748
     
197
Single-family residential
   
1,779
     
1,463
     
3,242
     
215,123
     
218,365
     
-  
Single-family residential -
                                             
Banco de la Gente stated income
   
1,588
     
246
     
1,834
     
42,599
     
44,433
     
-  
Commercial
   
602
     
142
     
744
     
233,259
     
234,003
     
-  
Multifamily and farmland
   
117
     
-  
     
117
     
13,886
     
14,003
     
-  
Total real estate loans
   
4,469
     
2,124
     
6,593
     
565,959
     
572,552
     
197
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
323
     
29
     
352
     
88,579
     
88,931
     
29
Farm loans
   
-  
     
-  
     
 -  
     
3
     
3
     
-  
Consumer loans
   
204
     
18
     
222
     
9,825
     
10,047
     
-  
All other loans
   
-  
     
-
     
-  
     
13,267
     
13,267
     
-  
Total loans
 
$
4,996
     
2,171
     
7,167
     
677,633
     
684,800
     
226
                                               
                                               
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
     
-  
 
13

The following table presents non-accrual loans as of September 30, 2015 and December 31, 2014:

(Dollars in thousands)
 
 
September 30, 2015
 
December 31, 2014
Real estate loans:
 
Construction and land development
$
209
 
3,854
Single-family residential
 
3,335
 
2,370
Single-family residential -
       
Banco de la Gente stated income
 
1,955
 
1,545
Commercial
 
2,598
 
2,598
     Multifamily and farmland
 
-  
 
110
Total real estate loans
 
8,097
 
10,477
         
Loans not secured by real estate:
       
Commercial loans
 
102
 
176
Consumer loans
 
67
 
75
Total
$
8,266
 
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 $25.5 million, $25.6 million and $26.8 million at September 30, 2015, December 31, 2014 and September 30, 2014, respectively.  Interest income recognized on accruing impaired loans was $968,000, $992,000 and $1.3 million for the nine months ended September 30, 2015, the nine months ended September 30, 2014 and the year ended December 31, 2014, respectively.  Interest income recognized on accruing impaired loans was $286,000 and $311,000 for the three months ended September 30, 2015 and 2014, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.
14

The following tables present impaired loans as of September 30, 2015 and December 31, 2014:
 
September 30, 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
 
$
643
     
241
     
289
     
530
     
19
     
1,638
Single-family residential
   
8,828
     
1,496
     
7,287
     
8,783
     
201
     
9,483
Single-family residential -
                                             
Banco de la Gente stated income
   
20,375
     
-  
     
19,572
     
19,572
     
1,155
     
19,114
Commercial
   
4,556
     
-  
     
4,172
     
4,172
     
234
     
4,948
Multifamily and farmland
   
96
     
-  
     
93
     
93
     
-  
     
100
Total impaired real estate loans
   
34,498
     
1,737
     
31,413
     
33,150
     
1,609
     
35,283
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
180
     
-  
     
154
     
154
     
3
     
149
Consumer loans
   
286
     
-  
     
280
     
280
     
5
     
298
Total impaired loans
 
$
34,964
     
1,737
     
31,847
     
33,584
     
1,617
     
35,730
                                               
                                               
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
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

 
15

Changes in the allowance for loan losses for the three and nine months ended September 30, 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
 
Nine months ended September 30, 2015
                   
Allowance for loan losses:
                   
Beginning balance
$
2,785
 
2,566
 
1,610
 
1,902
 
7
 
1,098
 
-
 
233
 
881
 
11,082
 
Charge-offs
 
(198
)
(447
)
(59
)
(62
)
-
 
(16
)
-
 
(394
)
-
 
(1,176
)
Recoveries
 
43
 
30
 
22
 
15
 
-
 
96
 
-
 
115
 
-
 
321
 
Provision
 
119
 
676
 
(113
)
75
 
(2
)
(297
)
-
 
258
 
(523
)
193
 
Ending balance
$
2,749
 
2,825
 
1,460
 
1,930
 
5
 
881