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EX-32 - EXHIBIT (32) - PEOPLES BANCORP OF NORTH CAROLINA INCex32.htm
EX-31.B - EXHIBIT (31)(B) - PEOPLES BANCORP OF NORTH CAROLINA INCex31_b.htm
EX-31.A - EXHIBIT (31)(A) - PEOPLES BANCORP OF NORTH CAROLINA INCex31_a.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, 2016
 
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
X
 
Non-Accelerated Filer
   
 
Smaller Reporting Company
               
 
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.
5,510,538 shares of common stock, outstanding at April 30, 2016.
 

INDEX    
         
PART I.
FINANCIAL INFORMATION
PAGE(S)
 
         
Item 1.
 
Financial Statements
   
         
   
Consolidated Balance Sheets at March 31, 2016 (Unaudited) and
   
   
December 31, 2015 (Audited)
3
 
         
   
Consolidated Statements of Earnings for the three months ended March
   
   
31, 2016 and 2015 (Unaudited)
4
 
         
   
Consolidated Statements of Comprehensive Income for the three months
   
   
ended March 31, 2016 and 2015 (Unaudited)
5
 
         
   
Consolidated Statements of Changes in Shareholders' Equity for the three
   
   
months ended March 31, 2016 and 2015 (Unaudited)
6
 
         
   
Consolidated Statements of Cash Flows for the three months ended March
   
   
31, 2016 and 2015 (Unaudited)
7-8
 
         
Item 2.
 
Notes to Consolidated Financial Statements (Unaudited)
9-23
 
         
Item 3.
 
Management's Discussion and Analysis of Financial Condition
   
   
and Results of Operations
24-33
 
         
Item 4T.
 
Quantitative and Qualitative Disclosures About Market Risk
34
 
         
   
Controls and Procedures
35
 
         
PART II.
OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
36
 
Item 1A.
 
Risk Factors
36
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
36
 
Item 3.
 
Defaults upon Senior Securities
37
 
Item 5.
 
Other Information
37
 
Item 6.
 
Exhibits
37-39
 
Signatures
   
40
 
Certifications
   
41-43
 
 
 
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, 2015.

2

 
PART I.                          FINANCIAL INFORMATION

Item 1.                              Financial Statements
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES   
         
Consolidated Balance Sheets    
         
March 31, 2016 and December 31, 2015    
         
(Dollars in thousands)    
   
March 31,
   
December 31,
 
Assets
 
2016
   
2015
 
   
(Unaudited)
   
(Audited)
 
         
Cash and due from banks, including reserve requirements
 
$
45,566
     
29,194
 
of $15,589 and $14,587
               
Interest-bearing deposits
   
30,826
     
10,569
 
Cash and cash equivalents
   
76,392
     
39,763
 
                 
Investment securities available for sale
   
264,092
     
268,530
 
Other investments
   
3,633
     
3,636
 
Total securities
   
267,725
     
272,166
 
                 
Mortgage loans held for sale
   
996
     
4,149
 
                 
Loans
   
693,033
     
689,091
 
Less allowance for loan losses
   
(9,116
)
   
(9,589
)
Net loans
   
683,917
     
679,502
 
                 
Premises and equipment, net
   
16,408
     
16,976
 
Cash surrender value of life insurance
   
14,652
     
14,546
 
Other real estate
   
85
     
739
 
Accrued interest receivable and other assets
   
10,169
     
10,640
 
Total assets
 
$
1,070,344
     
1,038,481
 
                 
Liabilities and Shareholders' Equity
               
                 
Deposits:
               
Noninterest-bearing demand
 
$
246,677
     
244,231
 
NOW, MMDA & savings
   
452,158
     
431,052
 
Time, $250,000 or more
   
26,352
     
26,891
 
Other time
   
127,930
     
130,001
 
Total deposits
   
853,117
     
832,175
 
                 
Securities sold under agreements to repurchase
   
36,056
     
27,874
 
FHLB borrowings
   
43,500
     
43,500
 
Junior subordinated debentures
   
20,619
     
20,619
 
Accrued interest payable and other liabilities
   
9,292
     
9,449
 
Total liabilities
   
962,584
     
933,617
 
                 
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 5,510,538
               
shares at March 31, 2016 and December 31, 2015
   
46,171
     
46,171
 
Retained earnings
   
55,189
     
53,183
 
Accumulated other comprehensive income
   
6,400
     
5,510
 
Total shareholders' equity
   
107,760
     
104,864
 
                 
Total liabilities and shareholders' equity
 
$
1,070,344
     
1,038,481
 
                 
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, 2016 and 2015    
         
(Dollars in thousands, except per share amounts)    
         
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
         
Interest income:
       
Interest and fees on loans
 
$
8,023
     
7,593
 
Interest on due from banks
   
17
     
10
 
Interest on investment securities:
               
U.S. Government sponsored enterprises
   
658
     
713
 
State and political subdivisions
   
1,127
     
1,163
 
Other
   
80
     
88
 
Total interest income
   
9,905
     
9,567
 
                 
Interest expense:
               
NOW, MMDA & savings deposits
   
120
     
111
 
Time deposits
   
162
     
247
 
FHLB borrowings
   
406
     
418
 
Junior subordinated debentures
   
113
     
97
 
Other
   
8
     
11
 
Total interest expense
   
809
     
884
 
                 
Net interest income
   
9,096
     
8,683
 
                 
Provision for (reduction of provision for) loan losses
   
(216
)
   
173
 
                 
Net interest income after provision for loan losses
   
9,312
     
8,510
 
                 
Non-interest income:
               
Service charges
   
1,041
     
1,134
 
Other service charges and fees
   
334
     
355
 
Mortgage banking income
   
369
     
239
 
Insurance and brokerage commissions
   
158
     
161
 
Gain/(loss) on sale and write-down of
               
other real estate
   
77
     
87
 
Miscellaneous
   
1,345
     
1,269
 
Total non-interest income
   
3,324
     
3,245
 
                 
Non-interest expense:
               
Salaries and employee benefits
   
4,581
     
4,801
 
Occupancy
   
1,754
     
1,483
 
Professional fees
   
935
     
256
 
Advertising
   
162
     
186
 
Debit card expense
   
266
     
235
 
FDIC Insurance
   
171
     
177
 
Other
   
1,623
     
1,610
 
Total non-interest expense
   
9,492
     
8,748
 
                 
Earnings before income taxes
   
3,144
     
3,007
 
                 
Income tax expense
   
691
     
679
 
                 
Net earnings
  $
2,453
     
2,328
 
                 
Basic net earnings per share
 
$
0.45
     
0.41
 
Diluted net earnings per share
 
$
0.44
     
0.41
 
Cash dividends declared per share
 
$
0.08
     
0.06
 
                 
                 
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, 2016 and 2015    
         
(Dollars in thousands)    
         
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
         
Net earnings
 
$
2,453
     
2,328
 
                 
Other comprehensive income:
               
Unrealized holding gains on securities
               
available for sale
   
1,472
     
1,413
 
                 
Total other comprehensive income,
               
before income taxes
   
1,472
     
1,413
 
                 
Income tax expense related to other
               
comprehensive income:
               
                 
Unrealized holding gains on securities
               
available for sale
   
582
     
550
 
                 
Total income tax expense related to
               
other comprehensive income
   
582
     
550
 
                 
Total other comprehensive income,
               
net of tax
   
890
     
863
 
                 
Total comprehensive income
 
$
3,343
     
3,191
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
5

PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES     
                     
Consolidated Statements of Changes in Shareholders' Equity       
                     
Three Months Ended March 31, 2016 and 2015         
                     
(Dollars in thousands)          
                     
               
Accumulated
     
               
Other
     
    Common Stock        Retained     Comprehensive        
   
Shares
   
Amount
   
Earnings
   
Income
   
Total
 
Balance, December 31, 2015
   
5,510,538
   
$
46,171
     
53,183
     
5,510
     
104,864
 
                                         
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(447
)
   
-
     
(447
)
Net earnings
   
-
     
-
     
2,453
     
-
     
2,453
 
Change in accumulated other
                                       
comprehensive loss, net of tax
   
-
     
-
     
-
     
890
     
890
 
Balance, March 31, 2016
   
5,510,538
   
$
46,171
     
55,189
     
6,400
     
107,760
 
                                         
Balance, December 31, 2014
   
5,612,588
   
$
48,088
     
45,124
     
5,453
     
98,665
 
                                         
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(342
)
   
-
      (342 )
Net earnings
   
-
     
-
     
2,328
     
-
     
2,328
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
863
     
863
 
Balance, March 31, 2015
   
5,612,588
   
$
48,088
     
47,110
     
6,316
     
101,514
 
                                         
See accompanying Notes to Consolidated Financial Statements.
                         
6

PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES    
         
Consolidated Statements of Cash Flows    
         
Three Months Ended March 31, 2016 and 2015    
         
(Dollars in thousands)    
         
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
         
Cash flows from operating activities:
       
Net earnings
 
$
2,453
     
2,328
 
Adjustments to reconcile net earnings to
               
net cash provided by operating activities:
               
Depreciation, amortization and accretion
   
1,475
     
1,471
 
(Reduction)/Provision for loan losses
   
(216
)
   
173
 
Deferred income taxes
   
(547
)
   
-
 
Gain on sale of other real estate
   
(79
)
   
(87
)
Write-down of other real estate
   
2
     
-
 
Restricted stock expense
   
70
     
117
 
Change in:
               
Mortgage loans held for sale
   
3,153
     
569
 
Cash surrender value of life insurance
   
(106
)
   
(104
)
Other assets
   
435
     
(344
)
Other liabilities
   
(227
)
   
580
 
                 
Net cash provided by operating activities
   
6,413
     
4,703
 
                 
Cash flows from investing activities:
               
Purchases of investment securities available for sale
   
(94
)
   
(7,359
)
Proceeds from sales, calls and maturities of investment securities
               
available for sale
   
40
     
505
 
Proceeds from paydowns of investment securities available for sale
   
5,130
     
5,872
 
Purchases of FHLB stock
   
-
     
(6
)
FHLB stock redemption
   
2
     
125
 
Net change in loans
   
(4,254
)
   
(11,601
)
Purchases of premises and equipment
   
(71
)
   
(297
)
Proceeds from sale of other real estate and repossessions
   
786
     
1,283
 
                 
Net cash provided (used) by investing activities
   
1,539
     
(11,478
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
20,942
     
15,260
 
Net change in securities sold under agreement to repurchase
   
8,182
     
(9,728
)
Cash dividends paid on common stock
   
(447
)
   
(342
)
                 
Net cash provided by financing activities
   
28,677
     
5,190
 
                 
Net change in cash and cash equivalents
   
36,629
     
(1,585
)
                 
Cash and cash equivalents at beginning of period
   
39,763
     
69,098
 
                 
Cash and cash equivalents at end of period
 
$
76,392
     
67,513
 
 
7

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES    
         
Consolidated Statements of Cash Flows, continued    
         
Three Months Ended March 31, 2016 and 2015    
         
(Dollars in thousands)    
         
         
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
         
Supplemental disclosures of cash flow information:
       
Cash paid during the period for:
       
Interest
 
$
809
     
904
 
Income taxes
 
$
397
     
-  
 
                 
Noncash investing and financing activities:
               
Change in unrealized gain on investment securities
               
 available for sale, net
 
$
890
     
863
 
Transfers of loans to other real estate and repossessions
 
$
55
     
2,603
 
                 
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 banking offices focused on the Latino population under the name Banco de la Gente ("Banco").  These offices are operated as a division of the Bank.  Banco 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 Bank operates one Banco loan production office in Durham County and one Banco loan production office in Forsyth County specifically designed to serve the growing Latino market.

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2015) 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 2015 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 5, 2016 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements
In January 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-01, (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  ASU No. 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In February 2016, FASB issued ASU No. 2016-02, (Topic 842):  Leases.  ASU No. 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  ASU No. 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In March 2016, FASB issued ASU No. 2016-07, (Topic 323):  Simplifying the Transition to the Equity Method of Accounting.  ASU No. 2016-07 eliminates the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence.  ASU No. 2016-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In March 2016, FASB issued ASU No. 2016-08, (Topic 606):  Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net).  ASU No. 2016-08 addresses how an entity should assess whether it is the principal or the agent in contracts that include three or more parties.  ASU No. 2016-08 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.
9

 
In March 2016, FASB issued ASU No. 2016-09, (Topic 718):  Improvements to Employee Share-Based Payment Accounting.  ASU No. 2016-09 was issued in an effort to improve the accounting for employee share-based payments.  ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016.  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 2016, FASB issued ASU No. 2016-10, (Topic 606):  Identifying Performance Obligations and Licensing. ASU No. 2016-10 clarifies guidance on the recognition of revenue from contracts with customers.  ASU No. 2016-10 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

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, 2016 and December 31, 2015 are as follows:

(Dollars in thousands)
             
   
March 31, 2016      
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
72,066
     
1,836
     
23
     
73,879
U.S. Government
                             
sponsored enterprises
   
37,021
     
622
     
126
     
37,517
State and political subdivisions
   
141,091
     
7,688
     
14
     
148,765
Corporate bonds
   
1,918
     
11
     
18
     
1,911
Trust preferred securities
   
750
     
-
     
-
     
750
Equity securities
   
748
     
522
     
-
     
1,270
Total
 
$
253,594
     
10,679
     
181
     
264,092
 
 
(Dollars in thousands)
             
   
December 31, 2015    
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
76,406
     
1,526
     
45
     
77,887
U.S. Government
                             
sponsored enterprises
   
38,173
     
399
     
155
     
38,417
State and political subdivisions
   
141,500
     
6,817
     
72
     
148,245
Corporate bonds
   
1,928
     
-
     
22
     
1,906
Trust preferred securities
   
750
     
-
     
-
     
750
Equity securities
   
748
     
577
     
-
     
1,325
Total
 
$
259,505
     
9,319
     
294
     
268,530
 
The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2016 and December 31, 2015 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.
10

 
(Dollars in thousands)
                     
   
March 31, 2016        
   
Less than 12 Months
   
12 Months or More
   
Total  
   
 
Fair Value
   
Unrealized
Losses
   
 
Fair Value
   
Unrealized
Losses
   
 
Fair Value
   
Unrealized
Losses
Mortgage-backed securities
 
$
4,277
     
23
     
-
     
-
     
4,277
     
23
U.S. Government
                                             
sponsored enterprises
   
-
     
-
     
10,684
     
126
     
10,684
     
126
State and political subdivisions
   
3,749
     
14
     
596
     
-
     
4,345
     
14
Corporate bonds
   
982
     
18
     
-
     
-
     
982
     
18
Total
 
$
9,008
     
55
     
11,280
     
126
     
20,288
     
181
 
 
(Dollars in thousands)
                     
     
December 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
 
$
7,891
     
45
     
-
     
-
     
7,891
     
45
U.S. Government
                                             
sponsored enterprises
   
3,074
     
13
     
10,828
     
142
     
13,902
     
155
State and political subdivisions
   
2,198
     
4
     
3,930
     
68
     
6,128
     
72
Corporate bonds
   
1,500
     
22
     
-
     
-
     
1,500
     
22
Total
 
$
14,663
     
84
     
14,758
     
210
     
29,421
     
294
 
At March 31, 2016, unrealized losses in the investment securities portfolio relating to debt securities totaled $181,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the March 31, 2016 tables above, five out of 174 securities issued by state and political subdivisions contained unrealized losses, seven out of 78 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, 2016, 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, 2016
     
(Dollars in thousands)
     
   
Amortized
Cost
   
Estimated
Fair Value
Due within one year
 
$
5,360
     
5,414
Due from one to five years
   
73,089
     
69,928
Due from five to ten years
   
87,563
     
98,330
Due after ten years
   
14,768
     
15,271
Mortgage-backed securities
   
72,066
     
73,879
Equity securities
   
748
     
1,270
Total
 
$
253,594
     
264,092
 
No securities available for sale were sold during the three months ended March 31, 2016 and 2015.

Securities with a fair value of approximately $88.0 million and $91.0 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes as required by law.
11

 
(3)     Loans

Major classifications of loans at March 31, 2016 and December 31, 2015 are summarized as follows:
 
(Dollars in thousands)
     
   
March 31, 2016
   
December 31, 2015
Real estate loans:
     
Construction and land development
 
$
63,973
     
65,791
Single-family residential
   
223,104
     
220,690
Single-family residential -
             
Banco de la Gente stated income
   
42,951
     
43,733
Commercial
   
228,166
     
228,526
Multifamily and farmland
   
18,122
     
18,080
Total real estate loans
   
576,316
     
576,820
               
Loans not secured by real estate:
             
Commercial loans
   
91,784
     
91,010
Farm loans
   
2
     
3
Consumer loans
   
9,705
     
10,027
All other loans
   
15,226
     
11,231
               
Total loans
   
693,033
     
689,091
               
Less allowance for loan losses
   
9,116
     
9,589
               
Total net loans
 
$
683,917
     
679,502
 
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, Durham and Forsyth 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, 2016, 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, 2016, single-family residential loans comprised approximately 38% of the Bank's total loan portfolio, and include Banco's 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 March 31, 2016, commercial real estate loans comprised approximately 33% of the Bank's total loan portfolio.

·
Commercial loans – Repayment is generally dependent upon the successful operation of the borrower's business.   In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business.  As of March 31, 2016, 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 March 31, 2016 and December 31, 2015:
 
March 31, 2016
                     
(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
 
$
76
     
17
     
93
     
63,880
     
63,973
     
-
Single-family residential
   
2,964
     
1,101
     
4,065
     
219,039
     
223,104
     
-
Single-family residential -
                                             
Banco de la Gente stated income
   
6,416
     
315
     
6,731
     
36,220
     
42,951
     
127
Commercial
   
860
     
1,824
     
2,684
     
225,482
     
228,166
     
-
Multifamily and farmland
   
-
     
-
     
-
     
18,122
     
18,122
     
-
Total real estate loans
   
10,316
     
3,257
     
13,573
     
562,743
     
576,316
     
127
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
74
     
23
     
97
     
91,687
     
91,784
     
-
Farm loans
   
-
     
-
     
-
     
2
     
2
     
-
Consumer loans
   
83
     
7
     
90
     
9,615
     
9,705
     
-
All other loans
   
16
     
-
     
16
     
15,210
     
15,226
     
-
Total loans
 
$
10,489
     
3,287
     
13,776
     
679,257
     
693,033
     
127
 
 
December 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
 
$
330
     
17
     
347
     
65,444
     
65,791
     
-
Single-family residential
   
2,822
     
1,385
     
4,207
     
216,483
     
220,690
     
-
Single-family residential -
                                             
Banco de la Gente stated income
   
7,021
     
114
     
7,135
     
36,598
     
43,733
     
-
Commercial
   
2,619
     
157
     
2,776
     
225,750
     
228,526
     
-
Multifamily and farmland
   
-
     
-
     
-
     
18,080
     
18,080
     
-
Total real estate loans
   
12,792
     
1,673
     
14,465
     
562,355
     
576,820
     
-
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
185
     
40
     
225
     
90,785
     
91,010
     
17
Farm loans
   
-
     
-
     
-
     
3
     
3
     
-
Consumer loans
   
136
     
8
     
144
     
9,883
     
10,027
     
-
All other loans
   
-
     
-
     
-
     
11,231
     
11,231
     
-
Total loans
 
$
13,113
     
1,721
     
14,834
     
674,257
     
689,091
     
17
 
13

 
The following table presents non-accrual loans as of March 31, 2016 and December 31, 2015:
 
(Dollars in thousands)
     
   
March 31, 2016
   
December 31, 2015
Real estate loans:
     
Construction and land development
 
$
149
     
146
Single-family residential
   
3,540
     
4,023
Single-family residential -
             
Banco de la Gente stated income
   
1,007
     
1,106
Commercial
   
3,431
     
2,992
     Multifamily and farmland
   
-
     
-
Total real estate loans
   
8,127
     
8,267
               
Loans not secured by real estate:
             
Commercial loans
   
102
     
113
Consumer loans
   
39
     
52
Total
 
$
8,268
     
8,432
 
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 $24.8 million, $25.0 million and $25.9 million at March 31, 2016, December 31, 2015 and March 31, 2015, respectively.  Interest income recognized on accruing impaired loans was $314,000, $335,000 and $1.3 million for the three months ended March 31, 2016, the three months ended March 31, 2015 and the year ended December 31, 2015, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present impaired loans as of March 31, 2016 and December 31, 2015:
 
March 31, 2016
                     
(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
 
$
497
     
-
     
433
     
433
     
22
     
459
Single-family residential
   
8,097
     
1,479
     
6,206
     
7,685
     
179
     
11,287
Single-family residential -
                                             
Banco de la Gente stated income
   
19,621
     
-
     
19,061
     
19,061
     
1,304
     
17,951
Commercial
   
5,984
     
4,720
     
604
     
5,324
     
4
     
6,739
Multifamily and farmland
   
78
     
-
     
78
     
78
     
-
     
80
Total impaired real estate loans
   
34,277
     
6,199
     
26,382
     
32,581
     
1,509
     
36,516
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
179
     
-
     
148
     
148
     
2
     
129
Consumer loans
   
245
     
-
     
238
     
238
     
4
     
245
Total impaired loans
 
$
34,701
     
6,199
     
26,768
     
32,967
     
1,515
     
36,890
 
14

 
December 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
 
$
643
     
216
     
226
     
442
     
12
     
705
Single-family residential
   
8,828
     
1,489
     
6,805
     
8,294
     
189
     
10,852
Single-family residential -
                                             
Banco de la Gente stated income
   
20,375
     
-
     
19,215
     
19,215
     
1,143
     
18,414
Commercial
   
4,556
     
-
     
4,893
     
4,893
     
179
     
5,497
Multifamily and farmland
   
96
     
-
     
83
     
83
     
-
     
93
Total impaired real estate loans
   
34,498
     
1,705
     
31,222
     
32,927
     
1,523
     
35,561
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
180
     
-
     
161
     
161
     
3
     
132
Consumer loans
   
286
     
-
     
260
     
260
     
4
     
283
Total impaired loans
 
$
34,964
     
1,705
     
31,643
     
33,348
     
1,530
     
35,976
 
Changes in the allowance for loan losses for the three months ended March 31, 2016 and 2015 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, 2016
                   
Allowance for loan losses:
                     
Beginning balance
 
$
2,185
 
2,534
 
1,460
 
1,917
 
-
 
842
 
-
 
172
 
479
 
9,589
 
Charge-offs
   
-
 
(59
)
-
 
(106
)
-
 
(29
)
-
 
(128
)
-
 
(322
)
Recoveries
   
3
 
8
 
-
 
5
 
-
 
6
 
-
 
43
 
-
 
65
 
Provision
   
(344
)
(8
)
(37
)
(28
)
-
 
(9
)
-
 
103
 
107
 
(216
)
Ending balance
 
$
1,844
 
2,475
 
1,423
 
1,788
 
-
 
810
 
-
 
190
 
586
 
9,116
 
                                             
Allowance for loan losses March 31, 2016:
                                     
Ending balance: individually
                                           
evaluated for impairment
 
$
-
 
95
 
1,107
 
170
 
-
 
-
 
-
 
-
 
-
 
1,372
 
Ending balance: collectively
                                           
evaluated for impairment
   
1,844
 
2,380
 
316
 
1,618
 
-
 
810
 
-
 
190
 
586
 
7,744
 
Ending balance
 
$
1,844
 
2,475
 
1,423
 
1,788
 
-
 
810
 
-
 
190
 
586
 
9,116
 
                                             
Loans March 31, 2016:
                                           
Ending balance
 
$
63,973
 
223,104
 
42,951
 
228,166
 
18,122
 
91,784
 
2
 
24,931
 
-
 
693,033
 
                                             
Ending balance: individually
                                           
evaluated for impairment
 
$
-
 
2,612
 
17,711
 
4,890
 
-
 
-
 
-
 
-
 
-
 
25,213
 
Ending balance: collectively
                                           
evaluated for impairment
 
$
63,973
 
220,492
 
25,240
 
223,276
 
18,122
 
91,784
 
2
 
24,931
 
-
 
667,820
 
 
15

 
(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
 
 
The provision for loan losses for the three months ended March 31, 2016 was a credit of $216,000, as compared to an expense of $173,000 for the three months ended March 31, 2015.  The decrease in the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the FASB Accounting Standards Codification ("ASC") 450-20 reserve as the elevated level of loan losses incurred in 2011 and 2012 are no longer included in the historical loss calculations.

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.
 
16

 
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of March 31, 2016 and December 31, 2015:

March 31, 2016
                 
(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