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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:    September 30, 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.
5,417,800 shares of common stock, outstanding at October 31, 2016.
 

INDEX    
         
PART I.
FINANCIAL INFORMATION
PAGE(S)
 
         
Item 1.
 
Financial Statements
   
         
   
Consolidated Balance Sheets at September 30, 2016 (Unaudited) and
   
   
December 31, 2015 (Audited)
3
 
         
   
Consolidated Statements of Earnings for the three and nine months ended
   
   
September 30, 2016 and 2015 (Unaudited)
4
 
         
   
Consolidated Statements of Comprehensive Income for the three and nine
   
   
months ended September 30, 2016 and 2015 (Unaudited)
5
 
         
   
Consolidated Statements of Changes in Shareholders' Equity for the nine
   
   
months ended September 30, 2016 and 2015 (Unaudited)
6
 
         
   
Consolidated Statements of Cash Flows for the nine months ended
   
   
September 30, 2016 and 2015 (Unaudited)
7-8
 
         
 
 
Notes to Consolidated Financial Statements (Unaudited)
9-25
 
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition
   
   
and Results of Operations
26-39
 
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
40
 
         
Item 4T.  
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
42-44
 
Signatures
   
45
 
Certifications
   
46-48
 
 
 

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      
             
September 30, 2016 and December 31, 2015      
             
(Dollars in thousands)      
   
September 30,
   
December 31,
 
Assets
 
2016
   
2015
 
   
(Unaudited)
   
(Audited)
 
             
Cash and due from banks, including reserve requirements
 
$
47,653
     
29,194
 
of $15,715 at 9/30/16 and $14,587 at 12/31/15
               
Interest-bearing deposits
   
35,191
     
10,569
 
Cash and cash equivalents
   
82,844
     
39,763
 
                 
Investment securities available for sale
   
262,423
     
268,530
 
Other investments
   
3,634
     
3,636
 
Total securities
   
266,057
     
272,166
 
                 
Mortgage loans held for sale
   
2,776
     
4,149
 
                 
Loans
   
713,019
     
689,091
 
Less allowance for loan losses
   
(8,045
)
   
(9,589
)
Net loans
   
704,974
     
679,502
 
                 
Premises and equipment, net
   
16,553
     
16,976
 
Cash surrender value of life insurance
   
14,853
     
14,546
 
Other real estate
   
26
     
739
 
Accrued interest receivable and other assets
   
9,525
     
10,640
 
Total assets
 
$
1,097,608
     
1,038,481
 
                 
Liabilities and Shareholders' Equity
               
                 
Deposits:
               
Noninterest-bearing demand
 
$
253,134
     
244,231
 
NOW, MMDA & savings
   
460,767
     
431,052
 
Time, $250,000 or more
   
26,627
     
26,891
 
Other time
   
121,419
     
130,001
 
Total deposits
   
861,947
     
832,175
 
                 
Securities sold under agreements to repurchase
   
50,920
     
27,874
 
FHLB borrowings
   
43,500
     
43,500
 
Junior subordinated debentures
   
20,619
     
20,619
 
Accrued interest payable and other liabilities
   
9,974
     
9,449
 
Total liabilities
   
986,960
     
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 5,417,800 shares
               
at September 30, 2016 and 5,510,538 shares at December 31, 2015
   
44,188
     
46,171
 
Retained earnings
   
59,502
     
53,183
 
Accumulated other comprehensive income
   
6,958
     
5,510
 
Total shareholders' equity
   
110,648
     
104,864
 
                 
Total liabilities and shareholders' equity
 
$
1,097,608
     
1,038,481
 
                 
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, 2016 and 2015          
                         
(Dollars in thousands, except per share amounts)            
                         
   
Three months ended
   
Nine months ended
 
   
September 30,   
   
September 30,   
 
   
2016
   
2015
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Interest income:
                       
Interest and fees on loans
 
$
8,188
     
8,089
     
24,185
     
23,015
 
Interest on due from banks
   
32
     
4
     
67
     
21
 
Interest on investment securities:
                               
U.S. Government sponsored enterprises
   
603
     
633
     
1,910
     
1,959
 
State and political subdivisions
   
1,105
     
1,145
     
3,350
     
3,465
 
Other
   
54
     
76
     
191
     
245
 
Total interest income
   
9,982
     
9,947
     
29,703
     
28,705
 
                                 
Interest expense:
                               
NOW, MMDA & savings deposits
   
126
     
106
     
367
     
324
 
Time deposits
   
142
     
211
     
452
     
685
 
FHLB borrowings
   
426
     
443
     
1,248
     
1,294
 
Junior subordinated debentures
   
122
     
101
     
353
     
297
 
Other
   
12
     
13
     
30
     
34
 
Total interest expense
   
828
     
874
     
2,450
     
2,634
 
                                 
Net interest income
   
9,154
     
9,073
     
27,253
     
26,071
 
                                 
Provision for (reduction of provision for) loan losses
   
(360
)
   
235
     
(1,108
)
   
193
 
                                 
Net interest income after provision for loan losses
   
9,514
     
8,838
     
28,361
     
25,878
 
                                 
Non-interest income:
                               
Service charges
   
1,163
     
1,193
     
3,291
     
3,498
 
Other service charges and fees
   
210
     
173
     
746
     
718
 
Gain on sale of securities
   
-
     
-
     
324
      -  
Mortgage banking income
   
426
     
300
     
1,088
     
810
 
Insurance and brokerage commissions
   
163
     
179
     
476
     
544
 
Gain/(loss) on sale and write-down of
                               
other real estate
   
(16
)
   
80
     
64
     
246
 
Miscellaneous
   
1,468
     
1,341
     
4,320
     
3,992
 
Total non-interest income
   
3,414
     
3,266
     
10,309
     
9,808
 
                                 
Non-interest expense:
                               
Salaries and employee benefits
   
4,829
     
4,596
     
14,114
     
13,683
 
Occupancy
   
1,755
     
1,611
     
5,243
     
4,577
 
Professional fees
   
429
     
163
     
1,603
     
590
 
Advertising
   
313
     
172
     
623
     
576
 
Debit card expense
   
271
     
256
     
870
     
737
 
FDIC Insurance
   
71
     
162
     
406
     
510
 
Other
   
1,930
     
1,709
     
5,339
     
5,081
 
Total non-interest expense
   
9,598
     
8,669
     
28,198
     
25,754
 
                                 
Earnings before income taxes
   
3,330
     
3,435
     
10,472
     
9,932
 
                                 
Income tax expense
   
872
     
942
     
2,597
     
2,487
 
                                 
Net earnings
 
$
2,458
     
2,493
     
7,875
     
7,445
 
                                 
Basic net earnings per share
 
$
0.45
     
0.45
     
1.43
     
1.34
 
Diluted net earnings per share
 
$
0.44
     
0.45
     
1.42
     
1.32
 
Cash dividends declared per share
 
$
0.10
     
0.08
     
0.28
     
0.20
 
                                 
                                 
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, 2016 and 2015          
                         
 (Dollars in thousands)            
                         
   
Three months ended
   
Nine months ended
 
   
September 30,  
   
September 30, 
 
   
2016
   
2015
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Net earnings
 
$
2,458
     
2,493
     
7,875
     
7,445
 
                                 
Other comprehensive income (loss):
                               
Unrealized holding (losses) gains on securities
                               
available for sale
   
(1,676
)
   
1,167
     
2,597
     
(819
)
Reclassification adjustment for gains on
                               
securities available for sale
                               
included in net earnings
   
-
     
-
     
(324
)
   
-
 
                                 
Total other comprehensive (loss) income,
                               
before income taxes
   
(1,676
)
   
1,167
     
2,273
     
(819
)
                                 
Income tax (benefit) expense related to other
                               
comprehensive (loss) income:
                               
                                 
Unrealized holding (losses) gains on securities
                               
available for sale
   
(614
)
   
455
     
951
     
(319
)
Reclassification adjustment for gains
                               
on securities available for sale
                               
included in net earnings
   
-
     
-
     
(126
)
   
-
 
                                 
Total income tax expense (benefit) related to
                               
other comprehensive income (loss)
   
(614
)
   
455
     
825
     
(319
)
                                 
Total other comprehensive (loss) income,
                               
net of tax
   
(1,062
)
   
712
     
1,448
     
(500
)
                                 
Total comprehensive income
 
$
1,396
     
3,205
     
9,323
     
6,945
 
                                 
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, 2016 and 2015             
                               
(Dollars in thousands)               
                               
                     
Accumulated
       
                     
Other
       
    Common Stock        Retained     Comprehensive        
   
Shares
   
Amount
   
Earnings
   
Income
   
Total
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                               
Balance, December 31, 2015
   
5,510,538
   
$
46,171
     
53,183
     
5,510
     
104,864
 
                                         
Common stock repurchase
   
(92,738
)
   
(1,983
)
   
-
     
-
     
(1,983
)
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(1,556
)
   
-
     
(1,556
)
Net earnings
   
-
     
-
     
7,875
     
-
     
7,875
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
1,448
     
1,448
 
Balance, September 30, 2016
   
5,417,800
   
$
44,188
     
59,502
     
6,958
     
110,648
 
                                         
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
 
                                         
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, 2016 and 2015      
             
(Dollars in thousands)      
             
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
             
Cash flows from operating activities:
           
Net earnings
 
$
7,875
     
7,445
 
Adjustments to reconcile net earnings to
               
net cash provided by operating activities:
               
Depreciation, amortization and accretion
   
4,181
     
4,523
 
(Reduction)/Provision for loan losses
   
(1,108
)
   
193
 
Deferred income taxes
   
(607
)
   
100
 
Gain on sale of investment securities
   
(324
)
   
-
 
Gain on sale of other real estate
   
(81
)
   
(275
)
Write-down of other real estate
   
17
     
29
 
Restricted stock expense
   
476
     
282
 
            Origination of mortgage loans held for sale     (50,813 )     (38,139 )
            Proceeds from sales of mortgage loans held for sale     52,186       37,835  
Change in:
               
Cash surrender value of life insurance
   
(307
)
   
(315
)
Other assets
   
897
     
792
 
Other liabilities
   
49
     
1,788
 
                 
Net cash provided by operating activities
   
12,441
     
14,258
 
                 
Cash flows from investing activities:
               
Purchases of investment securities available for sale
   
(12,642
)
   
(13,579
)
Proceeds from sales, calls and maturities of investment securities
               
available for sale
   
2,899
     
17,984
 
Proceeds from paydowns of investment securities available for sale
   
15,946
     
4,250
 
Purchases of FHLB stock
   
-
     
(5
)
FHLB stock redemption
   
2
     
125
 
Net change in loans
   
(24,639
)
   
(38,098
)
Purchases of premises and equipment
   
(1,257
)
   
(1,549
)
Proceeds from sale of other real estate and repossessions
   
1,052
     
4,173
 
                 
Net cash used by investing activities
   
(18,639
)
   
(26,699
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
29,772
     
(8,139
)
Net change in securities sold under agreement to repurchase
   
23,046
     
(1,190
)
Proceeds from FHLB borrowings
   
-
     
20,000
 
Repayments of FHLB borrowings
   
-
     
(20,000
)
Common stock repurchased
   
(1,983
)
   
(1,576
)
Cash dividends paid on common stock
   
(1,556
)
   
(1,127
)
                 
Net cash provided (used) by financing activities
   
49,279
     
(12,032
)
                 
Net change in cash and cash equivalents
   
43,081
     
(24,473
)
                 
Cash and cash equivalents at beginning of period
   
39,763
     
69,098
 
                 
Cash and cash equivalents at end of period
 
$
82,844
     
44,625
 
 
7

 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES      
             
Consolidated Statements of Cash Flows, continued      
             
Nine Months Ended September 30, 2016 and 2015      
             
(Dollars in thousands)      
             
             
   
2016
   
2015
 
   
(Unaudited)
   
(Unaudited)
 
             
Supplemental disclosures of cash flow information:
           
Cash paid during the period for:
           
Interest
 
$
2,425
     
2,624
 
Income taxes
 
$
3,180
     
1,514
 
                 
Noncash investing and financing activities:
               
Change in unrealized gain (loss) on investment securities
               
 available for sale, net
 
$
1,448
     
(500
)
Transfers of loans to other real estate and repossessions
 
$
275
     
4,274
 
Financed portion of sales of other real estate
 
$
-
     
60
 
                 
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 subsidiary, Peoples Bank (the "Bank"), along with the Bank's wholly owned subsidiaries, Peoples Investment Services, Inc., Real Estate Advisory Services, Inc. ("REAS") Community Bank Real Estate Solutions, LLC ("CBRES") and PB Real Estate Holdings, LLC (collectively called the "Company").  All significant intercompany balances and transactions have been eliminated in consolidation.  CBRES was moved from a wholly owned subsidiary of Peoples Bancorp of North Carolina, Inc. to a wholly owned subsidiary of the Bank effective August 31, 2016.

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.

In May 2016, FASB issued ASU No. 2016-12, (Topic 606):  Narrow-Scope Improvements and Practical Expedients.  ASU No. 2016-12 amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification ("ASC") to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition.  ASU No. 2016-12 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 June 2016, FASB issued ASU No. 2016-13, (Topic 326):  Measurement of Credit Losses on Financial Instruments.  ASU No. 2016-13 provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.  The Company is currently evaluating the effect that implementation of the new standard will have on its results of operations, financial position and disclosures.

In August 2016, FASB issued ASU No. 2016-15, (Topic 230):  Classification of Certain Cash Receipts and Cash Payments.  ASU No. 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows under ASC 230, Statement of Cash Flows.  ASU No. 2016-15 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 September 30, 2016 and December 31, 2015 are as follows:

(Dollars in thousands)
                     
   
September 30, 2016      
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
71,359
     
2,083
     
49
     
73,393
U.S. Government
                             
sponsored enterprises
   
38,575
     
743
     
240
     
39,078
State and political subdivisions
   
138,672
     
8,481
     
11
     
147,142
Corporate bonds
   
1,505
     
20
     
-
     
1,525
Trust preferred securities
   
750
     
-
     
-
     
750
Equity securities
   
264
     
271
     
-
     
535
Total
 
$
251,125
     
11,598
     
300
     
262,423
 
10

(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 September 30, 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.

(Dollars in thousands)
                                 
   
September 30, 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
 
$
5,795
     
49
     
-
     
-
     
5,795
     
49
U.S. Government
                                             
sponsored enterprises
 
 
7,517
     
66
     
9,685
     
174
     
17,202
     
240
State and political subdivisions
   
426
     
1
     
582
     
10
     
1,008
     
11
Total
 
$
13,738
     
116
     
10,267
     
184
     
24,005
     
300
                                               
(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 September 30, 2016, unrealized losses in the investment securities portfolio relating to debt securities totaled $300,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the September 30, 2016 tables above, two out of 170 securities issued by state and political subdivisions contained unrealized losses, 10 out of 82 securities issued by U.S. Government sponsored enterprises contained unrealized losses, and no 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, 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.
 
11

 
September 30, 2016
         
(Dollars in thousands)
         
   
Amortized
Cost
   
Estimated
Fair Value
Due within one year
 
$
8,444
     
8,500
Due from one to five years
   
76,972
     
81,294
Due from five to ten years
   
83,725
     
87,937
Due after ten years
   
10,361
     
10,764
Mortgage-backed securities
   
71,359
     
73,393
Equity securities
   
264
     
535
Total
 
$
251,125
     
262,423
 
Proceeds from sales of securities available for sale during the nine months ended September 30, 2016 were $804,000 and resulted in gross gains of $324,000.  No securities available for sale were sold during the three months ended September 30, 2016, or the three and nine months ended September 30, 2015.

Securities with a fair value of approximately $85.2 million and $91.0 million at September 30, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for other purposes as required by law.

(3)     Loans

Major classifications of loans at September 30, 2016 and December 31, 2015 are summarized as follows:

(Dollars in thousands)
         
   
September 30, 2016
   
December 31, 2015
Real estate loans:
         
Construction and land development
 
$
59,456
     
65,791
Single-family residential
   
231,958
     
220,690
Single-family residential -
             
Banco de la Gente stated income
   
40,934
     
43,733
Commercial
   
240,150
     
228,526
Multifamily and farmland
   
18,727
     
18,080
Total real estate loans
   
591,225
     
576,820
               
Loans not secured by real estate:
             
Commercial loans
   
94,790
     
91,010
Farm loans
   
-
     
3
Consumer loans
   
10,036
     
10,027
All other loans
   
16,968
     
11,231
               
Total loans
   
713,019
     
689,091
               
Less allowance for loan losses
   
8,045
     
9,589
               
Total net loans
 
$
704,974
     
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 September 30, 2016, construction and land development loans comprised approximately 8% of the Bank's total loan portfolio.
 
12

 
·
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, 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 September 30, 2016, 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, 2016, commercial loans comprised approximately 13% of the Bank's total loan portfolio.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management's opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present an age analysis of past due loans, by loan type, as of September 30, 2016 and December 31, 2015:

September 30, 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
 
$
18
     
13
     
31
     
59,425
     
59,456
     
-
Single-family residential
   
1,344
     
310
     
1,654
     
230,304
     
231,958
     
-
Single-family residential -
                                             
Banco de la Gente stated income
   
1,588
     
257
     
1,845
     
39,089
     
40,934
     
-
Commercial
   
58
     
-
     
58
     
240,092
     
240,150
     
-
Multifamily and farmland
   
-
     
-
     
-
     
18,727
     
18,727
     
-
Total real estate loans
   
3,008
     
580
     
3,588
     
587,637
     
591,225
     
-
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
85
     
-
     
85
     
94,705
     
94,790
     
-
Farm loans
   
-
     
-
     
-
     
-
     
-
     
-
Consumer loans
   
95
     
7
     
102
     
9,934
     
10,036
     
-
All other loans
   
-
     
-
     
-
     
16,968
     
16,968
     
-
Total loans
 
$
3,188
     
587
     
3,775
     
709,244
     
713,019
     
-
 
13

 
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
 
The following table presents non-accrual loans as of September 30, 2016 and December 31, 2015:
 
(Dollars in thousands)
         
   
September 30, 2016
   
December 31, 2015
Real estate loans:
         
Construction and land development
 
$
31
     
146
Single-family residential
   
1,797
     
4,023
Single-family residential -
             
Banco de la Gente stated income
   
1,251
     
1,106
Commercial
   
1,571
     
2,992
Multifamily and farmland
   
-
     
-
Total real estate loans
   
4,650
     
8,267
               
Loans not secured by real estate:
             
Commercial loans
   
66
     
113
Consumer loans
   
41
     
52
Total
 
$
4,757
     
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 $22.9 million, $25.0 million and $25.5 million at September 30, 2016, December 31, 2015 and September 30, 2015, respectively.  Interest income recognized on accruing impaired loans was $871,000, $968,000 and $1.3 million for the nine months ended September 30, 2016, the nine months ended September 30, 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.
 
14

The following tables present impaired loans as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
                                 
(Dollars in thousands)
                                 
                     
Nine months ended
 
Three months ended
 
Unpaid
Contractual Principal
Balance
 
Recorded Investment
With No Allowance
 
Recorded Investment
With
Allowance
 
Recorded Investment
 in Impaired Loans
 
Related Allowance
 
Average Outstanding Impaired
Loans
 
Interest
Income Recognized
 
Average Outstanding Impaired
Loans
 
Interest
 Income Recognized
Real estate loans:
                                 
Construction and land development
$
292
 
-
 
288
 
288
 
13
 
375
 
10
 
369
 
3
Single-family residential
 
5,731
 
878
 
4,473
 
5,351
 
46
 
8,921
 
122
 
6,556
 
40
Single-family residential -
                                   
Banco de la Gente stated income
 
18,603
 
-
 
18,094
 
18,094
 
1,188
 
17,673
 
657
 
17,395
 
207
Commercial
 
3,775
 
1,221
 
2,222
 
3,443
 
174
 
5,376
 
73
 
4,013
 
24
Multifamily and farmland
 
78
 
-
 
78
 
78
 
-
 
79
 
3
 
78
 
-
Total impaired real estate loans
 
28,479
 
2,099
 
25,155
 
27,254
 
1,421
 
32,424
 
865
 
28,411
 
274
                                     
Loans not secured by real estate:
                                   
Commercial loans
 
74
 
-
 
73
 
73
 
1
 
123
 
-
 
116
 
-
Consumer loans
 
226
 
-
 
219
 
219
 
4
 
235
 
6
 
225
 
2
Total impaired loans
$
28,779
 
2,099
 
25,447
 
27,546
 
1,426
 
32,782
 
871
 
28,752
 
276
 
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
 
YTD
Interest
Income
Recognized
Real estate loans:
                         
Construction and land development
$
643
 
216
 
226
 
442
 
12
 
705
 
18
Single-family residential
 
8,828
 
1,489
 
6,805
 
8,294
 
189
 
10,852
 
224
Single-family residential -
                           
Banco de la Gente stated income
 
20,375
 
-
 
19,215
 
19,215
 
1,143
 
18,414
 
921
Commercial
 
4,556
 
-
 
4,893
 
4,893
 
179
 
5,497
 
89
Multifamily and farmland
 
96
 
-
 
83
 
83
 
-
 
93
 
6
Total impaired real estate loans
 
34,498
 
1,705
 
31,222
 
32,927
 
1,523
 
35,561
 
1,258
                             
Loans not secured by real estate:
                           
Commercial loans
 
180
 
-
 
161
 
161
 
3
 
132
 
5
Consumer loans
 
286
 
-
 
260
 
260
 
4
 
283
 
11
Total impaired loans
$
34,964
 
1,705
 
31,643
 
33,348
 
1,530
 
35,976
 
1,274
 
15

Changes in the allowance for loan losses for the three and nine months ended September 30, 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
 
Nine months ended September 30, 2016:
                                 
Allowance for loan losses:
                                     
Beginning balance
$
2,185
 
2,534
 
1,460
 
1,917
 
-
 
842
 
-
 
172
 
479
 
9,589
 
Charge-offs
 
-
 
(158
)
-
 
(106
)
-
 
(129
)
-
 
(361
)
-
 
(754
)
Recoveries
 
8
 
18
 
-
 
15
 
-
 
165
 
-
 
112
 
-
 
318
 
Provision
 
(808
)
(388
)
(60
)
(250
)
47
 
(118
)
-
 
291
 
178
 
(1,108
)
Ending balance
$
1,385
 
2,006
 
1,400
 
1,576
 
47
 
760
 
-
 
214
 
657
 
8,045
 
                                           
Three months ended September 30, 2016:
                                 
Allowance for loan losses:
                                     
Beginning balance
$
1,582
 
2,233
 
1,354
 
1,650
 
46
 
803
 
-
 
234
 
638
 
8,540
 
Charge-offs
 
-
 
(35
)
-
 
-
 
-
 
(89
)
-
 
(122
)
-
 
(246
)
Recoveries
 
2
 
6
 
-
 
5
 
-
 
60
 
-
 
38
 
-
 
111
 
Provision
 
(199
)
(198
)
46
 
(79
)
1
 
(14
)
-
 
64
 
19
 
(360
)
Ending balance
$
1,385
 
2,006
 
1,400
 
1,576
 
47
 
760
 
-
 
214
 
657
 
8,045
 
                                           
Allowance for loan losses at September 30, 2016: