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EX-32 - EXHIBIT (32) - PEOPLES BANCORP OF NORTH CAROLINA INCex32.htm
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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, 2017
 
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.
5,437,740 shares of common stock, outstanding at April 30, 2017.
 

 
 
INDEX    
         
PART I.
FINANCIAL INFORMATION
PAGE(S)
 
         
Item 1.
 
Financial Statements
   
         
   
Consolidated Balance Sheets at March 31, 2017 (Unaudited) and
   
   
December 31, 2016 (Audited)
3
 
         
   
Consolidated Statements of Earnings for the three months ended March
   
   
31, 2017 and 2016 (Unaudited)
4
 
         
   
Consolidated Statements of Comprehensive Income for the three months
   
   
ended March 31, 2017 and 2016 (Unaudited)
5
 
         
   
Consolidated Statements of Changes in Shareholders' Equity for the three
   
   
months ended March 31, 2017 and 2016 (Unaudited)
6
 
         
   
Consolidated Statements of Cash Flows for the three months ended March
   
   
31, 2017 and 2016 (Unaudited)
7-8
 
         
 
 
Notes to Consolidated Financial Statements (Unaudited)
9-23
 
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition
   
   
and Results of Operations
24-33
 
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
34
 
         
Item 4.  
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
36
 
Item 5.
 
Other Information
36
 
Item 6.
 
Exhibits
36-38
 
Signatures
   
39
 
Certifications
   
40-42
 
 
 
 
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 the registrant and its subsidiaries, (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 the registrant's Annual Report on Form 10-K for the year ended December 31, 2016.
2

 
PART I.
FINANCIAL INFORMATION
   
Item 1.
Financial Statements
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Balance Sheets      
             
March 31, 2017 and December 31, 2016      
             
(Dollars in thousands)      
   
March 31,
   
December 31,
 
Assets
 
2017
   
2016
 
     (Unaudited)      (Audited)  
             
Cash and due from banks, including reserve requirements
 
$
55,491
     
53,613
 
of $7,145 at 3/31/17 and $6,075 at 12/31/16
               
Interest-bearing deposits
   
31,959
     
16,481
 
Cash and cash equivalents
   
87,450
     
70,094
 
                 
Investment securities available for sale
   
244,863
     
249,946
 
Other investments
   
2,679
     
2,635
 
Total securities
   
247,542
     
252,581
 
                 
Mortgage loans held for sale
   
1,340
     
5,709
 
                 
Loans
   
735,861
     
723,811
 
Less allowance for loan losses
   
(7,263
)
   
(7,550
)
Net loans
   
728,598
     
716,261
 
                 
Premises and equipment, net
   
18,597
     
16,452
 
Cash surrender value of life insurance
   
15,251
     
14,952
 
Other real estate
   
-
     
283
 
Accrued interest receivable and other assets
   
11,496
     
11,659
 
Total assets
 
$
1,110,274
     
1,087,991
 
                 
Liabilities and Shareholders' Equity
               
                 
Deposits:
               
Noninterest-bearing demand
 
$
275,369
     
271,851
 
NOW, MMDA & savings
   
494,273
     
477,054
 
Time, $250,000 or more
   
24,262
     
26,771
 
Other time
   
114,510
     
117,242
 
Total deposits
   
908,414
     
892,918
 
                 
Securities sold under agreements to repurchase
   
42,163
     
36,434
 
FHLB borrowings
   
20,000
     
20,000
 
Junior subordinated debentures
   
20,619
     
20,619
 
Accrued interest payable and other liabilities
   
8,941
     
10,592
 
Total liabilities
   
1,000,137
     
980,563
 
                 
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 5,437,740 shares
               
at March 31, 2017 and 5,417,800 shares at December 31, 2016
   
44,745
     
44,187
 
Retained earnings
   
61,801
     
60,254
 
Accumulated other comprehensive income
   
3,591
     
2,987
 
Total shareholders' equity
   
110,137
     
107,428
 
                 
Total liabilities and shareholders' equity
 
$
1,110,274
     
1,087,991
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
3

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Earnings      
             
 Three Months Ended March 31, 2017 and 2016      
             
(Dollars in thousands, except per share amounts)      
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Interest income:
           
Interest and fees on loans
 
$
8,280
     
8,023
 
Interest on due from banks
   
30
     
17
 
Interest on investment securities:
               
U.S. Government sponsored enterprises
   
604
     
658
 
State and political subdivisions
   
1,084
     
1,127
 
Other
   
66
     
80
 
Total interest income
   
10,064
     
9,905
 
                 
Interest expense:
               
NOW, MMDA & savings deposits
   
132
     
120
 
Time deposits
   
128
     
162
 
FHLB borrowings
   
192
     
406
 
Junior subordinated debentures
   
135
     
113
 
Other
   
11
     
8
 
Total interest expense
   
598
     
809
 
                 
Net interest income
   
9,466
     
9,096
 
                 
Provision for (reduction of provision for) loan losses
   
(236
)
   
(216
)
                 
Net interest income after provision for loan losses
   
9,702
     
9,312
 
                 
Non-interest income:
               
Service charges
   
1,106
     
1,041
 
Other service charges and fees
   
155
     
334
 
Mortgage banking income
   
346
     
369
 
Insurance and brokerage commissions
   
168
     
158
 
Gain/(loss) on sale and write-down of
               
other real estate
   
(283
)
   
77
 
Miscellaneous
   
1,384
     
1,345
 
Total non-interest income
   
2,876
     
3,324
 
                 
Non-interest expense:
               
Salaries and employee benefits
   
5,234
     
4,581
 
Occupancy
   
1,613
     
1,754
 
Professional fees
   
249
     
935
 
Advertising
   
246
     
162
 
Debit card expense
   
306
     
266
 
FDIC Insurance
   
86
     
171
 
Other
   
2,061
     
1,623
 
Total non-interest expense
   
9,795
     
9,492
 
                 
Earnings before income taxes
   
2,783
     
3,144
 
                 
Income tax expense
   
578
     
691
 
                 
Net earnings
 
$
2,205
     
2,453
 
                 
Basic net earnings per share
 
$
0.41
     
0.45
 
Diluted net earnings per share
 
$
0.40
     
0.44
 
Cash dividends declared per share
 
$
0.12
     
0.08
 
                 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
4

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Comprehensive Income      
             
Three Months Ended March 31, 2017 and 2016      
             
(Dollars in thousands)      
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Net earnings
 
$
2,205
     
2,453
 
                 
Other comprehensive income:
               
Unrealized holding gains on securities
               
available for sale
   
586
     
1,472
 
                 
Total other comprehensive income,
               
before income taxes
   
586
     
1,472
 
                 
Income tax (benefit) expense related to other
               
comprehensive income:
               
                 
Unrealized holding gains on securities
               
available for sale
   
(18
)
   
582
 
                 
Total income tax (benefit) expense related to
               
other comprehensive income
   
(18
)
   
582
 
                 
Total other comprehensive income,
               
net of tax
   
604
     
890
 
                 
Total comprehensive income
 
$
2,809
     
3,343
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
5

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.          
                               
Consolidated Statements of Changes in Shareholders' Equity          
                               
Three Months Ended March 31, 2017 and 2016             
                               
(Dollars in thousands)               
                               
                     
Accumulated
       
                     
Other
       
    Common Stock        Retained     Comprehensive        
   
Shares
   
Amount
   
Earnings
   
Income
   
Total
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                               
Balance, December 31, 2016
   
5,417,800
   
$
44,187
     
60,254
     
2,987
     
107,428
 
                                         
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(658
)
   
-
     
(658
)
Restricted stock units exercised
   
19,940
     
558
     
-
     
-
     
558
 
Net earnings
   
-
     
-
     
2,205
     
-
     
2,205
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
604
     
604
 
Balance, March 31, 2017
   
5,437,740
   
$
44,745
     
61,801
     
3,591
     
110,137
 
                                         
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
 
                                         
See accompanying Notes to Consolidated Financial Statements.
                         
 
6

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Cash Flows      
             
Three Months Ended March 31, 2017 and 2016      
             
(Dollars in thousands)      
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Cash flows from operating activities:
           
Net earnings
 
$
2,205
     
2,453
 
Adjustments to reconcile net earnings to
               
net cash provided by operating activities:
               
Depreciation, amortization and accretion
   
1,228
     
1,475
 
(Reduction)/Provision for loan losses
   
(236
)
   
(216
)
Deferred income taxes
   
(1,122
)
   
(547
)
Gain on sale of other real estate
   
-
     
(79
)
Write-down of other real estate
   
283
     
2
 
Loss on sale of premises and equipment
   
33
      -  
Restricted stock expense
   
430
     
70
 
Proceeds from sales of mortgage loans held for sale
    18,376       16,607  
Origination of mortgage loans held for sale
    (14,007 )     (13,454 )
Change in:
               
Cash surrender value of life insurance
   
(299
)
   
(106
)
Other assets
   
1,302
     
435
 
Other liabilities
   
(1,523
)
   
(227
)
                 
Net cash provided by operating activities
   
6,670
     
6,413
 
                 
Cash flows from investing activities:
               
Purchases of investment securities available for sale
   
(3,071
)
   
(94
)
Proceeds from sales, calls and maturities of investment securities
               
available for sale
   
2,830
     
40
 
Proceeds from paydowns of investment securities available for sale
   
5,152
     
5,130
 
Purchases of FHLB stock
   
(44
)
   
-
 
FHLB stock redemption
   
-
     
2
 
Net change in loans
   
(12,101
)
   
(4,254
)
Purchases of premises and equipment
   
(2,647
)
   
(71
)
Proceeds from sale of other real estate and repossessions
   
-
     
786
 
                 
Net cash provided (used) by investing activities
   
(9,881
)
   
1,539
 
                 
Cash flows from financing activities:
               
Net change in deposits
   
15,496
     
20,942
 
Net change in securities sold under agreement to repurchase
   
5,729
     
8,182
 
Proceeds from Fed Funds purchased
   
-
     
8,985
 
Repayments of Fed Funds purchased
   
-
     
(8,995
)
Cash dividends paid on common stock
   
(658
)
   
(447
)
                 
Net cash provided by financing activities
   
20,567
     
28,667
 
                 
Net change in cash and cash equivalents
   
17,356
     
36,619
 
                 
Cash and cash equivalents at beginning of period
   
70,094
     
39,763
 
                 
Cash and cash equivalents at end of period
 
$
87,450
     
76,382
 
 
7

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Cash Flows, continued      
             
Three Months Ended March 31, 2017 and 2016      
             
(Dollars in thousands)      
             
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Supplemental disclosures of cash flow information:
           
Cash paid during the period for:
           
Interest
 
$
297
     
809
 
Income taxes
 
$
-
     
397
 
                 
Noncash investing and financing activities:
               
Change in unrealized gain on investment securities
               
 available for sale, net
 
$
604
     
890
 
Issuance of accrued restricted stock units
  $ (558 )      
Transfers of loans to other real estate and repossessions
 
$
-
     
55
 
                 
See accompanying Notes to Consolidated Financial Statements.
               
                 
 
8

 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.

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.

The Bank operates three banking offices focused on the Latino population that were formerly operated as a division of the Bank under the name Banco de la Gente ("Banco").  These offices are now branded as Bank branches and considered a separate market territory of the Bank as they offer normal and customary banking services as are offered in the Bank's other branches such as the taking of deposits and the making of loans.

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2016) 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 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, (Topic 805):  Clarifying the Definition of a Business.  ASU No. 2017-01 adds guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  ASU No. 2017-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In January 2017, FASB issued ASU No. 2017-04, (Topic 350):  Simplifying the Test for Goodwill Impairment.  ASU No. 2017-04 provides guidance to simplify the accounting related to goodwill impairment. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

In February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20):  Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.  ASU No. 2017-05 clarifies the scope of established guidance on nonfinancial asset derecognition (issued as part of the new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers), as well as the accounting for partial sales of nonfinancial assets.  ASU No. 2017-05 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The adoption of this guidance is not expected to have a material impact on the Company's results of operations, financial position or disclosures.

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.
 
9


(2)
    Investment Securities

Investment securities available for sale at March 31, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
                     
   
March 31, 2017         
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
62,488
     
1,157
     
321
     
63,324
U.S. Government
                             
sponsored enterprises
   
39,888
     
273
     
262
     
39,899
State and political subdivisions
   
135,128
     
4,826
     
101
     
139,854
Corporate bonds
   
1,500
     
36
     
-
     
1,536
Trust preferred securities
   
250
     
-
     
-
     
250
Total
 
$
239,254
     
6,292
     
684
     
244,863
                               
(Dollars in thousands)
                             
   
December 31, 2016        
   
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Estimated
Fair Value
Mortgage-backed securities
 
$
66,654
     
1,221
     
290
     
67,585
U.S. Government
                             
sponsored enterprises
   
38,188
     
308
     
274
     
38,222
State and political subdivisions
   
137,832
     
4,176
     
152
     
141,856
Corporate bonds
   
1,500
     
33
     
-
     
1,533
Trust preferred securities
   
750
     
-
     
-
     
750
Total
 
$
244,924
     
5,738
     
716
     
249,946
 
The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2017 and December 31, 2016 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.
 
(Dollars in thousands)
                                 
   
March 31, 2017               
   
Less than 12 Months
   
12 Months or More
   
Total   
   
 
Fair Value
   
Unrealized
Losses
   
 
Fair Value
   
Unrealized
Losses
   
 
Fair Value
   
Unrealized
 Losses
Mortgage-backed securities
 
$
16,534
     
321
     
-
     
-
     
16,534
     
321
U.S. Government
                                             
sponsored enterprises
   
5,832
     
28
     
13,286
     
234
     
19,118
     
262
State and political subdivisions
   
7,101
     
74
     
562
     
27
     
7,663
     
101
Total
 
$
29,467
     
423
     
13,848
     
261
     
43,315
     
684
                                               
(Dollars in thousands)
                                             
   
December 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
 
$
15,594
     
290
     
-
     
-
     
15,594
     
290
U.S. Government
                                             
sponsored enterprises
   
10,120
     
94
     
9,562
     
180
     
19,682
     
274
State and political subdivisions
   
10,441
     
123
     
561
     
29
     
11,002
     
152
Total
 
$
36,155
     
507
     
10,123
     
209
     
46,278
     
716
 
At March 31, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $684,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the March 31, 2017 tables above, 12 out of 163 securities issued by state and political subdivisions contained unrealized losses, 18 out of 78 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.
 
10

 
The amortized cost and estimated fair value of investment securities available for sale at March 31, 2017, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

March 31, 2017
         
(Dollars in thousands)
         
   
Amortized
Cost
   
Estimated
Fair Value
Due within one year
 
$
12,140
   
12,273
Due from one to five years
   
89,495
   
92,754
Due from five to ten years
   
64,550
   
65,871
Due after ten years
   
10,331
   
10,391
Mortgage-backed securities
   
62,488
   
63,324
Equity securities
   
250
   
250
Total
 
$
239,254
   
244,863
 
No securities available for sale were sold during the three months ended March 31, 2017 and 2016.
 
Securities with a fair value of approximately $91.1 million and $95.6 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required by law.

(3)
    Loans

Major classifications of loans at March 31, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)
         
   
March 31, 2017
   
December 31, 2016
Real estate loans:
         
Construction and land development
 
$
65,438
     
61,749
Single-family residential
   
239,322
     
240,700
Single-family residential -
             
Banco de la Gente stated income
   
39,230
     
40,189
Commercial
   
247,940
     
247,521
Multifamily and farmland
   
29,078
     
21,047
Total real estate loans
   
621,008
     
611,206
               
Loans not secured by real estate:
             
Commercial loans
   
90,923
     
87,596
Farm loans
   
897
     
-
Consumer loans
   
9,634
     
9,832
All other loans
   
13,399
     
15,177
               
Total loans
   
735,861
     
723,811
               
Less allowance for loan losses
   
7,263
     
7,550
               
Total net loans
 
$
728,598
     
716,261
 
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 and Wake 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:
 
 
11

 

·
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, 2017, 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, 2017, 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 5% of the Bank's total loan portfolio.

·
Commercial real estate loans – Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.  These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity.  A borrower's ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property.  As of March 31, 2017, commercial real estate loans comprised approximately 34% of the Bank's total loan portfolio.

·
Commercial loans – Repayment is generally dependent upon the successful operation of the borrower's business.   In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business.  As of March 31, 2017, commercial loans comprised approximately 12% of the Bank's total loan portfolio.

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

The following tables present an age analysis of past due loans, by loan type, as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
                                 
(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
 
$
176
     
9
     
185
     
65,253
     
65,438
     
-
Single-family residential
   
2,859
     
119
     
2,978
     
236,344
     
239,322
     
-
Single-family residential -
                                             
Banco de la Gente stated income
   
4,688
     
54
     
4,742
     
34,488
     
39,230
     
-
Commercial
   
1,710
     
122
     
1,832
     
246,108
     
247,940
     
-
Multifamily and farmland
   
99
     
78
     
177
     
28,901
     
29,078
     
-
Total real estate loans
   
9,532
     
382
     
9,914
     
611,094
     
621,008
     
-
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
333
     
-
     
333
     
90,590
     
90,923
     
-
Farm loans
   
-
     
-
     
-
     
897
     
897
     
-
Consumer loans
   
51
     
8
     
59
     
9,575
     
9,634
     
-
All other loans
   
-
     
-
     
-
     
13,399
     
13,399
     
-
Total loans
 
$
9,916
     
390
     
10,306
     
725,555
     
735,861
     
-
 
 
12

 
 
December 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
 
$
-
     
10
     
10
     
61,739
     
61,749
     
-
Single-family residential
   
4,890
     
80
     
4,970
     
235,730
     
240,700
     
-
Single-family residential -
                                             
Banco de la Gente stated income
   
5,250
     
249
     
5,499
     
34,690
     
40,189
     
-
Commercial
   
342
     
126
     
468
     
247,053
     
247,521
     
-
Multifamily and farmland
   
471
     
-
     
471
     
20,576
     
21,047
     
-
Total real estate loans
   
10,953
     
465
     
11,418
     
599,788
     
611,206
     
-
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
273
     
-
     
273
     
87,323
     
87,596
     
-
Farm loans
   
-
     
-
     
-
     
-
     
-
     
-
Consumer loans
   
68
     
6
     
74
     
9,758
     
9,832
     
-
All other loans
   
3
     
-
     
3
     
15,174
     
15,177
     
-
Total loans
 
$
11,297
     
471
     
11,768
     
712,043
     
723,811
     
-
 
The following table presents non-accrual loans as of March 31, 2017 and December 31, 2016:

(Dollars in thousands)
         
   
March 31, 2017
   
December 31, 2016
Real estate loans:
         
Construction and land development
 
$
20
     
22
Single-family residential
   
1,492
     
1,662
Single-family residential -
             
Banco de la Gente stated income
   
1,405
     
1,340
Commercial
   
562
     
669
Multifamily and farmland
   
78
     
78
Total real estate loans
   
3,557
     
3,771
               
Loans not secured by real estate:
             
Commercial loans
   
-
     
21
Consumer loans
   
27
     
33
Total
 
$
3,584
     
3,825
 
At each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank's impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan that is collateral-dependent is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers that also perform appraisals for other companies.  Factors, including the assumptions and techniques utilized by the appraiser, are considered by management.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  An allowance for each impaired loan that is not collateral dependent is calculated based on the present value of projected cash flows.  If the recorded investment in the impaired loan exceeds the present value of projected cash flows, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment with the exception of the Bank's troubled debt restructured ("TDR") loans in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Accruing impaired loans were $26.1 million, $23.5 million and $24.8 million at March 31, 2017, December 31, 2016 and March 31, 2016, respectively.  Interest income recognized on accruing impaired loans was $372,000, $314,000 and $1.2 million for the three months ended March 31, 2017, the three months ended March 31, 2016 and the year ended December 31, 2016, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.
 
 
13

 
 
The following tables present impaired loans as of March 31, 2017 and December 31, 2016:
 
March 31, 2017 
                                     
(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
 
$
270
     
-
     
265
     
265
     
9
     
272
     
4
Single-family residential
   
4,950
     
698
     
3,912
     
4,610
     
43
     
5,444
     
69
Single-family residential -
                                               
Banco de la Gente stated income
   
18,206
     
-
     
17,639
     
17,639
     
1,140
     
17,187
     
237
Commercial
   
3,617
     
1,269
     
2,081
     
3,350
     
68
     
3,572
     
59
Multifamily and farmland
   
78
     
-
     
78
     
78
     
-
     
78
     
-
Total impaired real estate loans
   
27,121
     
1,967
     
23,975
     
25,942
     
1,260
     
26,553
     
369
                                                       
Loans not secured by real estate:
                                       
Commercial loans
   
5
     
-
     
5
     
5
     
-
     
16
     
-
Consumer loans
   
200
     
-
     
192
     
192
     
3
     
229
     
3
Total impaired loans
 
$
27,326
     
1,967
     
24,172
     
26,139
     
1,263
     
26,798
     
372
 
 
December 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
   
YTD
 Interest
Income
Recognized
Real estate loans:
                                       
Construction and land development
 
$
282
     
-
     
278
     
278
     
11
     
330
     
13
Single-family residential
   
5,354
     
703
     
4,323
     
5,026
     
47
     
7,247
     
164
Single-family residential -
                                               
Banco de la Gente stated income
   
18,611
     
-
     
18,074
     
18,074
     
1,182
     
17,673
     
861
Commercial
   
3,750
     
1,299
     
2,197
     
3,496
     
166
     
4,657
     
152
Multifamily and farmland
   
78
     
-
     
78
     
78
     
-
     
78
     
-
Total impaired real estate loans
   
28,075
     
2,002
     
24,950
     
26,952
     
1,406
     
29,985
     
1,190
                                                       
Loans not secured by real estate:
                                       
Commercial loans
   
27
     
-
     
27
     
27
     
-
     
95
     
-
Consumer loans
   
211
     
-
     
202
     
202
     
3
     
222
     
8
Total impaired loans
 
$
28,313
     
2,002
     
25,179
     
27,181
     
1,409
     
30,302
     
1,198
 
Changes in the allowance for loan losses for the three months ended March 31, 2017 and 2016 were as follows:
 
 
14

 
 
(Dollars in thousands)
                                                           
   
Real Estate Loans         
                               
   
Construction and Land Development
   
Single-
Family Residential
   
Single-
Family Residential
- Banco de
 la Gente Stated
Income
   
Commercial
   
Multifamily and
Farmland
   
Commercial
   
Farm
   
Consumer and All
Other
   
Unallocated
   
Total
 
Three months ended March 31, 2017
                                                 
Allowance for loan losses:
                                                       
Beginning balance
 
$
1,152
     
2,126
     
1,377
     
1,593
     
52
     
675
     
-
     
204
     
371
     
7,550
 
Charge-offs
   
-
     
(20
)
   
-
     
-
     
-
     
(2
)
   
-
     
(109
)
   
-
     
(131
)
Recoveries
   
8
     
7
     
-
     
7
     
-
     
8
     
-
     
50
     
-
     
80
 
Provision
   
(191
)
   
(110
)
   
(49
)
   
55
     
21
     
(53
)
   
-
     
33
     
58
     
(236
)
Ending balance
 
$
969
     
2,003
     
1,328
     
1,655
     
73
     
628
     
-
     
178
     
429
     
7,263
 
                                                                                 
Allowance for loan losses March 31, 2017
                                                                 
Ending balance: individually
                                                                         
evaluated for impairment
 
$
-
     
-
     
1,120
     
62
     
-
     
-
     
-
     
-
     
-
     
1,182
 
Ending balance: collectively
                                                                         
evaluated for impairment
   
969
     
2,003
     
208
     
1,593
     
73
     
628
     
-
     
178
     
429
     
6,081
 
Ending balance
 
$
969
     
2,003
     
1,328
     
1,655
     
73
     
628
     
-
     
178
     
429
     
7,263
 
                                                                                 
Loans March 31, 2017:
                                                                               
Ending balance
 
$
65,438
     
239,322
     
39,230
     
247,940
     
29,078
     
90,923
     
897
     
23,033
     
-
     
735,861
 
                                                                                 
Ending balance: individually
                                                                         
evaluated for impairment
 
$
-
     
1,630
     
16,303
     
2,736
     
-
     
-
     
-
     
-
     
-
     
20,669
 
Ending balance: collectively
                                                                         
evaluated for impairment
 
$
65,438
     
237,692
     
22,927
     
245,204
     
29,078
     
90,923
     
897
     
23,033
     
-
     
715,192
 
 
 
(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