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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:     June 30, 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.
5,450,412 shares of common stock, outstanding at July 31, 2017.
 

 
INDEX   
       
PART I.
FINANCIAL INFORMATION
PAGE(S)
       
Item 1.
 
Financial Statements
 
       
   
Consolidated Balance Sheets at June 30, 2017 (Unaudited) and December
 
   
31, 2016 (Audited)
3
       
   
Consolidated Statements of Earnings for the three and six months ended
 
   
June 30, 2017 and 2016 (Unaudited)
4
       
   
Consolidated Statements of Comprehensive Income for the three and six
 
   
months ended June 30, 2017 and 2016 (Unaudited)
5
       
   
Consolidated Statements of Changes in Shareholders'Equity for the six
 
   
months ended June 30, 2017 and 2016 (Unaudited)
6
       
   
Consolidated Statements of Cash Flows for the six months ended June 30,
 
   
2017 and 2016 (Unaudited)
7-8
       
 
 
Notes to Consolidated Financial Statements (Unaudited)
9-24
       
Item 2.
 
Management's Discussion  and Analysis of Financial Condition
 
   
and Results of Operations
25-37
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
38
       
Item 4T.  
Controls and Procedures
39
       
PART II.
OTHER INFORMATION
 
       
Item 1.
 
Legal Proceedings
40
Item 1A.
 
Risk Factors
40
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
40
Item 3.
 
Defaults upon Senior Securities
40
Item 5.
 
Other Information
40
Item 6.
 
Exhibits
40-42
Signatures 
 
43
Certifications 
 
44-46
 
 
Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared.  These statements can be identified by the use of words like "expect," "anticipate," "estimate," and "believe," variations of these words and other similar expressions.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by 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      
             
June 30, 2017 and December 31, 2016      
             
(Dollars in thousands)      
   
June 30,
   
December 31,
 
Assets
 
2017
   
2016
 
   
(Unaudited)
   
(Audited)
 
             
Cash and due from banks, including reserve requirements
 
$
54,100
     
53,613
 
of $8,947 at 6/30/17 and $6,075 at 12/31/16
               
Interest-bearing deposits
   
20,955
     
16,481
 
Cash and cash equivalents
   
75,055
     
70,094
 
                 
Investment securities available for sale
   
241,320
     
249,946
 
Other investments
   
2,680
     
2,635
 
Total securities
   
244,000
     
252,581
 
                 
Mortgage loans held for sale
   
3,513
     
5,709
 
                 
Loans
   
745,038
     
723,811
 
Less allowance for loan losses
   
(7,167
)
   
(7,550
)
Net loans
   
737,871
     
716,261
 
                 
Premises and equipment, net
   
19,385
     
16,452
 
Cash surrender value of life insurance
   
15,351
     
14,952
 
Other real estate
   
-
     
283
 
Accrued interest receivable and other assets
   
11,809
     
11,659
 
Total assets
 
$
1,106,984
     
1,087,991
 
                 
Liabilities and Shareholders' Equity
               
                 
Deposits:
               
Noninterest-bearing demand
 
$
276,614
     
271,851
 
NOW, MMDA & savings
   
483,440
     
477,054
 
Time, $250,000 or more
   
22,462
     
26,771
 
Other time
   
109,969
     
117,242
 
Total deposits
   
892,485
     
892,918
 
                 
Securities sold under agreements to repurchase
   
49,977
     
36,434
 
FHLB borrowings
   
20,000
     
20,000
 
Junior subordinated debentures
   
20,619
     
20,619
 
Accrued interest payable and other liabilities
   
9,971
     
10,592
 
Total liabilities
   
993,052
     
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 5,448,454 shares
               
at June 30, 2017 and 5,417,800 shares at December 31, 2016
   
45,039
     
44,187
 
Retained earnings
   
63,954
     
60,254
 
Accumulated other comprehensive income
   
4,939
     
2,987
 
Total shareholders' equity
   
113,932
     
107,428
 
                 
Total liabilities and shareholders' equity
 
$
1,106,984
     
1,087,991
 
                 
See accompanying Notes to Consolidated Financial Statements.
               

3

 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.            
                         
Consolidated Statements of Earnings            
                         
Three and Six Months Ended June 30, 2017 and 2016            
                         
(Dollars in thousands, except per share amounts)            
                         
   
Three months ended
   
Six months ended
 
   
June 30,   
   
June 30,  
 
   
2017
   
2016
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Interest income:
                       
Interest and fees on loans
 
$
8,689
     
7,973
     
16,969
     
15,996
 
Interest on due from banks
   
48
     
18
     
78
     
35
 
Interest on investment securities:
                               
U.S. Government sponsored enterprises
   
613
     
649
     
1,217
     
1,307
 
State and political subdivisions
   
1,067
     
1,118
     
2,151
     
2,245
 
Other
   
44
     
57
     
110
     
137
 
Total interest income
   
10,461
     
9,815
     
20,525
     
19,720
 
                                 
Interest expense:
                               
NOW, MMDA & savings deposits
   
143
     
121
     
275
     
241
 
Time deposits
   
120
     
148
     
248
     
310
 
FHLB borrowings
   
201
     
416
     
393
     
822
 
Junior subordinated debentures
   
145
     
118
     
280
     
231
 
Other
   
13
     
10
     
24
     
18
 
Total interest expense
   
622
     
813
     
1,220
     
1,622
 
                                 
Net interest income
   
9,839
     
9,002
     
19,305
     
18,098
 
                                 
Provision for (reduction of provision for) loan losses
   
49
     
(531
)
   
(187
)
   
(748
)
                                 
Net interest income after provision for loan losses
   
9,790
     
9,533
     
19,492
     
18,846
 
                                 
Non-interest income:
                               
Service charges
   
1,094
     
1,087
     
2,200
     
2,128
 
Other service charges and fees
   
147
     
202
     
302
     
536
 
Gain on sale of securities
   
-
     
324
     
-
     
324
 
Mortgage banking income
   
319
     
292
     
665
     
661
 
Insurance and brokerage commissions
   
179
     
156
     
347
     
314
 
Gain/(loss) on sale and write-down of
                               
other real estate
   
-
     
3
     
(283
)
   
80
 
Miscellaneous
   
1,542
     
1,508
     
2,926
     
2,853
 
Total non-interest income
   
3,281
     
3,572
     
6,157
     
6,896
 
                                 
Non-interest expense:
                               
Salaries and employee benefits
   
4,871
     
4,704
     
10,105
     
9,285
 
Occupancy
   
1,699
     
1,734
     
3,312
     
3,488
 
Professional fees
   
236
     
239
     
485
     
1,174
 
Advertising
   
366
     
148
     
612
     
310
 
Debit card expense
   
268
     
333
     
574
     
599
 
FDIC Insurance
   
87
     
164
     
173
     
335
 
Other
   
1,808
     
1,787
     
3,869
     
3,410
 
Total non-interest expense
   
9,335
     
9,109
     
19,130
     
18,601
 
                                 
Earnings before income taxes
   
3,736
     
3,996
     
6,519
     
7,141
 
                                 
Income tax expense
   
925
     
1,032
     
1,503
     
1,723
 
                                 
Net earnings
 
$
2,811
     
2,964
     
5,016
     
5,418
 
                                 
Basic net earnings per share
 
$
0.52
     
0.54
     
0.92
     
0.98
 
Diluted net earnings per share
 
$
0.51
     
0.53
     
0.91
     
0.97
 
Cash dividends declared per share
 
$
0.12
     
0.10
     
0.24
     
0.18
 
                                 
See accompanying Notes to Consolidated Financial Statements.
                         
 
 
4

 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.            
                         
Consolidated Statements of Comprehensive Income            
                         
Three and Six Months Ended June 30, 2017 and 2016            
 
(Dollars in thousands)            
                         
   
Three months ended
   
Six months ended
 
   
June 30,   
   
June 30,  
 
   
2017
   
2016 
 
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                         
Net earnings
 
$
2,811
     
2,964
     
5,016
     
5,418
 
                                 
Other comprehensive income:
                               
Unrealized holding gains on securities
                               
available for sale
   
2,107
     
2,844
     
2,694
     
4,273
 
Reclassification adjustment for gains on
                               
securities available for sale
                               
included in net earnings
   
-
     
(324
)
   
-
     
(324
)
                                 
Total other comprehensive  income,
                               
before income taxes
   
2,107
     
2,520
     
2,694
     
3,949
 
                                 
Income tax expense related to other
                               
comprehensive income:
                               
                                 
Unrealized holding gains on securities
                               
available for sale
   
758
     
1,026
     
742
     
1,566
 
Reclassification adjustment for gains
                               
on securities available for sale
                               
included in net earnings
   
-
     
(126
)
   
-
     
(126
)
                                 
Total income tax expense related to
                               
other comprehensive income
   
758
     
900
     
742
     
1,440
 
                                 
Total other comprehensive income,
                               
net of tax
   
1,349
     
1,620
     
1,952
     
2,509
 
                                 
Total comprehensive income
 
$
4,160
     
4,584
     
6,968
     
7,927
 
                                 
See accompanying Notes to Consolidated Financial Statements.
                         
 
 
5

 
PEOPLES BANCORP OF NORTH CAROLINA, INC.          
                               
Consolidated Statements of Changes in Shareholders' Equity          
                               
Six Months Ended June 30, 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
   
-
     
-
     
(1,316
)
   
-
     
(1,316
)
Restricted stock units exercised
   
30,654
     
852
     
-
     
-
     
852
 
Net earnings
   
-
     
-
     
5,016
     
-
     
5,016
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
1,952
     
1,952
 
Balance, June 30, 2017
   
5,448,454
   
$
45,039
     
63,954
     
4,939
     
113,932
 
                                         
Balance, December 31, 2015
   
5,510,538
   
$
46,171
     
53,183
     
5,510
     
104,864
 
                                         
Cash dividends declared on
                                       
common stock
   
-
     
-
     
(1,007
)
   
-
     
(1,007
)
Net earnings
   
-
     
-
     
5,418
     
-
     
5,418
 
Change in accumulated other
                                       
comprehensive income, net of tax
   
-
     
-
     
-
     
2,509
     
2,509
 
Balance, June 30, 2016
   
5,510,538
   
$
46,171
     
57,594
     
8,019
     
111,784
 
                                         
See accompanying Notes to Consolidated Financial Statements.
                         
 
6

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Cash Flows      
             
Six Months Ended June 30, 2017 and 2016      
             
(Dollars in thousands)      
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Cash flows from operating activities:
           
Net earnings
 
$
5,016
     
5,418
 
Adjustments to reconcile net earnings to
               
net cash provided by operating activities:
               
Depreciation, amortization and accretion
   
2,506
     
2,862
 
(Reduction)/Provision for loan losses
   
(187
)
   
(748
)
Deferred income taxes
   
(1,122
)
   
(532
)
Gain on sale of investment securities
   
-
     
(324
)
Gain on sale of other real estate
   
-
     
(83
)
Write-down of other real estate
   
283
     
3
 
Loss on sale of premises and equipment
   
32
     
-
 
Restricted stock expense
   
471
     
252
 
Proceeds from sales of mortgage loans held for sale
   
34,845
     
30,099
 
Origination of mortgage loans held for sale
   
(32,649
)
   
(28,974
)
Change in:
               
Cash surrender value of life insurance
   
(399
)
   
(207
)
Other assets
   
230
     
518
 
Other liabilities
   
(240
)
   
630
 
                 
Net cash provided by operating activities
   
8,786
     
8,914
 
                 
Cash flows from investing activities:
               
Purchases of investment securities available for sale
   
(3,138
)
   
(6,686
)
Proceeds from sales, calls and maturities of investment securities
               
available for sale
   
4,285
     
2,774
 
Proceeds from paydowns of investment securities available for sale
   
8,682
     
9,949
 
Purchases of FHLB stock
   
(45
)
   
-
 
FHLB stock redemption
   
-
     
2
 
Net change in loans
   
(21,423
)
   
(13,512
)
Purchases of premises and equipment
   
(3,980
)
   
(444
)
Proceeds from sale of other real estate and repossessions
   
-
     
855
 
                 
Net cash used by investing activities
   
(15,619
)
   
(7,062
)
                 
Cash flows from financing activities:
               
Net change in deposits
   
(433
)
   
9,225
 
Net change in securities sold under agreement to repurchase
   
13,543
     
14,841
 
Proceeds from Fed Funds purchased
   
-
     
8,985
 
Repayments of Fed Funds purchased
   
-
     
(8,995
)
Cash dividends paid on common stock
   
(1,316
)
   
(1,007
)
                 
Net cash provided by financing activities
   
11,794
     
23,049
 
                 
Net change in cash and cash equivalents
   
4,961
     
24,911
 
                 
Cash and cash equivalents at beginning of period
   
70,094
     
39,763
 
                 
Cash and cash equivalents at end of period
 
$
75,055
     
64,674
 
 
7

 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.      
             
Consolidated Statements of Cash Flows, continued      
             
Six Months Ended June 30, 2017 and 2016      
             
(Dollars in thousands)      
             
             
   
2017
   
2016
 
   
(Unaudited)
   
(Unaudited)
 
             
Supplemental disclosures of cash flow information:
           
Cash paid during the period for:
           
Interest
 
$
1,241
     
1,608
 
Income taxes
 
$
40
     
2,851
 
                 
Noncash investing and financing activities:
               
Change in unrealized gain on investment securities
               
 available for sale, net
 
$
1,952
     
2,509
 
Issuance of accrued restricted stock units
 
$
(852
)
   
-
 
Transfers of loans to other real estate and repossessions
 
$
-
     
271
 
                 
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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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 January 2017, FASB issued 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.
 
9


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.

In March 2017, FASB issued ASU No. 2017-07, (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.  ASU No. 2017-07 amended the requirements related to the income statement presentation of the components of net periodic benefit cost for an entity's sponsored defined benefit pension and other postretirement plans.  ASU No. 2017-07 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 March 2017, FASB issued ASU No. 2017-08, (Subtopic 310-20):  Premium Amortization on Purchased Callable Debt Securities.  ASU No. 2017-08 amended the requirements related to the amortization period for certain purchased callable debt securities held at a premium.  ASU No. 2017-08 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 May 2017, FASB issued ASU No. 2017-09, (Topic 718):  Scope of Modification Accounting.  ASU No. 2017-09 amended the requirements related to changes to the terms or conditions of a share-based payment award.  ASU No. 2017-09 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 June 30, 2017 and December 31, 2016 are as follows:
 
(Dollars in thousands)
                   
 
June 30, 2017         
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
Mortgage-backed securities
$
59,302
   
1,257
   
182
   
60,377
U.S. Government
                     
sponsored enterprises
 
39,254
   
402
   
29
   
39,627
State and political subdivisions
 
133,298
   
6,252
   
20
   
139,530
Corporate bonds
 
1,500
   
36
   
-
   
1,536
Trust preferred securities
 
250
   
-
   
-
   
250
Total
$
233,604
   
7,947
   
231
   
241,320
 
10

 
 
(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 June 30, 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)
                                 
   
June 30, 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
 
$
14,513
     
182
     
-
     
-
     
14,513
     
182
U.S. Government
                                             
sponsored enterprises
   
-
     
-
     
11,567
     
29
     
11,567
     
29
State and political subdivisions
   
1,037
     
4
     
570
     
16
     
1,607
     
20
Total
 
$
15,550
     
186
     
12,137
     
45
     
27,687
     
231
                                               
(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 June 30, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $231,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the June 30, 2017 tables above, 3 out of 163 securities issued by state and political subdivisions contained unrealized losses, 15 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.

The amortized cost and estimated fair value of investment securities available for sale at June 30, 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.
 
11

 
 
June 30, 2017
         
(Dollars in thousands)
         
   
Amortized
Cost
   
Estimated
Fair Value
Due within one year
 
$
14,885
     
15,051
Due from one to five years
   
93,690
     
97,862
Due from five to ten years
   
56,040
     
58,093
Due after ten years
   
9,437
     
9,687
Mortgage-backed securities
   
59,302
     
60,377
Trust preferred securities
   
250
     
250
Total
 
$
233,604
     
241,320
 
No securities available for sale were sold during the six months ended June 30, 2017.   Proceeds from sales of securities available for sale during the six months ended June 30, 2016 were $804,000 and resulted in gross gains of $324,000.

Securities with a fair value of approximately $88.4 million and $95.6 million at June 30, 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 June 30, 2017 and December 31, 2016 are summarized as follows:
 
(Dollars in thousands)
         
   
June 30, 2017
   
December 31, 2016
Real estate loans:
         
Construction and land development
 
$
71,213
     
61,749
Single-family residential
   
240,993
     
240,700
Single-family residential -
             
Banco de la Gente stated income
   
38,875
     
40,189
Commercial
   
243,957
     
247,521
Multifamily and farmland
   
30,125
     
21,047
Total real estate loans
   
625,163
     
611,206
               
Loans not secured by real estate:
             
Commercial loans
   
94,567
     
87,596
Farm loans
   
1,591
     
-
Consumer loans
   
10,099
     
9,832
All other loans
   
13,618
     
15,177
               
Total loans
   
745,038
     
723,811
               
Less allowance for loan losses
   
7,167
     
7,550
               
Total net loans
 
$
737,871
     
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, Wake and Durham counties of North Carolina.  Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market.  Risk characteristics of the major components of the Bank's loan portfolio are discussed below:
 
·
Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property's value at completion equals or exceeds the cost of property construction and the availability of take-out financing.  During the construction phase, a number of factors can result in delays or cost overruns.  If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral.  As of June 30, 2017, construction and land development loans comprised approximately 10% 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 June 30, 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 June 30, 2017, commercial real estate loans comprised approximately 33% of the Bank's total loan portfolio.

·
Commercial loans – Repayment is generally dependent upon the successful operation of the borrower's business.   In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid or fluctuate in value based on the success of the business.  As of June 30, 2017, 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 of 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 June 30, 2017 and December 31, 2016:

June 30, 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
 
$
3,706
     
-
     
3,706
     
67,507
     
71,213
     
-
Single-family residential
   
949
     
174
     
1,123
     
239,870
     
240,993
     
55
Single-family residential -
                                             
Banco de la Gente stated income
   
1,365
     
273
     
1,638
     
37,237
     
38,875
     
-
Commercial
   
12
     
249
     
261
     
243,696
     
243,957
     
-
Multifamily and farmland
   
-
     
12
     
12
     
30,113
     
30,125
     
-
Total real estate loans
   
6,032
     
708
     
6,740
     
618,423
     
625,163
     
55
                                               
Loans not secured by real estate:
                                             
Commercial loans
   
1,070
     
-
     
1,070
     
93,497
     
94,567
     
-
Farm loans
   
-
     
-
     
-
     
1,591
     
1,591
     
-
Consumer loans
   
52
     
6
     
58
     
10,041
     
10,099
     
-
All other loans
   
-
     
-
     
-
     
13,618
     
13,618
     
-
Total loans
 
$
7,154
     
714
     
7,868
     
737,170
     
745,038
     
55
 
 
13

 
 
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 June 30, 2017 and December 31, 2016:

(Dollars in thousands)
         
   
June 30, 2017
   
December 31, 2016
Real estate loans:
         
Construction and land development
 
$
18
     
22
Single-family residential
   
1,444
     
1,662
Single-family residential -
             
Banco de la Gente stated income
   
1,461
     
1,340
Commercial
   
1,440
     
669
Multifamily and farmland
   
12
     
78
Total real estate loans
   
4,375
     
3,771
               
Loans not secured by real estate:
             
Commercial loans
   
249
     
21
Consumer loans
   
21
     
33
Total
 
$
4,645
     
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 $22.4 million, $23.5 million and $23.7 million at June 30, 2017, December 31, 2016 and June 30, 2016, respectively.  Interest income recognized on accruing impaired loans was $740,000, $596,000 and $1.2 million for the six months ended June 30, 2017, the six months ended June 30, 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.
 
 
14

 
The following table presents impaired loans as of June 30, 2017:

June 30, 2017
                           
(Dollars in thousands)
                           
                             
   
Unpaid
Contractual
Principal
Balance
   
Recorded
Investment
With No
Allowance
   
Recorded
Investment
With
Allowance
   
Recorded
Investment
 in Impaired
Loans
   
Related
Allowance
Real estate loans:
                           
Construction and land development
 
$
253
     
-
     
257
     
257
     
9
Single-family residential
   
4,666
     
1,152
     
3,896
     
5,048
     
38
Single-family residential -
                                     
Banco de la Gente stated income
   
17,439
     
-
     
18,029
     
18,029
     
1,123
Commercial
   
4,190
     
1,699
     
2,769
     
4,468
     
68
Multifamily and farmland
   
12
     
-
     
78
     
78
     
-
Total impaired real estate loans
   
26,560
     
2,851
     
25,029
     
27,880
     
1,238
                                       
Loans not secured by real estate:
                                     
Commercial loans
   
253
     
-
     
288
     
288
     
27
Consumer loans
   
187
     
-
     
197
     
197
     
3
Total impaired loans
 
$
27,000
     
2,851
     
25,514
     
28,365
     
1,268
 
The following table presents the average impaired loan balance and the interest income recognized by loan class for the three and six months ended June 30, 2017 and 2016.
 
(Dollars in thousands)   
                                       
   
Three months ended      
   
Six months ended      
   
June 30, 2017
   
June 30, 2016
   
June 30, 2017
   
June 30, 2016
   
Average
Balance
   
Interest
Income Recognized
   
Average
Balance
   
Interest
Income Recognized
   
Average
Balance
   
Interest
Income Recognized
   
Average
Balance
   
Interest
Income Recognized
Real estate loans:
                                             
Construction and land development
 
$
304
     
2
     
455
     
4
     
265
     
6
     
405
     
7
Single-family residential
   
4,595
     
63
     
8,680
     
33
     
5,185
     
131
     
9,769
     
82
Single-family residential -
                                                             
Banco de la Gente stated income
   
17,539
     
232
     
17,888
     
219
     
17,271
     
469
     
17,875
     
449
Commercial
   
3,831
     
66
     
5,694
     
24
     
3,778
     
125
     
5,978
     
49
Multifamily and farmland
   
45
     
-
     
78
     
-
     
56
     
-
     
80
     
3
Total impaired real estate loans
   
26,314
     
363
     
32,795
     
280
     
26,555
     
731
     
34,107
     
590
                                                               
Loans not secured by real estate:
                                                             
Commercial loans
   
129
     
3
     
141
     
-
     
95
     
3
     
139
     
1
Consumer loans
   
221
     
3
     
233
     
2
     
215
     
6
     
240
     
5
Total impaired loans
 
$
26,664
     
369
     
33,169
     
282
     
26,865
     
740
     
34,486
     
596
 
 
15

 
 
The following table presents impaired loans as of December 31, 2016:

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 and six months ended June 30, 2017 and 2016 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
 
Six months ended June 30, 2017:
                                     
Allowance for loan losses: