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EX-32 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - PEOPLES BANCORP OF NORTH CAROLINA INCex_32.htm
EX-31.B - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARB - PEOPLES BANCORP OF NORTH CAROLINA INCex_31-b.htm
EX-31.A - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARB - PEOPLES BANCORP OF NORTH CAROLINA INCex_31-a.htm
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:   September 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   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   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):   Yes   No
 
Large accelerated filer
Accelerated filer
Non-accelerated filer

Smaller reporting company
 
 
Emerging growth 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
 
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 October 31, 2017.
 
 
 
 
INDEX
 
PART I. FINANCIAL INFORMATION 
 
 
PAGE(S)
Item 1.
Financial Statements
 
 
 
 
 
Consolidated Balance Sheets at September 30, 2017 (Unaudited) and December 31, 2016 (Audited)
3
 
 
 
 
Consolidated Statements of Earnings for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
4
 
 
 
 
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
 
5
 
Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)
6
 
 
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)
7-8
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
9-26
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
27-40
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
41
 
 
 
Item 4.
Controls and Procedures
42
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
43
Item 1A.
Risk Factors
43
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 3.
Defaults upon Senior Securities
43
Item 5.
Other Information
43
Item 6.
Exhibits
43-45
Signatures
 
46
Certifications
 
47-49
 
Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared. These statements can be identified by the use of words like “expect,” “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, (1) competition in the markets served by 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
 
 
 
 
 
 
 
 
 
September 30, 2017 and December 31, 2016
 
 
 
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
September 30,
 
 
December 31,
 
Assets
 
2017
 
 
2016
 
 
 
(Unaudited)
 
 
(Audited)
 
 
 
 
 
 
 
 
Cash and due from banks, including reserve requirements
 $55,718 
  53,613 
of $9,337 at 9/30/17 and $6,075 at 12/31/16
    
    
Interest-bearing deposits
  37,538 
  16,481 
Cash and cash equivalents
  93,256 
  70,094 
 
    
    
Investment securities available for sale
  235,736 
  249,946 
Other investments
  2,680 
  2,635 
Total securities
  238,416 
  252,581 
 
    
    
Mortgage loans held for sale
  2,623 
  5,709 
 
    
    
Loans
  747,437 
  723,811 
Less allowance for loan losses
  (6,844)
  (7,550)
Net loans
  740,593 
  716,261 
 
    
    
Premises and equipment, net
  19,697 
  16,452 
Cash surrender value of life insurance
  15,452 
  14,952 
Other real estate
  - 
  283 
Accrued interest receivable and other assets
  11,516 
  11,659 
Total assets
 $1,121,553 
  1,087,991 
 
    
    
Liabilities and Shareholders' Equity
    
    
 
    
    
Deposits:
    
    
Noninterest-bearing demand
 $287,794 
  271,851 
NOW, MMDA & savings
  486,051 
  477,054 
Time, $250,000 or more
  21,318 
  26,771 
Other time
  106,476 
  117,242 
Total deposits
  901,639 
  892,918 
 
    
    
Securities sold under agreements to repurchase
  53,307 
  36,434 
Short-term Federal Reserve Bank borrowings
  - 
  - 
FHLB borrowings
  20,000 
  20,000 
Junior subordinated debentures
  20,619 
  20,619 
Accrued interest payable and other liabilities
  9,835 
  10,592 
Total liabilities
  1,005,400 
  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 5,450,412 shares
    
    
at September 30, 2017 and 5,417,800 shares at December 31, 2016
  45,102 
  44,187 
Retained earnings
  66,539 
  60,254 
Accumulated other comprehensive income
  4,512 
  2,987 
Total shareholders' equity
  116,153 
  107,428 
Total liabilities and shareholders' equity
 $1,121,553 
  1,087,991 
 
    
    
See accompanying Notes to Consolidated Financial Statements.
    
    
 
 
3
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
 
Consolidated Statements of Earnings
 
Three and Nine Months Ended September 30, 2017 and 2016
 
(Dollars in thousands, except per share amounts)
 
 
 
 
Three months ended
 
 
Nine months ended
 
 
 
  September 30, 
 
 
  September 30,
 
 
 
 2017
 
 
 2016
 
 
 2017
 
 
 2016
 
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fees on loans
 $8,966 
  8,188 
  25,935 
  24,185 
Interest on due from banks
  60 
  32 
  138 
  67 
Interest on investment securities:
    
    
    
    
U.S. Government sponsored enterprises
  578 
  603 
  1,795 
  1,910 
State and political subdivisions
  1,047 
  1,105 
  3,198 
  3,350 
Other
  47 
  54 
  157 
  191 
Total interest income
  10,698 
  9,982 
  31,223 
  29,703 
 
    
    
    
    
Interest expense:
    
    
    
    
NOW, MMDA & savings deposits
  156 
  126 
  431 
  367 
Time deposits
  112 
  142 
  360 
  452 
FHLB borrowings
  211 
  426 
  604 
  1,248 
Junior subordinated debentures
  152 
  122 
  432 
  353 
Other
  19 
  12 
  43 
  30 
Total interest expense
  650 
  828 
  1,870 
  2,450 
 
    
    
    
    
Net interest income
  10,048 
  9,154 
  29,353 
  27,253 
 
    
    
    
    
Provision for (reduction of provision for) loan losses
  (218)
  (360)
  (405)
  (1,108)
 
    
    
    
    
Net interest income after provision for loan losses
  10,266 
  9,514 
  29,758 
  28,361 
 
    
    
    
    
Non-interest income:
    
    
    
    
Service charges
  1,140 
  1,163 
  3,340 
  3,291 
Other service charges and fees
  145 
  210 
  447 
  746 
Gain on sale of securities
  - 
  - 
  - 
  324 
Mortgage banking income
  280 
  426 
  945 
  1,088 
Insurance and brokerage commissions
  221 
  163 
  568 
  476 
Gain/(loss) on sale and write-down of
    
    
    
    
other real estate
  43 
  (16)
  (240)
  64 
Miscellaneous
  1,675 
  1,468 
  4,601 
  4,320 
Total non-interest income
  3,504 
  3,414 
  9,661 
  10,309 
 
    
    
    
    
Non-interest expense:
    
    
    
    
Salaries and employee benefits
  4,933 
  4,829 
  15,038 
  14,114 
Occupancy
  1,669 
  1,755 
  4,981 
  5,243 
Professional fees
  303 
  429 
  788 
  1,603 
Advertising
  247 
  313 
  859 
  623 
Debit card expense
  320 
  271 
  894 
  870 
FDIC Insurance
  87 
  71 
  260 
  406 
Other
  1,792 
  1,930 
  5,661 
  5,339 
Total non-interest expense
  9,351 
  9,598 
  28,481 
  28,198 
 
    
    
    
    
Earnings before income taxes
  4,419 
  3,330 
  10,938 
  10,472 
 
    
    
    
    
Income tax expense
  1,177 
  872 
  2,680 
  2,597 
 
    
    
    
    
Net earnings
 $3,242 
  2,458 
  8,258 
  7,875 
 
    
    
    
    
Basic net earnings per share
 $0.59 
  0.45 
  1.52 
  1.43 
Diluted net earnings per share
 $0.58 
  0.44 
  1.49 
  1.42 
Cash dividends declared per share
 $0.12 
  0.10 
  0.36 
  0.28 
 
    
    
    
    
 
See accompanying Notes to Consolidated Financial Statements.
 
    
    
    
 
 
4
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
 
Consolidated Statements of Comprehensive Income
 
Three and Nine Months Ended September 30, 2017 and 2016
 
(Dollars in thousands)
 
 
 
Three months ended
 
 
Nine months ended
 
 
 
  September 30,
 
 
  September 30,
 
 
 
 2017
 
 
 2016
 
 
 2017
 
 
 2016
 
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 $3,242 
  2,458 
  8,258 
  7,875 
 
    
    
    
    
Other comprehensive income (loss):
    
    
    
    
Unrealized holding (losses) gains on securities
    
    
    
    
available for sale
  (666)
  (1,676)
  2,027 
  2,597 
Reclassification adjustment for gains on
    
    
    
    
securities available for sale
    
    
    
    
included in net earnings
  - 
  - 
  - 
  (324)
 
    
    
    
    
Total other comprehensive (loss) income,
    
    
    
    
before income taxes
  (666)
  (1,676)
  2,027 
  2,273 
 
    
    
    
    
Income tax (benefit) expense related to other
    
    
    
    
comprehensive (loss) income:
    
    
    
    
 
    
    
    
    
Unrealized holding (losses) gains on securities
    
    
    
    
available for sale
  (239)
  (614)
  502 
  951 
Reclassification adjustment for gains
    
    
    
    
on securities available for sale
    
    
    
    
included in net earnings
  - 
  - 
  - 
  (126)
 
    
    
    
    
Total income tax expense (benefit) related to
    
    
    
    
other comprehensive income (loss)
  (239)
  (614)
  502 
  825 
 
    
    
    
    
Total other comprehensive (loss) income,
    
    
    
    
net of tax
  (427)
  (1,062)
  1,525 
  1,448 
 
    
    
    
    
Total comprehensive income
 $2,815 
  1,396 
  9,783 
  9,323 
 
    
    
    
    
 
See accompanying Notes to Consolidated Financial Statements.
 
    
    
    
 
 
5
 
 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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 
 
    
    
    
    
    
Common stock repurchase
  - 
  - 
  - 
  - 
  - 
Cash dividends declared on
    
    
    
    
    
common stock
  - 
  - 
  (1,973)
  - 
  (1,973)
Restricted stock units exercised
  32,612 
  915 
  - 
  - 
  915 
Net earnings
  - 
  - 
  8,258 
  - 
  8,258 
Change in accumulated other
    
    
    
    
    
comprehensive income, net of tax
  - 
  - 
  - 
  1,525 
  1,525 
Balance, September 30, 2017
  5,450,412 
 $45,102 
  66,539 
  4,512 
  116,153 
 
    
    
    
    
    
Balance, December 31, 2015
  5,510,538 
 $46,171 
  53,183 
  5,510 
  104,864 
 
    
    
    
    
    
Common stock repurchase
  (92,738)
  (1,983)
  - 
  - 
  (1,983)
Cash dividends declared on
    
    
    
    
    
common stock
  - 
  - 
  (1,556)
  - 
  (1,556)
Net earnings
  - 
  - 
  7,875 
  - 
  7,875 
Change in accumulated other
    
    
    
    
    
comprehensive income, net of tax
  - 
  - 
  - 
  1,448 
  1,448 
Balance, September 30, 2016
  5,417,800 
 $44,188 
  59,502 
  6,958 
  110,648 
 
    
    
    
    
    
See accompanying Notes to Consolidated Financial Statements.
    
    
    
    
    
 
 
6
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
 
Consolidated Statements of Cash Flows
 
Nine Months Ended September 30, 2017 and 2016
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
 
 
(Unaudited)
 
 
(Unaudited)
 
Cash flows from operating activities:
 
 
 
 
 
 
Net earnings
 $8,258 
  7,875 
Adjustments to reconcile net earnings to
    
    
net cash provided by operating activities:
    
    
Depreciation, amortization and accretion
  3,764 
  4,181 
Reduction of provision for loan losses
  (405)
  (1,108)
Deferred income taxes
  (1,122)
    
Gain on sale of investment securities
  - 
  (324)
Gain on sale of other real estate
  -
 
  (81)
Write-down of other real estate
  240 
  17 
Restricted stock expense
  32 
  476 
Origination of mortgage loans held for sale
  (46,173)
  (50,813)
Proceeds from sales of mortgage loans held for sale
  49,259 
  52,186 
Change in:
    
    
Cash surrender value of life insurance
  (500)
  (307)
Other assets
  763 
  897 
Other liabilities
  (408)
  49 
 
    
    
Net cash provided by operating activities
  14,274 
  12,441 
 
    
    
Cash flows from investing activities:
    
    
Purchases of investment securities available for sale
  (6,492)
  (12,642)
Proceeds from sales, calls and maturities of investment securities
    
    
available for sale
  6,535 
  2,899 
Proceeds from paydowns of investment securities available for sale
  13,963 
  15,946 
Purchases of FHLB stock
  - 
  - 
FHLB stock redemption
  (45)
  2 
Net change in loans
  (23,927)
  (24,639)
Purchases of premises and equipment
  (4,810)
  (1,257)
Purchases of bank owned life insurance
  - 
  - 
Proceeds from sale of premises and equipment
  - 
  - 
Proceeds from sale of other real estate and repossessions
  43 
  1,052 
 
    
    
Net cash used by investing activities
  (14,733)
  (18,639)
 
    
    
Cash flows from financing activities:
    
    
Net change in deposits
  8,721 
  29,772 
Net change in securities sold under agreement to repurchase
  16,873 
  23,046 
Proceeds from Fed Funds purchased
  - 
  (8,985)
Repayments of Fed Funds purchased
  - 
  8,985 
Common stock repurchased
  - 
  (1,983)
Cash dividends paid on common stock
  (1,973)
  (1,556)
 
    
    
Net cash provided by financing activities
  23,621 
  49,279 
 
    
    
Net change in cash and cash equivalents
  23,162 
  43,081 
 
    
    
Cash and cash equivalents at beginning of period
  70,094 
  39,763 
 
    
    
Cash and cash equivalents at end of period
 $93,256 
  82,844 
 
 
7
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
 
Consolidated Statements of Cash Flows, continued
 
Nine Months Ended September 30, 2017 and 2016
 
(Dollars in thousands)
 
 
 
2017
 
 
2016
 
 
 
(Unaudited)
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
Interest
 $1,858 
  2,425 
Income taxes
 $872 
  3,180 
 
    
    
Noncash investing and financing activities:
    
    
Change in unrealized gain (loss) on investment securities
    
    
 available for sale, net
 $1,525 
  1,448 
Change in unrealized gain on derivative financial
    
    
 instruments, net
 $- 
  - 
Issuance of accrued restricted stock units
 $(915)
  - 
Transfers of loans to other real estate and repossessions
 $- 
  275 
 
    
    
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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, (Topic 606): Revenue from Contracts with Customers. ASU No. 2014-09 provides guidance on the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. ASU No. 2014-09 is effective for reporting periods beginning after December 15, 2017.
 
The Company will apply ASU No. 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU No. 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues will not be affected. The Company is currently assessing its revenue contracts related to revenue streams that are within the scope of ASU No. 2014-09. The Company’s accounting policies will not change materially since the principles of revenue recognition from ASU No. 2014-09 are largely consistent with existing guidance and the Company’s current practices. The Company has not identified material changes to the timing or amount of revenue recognition. However, the Company does anticipate that it will make changes to its revenue-related disclosures. The Company will provide qualitative disclosures of its performance obligations related to its revenue recognition and will continue to evaluate disaggregation for significant categories of revenue within the scope of ASU No. 2014-09.
 
In February 2016, FASB issued ASU No. 2016-02, (Topic 842): Leases. ASU No. 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018.
 
The Company expects to adopt ASU No. 2016-02 using the modified retrospective method and practical expedients for transition. The practical expedients allow the Company to largely account for its existing leases consistent with current guidance except for the incremental balance sheet recognition for lessees. The Company has started an initial evaluation of its leasing contracts and activities and has started developing its methodology to estimate the right-of use assets and lease liabilities, which is based on the present value of lease payments (the December 31, 2016 future minimum lease payments were $4.6 million). While the Company does not expect there to be a material change in the timing of expense recognition, it is too early in the evaluation process to determine if there will be a material change to the timing of expense recognition. The Company is evaluating its existing disclosures and may need to provide additional information as a result of adoption of ASU No. 2016-02.
 
 
9
 
 
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. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.
 
The Company will apply the amendments to ASU No. 2016-13 through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. While early adoption is permitted beginning in the first quarter of 2019, the Company does not expect to elect that option. The Company is evaluating the impact of ASU No. 2016-13 on its consolidated financial statements. The Company anticipates that ASU No. 2016-13 will have no material impact on the recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
 
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.
 
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.
 
 
10
 
 
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 September 30, 2017 and December 31, 2016 are as follows:
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2017
 
 
 
Amortized Cost
 
 
Gross Unrealized Gains
 
 
Gross Unrealized Losses
 
 
Estimated Fair Value
 
Mortgage-backed securities
 $55,947 
  1,142 
  196 
  56,893 
U.S. Government
    
    
    
    
sponsored enterprises
  40,815 
  290 
  151 
  40,954 
State and political subdivisions
  130,175 
  5,954 
  20 
  136,109 
Corporate bonds
  1,500 
  30 
  - 
  1,530 
Trust preferred securities
  250 
  - 
  - 
  250 
Total
 $228,687 
  7,416 
  367 
  235,736 
 
(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 September 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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 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
 $10,540 
  95 
  4,792 
  101 
  15,332 
  196 
U.S. Government
    
    
    
    
    
    
sponsored enterprises
  5,424 
  47 
  10,762 
  104 
  16,186 
  151 
State and political subdivisions
  545 
  2 
  986 24 
  18 
  1,531 
  20 
Total
 $16,509 
  144 
  16,540 
  223 
  33,049 
  367 
 
 
11
 
 
(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 24 
  29 
  11,002 
  152 
Total
 $36,155 
  507 
  10,123 
  209 
  46,278 
  716 
 
At September 30, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $367,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the September 30, 2017 tables above, three out of 160 securities issued by state and political subdivisions contained unrealized losses, 17 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 September 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.
 
September 30, 2017
 
 
 
 
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Amortized Cost
 
 
Estimated Fair Value
 
Due within one year
 $13,299 12,273 
  13,397 
Due from one to five years
  95,096 
  99,142 
Due from five to ten years
  55,333 
  57,069 
Due after ten years
  8,762 
  8,985 
Mortgage-backed securities
  55,947 
  56,893 
Trust preferred securities
  250 
  250 
Total
 $228,687 
  235,736 
 
No securities available for sale were sold during the nine months ended September 30, 2017. Proceeds from sales of securities available for sale during the nine months ended September 30, 2016 were $804,000 and resulted in gross gains of $324,000.
 
Securities with a fair value of approximately $88.2 million and $95.6 million at September 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required by law.
 
 
12
 
 
(3)          Loans
 
Major classifications of loans at September 30, 2017 and December 31, 2016 are summarized as follows:
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
September 30, 2017
 
 
December 31, 2016
 
Real estate loans:
 
 
 
 
 
 
Construction and land development
 $75,483 
  61,749 
Single-family residential
  247,184 
  240,700 
Single-family residential -
    
    
Banco de la Gente stated income
  37,840 
  40,189 
Commercial
  245,279 
  247,521 
Multifamily and farmland
  28,662 
  21,047 
Total real estate loans
  634,448 
  611,206 
 
    
    
Loans not secured by real estate:
    
    
Commercial loans
  87,019 
  87,596 
Farm loans
  895 
  - 
Consumer loans
  10,005 
  9,832 
All other loans
  15,070 
  15,177 
 
    
    
Total loans
  747,437 
  723,811 
 
    
    
Less allowance for loan losses
  6,844 
  7,550 
 
    
    
Total net loans
 $740,593 
  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 September 30, 2017, construction and land development loans comprised approximately 10% of the Bank’s total loan portfolio.
 
Single-family residential loans – Declining home sales volumes, decreased real estate values and higher than normal levels of unemployment could contribute to losses on these loans. As of September 30, 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 September 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 September 30, 2017, commercial loans comprised approximately 12% of the Bank’s total loan portfolio.
 
 
13
 
 
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 September 30, 2017 and December 31, 2016:
 
September 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
 $206 
  - 
  206 
  75,277 
  75,483 
  - 
Single-family residential
  2,268 
  416 
  2,684 
  244,500 
  247,184 
  - 
Single-family residential -
    
    
    
    
    
    
Banco de la Gente stated income
  1,363 
  462 
  1,825 
  36,015 
  37,840 
  - 
Commercial
  27 
  229 
  256 
  245,023 
  245,279 
  - 
Multifamily and farmland
  - 
  12 
  12 
  28,650 
  28,662 
  - 
Total real estate loans
  3,864 
  1,119 
  4,983 
  629,465 
  634,448 
  - 
 
    
    
    
    
    
    
Loans not secured by real estate:
    
    
    
    
    
    
Commercial loans
  121 
  1,013 
  1,134 
  85,885 
  87,019 
  - 
Farm loans
  - 
  - 
  - 
  895 
  895 
  - 
Consumer loans
  93 
  5 
  98 
  9,907 
  10,005 
  - 
All other loans
  - 
  - 
  - 
  15,070 
  15,070 
  - 
Total loans
 $4,078 
  2,137 
  6,215 
  741,222 
  747,437 
  - 
 
 
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 
  - 
 
 
 
14
 
 
The following table presents non-accrual loans as of September 30, 2017 and December 31, 2016:
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
September 30, 2017
 
 
December 31, 2016
 
Real estate loans:
 
 
 
 
 
 
Construction and land development
 $16 
  22 
Single-family residential
  1,728 
  1,662 
Single-family residential -
    
    
Banco de la Gente stated income
  1,502 
  1,340 
Commercial
  1,422