Attached files
UNITED
STATES
SECURITIES AND
EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
December 31,
2017
Peoples Bancorp of
North Carolina,
Inc.
(Exact Name of Registrant as Specified in Its
Charter)
North Carolina
(State or Other Jurisdiction of
Incorporation)
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000-27205
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56-2132396
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(Commission File
No.)
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(IRS Employer Identification
No.)
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518 West C Street, Newton, North
Carolina
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28658
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(Address of Principal Executive
Offices)
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(Zip Code)
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(828)
464-5620
(Registrant’s Telephone Number,
Including Area Code)
Securities Registered Pursuant to
Section 12(b) of the Act: None
Securities Registered Pursuant to
Section 12(g) of the Act:
Common
Stock, no par value
(title of
class)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
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Yes
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No
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Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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Yes
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No
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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.
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Yes
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No
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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).
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Yes
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No
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Indicate by check
mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference inPart III of this
Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
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Large Accelerated
Filer
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☐
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Accelerated
Filer
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Non-Accelerated
Filer
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☐
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Smaller Reporting
Company
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☐
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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Yes
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No
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State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
prices of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter.
$132,203,074 based on the closing price of such common stock on
June 30, 2017, which was $28.73 per share.
Indicate
the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable
date.
5,995,256 shares of common stock, outstanding at February 28,
2018.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Annual Report of
Peoples Bancorp of North Carolina, Inc. for the year ended December
31, 2017 (the “Annual Report”), which will be included
as Appendix A to the Proxy Statement for the 2018 Annual Meeting of
Shareholders, are incorporated by reference into Part II and
included as Exhibit 13 to this Form 10-K.
Portions of the Proxy Statement
for the 2018 Annual Meeting of Shareholders of Peoples Bancorp of
North Carolina, Inc. to be held on May 3, 2018 (the “Proxy
Statement”), are incorporated by reference into Part
III.
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and
business of Peoples Bancorp of North Carolina, Inc. (the
“Company”). These forward-looking statements involve
risks and uncertainties and are based on the beliefs and
assumptions of management of the Company and on the information
available to management at the time that these disclosures were
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 materially include, but are not
limited to, (1) competition in the markets served by Peoples Bank,
(2) changes in the interest rate environment, (3) general national,
regional or local economic conditions may be less favorable than
expected, resulting in, among other things, a deterioration in
credit quality and the possible impairment of collectibility of
loans, (4) legislative or regulatory changes, including changes in
accounting standards, (5) significant changes in the federal and
state legal and regulatory environment 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 the
Company’s other filings with the Securities and Exchange
Commission. The Company undertakes no obligation to update any
forward-looking statements.
2
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
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FORM 10-K CROSS REFERENCE INDEX
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2017
Form
10-K
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Notice of
2018
Annual
Meeting,
Proxy
Statement
and
Annual Report
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Page
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Page
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PART I
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Item 1 -
Business
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4 -
11
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N/A
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Item 1A -
Risk Factors
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11 -
18
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N/A
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Item 1B -
Unresolved Staff Comments
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18
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N/A
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Item 2 -
Properties
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19
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N/A
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Item 3 -
Legal Proceedings
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19
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N/A
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Item 4 -
Mine Safety Disclosures
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19
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N/A
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PART II
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Item 5 - Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
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20 -
22
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N/A
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Item 6 -
Selected Financial Data
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22
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A-3
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Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations
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23
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A-4 -
A-23
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Item 7A -
Quantitative and Qualitative Disclosures About Market
Risk
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23
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A-22 -
A-23
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Item 8 -
Financial Statements and Supplementary Data
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23
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A-24 -
A-66
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Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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23
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N/A
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Item 9A -
Controls and Procedures
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23 -
24
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N/A
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Item 9B -
Other Information
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24
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N/A
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PART III
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Item 10 -
Directors and Executive Officers and Corporate
Governance
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24
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A-67
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Item 11 -
Executive Compensation
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24
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14 -
24
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Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder
Matters
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24 -
25
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5 -
7
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Item 13 - Certain Relationships and Related Transactions and
Director Independence
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25
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11 and
27
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Item 14 -
Principal Accountant Fees and Services
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25
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30
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PART IV
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Item 15 -
Exhibits and Financial Statement Schedules
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26 -
29
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N/A
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Signatures
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30
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N/A
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3
PART
I
ITEM 1.
BUSINESS
General
Peoples Bancorp of North
Carolina, Inc. (“Bancorp”), was formed in 1999 to serve
as the holding company for Peoples Bank (the “Bank”).
Bancorp is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the “Federal
Reserve”) under the Bank Holding Company Act of 1956, as
amended (the “BHCA”). Bancorp’s principal source
of income is dividends declared and paid by the Bank on its capital
stock, if any. Bancorp has no operations and conducts no business
of its own other than owning the Bank. Accordingly, the discussion
of the business which follows concerns the business conducted by
the Bank, unless otherwise indicated. Bancorp and its wholly owned
subsidiary, the Bank, along with the Bank’s wholly owned
subsidiaries are collectively called the
“Company”.
The Bank, founded in 1912, is a
state-chartered commercial bank serving the citizens and business
interests of the Catawba Valley and surrounding communities through
19 banking offices, as of December 31, 2017, located in Lincolnton,
Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite,
Hickory, Charlotte, Cornelius, Mooresville and Raleigh, North
Carolina. The Bank also operates loan production offices in Denver
and Durham, North Carolina. At December 31, 2017, the Company had
total assets of $1.1 billion, net loans of $753.4 million, deposits
of $907.0 million, total securities of $231.2 million, and
shareholders’ equity of $116.0 million.
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 Bank has a diversified loan
portfolio, with no foreign loans and few agricultural loans. Real
estate loans are predominately variable rate and fixed rate
commercial property loans, which include residential development
loans to commercial customers. Commercial loans are spread
throughout a variety of industries with no one particular industry
or group of related industries accounting for a significant portion
of the commercial loan portfolio. The majority of the Bank’s
deposit and loan customers are individuals and small to
medium-sized businesses located in the Bank’s market area.
The Bank’s loan portfolio also includes Individual Taxpayer
Identification Number (ITIN) mortgage loans generated thorough the
Bank’s Banco offices. Additional discussion of the
Bank’s loan portfolio and sources of funds for loans can be
found in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” on pages A-4
through A-23 of the Annual Report, which is included in this Form
10-K as Exhibit (13).
The operations of the Bank and
depository institutions in general are significantly influenced by
general economic conditions and by related monetary and fiscal
policies of depository institution regulatory agencies, including
the Federal Reserve, the Federal Deposit Insurance Corporation (the
“FDIC”) and the North Carolina Commissioner of Banks
(the “Commissioner”).
The Company’s fiscal year
ends December 31. This Form 10-K is also being used as the
Bank’s Annual Disclosure Statement under FDIC Regulations.
This Form 10-K has not been reviewed, or confirmed for accuracy or
relevance by the FDIC.
At December 31, 2017, the Company
employed 302 full-time employees and 33 part-time employees, which
equated to 326 full-time equivalent employees.
Subsidiaries
The Bank is a subsidiary of the
Company. At December 31, 2017, the Bank had four subsidiaries,
Peoples Investment Services, Inc., Real Estate Advisory Services,
Inc., Community Bank Real Estate Solutions, LLC
(“CBRES”) and PB Real Estate Holdings, LLC. Through a
relationship with Raymond James Financial Services, Inc., Peoples
Investment Services, Inc. provides the Bank’s customers
access to investment counseling and non-deposit investment products
such as stocks, bonds, mutual funds, tax deferred annuities, and
related brokerage services. Real Estate Advisory Services, Inc.
provides real estate appraisal and real estate brokerage services.
CBRES serves as a “clearing-house” for appraisal
services for community banks. Other banks are able to contract with
CBRES to find and engage appropriate appraisal companies in the
area where the property to be appraised is located. This type of
service ensures that the appraisal process remains independent from
the financing process within the Bank. PB Real Estate Holdings, LLC
acquires, manages and disposes of real property, other collateral
and other assets obtained in the ordinary course of collecting
debts previously contracted.
4
In June 2006, the Company formed
a wholly owned Delaware statutory trust, PEBK Capital Trust II
(“PEBK Trust II”), which issued $20.0 million of
guaranteed preferred beneficial interests in the Company’s
junior subordinated deferrable interest debentures. All of the
common securities of PEBK Trust II are owned by the Company. The
proceeds from the issuance of the common securities and the trust
preferred securities were used by PEBK Trust II to purchase $20.6
million of junior subordinated debentures of the Company, which pay
a floating rate equal to three-month LIBOR plus 163 basis points.
The proceeds received by the Company from the sale of the junior
subordinated debentures were used in December 2006 to repay the
trust preferred securities issued in December 2001 by PEBK Capital
Trust, a wholly owned Delaware statutory trust of the Company, and
for general purposes. The debentures represent the sole asset of
PEBK Trust II. PEBK Trust II is not included in the consolidated
financial statements.
The trust preferred securities
issued by PEBK Trust II accrue and pay quarterly at a floating rate
of three-month LIBOR plus 163 basis points. The Company has
guaranteed distributions and other payments due on the trust
preferred securities to the extent PEBK Trust II does not have
funds with which to make the distributions and other payments. The
net combined effect of the trust preferred securities transaction
is that the Company is obligated to make the distributions and
other payments required on the trust preferred
securities.
These trust preferred securities
are mandatorily redeemable upon maturity of the debentures on June
28, 2036, or upon earlier redemption as provided in the indenture.
The Company has the right to redeem the debentures purchased by
PEBK Trust II, in whole or in part, which became effective on June
28, 2011. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the
principal amount plus any accrued but unpaid
interest.
Market
Area
The Bank’s primary market
consists of the communities in an approximate 50-mile radius around
its headquarters office in Newton, North Carolina. This area
includes Catawba County, Alexander County, Lincoln County, Iredell
County and portions of northeast Gaston County, North Carolina. The
Bank is located only 40 miles north of Charlotte, North Carolina,
and the Bank’s primary market area is and will continue to be
significantly affected by its close proximity to this major
metropolitan area.
Employment in the Bank’s
primary market area is diversified among manufacturing, retail and
wholesale trade, technology, services and utilities. Catawba
County’s largest employers include Catawba County Schools,
Frye Regional Medical Center, Catawba Valley Medical Center,
Merchant Distributors, Inc. (wholesale food distributor), Catawba
County, CommScope, Inc. (manufacturer of fiber optic cable and
accessories), Corning Optical Communications (manufacturer of fiber
optic cable and accessories), Ethan Allen (furniture manufacturer),
HSM (manufacturing) and Advance Pierre Foods (restaurants and
bakeries).
Competition
The Bank has operated in the
Catawba Valley region of North Carolina for over 100 years and is
the only financial institution headquartered in Newton, North
Carolina. Nevertheless, the Bank faces strong competition both in
attracting deposits and making loans. Its most direct competition
for deposits has historically come from other commercial banks,
credit unions and brokerage firms located in its primary market
area, including large financial institutions. One national money
center commercial bank is headquartered in Charlotte, North
Carolina. Based upon June 30, 2017 comparative data, the Bank had
23.42% of the deposits in Catawba County, placing it second in
deposit size among a total of 12 banks with branch offices in
Catawba County; 9.83% of the deposits in Lincoln County, placing it
fifth in deposit size among a total of ten banks with branch
offices in Lincoln County; and 12.26% of the deposits in Alexander
County, placing it fifth in deposit size among a total of six banks
with branch offices in Alexander County.
The Bank also faces additional
significant competition for investors’ funds from short-term
money market securities and other corporate and government
securities. The Bank’s core deposit base has grown
principally due to economic growth in the Bank’s market area
coupled with the implementation of new and competitive deposit
products. The ability of the Bank to attract and retain deposits
depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing
investment opportunities.
5
The Bank experiences strong
competition for loans from commercial banks and mortgage banking
companies. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and
quality of services it provides to borrowers. Competition is
increasing as a result of the continuing reduction of restrictions
on the interstate operations of financial
institutions.
Supervision
and Regulation
Bank holding companies and
commercial banks are extensively regulated under both federal and
state law. The following is a brief summary of certain statutes and
rules and regulations that affect or will affect the Company, the
Bank and their subsidiaries. This summary is qualified in its
entirety by reference to the particular statute and regulatory
provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to
the business of the Company, the Bank and their subsidiaries.
Supervision, regulation and examination of the Company and the Bank
by the regulatory agencies are intended primarily for the
protection of depositors rather than shareholders of the Company.
Statutes and regulations which contain wide-ranging proposals for
altering the structures, regulations and competitive relationship
of financial institutions are introduced regularly. The Company
cannot predict whether or in what form any proposed statute or
regulation will be adopted or the extent to which the business of
the Company and the Bank may be affected by such statute or
regulation.
General. There are a number of obligations and
restrictions imposed on bank holding companies and their depository
institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event
the depository institution becomes in danger of default or in
default. For example, to mitigate the risk of failure, bank holding
companies are required to guarantee the compliance of any insured
depository institution subsidiary that may become
“undercapitalized” with the terms of the capital
restoration plan filed by such subsidiary with its appropriate
federal banking agency up to the lesser of (i) an amount equal to
5% of the bank’s total assets at the time the bank became
undercapitalized or (ii) the amount which is necessary (or would
have been necessary) to bring the bank into compliance with all
capital standards as of the time the bank fails to comply with such
capital restoration plan. The Company, as a registered bank holding
company, is subject to the regulation of the Federal Reserve. Under
a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions
in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a
bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve’s determination that such
activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding
company.
In addition, insured depository
institutions under common control are required to reimburse the
FDIC for any loss suffered by its deposit insurance funds as a
result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest
of the deposit insurance funds. The FDIC’s claim for damages
is superior to claims of stockholders of the insured depository
institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured
depository institutions.
As a result of the
Company’s ownership of the Bank, the Company is also
registered under the bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and
supervision by the Commissioner.
Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank
Act”). The Dodd-Frank Act significantly
changed bank regulation and has affected the lending, investment,
trading and operating activities of depository institutions and
their holding companies.
The Dodd-Frank Act also created a
new Consumer Financial Protection Bureau (the "Bureau") with
extensive powers to supervise and enforce consumer protection laws.
The Bureau has broad rule-making authority for a wide range of
consumer protection laws that apply to all banks and savings
institutions, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices. The Bureau also has
examination and enforcement authority over all banks and savings
institutions with more than $10 billion in assets. Banks and
savings institutions with $10 billion or less in assets, such as
the Bank, will continue to be examined by their applicable federal
bank regulators. The Dodd-Frank Act also gave state attorneys
general the ability to enforce applicable federal consumer
protection laws.
6
The Dodd-Frank Act broadened the
base for FDIC assessments for deposit insurance and permanently
increased the maximum amount of deposit insurance to $250,000 per
depositor. The legislation also, among other things, requires
originators of certain securitized loans to retain a portion of the
credit risk, stipulates regulatory rate-setting for certain debit
card interchange fees, repealed restrictions on the payment of
interest on commercial demand deposits and contains a number of
reforms related to mortgage originations. The Dodd-Frank Act
increased the ability of shareholders to influence boards of
directors by requiring companies to give shareholders a non-binding
vote on executive compensation and so-called “golden
parachute” payments. The legislation also directed the
Federal Reserve to promulgate rules prohibiting excessive
compensation paid to company executives, regardless of whether the
company is publicly traded or not. Many of the provisions of the
Dodd-Frank Act are subject to delayed effective dates or require
the implementing regulations and, therefore, their impact on the
Company's and the Bank's operations cannot be fully determined at
this time. However, it is likely that the Dodd-Frank Act will
increase the regulatory burden, compliance costs and interest
expense for the Bank and the Company.
Capital
Adequacy. At
December 31, 2017, the Bank exceeded each of its capital
requirements with a Tier 1 leverage capital ratio of 11.69%, common
equity Tier 1 risk-based capital ratio of 15.09%, Tier 1 risk-based
capital ratio of 15.09% and total risk-based capital ratio of
15.83%. At December 31, 2017, the Company also exceeded each of its
capital requirements with a Tier 1 leverage capital ratio of
11.94%, common equity Tier 1 risk-based capital ratio of 13.00%,
Tier 1 risk-based capital ratio of 15.32% and total risk-based
capital ratio of 16.06%.
On July 2, 2013, the Federal
Reserve approved a final rule that establishes an integrated
regulatory capital framework that addresses shortcomings in certain
capital requirements. The rule, which became effective on January
1, 2015, implements in the United States the Basel III regulatory
capital reforms from the Basel Committee on Banking Supervision and
certain changes required by the Dodd-Frank Act. The final
rule:
●
established a new minimum common
equity Tier 1 risk-based capital ratio (common equity Tier 1
capital to total risk-weighted assets) of 4.5% and increased the
minimum Tier 1 risk-based capital ratio from 4.0% to 6.0%, while
maintaining the minimum total risk-based capital ratio of 8.0% and
the minimum Tier 1 leverage capital ratio of
4.0%;
●
revised the rules for calculating
risk-weighted assets to enhance their risk
sensitivity;
●
phased out trust preferred
securities and cumulative perpetual preferred stock as Tier 1
capital;
●
added a requirement to maintain a
minimum conservation buffer, composed of common equity Tier 1
capital, of 2.5% of risk-weighted assets, to be applied to the new
common equity Tier 1 risk-based capital ratio, the Tier 1
risk-based capital ratio and the Total risk-based capital ratio,
which means that banking organizations, on a fully phased in basis
no later than January 1, 2019, must maintain a minimum common
equity Tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1
risk-based capital ratio of 8.5% and a minimum Total risk-based
capital ratio of 10.5%; and
●
changed the definitions of
capital categories for insured depository institutions for purposes
of the Federal Deposit Insurance Corporation Improvement Act of
1991 prompt corrective action provisions. Under these revised
definitions, to be considered well-capitalized, an insured
depository institution must have a Tier 1 leverage capital ratio of
at least 5.0%, a common equity Tier 1 risk-based capital ratio of
at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0%
and a total risk-based capital ratio of at least
10.0%.
The new minimum regulatory
capital ratios and changes to the calculation of risk-weighted
assets became effective for the Bank and the Company on January 1,
2015. The required minimum conservation buffer began to be phased
in incrementally, starting at 0.625% on January 1, 2016 and
increased to 1.25% on January 1, 2017, 1.875% on January 1, 2018,
and will increase to 2.5% on January 1, 2019.
The final rule established common
equity Tier 1 capital as a new capital component. Common equity
Tier 1 capital consists of common stock instruments that meet the
eligibility criteria in the final rule, retained earnings,
accumulated other comprehensive income/loss and common equity Tier
1 minority interest. As a result, Tier 1 capital has two
components: common equity Tier 1 capital and additional Tier 1
capital. The final rule also revised the eligibility criteria for
inclusion in additional Tier 1 and Tier 2 capital. As a result of
these changes, certain non-qualifying capital instruments,
including cumulative preferred stock and trust preferred
securities, are excluded as a component of Tier 1 capital for
institutions of the size of the Company.
7
The final rule further requires
that certain items be deducted from common equity Tier 1 capital,
including (1) goodwill and other intangible assets, other than
mortgage servicing rights, net of deferred tax liabilities
(“DTLs”); (2) deferred tax assets that arise from
operating losses and tax credit carryforwards, net of valuation
allowances and DTLs; (3) after-tax gain-on-sale associated with a
securitization exposure; and (4) defined benefit pension fund
assets held by a depository institution holding company, net of
DTLs. In addition, banking organizations must deduct from common
equity Tier 1 capital the amount of certain assets, including
mortgage servicing assets, that exceed certain thresholds. The
final rule also allows all but the largest banking organizations to
make a one-time election not to recognize unrealized gains and
losses on available for sale debt securities in regulatory capital,
as under prior capital rules.
The final rule provides that the
failure to maintain the minimum conservation buffer will result in
restrictions on capital distributions and discretionary cash bonus
payments to executive officers. If a banking organization’s
conservation buffer is less than 0.625%, the banking organization
may not make any capital distributions or discretionary cash bonus
payments to executive officers. If the conservation buffer is
greater than 0.625% but not greater than 1.25%, capital
distributions and discretionary cash bonus payments are limited to
20% of net income for the four calendar quarters preceding the
applicable calendar quarter (net of any such capital
distributions), or eligible retained income. If the conservation
buffer is greater than 1.25% but not greater than 1.875%, the limit
is 40% of eligible retained income, and if the conservation buffer
is greater than 1.875% but not greater than 2.5%, the limit is 60%
of eligible retained income. The preceding thresholds for the
conservation buffer and related restrictions represent the fully
phased in rules effective no later than January 1, 2019. Such
thresholds will be phased in incrementally throughout the phase in
period, with the lowest thresholds having become effective January
1, 2016.
Dividend and Repurchase
Limitations. Federal
regulations provide that the Company must obtain Federal Reserve
approval prior to repurchasing its common stock for consideration
in excess of 10% of its net worth during any twelve-month period
unless the Company (i) both before and after the redemption
satisfies capital requirements for a “well capitalized”
bank holding company; (ii) received a one or two rating in its last
examination; and (iii) is not the subject of any unresolved
supervisory issues.
The ability of the Company to pay
dividends or repurchase shares may be dependent upon the
Company’s receipt of dividends from the Bank. North Carolina
commercial banks, such as the Bank, are subject to legal
limitations on the amounts of dividends they are permitted to pay.
Also, an insured depository institution, such as the Bank, is
prohibited from making capital distributions, including the payment
of dividends, if, after making such distribution, the institution
would become “undercapitalized” (as such term is
defined in the applicable law and regulations).
Deposit
Insurance. The
assessment paid by each Deposit Insurance Fund member institution
is based on its relative risks of default as measured by regulatory
capital ratios and other factors. Specifically, the assessment rate
is based on the institution’s capitalization risk category
and supervisory subgroup category. An institution’s
capitalization risk category is based on the FDIC’s
determination of whether the institution is well capitalized,
adequately capitalized or less than adequately
capitalized.
An institution’s
supervisory subgroup category is based on the FDIC’s
assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will
be required. The FDIC may terminate insurance of deposits upon a
finding that an institution has engaged in unsafe and unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule,
order or condition imposed by the FDIC.
The Dodd-Frank Act expanded the
base for FDIC insurance assessments, requiring that assessments be
based on the average consolidated total assets less tangible equity
capital of a financial institution. On February 7, 2011, the FDIC
approved a final rule to implement the foregoing provision of the
Dodd-Frank Act. Among other things, the final rule revises the
assessment rate schedule to provide assessments ranging from five
to 35 basis points, with the initial assessment rates subject to
adjustments which could increase or decrease the total base
assessment rates. The FDIC has three possible adjustments to an
institution’s initial base assessment rate: (i) a decrease of
up to five basis points (or 50% of the initial base assessment
rate) for long-term unsecured debt, including senior unsecured debt
and subordinated debt; (ii) an increase for holding long-term
unsecured or subordinated debt issued by other insured depository
institutions known as the Depository Institution Debt Adjustment
and (iii) for institutions not well rated and well capitalized, an
increase not to exceed ten basis points for brokered deposits in
excess of ten percent of domestic deposits.
8
Federal Home Loan Bank
System. The Federal
Home Loan Bank (“FHLB”) system provides a central
credit facility for member institutions. As a member of the FHLB of
Atlanta, the Bank is required to own capital stock in the FHLB of
Atlanta in an amount at least equal to 0.20% (or 20 basis points)
of the Bank’s total assets at the end of each calendar year,
plus 4.5% of its outstanding advances (borrowings) from the FHLB of
Atlanta under the new activity-based stock ownership requirement.
On December 31, 2017, the Bank was in compliance with this
requirement.
Community
Reinvestment.
Under the Community Reinvestment Act (“CRA”), as
implemented by regulations of the FDIC, an insured institution has
a continuing and affirmative obligation consistent with its safe
and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for
financial institutions, nor does it limit an institution’s
discretion to develop, consistent with the CRA, the types of
products and services that it believes are best suited to its
particular community. The CRA requires the federal banking
regulators, in connection with their examinations of insured
institutions, to assess the institutions’ records of meeting
the credit needs of their communities, using the ratings of
“outstanding,” “satisfactory,” “needs
to improve,” or “substantial noncompliance,” and
to take that record into account in its evaluation of certain
applications by those institutions. All institutions are required
to make public disclosure of their CRA performance ratings. The
Bank received a “satisfactory” rating in its last CRA
examination, which was conducted during February
2017.
Changes in Control.
The BHCA prohibits the Company from acquiring direct or indirect
control of more than 5% of the outstanding voting stock or
substantially all of the assets of any bank or savings bank or
merging or consolidating with another bank or financial holding
company or savings bank holding company without prior approval of
the Federal Reserve. Similarly, Federal Reserve approval (or, in
certain cases, non-objection) must be obtained prior to any person
acquiring control of the Company. Control is deemed to exist if,
among other things, a person acquires 25% or more of any class of
voting stock of the Company or controls in any manner the election
of a majority of the directors of the Company. Control is presumed
to exist if a person acquires 10% or more of any class of voting
stock and the stock is registered under Section 12 of the
Securities Exchange Act of 1934, as amended from time to time (the
“Exchange Act”), or the acquiror will be the largest
shareholder after the acquisition.
Federal Securities
Law. The Company
has registered its common stock with the Securities and Exchange
Commission (“SEC”) pursuant to Section 12(g) of the
Exchange Act. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual
and periodic reporting and other requirements of the Exchange Act
are applicable to the Company.
Transactions with
Affiliates. Under current federal law,
depository institutions are subject to the restrictions contained
in Section 22(h) of the Federal Reserve Act with respect to loans
to directors, executive officers and principal shareholders. Under
Section 22(h), loans to directors, executive officers and
shareholders who own more than 10% of a depository institution (18%
in the case of institutions located in an area with less than
30,000 in population), and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the
institution’s loans-to-one-borrower limit (as discussed
below). Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive
officers and shareholders who own more than 10% of an institution,
and their respective affiliates, unless such loans are approved in
advance by a majority of the board of directors of the institution.
Any “interested” director may not participate in the
voting. The FDIC has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further,
pursuant to Section 22(h), the Federal Reserve requires that loans
to directors, executive officers, and principal shareholders be
made on terms substantially the same as offered in comparable
transactions with non-executive employees of the Bank. The FDIC has
imposed additional limits on the amount a bank can loan to an
executive officer.
Loans to One
Borrower. The
Bank is subject to the loans-to-one-borrower limits imposed by
North Carolina law, which are substantially the same as those
applicable to national banks. Under these limits, no loans and
extensions of credit to any borrower outstanding at one time and
not fully secured by readily marketable collateral shall exceed 15%
of the Bank’s total equity capital. At December 31, 2016,
this limit was $20.4 million. This limit is increased by an
additional 10% of the Bank’s total equity capital, or $34.1
million as of December 31, 2017, for loans and extensions of credit
that are fully secured by readily marketable
collateral.
Gramm-Leach-Bliley
Act. The federal Gramm-Leach-Bliley Act (the “GLB
Act”) dramatically changed various federal laws governing the
banking, securities and insurance industries. The GLB Act expanded
opportunities for banks and bank holding companies to provide
services and engage in other revenue-generating activities that
previously were prohibited. In doing so, it increased competition
in the financial services industry, presenting greater
opportunities for our larger competitors, which were more able to
expand their service and products than smaller, community-oriented
financial institutions, such as the Bank.
9
USA Patriot Act of
2001. The
Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act (the “Patriot Act”) was enacted
in response to the terrorist attacks that occurred in New York,
Pennsylvania and Washington, D.C. on September 11, 2001. The
Patriot Act was intended to strengthen the ability of U.S. law
enforcement and the intelligence community to work cohesively to
combat terrorism on a variety of fronts. The impact of the Patriot
Act on financial institutions of all kinds has been significant and
wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and requires various
regulations, including standards for verifying customer
identification at account opening, and rules to promote cooperation
among financial institutions, regulators, and law enforcement
entities in identifying parties that may be involved in terrorism
or money laundering.
Interstate Banking and
Branching. The BHCA was amended by the Interstate Banking
Act. The Interstate Banking Act provides that adequately
capitalized and managed financial and bank holding companies are
permitted to acquire banks in any state. State law prohibiting
interstate banking or discriminating against out-of-state banks is
preempted. States are not permitted to enact laws opting out of
this provision; however, states are allowed to adopt a minimum age
restriction requiring that target banks located within the state be
in existence for a period of years, up to a maximum of five years,
before a bank may be subject to the Interstate Banking Act. The
Interstate Banking Act, as amended by the Dodd-Frank Act,
establishes deposit caps which prohibit acquisitions that result in
the acquiring company controlling 30% or more of the deposits of
insured banks and thrift institutions held in the state in which
the target maintains a breach or 10% or more of the deposits
nationwide. States have the authority to waive the 30% deposit cap.
State-level deposit caps are not preempted as long as they do not
discriminate against out-of-state companies, and the federal
deposit caps apply only to initial entry
acquisitions.
Sarbanes-Oxley Act of
2002. The
Sarbanes-Oxley Act of 2002 mandates for public companies a variety
of reforms intended to address corporate and accounting fraud and
provides for the establishment of the Public Company Accounting
Oversight Board (the “PCAOB”) which enforces auditing,
quality control and independence standards for firms that audit
SEC-reporting companies. The Sarbanes-Oxley Act imposes higher
standards for auditor independence and restricts the provision of
consulting services by auditing firms to companies they audit and
requires that certain audit partners be rotated periodically. It
also requires chief executive officers and chief financial
officers, or their equivalents, to certify the accuracy of periodic
reports filed with the SEC, subject to civil and criminal penalties
if they knowingly or willfully violate this certification
requirement, and increases the oversight and authority of audit
committees of publicly traded companies.
Limits on Rates Paid on
Deposits and Brokered Deposits. FDIC regulations limit
the ability of insured depository institutions to accept, renew or
roll-over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions having
the same type of charter in such depository institution’s
normal market area. Under these regulations, “well
capitalized” depository institutions may accept, renew or
roll-over such deposits without restriction, “adequately
capitalized” depository institutions may accept, renew or
roll-over such deposits with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and
“undercapitalized” depository institutions may not
accept, renew, or roll-over such deposits. Definitions of
“well capitalized,” “adequately
capitalized” and “undercapitalized” are the same
as the definitions adopted by federal banking agencies to implement
the prompt corrective action provisions discussed
above.
Other. Additional regulations require
annual examinations of all insured depository institutions by the
appropriate federal banking agency and establish operational and
managerial, asset quality, earnings and stock valuation standards
for insured depository institutions, as well as compensation
standards.
The Bank is subject to
examination by the FDIC and the Commissioner. In addition, the Bank
is subject to various other state and federal laws and regulations,
including state usury laws, laws relating to fiduciaries, consumer
credit, equal credit and fair credit reporting laws and laws
relating to branch banking. The Bank, as an insured North Carolina
commercial bank, is prohibited from engaging as a principal in
activities that are not permitted for national banks, unless (i)
the FDIC determines that the activity would pose no significant
risk to the appropriate deposit insurance fund and (ii) the Bank
is, and continues to be, in compliance with all applicable capital
standards.
Future
Requirements. Statutes and regulations, which contain
wide-ranging proposals for altering the structures, regulations and
competitive relationships of financial institutions, are introduced
regularly. Neither the Company nor the Bank can predict whether or
what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company or the Bank may be
affected by such statute or regulation.
10
Consent
Order
On August 31, 2015, the FDIC and
the North Carolina Office of the Commissioner issued a Consent
Order (the “Order”) in connection with compliance by
the Bank with the Bank Secrecy Act and its implementing regulations
(collectively, the “BSA”). The Order was issued
pursuant to the consent of the Bank. In consenting to the issuance
of the Order, the Bank did not admit or deny any unsafe or unsound
banking practices or violations of law or
regulation.
The Order required the Bank to
take certain affirmative actions to comply with its obligations
under the BSA, including, without limitation, strengthening its
Board of Directors’ oversight of BSA activities; reviewing,
enhancing, adopting and implementing a revised BSA compliance
program; completing a BSA risk assessment; developing a revised
system of internal controls designed to ensure full compliance with
the BSA; reviewing and revising customer due diligence and risk
assessment processes, policies and procedures; developing, adopting
and implementing effective BSA training programs; assessing BSA
staffing needs and resources and appointing a qualified BSA
officer; establishing an independent BSA testing program; ensuring
that all reports required by the BSA are accurately and properly
filed and engaging an independent firm to review past account
activity to determine whether suspicious activity was properly
identified and reported.
During the third quarter of 2017
the Bank received notice that the Order was terminated effective
August 30, 2017.
Available
Information
The Company makes its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports available free
of charge on its internet website www.peoplesbanknc.com as soon as
reasonably practicable after the reports are electronically filed
with the SEC. The Company’s Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q are also available on its internet
website in interactive data format using the eXtensible Business
Reporting Language (XBRL), which allows financial statement
information to be downloaded directly into spreadsheets, analyzed
in a variety of ways using commercial off-the-shelf software and
used within investment models in other software formats. Any
materials that the Company files with the SEC may be read and/or
copied at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, DC 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. These filings are also accessible on the
SEC’s website at www.sec.gov.
Additionally, the Company’s
corporate governance policies, including the charters of the Audit
and Enterprise Risk, Compensation, and Governance Committees, and
the Code of Business Conduct and Ethics may also be found the
Company’s website (www.peoplesbanknc.com). A written copy of
the foregoing corporate governance policies is available upon
written request to the Company.
ITEM 1A.
RISK FACTORS
The following are potential risks
that management considers material and that could affect the future
operating results and financial condition of the Bank and the
Company. The risks are not listed in any particular order of
importance, and there is the potential that there are other risks
that have either not been identified or that management believed to
be immaterial but which could in fact adversely affect the
operating results and financial condition of the Bank and the
Company.
If any of the following risks
actually occur, the Company’s financial condition and results
of operations could be materially and adversely affected. If this
were to happen, the value of the Company’s common stock could
decline significantly, and you could lose all or part of your
investment.
11
Our business
could be adversely affected by current conditions in the financial
markets and economic conditions generally.
Our business is subject to
periodic fluctuations based on national, regional and local
economic conditions. These fluctuations are not predictable, cannot
be controlled, and may have a material adverse impact on our
operations and financial condition. Sustained weakness or weakening
in business and economic conditions generally or specifically in
the principal markets in which we do business could have one or
more of the following adverse effects on our
business:
●
a
decrease in the demand for loans or other products and services
offered by us;
●
a
decrease in the value of our loans or other assets secured by
consumer or commercial real estate;
●
a
decrease in deposit balances due to overall reductions in the
accounts of customers;
●
an
impairment of certain intangible assets or investment
securities;
●
a
decreased ability to raise additional capital on terms acceptable
to us or at all; or
●
an
increase in the number of borrowers who become delinquent, file for
protection under bankruptcy laws or default on their loans or other
obligations to us. An increase in the number of delinquencies,
bankruptcies or defaults could result in a higher level of
nonperforming assets, net charge-offs and provision for credit
losses, which would reduce our earnings.
Financial
reform legislation enacted by Congress and resulting regulations
have increased, and are expected to continue to increase our costs
of operations.
Congress enacted the Dodd-Frank
Act in 2010. This law has significantly changed the structure of
the bank regulatory system and affects the lending, deposit,
investment, trading and operating activities of financial
institutions and their holding companies. The Dodd-Frank Act
requires various federal agencies to adopt a broad range of new
implementing rules and regulations, and to prepare numerous studies
and reports for Congress. The federal agencies are given
significant discretion in drafting the implementing rules and
regulations. Although some of these regulations have been
promulgated, additional regulations are expected to be issued in
2018.
It is difficult to quantify what
specific impact the Dodd-Frank Act and related regulations have had
on the Company to date and what impact yet to be written
regulations will have on us in the future. However, it is expected
that at a minimum they will increase our operating and compliance
costs and could increase our interest expense.
Notwithstanding the foregoing, on
February 3, 2017, the President of the United States issued an
executive order identifying “core principles” for the
administration’s financial services regulatory policy and
directing the Secretary of the Treasury, in consultation with the
heads of other financial regulatory agencies, to evaluate how the
current regulatory framework promotes or inhibits the principles
and what actions have been, and are being, taken to promote the
principles. In response to the executive order, on June 12, 2017,
October 6, 2017 and October 26, 2017, respectively, the U.S.
Department of the Treasury issued the first three of four reports
recommending a number of comprehensive changes in the current
regulatory system for U.S. depository institutions, the U.S.
capital markets and the U.S. asset management and insurance
industries that may serve to reduce the impact of existing and
future regulations on our operations. There can be no
assurance that such regulations will be implemented or that they
will reduce the impact of existing and future regulations on our
operations.
Increases in
FDIC insurance premiums may adversely affect the Company’s
net income and profitability.
The Company is generally unable
to control the amount of premiums that the Bank is required to pay
for FDIC insurance. If there are bank or financial institution
failures that exceed the FDIC’s expectations, the Bank may be
required to pay higher FDIC premiums than those currently in force.
Any future increases or required prepayments of FDIC insurance
premiums may adversely impact the Company’s earnings and
financial condition.
Market
developments may adversely affect our industry, business and
results of operations.
Significant declines in the
housing market, with falling home prices and increasing
foreclosures and unemployment, resulted in significant write-downs
of asset values by many financial institutions, including
government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities
but spreading to credit default swaps and other derivative
securities, caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in
some cases, to fail. As a consequence, the Company experienced
significant challenges, its credit quality deteriorated and its net
income and results of operations were adversely impacted.
Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and
institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers including other financial
institutions. Although to date the Company and the Bank remain
“well capitalized,” we are part of the financial system
and a systemic lack of available credit, a lack of confidence in
the financial sector, increased volatility in the financial markets
and/or reduced business activity could materially adversely affect
our business, financial condition and results of
operations.
12
Loss of key
personnel could adversely impact results.
The success of the Bank has been
and will continue to be greatly influenced by the ability to retain
the services of existing senior management. The Bank has benefited
from consistency within its senior management team, with its top
three executives averaging 19 years of service with the Bank. The
Company has entered into employment contracts with each of these
top management officials. Nevertheless, the unexpected loss of the
services of any of the key management personnel, or the inability
to recruit and retain qualified personnel in the future, could have
an adverse impact on the business and financial results of the
Bank.
A significant
amount of the Bank’s business is concentrated in lending
which is secured by property located in the Catawba Valley and
surrounding areas.
In addition to the financial
strength and cash flow characteristics of the borrower in each
case, the Bank often secures its loans with real estate collateral.
The real estate collateral in each case provides an alternate
source of repayment in the event of default by the borrower and may
deteriorate in value during the time the credit is extended. If the
Bank is required to liquidate the collateral securing a loan during
a period of reduced real estate values to satisfy the debt, the
Bank’s earnings and capital could be adversely
affected.
Additionally, with most of the
Bank’s loans concentrated in the Catawba Valley and
surrounding areas, a decline in local economic conditions could
adversely affect the values of the Bank’s real estate
collateral. Consequently, a decline in local economic conditions
may have a greater effect on the Bank’s earnings and capital
than on the earnings and capital of larger financial institutions
whose real estate loan portfolios are geographically
diverse.
Our allowance
for loan losses may be insufficient and could therefore reduce
earnings.
The risk of credit losses on
loans varies with, among other things, general economic conditions,
the creditworthiness of the borrower over the term of the loan and,
in the case of a collateralized loan, the value and marketability
of the collateral for the loan. Management maintains an allowance
for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular
reviews of delinquencies and loan portfolio quality. Management
believes it has established the allowance in accordance with U.S.
Generally Accepted Accounting Principles (“GAAP”) and
in consideration of the current economic environment. Although
management uses the best information available to make evaluations,
significant future additions to the allowance may be necessary
based on changes in economic and other conditions, thus adversely
affecting the operating results of the Company. If
management’s assumptions and judgments prove to be incorrect
and the allowance for loan losses is inadequate to absorb future
losses, or if the bank regulatory authorities require the Bank to
increase the allowance for loan losses as a part of their
examination process, the Bank’s earnings and capital could be
significantly and adversely affected. For further discussion
related to our process for determining the appropriate level of the
allowance for loan losses, see “Allowance for Loan
Losses” within “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results and
Operation” of the Annual Report, which is included in this
Form 10-K as Exhibit (13).
Changes in
interest rates affect profitability and assets.
Changes in prevailing interest
rates may hurt the Bank’s business. The Bank derives its
income primarily from the difference or “spread”
between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings
and other interest-bearing liabilities. In general, the larger the
spread, the more the Bank earns. When market rates of interest
change, the interest the Bank receives on its assets and the
interest the Bank pays on its liabilities will fluctuate. This can
cause decreases in the “spread” and can adversely
affect the Bank’s income. Changes in market interest rates
could reduce the value of the Bank’s financial assets.
Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decrease in value as interest rates rise.
In addition, interest rates affect how much money the Bank lends.
For example, when interest rates rise, the cost of borrowing
increases and the loan originations tend to decrease. If the Bank
is unsuccessful in managing the effects of changes in interest
rates, the financial condition and results of operations could
suffer.
We measure
interest rate risk under various rate scenarios using specific
criteria and assumptions. A summary of this process, along with the
results of our net interest income simulations, is presented within
“Item 7A. Quantitative and Qualitative Disclosures About
Market Risk” of the Annual Report which is included in this
Form 10-K as Exhibit (13).
The Bank faces
strong competition from other banks and financial institutions
which can hurt its business.
The financial services industry
is highly competitive. The Bank competes against commercial banks,
savings banks, savings and loan associations, credit unions,
mortgage banks, brokerage firms, investment advisory firms,
insurance companies and other financial institutions. Many of these
entities are larger organizations with significantly greater
financial, management and other resources than the Bank has.
Moreover, one national money center commercial bank is
headquartered in Charlotte, North Carolina, only 40 miles from the
Bank’s primary market area.
While
management believes it can and does successfully compete with other
financial institutions in our market, we may face a competitive
disadvantage as a result of our smaller size and lack of geographic
diversification.
13
Changes in
technology may impact the Bank’s
business.
The Bank uses various
technologies in its business and the banking industry is undergoing
rapid technological changes. The effective use of technology
increases efficiency and enables financial institutions to reduce
costs. The Bank’s future success will depend in part on its
ability to address the needs of its customers by using technology
to provide products and services that will satisfy customer demands
for convenience as well as create additional efficiencies in the
Bank’s operations. The Bank’s competitors may have
substantially greater resources to invest in technological
improvements.
We may be subject to examinations by taxing authorities which could
adversely affect our results of operations.
In the
normal course of business, we may be subject to examinations from
federal and state taxing authorities regarding the amount of taxes
due in connection with investments we have made and the businesses
in which we are engaged. Recently, federal and state taxing
authorities have become increasingly aggressive in challenging tax
positions taken by financial institutions. The challenges made by
taxing authorities may result in adjustments to the timing or
amount of taxable income or deductions or the allocation of income
among tax jurisdictions. If any such challenges are made and are
not resolved in our favor, they could have an adverse effect on our
financial condition and results of operations.
Changes in our
accounting policies or in accounting standards could materially
affect how we report our financial results and
condition.
Our accounting policies are
fundamental to understanding our financial results and condition.
Some of these policies require use of estimates and assumptions
that may affect the value of our assets or liabilities and
financial results. Some of our accounting policies are critical
because they require management to make difficult, subjective and
complex judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be
reported under different conditions or using different
assumptions.
From time to time the Financial
Accounting Standards Board (“FASB”) and the SEC change
the financial accounting and reporting standards or the
interpretation of those standards that govern the preparation of
our external financial statements. These changes are beyond our
control, can be hard to predict and could materially impact how we
report our results of operations and financial condition. We could
be required to apply a new or revised standard retroactively,
resulting in our restating prior period financial statements in
material amounts.
Our internal
controls may be ineffective.
Management regularly reviews and
updates our internal controls, disclosure controls and procedures,
and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure
or circumvention of our controls and procedures or failure to
comply with regulations related to controls and procedures could
have a material adverse effect on our business, results of
operations, and financial condition.
Impairment of
investment securities or deferred tax assets could require charges
to earnings, which could result in a negative impact on our results
of operations.
In assessing the impairment of
investment securities, management considers the length of time and
extent to which the fair value has been less than cost, the
financial condition and near-term prospects of the issues, and the
intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated
recovery of fair value in the near term. In assessing the future
ability of the Company to realize the deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. The impact of each
of these impairment matters could have a material adverse effect on
our business, results of operations, and financial
condition.
We rely on
other companies to provide key components of our business
infrastructure.
Third party vendors provide key
components of our business infrastructure such as internet
connections, network access and core application processing. While
we have selected these third party vendors carefully, we do not
control their actions. Any problems caused by these third parties,
including as a result of their not providing us their services for
any reason or their performing their services poorly, could
adversely affect our ability to deliver products and services to
our customers and otherwise to conduct our business. Replacing
these third party vendors could also entail significant delay and
expense.
14
Our
information systems may experience an interruption or breach in
security.
We rely heavily on communications
and information systems to conduct our business. Any failure,
interruption, or breach in security or operational integrity of
these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan,
and other systems. While we have policies and procedures designed
to prevent or limit the effect of these possible events, there can
be no assurance that any such failure, interruption or security
breach will not occur or, if any does occur, that it can be
sufficiently remediated.
There have been increasing
efforts on the part of third parties, including through
cyber-attacks, to breach data security at financial institutions or
with respect to financial transactions. There have been several
recent instances involving financial services and consumer-based
companies reporting the unauthorized disclosure of client or
customer information or the destruction or theft of corporate data.
In addition, because the techniques used to cause such security
breaches change frequently, often are not recognized until launched
against a target and may originate from less regulated and remote
areas around the world, we may be unable to proactively address
these techniques or to implement adequate preventative measures.
The ability of our customers to bank remotely, including online and
through mobile devices, requires secure transmission of
confidential information and increases the risk of data security
breaches.
The occurrence of any failures,
interruptions, or security breaches of our information systems
could damage our reputation, result in a loss of customer business,
subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could
have a material adverse effect on our financial condition, results
of operations and business.
Liquidity is
essential to our businesses.
Our liquidity could be impaired
by an inability to access the capital markets or unforeseen
outflows of cash. This situation may arise due to circumstances
that we may be unable to control, such as a general market
disruption or an operational problem that affects third parties or
us. Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger unfavorable contractual
obligations.
Negative
publicity could damage our reputation
Reputation risk, or the risk to
our earnings and capital from negative public opinion, is inherent
in our business. Negative public opinion could adversely affect our
ability to keep and attract customers and expose us to adverse
legal and regulatory consequences. Negative public opinion could
result from our actual or alleged conduct in any number of
activities, including lending practices, corporate governance,
regulatory compliance, mergers and acquisitions, and disclosure,
sharing or inadequate protection of customer information, and from
actions taken by government regulators and community organizations
in response to that conduct.
Financial
services companies depend on the accuracy and completeness of
information about customers and counterparties.
In deciding whether to extend
credit or enter into other transactions, we may rely on information
furnished by or on behalf of customers and counterparties,
including financial statements, credit reports, and other financial
information. We may also rely on representations of those
customers, counterparties, or other third parties, such as
independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial
statements, financial advisors and consultants, credit reports, or
other financial information could cause us to enter into
unfavorable transactions, which could have a material adverse
effect on our financial condition and results of
operations.
If our
non-performing assets increase, our earnings will
suffer.
Our non-performing assets
adversely affect our net income in various ways. We do not record
interest income on non-accrual loans or real estate owned. We must
reserve for probable losses, which is established through a current
period charge to the provision for loan losses as well as from time
to time, as appropriate, the write down of the value of properties
in our other real estate owned portfolio to reflect changing market
values. Additionally, there are legal fees associated with the
resolution of problem assets as well as carrying costs such as
taxes, insurance and maintenance related to our other real estate
owned. Further, the resolution of non-performing assets requires
the active involvement of management, which can distract them from
more profitable activity. Finally, if our estimate for the recorded
allowance for loan losses proves to be incorrect and our allowance
is inadequate, we will have to increase the allowance
accordingly.
15
Our loan
portfolio includes loans with a higher risk of
loss.
We originate commercial real
estate loans, commercial loans, construction and land development
loans, and residential mortgage loans primarily within our market
area. Commercial real estate, commercial, and construction and land
development loans tend to involve larger loan balances to a single
borrower or groups of related borrowers and are most susceptible to
a risk of loss during a downturn in the business cycle. These loans
also have historically had greater credit risk than other loans for
the following reasons:
●
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
December 31, 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 December 31, 2017, commercial loans comprised
approximately 12% of the Bank’s total loan
portfolio.
●
Construction and land development
loans. The risk of loss is largely dependent on our 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 our estimate is
inaccurate or if actual construction costs exceed estimates, the
value of the property securing our 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 December 31,
2017, construction and land development loans comprised
approximately 11% 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 December 31, 2017, single-family
residential loans comprised approximately 37% of the Bank’s
total loan portfolio, including Banco single-family residential
stated income loans which were approximately 5% of the Bank’s
total loan portfolio.
Because we
engage in lending secured by real estate and may be forced to
foreclose on the collateral property and own the underlying real
estate, we may be subject to the increased costs associated with
the ownership of real property, which could result in reduced net
income.
Since we originate loans secured
by real estate, we may have to foreclose on the collateral property
to protect our investment and may thereafter own and operate such
property, in which case we are exposed to the risks inherent in the
ownership of real estate. The amount that we, as a mortgagee, may
realize after a default is dependent upon factors outside of our
control, including, but not limited to:
●
general or local economic
conditions;
●
environmental cleanup
liability;
●
neighborhood
values;
●
interest
rates;
●
real estate tax
rates;
●
operating expenses of the
mortgaged properties;
●
supply of and demand for rental
units or properties;
●
ability to obtain and maintain
adequate occupancy of the properties;
●
zoning laws;
●
governmental rules, regulations
and fiscal policies; and
●
acts of God.
Certain expenditures associated
with the ownership of real estate, principally real estate taxes
and maintenance costs, may adversely affect the income from the
real estate. Therefore, the cost of operating real property may
exceed the rental income earned from such property, and we may have
to advance funds in order to protect our investment or we may be
required to dispose of the real property at a
loss.
16
We are subject to extensive regulation and
oversight, and depending
upon the findings and determinations of our regulatory authorities,
we may be required to make adjustments to our business, operations
or financial position and could become subject to formal or
informal regulatory action.
We are subject to extensive
regulation and supervision, including examination by federal and
state banking regulators. Federal and state regulators have the
ability to impose substantial sanctions, restrictions and
requirements on us if they determine, upon conclusion of their
examination or otherwise, violations of laws with which we must
comply or weaknesses or failures with respect to general standards
of safety and soundness, including, for example, in respect of any
financial concerns that the regulators may identify and desire for
us to address. Such enforcement may be formal or informal and can
include directors’ resolutions, memoranda of understanding,
consent orders, civil money penalties and termination of deposit
insurance and bank closure. Enforcement actions may be taken
regardless of the capital levels of the institution, and regardless
of prior examination findings. In particular, institutions that are
not sufficiently capitalized in accordance with regulatory
standards may also face capital directives or prompt corrective
actions. Enforcement actions may require certain corrective steps
(including staff additions or changes), impose limits on activities
(such as lending, deposit taking, acquisitions, paying dividends or
branching), prescribe lending parameters (such as loan types,
volumes and terms) and require additional capital to be raised, any
of which could adversely affect our financial condition and results
of operations. The imposition of regulatory sanctions, including
monetary penalties, may have a material impact on our financial
condition and results of operations and/or damage our reputation.
In addition, compliance with any such action could distract
management’s attention from normal operations, cause us to
incur significant expenses, restrict us from engaging in
potentially profitable activities and limit our ability to raise
capital.
We will become
subject to more stringent capital requirements, which may adversely
impact our return on equity, require us to raise additional
capital, or constrain us from paying dividends or repurchasing
shares.
In July 2013,
the Federal Reserve and the FDIC approved new rules that
substantially amend the regulatory risk-based capital rules
applicable to the Bank. The final rule implements the “Basel
III” regulatory capital reforms and changes required by the
Dodd-Frank Act.
The final rule includes new
minimum risk-based capital and leverage ratios, which became
effective for the Bank and the Company on January 1, 2015, and
revises the definition of what constitutes “capital”
for purposes of calculating those ratios. The new minimum capital
requirements are: (i) a new common equity tier 1 capital ratio of
4.5%; (ii) a tier 1 to risk-based assets capital ratio of 6%
(increased from 4%); (iii) a total capital ratio of 8% (unchanged
from current rules); and (iv) a tier 1 leverage ratio of 4%. These
rules also establish a “capital conservation buffer” of
2.5%, and will result in the following minimum ratios: (i) a common
equity tier 1 capital ratio of 7.0%, (ii) a tier 1 to risk-based
assets capital ratio of 8.5%, and (iii) a total capital ratio of
10.5%. The new capital conservation buffer requirement is being
phased in beginning in January 2016 at 0.625% of risk-weighted
assets and increases each year until fully implemented in January
2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary
bonuses if its capital level falls below the buffer amount. These
limitations will establish a maximum percentage of eligible
retained income that can be utilized for such
actions.
The application of more stringent
capital requirements for the Bank could, among other things, result
in lower returns on equity, require the raising of additional
capital, and result in regulatory actions constraining us from
paying dividends or repurchasing shares if we were to be unable to
comply with such requirements.
The trading volume in our common stock is less than that of larger
public companies which can cause price
volatility.
The trading
history of our common stock has been characterized by relatively
low trading volume. The value of a shareholder’s investment
may be subject to sudden decreases due to the volatility of the
price of our common stock, which trades on the NASDAQ Global
Market.
The market
price of our common stock may be volatile and subject to
fluctuations in response to numerous factors, including, but not
limited to, the factors discussed in other risk factors and the
following:
●
actual or
anticipated fluctuation in our operating
results;
●
changes in
interest rates;
●
changes in
the legal or regulatory environment in which we
operate;
●
press
releases, announcements or publicity relating to us or our
competitors or relating to trends in our
industry;
●
changes in
expectations as to our future financial performance, including
financial estimates or recommendations by securities analysts and
investors;
●
future sales
of our common stock;
●
changes in
economic conditions in our market, general conditions in the
U.S. economy, financial markets or the banking
industry; and
●
other
developments affecting our competitors or us.
These factors may adversely
affect the trading price of our common stock, regardless of our
actual operating performance, and could prevent a shareholder from
selling common stock at or above the current market price. These
factors may also adversely affect the Company’s ability to
raise capital in the open market if needed. In addition, the
Company cannot say with any certainty that a more active and liquid
trading market for its common stock will
develop.
17
Our stock
price can be volatile.
Stock price
volatility may make it more difficult for you to resell your common
stock when you want and at prices you find attractive. Our stock
price can fluctuate significantly in response to a variety of
factors including, among other things:
●
actual or anticipated variations
in quarterly results of operations;
●
recommendations by securities
analysts;
●
operating results and stock price
performance of other companies that investors deem comparable to
us;
●
news reports relating to trends,
concerns, and other issues in the financial services
industry;
●
perceptions in the marketplace
regarding us and/or our competitors;
●
new
technology used or services offered by
competitors;
●
significant acquisitions or
business combinations, strategic partnerships, joint ventures, or
capital commitments by or involving us or our competitors;
and
●
changes in government
regulations.
Our common
stock is not FDIC insured.
The Company’s common
stock is not a savings or deposit account or other obligation of
any bank and is not insured by the FDIC or any other governmental
agency and is subject to investment risk, including the possible
loss of principal. Investment in our common stock is inherently
risky for the reasons described in this “Risk Factors”
section and elsewhere in this report and is subject to the same
market forces that affect the price of common stock in any company.
As a result, holders of our common stock may lose some or all of
their investment.
We may reduce
or eliminate dividends on our common stock.
Although we have historically
paid a quarterly cash dividend to the holders of our common stock,
holders of our common stock are not entitled to receive dividends.
Downturns in the domestic and global economies could cause our
Board of Directors to consider, among other things, reducing or
eliminating dividends paid on our common stock. This could
adversely affect the market price of our common stock. Furthermore,
as a bank holding company, our ability to pay dividends is subject
to the guidelines of the Federal Reserve regarding capital adequacy
and dividends before declaring or paying any dividends. Dividends
also may be limited as a result of safety and soundness
considerations.
We may need
additional access to capital, which it may be unable to obtain on
attractive terms or at all.
We may need to incur additional
debt or equity financing in the future to make strategic
acquisitions or investments, for future growth or to fund losses or
additional provision for loan losses in the future. Our ability to
raise additional capital, if needed, will depend in part on
conditions in the capital markets at that time, which are outside
our control, and on our financial performance. Accordingly, we may
be unable to raise additional capital, if and when needed, on terms
acceptable to it, or at all. If we cannot raise additional capital
when needed, our ability to further expand our operations through
internal growth and acquisitions could be materially impaired and
our stock price negatively affected.
Our articles
of incorporation, as amended, amended and restated bylaws, and
certain banking laws may have an anti-takeover
effect.
Provisions of our articles of
incorporation, as amended, amended and restated bylaws, and federal
banking laws, including regulatory approval requirements, could
make it more difficult for a third party to acquire us, even if
doing so would be perceived to be beneficial to our shareholders.
The combination of these provisions may prohibit a non-negotiated
merger or other business combination, which, in turn, could
adversely affect the market price of our common
stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not
applicable.
18
ITEM 2.
PROPERTIES
At December 31, 2017, the Company
and the Bank conducted their business from the headquarters office
in Newton, North Carolina, its Banco administrative office and its
19 other branch offices in Lincolnton, Hickory, Newton, Catawba,
Conover, Claremont, Maiden, Denver, Triangle, Hiddenite, Charlotte,
Cornelius, Mooresville and Raleigh, North Carolina. The Bank also
operates loan production offices in Denver and Durham North
Carolina. The following table sets forth certain information
regarding the Bank’s properties at December 31,
2017.
|
Owned
Corporate
Office
518 West C
Street
Newton, North Carolina
28658
420 West A
Street
Newton, North Carolina
28658
2619 North Main
Avenue
Newton, North Carolina
28658
213 1st Street,
West
Conover, North Carolina
28613
3261 East Main
Street
Claremont, North Carolina
28610
6125 Highway 16
South
Denver, North Carolina
28037
5153 N.C. Highway
90E
Hiddenite, North Carolina
28636
200 Island Ford
Road
Maiden, North Carolina
28650
3310 Springs Road
NE
Hickory, North Carolina
28601
142 South Highway
16
Denver, North Carolina
28037
106 North Main
Street
Catawba, North Carolina
28609
2050 Catawba Valley
Boulevard
Hickory, North Carolina
28601
800 E. Arrowood
Road
Charlotte, North Carolina
28217
1074 River
Highway
Mooresville, North Carolina
28117
|
Leased
1333 2nd Street
NE
Hickory, North Carolina
28601
1910 East Main
Street
Lincolnton, North Carolina
28092
760 Highway 27
West
Lincolnton, North Carolina
28092
102 Leonard
Avenue
Newton, North Carolina
28658
6350 South
Boulevard
Charlotte, North Carolina
28217
4451 Central
Avenue
Suite A
Charlotte, North Carolina
28205
3752/3754 Highway 16
North
Denver, North Carolina
28037
9624-I Bailey
Road
Cornelius, North Carolina
28031
3023-10 Capital
Boulevard
Raleigh, North Carolina
27604
2530 Meridian
Parkway
Durham, North Carolina
27713
|
ITEM 3.
LEGAL PROCEEDINGS
In the opinion of management, the
Company is not involved in any material pending legal proceedings
other than routine proceedings occurring in the ordinary course of
business.
ITEM 4.
MINE SAFETY DISCLOSURES
Not
applicable.
19
PART
II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock
is listed on the NASDAQ Global Market, under the symbol
“PEBK.” Market makers for the Company’s shares
include Raymond James Financial, Inc. and Hovde Group,
LLC.
Although the payment of dividends
by the Company is subject to certain requirements and limitations
of North Carolina corporate law, neither the Commissioner nor the
FDIC have promulgated any regulations specifically limiting the
right of the Company to pay dividends and repurchase shares.
However, the ability of the Company to pay dividends and repurchase
shares may be dependent upon, among other things, the
Company’s receipt of dividends from the Bank. The
Bank’s ability to pay dividends is limited. North Carolina
commercial banks, such as the Bank, are subject to legal
limitations on the amount of dividends they are permitted to pay.
Dividends may be paid by the Bank from undivided profits, which are
determined by deducting and charging certain items against actual
profits, including any contributions to surplus required by North
Carolina law. Also, an insured depository institution, such as the
Bank, is prohibited from making capital distributions, including
the payment of dividends, if, after making such distribution, the
institution would become “undercapitalized” (as such
term is defined in the applicable law and regulations). Based on
its current financial condition, the Bank does not expect that this
provision will have any impact on the Bank’s ability to pay
dividends. See Supervision and Regulation under Item 1
Business.
As of March 9, 2018, the Company
had 662 shareholders of record, not including the number of persons
or entities whose
stock is held in nominee or street name through various brokerage
firms or banks. The closing market price for the Company’s
common stock was $29.31 on March 9, 2018.
The following table presents
certain market and dividend information for the last two fiscal
years. Over-the-counter quotations reflect inter-dealer prices,
without retail mark-up, mark down or commission and may not
necessarily represent actual transactions. Stock prices and cash
dividends per share have been adjusted for the 10% stock dividend
paid on December 15, 2017.
|
|
|
|
Cash Dividend
|
|
2017
|
Low Bid
|
High Bid
|
Per Share
|
|
First
Quarter
|
$20.38
|
28.54
|
0.11
|
|
|
|
|
|
|
Second
Quarter
|
$19.65
|
29.91
|
0.11
|
|
|
|
|
|
|
Third
Quarter
|
$26.00
|
36.12
|
0.11
|
|
|
|
|
|
|
Fourth
Quarter
|
$27.73
|
34.55
|
0.11
|
|
|
|
|
Cash Dividend
|
|
2016
|
Low Bid
|
High Bid
|
Per Share
|
|
First
Quarter
|
$16.62
|
17.59
|
0.07
|
|
|
|
|
|
|
Second
Quarter
|
$16.74
|
18.05
|
0.09
|
|
|
|
|
|
|
Third
Quarter
|
$17.51
|
20.70
|
0.09
|
|
|
|
|
|
|
Fourth
Quarter
|
$18.00
|
24.45
|
0.09
|
20
STOCK
PERFORMANCE GRAPH
The following graph compares the
Company’s cumulative shareholder return on its common stock
with a NASDAQ index and with a southeastern bank index. The graph
was prepared by S&P Global Market Intelligence, using data as
of December 31, 2017.
COMPARISON OF SIX-YEAR CUMULATIVE
TOTAL RETURNS
Performance Report
for
Peoples Bancorp of North Carolina,
Inc.
|
|
Period Ending
|
|||||
|
Index
|
12/31/12
|
12/31/13
|
12/31/14
|
12/31/15
|
12/31/16
|
12/31/17
|
|
Peoples
Bancorp of North Carolina, Inc.
|
100.00
|
157.33
|
201.73
|
220.12
|
290.70
|
397.96
|
|
NASDAQ
Composite Index
|
100.00
|
140.12
|
160.78
|
171.97
|
187.22
|
242.71
|
|
SNL
Southeast Bank Index
|
100.00
|
135.52
|
152.63
|
150.24
|
199.45
|
246.72
|
|
|
|
|
|
|
|
|
|
Source: S&P Global Market Intelligence
|
|
|
|
|
|
|
|
© 2017
|
|
|
|
|
|
|
21
The information required by Item
201(d) concerning securities authorized for issuance under equity
compensation plans is set forth in Item 12 hereof.
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
|||||
|
|
|
|
|
|
|
|
Period
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
Total
Number
of
Shares
Purchased
as
Part
of
Publicly
Announced
Plans
or
Programs
(2)
|
Maximum
Number
(or
Approximate
Dollar Value)
of
Shares that
May
Yet Be
Purchased
Under the Plans
or
Programs
(3)
|
|
|
|
|
|
|
|
|
January 1 - 31,
2017
|
1,113
|
|
$24.09
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
February 1 - 28,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
March 1 - 31,
2017
|
323
|
|
25.23
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
April 1 - 30,
2017
|
639
|
|
27.40
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
May 1 - 31,
2017
|
413
|
|
25.58
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
June 1 - 30,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
July 1 - 31,
2017
|
853
|
|
34.13
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
August 1 - 31,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
September 1 - 30,
2017
|
217
|
|
27.73
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
October 1 - 31,
2017
|
669
|
|
30.87
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
November 1 - 30,
2017
|
347
|
|
30.67
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
December 1 - 31,
2017
|
-
|
|
-
|
-
|
$16,180
|
|
|
|
|
|
|
|
|
Total
|
4,574
|
(1)
|
$28.30
|
-
|
|
|
(1) The Company
purchased 4,574 shares on the open market in the year ended
December 31, 2017 for its deferred compensation plan. All purchases
were funded by participant contributions to the plan. Number
of shares purchased and average price paid per share have been
adjusted for the 10% stock dividend paid in December
2017.
|
|||||
|
|
|
|
|
|
|
|
(2) Reflects shares
purchased under the 2016 Stock Repurchase Plan authorized by the
Company's Board of Directors in 2016.
|
|||||
|
|
|
|
|
|
|
|
(3) Reflects dollar
value of shares that may yet be purchased under the Stock
Repurchase Plan authorized by the Company's Board of Directors in
2016.
|
|||||
ITEM
6. SELECTED FINANCIAL
DATA
The information required by this
Item is set forth in the section captioned "Selected Financial
Data" on page A-3 of the Annual Report, which Annual Report is
included in this Form 10-K as Exhibit (13). The section captioned
"Selected Financial Data" on page A-3 of the Annual Report is
incorporated herein by reference.
22
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this
Item is set forth in the section captioned
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on pages
A-4 through A-23 of the Annual
Report, which section is included in this Form 10-K as Exhibit
(13), and which section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” is incorporated herein by
reference.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this
Item is set forth in the section captioned “Quantitative and
Qualitative Disclosures About Market Risk” on page A-22 of
the Annual Report, which Annual Report is included in this Form
10-K as Exhibit (13), and which section captioned
“Quantitative and Qualitative Disclosures About Market
Risk” is incorporated herein by
reference.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The consolidated financial
statements of the Company and supplementary data are set forth on
pages A-24 through A-66 of the Annual Report, which Annual Report
is included in this Form 10-K as Exhibit (13). The consolidated
financial statements of the Company and supplementary data set
forth on pages A-24 through A-66 of the Annual Report are
incorporated herein by reference.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
The Company’s management,
under the supervision and with the participation of the Chief
Executive Officer and the Chief Financial Officer of the Company,
has concluded, based on their evaluation as of the end of the
period covered by this Report, that the Company’s disclosure
controls and procedures (as defined in Rule 13A-15(e) promulgated
under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in the reports filed or
submitted by it under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
applicable rules and forms and include controls and procedures
designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the
Company’s management including the Chief Executive Officer
and the Chief Financial Officer of the Company as appropriate to
allow timely decisions regarding required
disclosure.
Changes in
Internal Controls over Financial Reporting
There have been no changes in
internal control over financial reporting during the quarter ended
December 31, 2017 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control
over financial reporting.
Management’s
Annual Report on Internal Controls over Financial
Reporting
The Company’s management is
responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over
financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the company, (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles
generally accepted in the United States of America, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition
of the company’s assets that could have a material effect on
the financial statements.
23
Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017. In making this
assessment, management used the criteria established in
“Internal Control – Integrated Framework” issued
by the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. Based on our assessment and those criteria,
management believes that the Company maintained effective internal
control over financial reporting as of December 31,
2017.
Elliott Davis, PLLC, an
independent, registered public accounting firm, has audited the
Company’s consolidated financial statements as of and for the
year ended December 31, 2017, and audited the Company’s
effectiveness of internal control over financial reporting as of
December 31, 2017, as stated in their report, which is included in
Item 8 hereof.
ITEM
9B. OTHER INFORMATION
None
PART
III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this
Item is set forth under the sections captioned “Director
Nominees”, “Executive Officers of the Company “,
“Security Ownership Of Certain Beneficial Owners and
Management, “Section 16(a) Beneficial Ownership Reporting
Compliance”, “Code of Business Conduct and
Ethics”, “Board Committees – Governance
Committee” and “Board Committees – Audit and
Enterprise Risk Committee” contained in the Proxy Statement,
which sections are incorporated herein by
reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this
Item is set forth under the section captioned “Compensation
Discussion and Analysis”, “Summary Compensation
Table”, “Grants of Plan-Based Awards”,
“Outstanding Equity Awards at Fiscal Year End”,
“Option Exercises and Stock Vested”, “Pension
Benefits”, “Nonqualified Deferred Compensation”,
“Employment Agreements”, “Potential Payments upon
Termination or Change in Control”, “Omnibus Stock
Option and Long Term Incentive Plan”, “Director
Compensation”, “Compensation Committee –
Compensation Committee Interlocks and Insider Participation”
and “Compensation Committee – Compensation Committee
Report” contained in the Proxy Statement, which sections are
incorporated herein by reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
For the information required by
the Item see the section captioned “Security Ownership of
Certain Beneficial Owners and Management” contained in the
Proxy Statement, which section is incorporated herein by
reference.
The following table presents the
number of shares of Company common stock to be issued upon the
exercise of outstanding options, warrants and rights; the
weighted-average price of the outstanding options, warrants and
rights and the number of options, warrants and rights remaining
that may be issued under the Company’s Omnibus Plan described
under the section captioned “Omnibus Stock Option and Long
Term Incentive Plan” contained in the Proxy
Statement.
24
|
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding option,
warrants and rights
(1), (2), (3)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
(4)
|
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
column (a)) (5), (6)
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans
approved
by security holders
|
25,801
|
$30.69
|
284,658
|
|
Equity
compensation plans not
approved
by security holders
|
-
|
-
|
-
|
|
Total
|
25,801
|
$30.69
|
284,658
|
|
(1) Includes 16,583 restricted
stock units granted on February 19, 2015 (adjusted for the 10%
stock dividend paid December 15, 2017) under the Omnibus Plan.
These restricted stock grants vest on February 19,
2019.
|
|
|
|
(2) Includes 5,104 restricted
stock units granted on February 18, 2016 (adjusted for the 10%
stock dividend paid December 15, 2017) under the Omnibus Plan.
These restricted stock grants vest on February 20,
2020.
|
|
|
|
(3) Includes 4,144 restricted
stock units granted on March 1, 2017 (adjusted for the 10% stock
dividend paid December 15, 2017) under the Omnibus Plan. These
restricted stock grants vest on March 1, 2021.
|
|
|
|
(4) The exercise price used for
the grants of restricted stock units under the Omnibus Plan is
$30.69, the closing price for the Company’s stock on December
31, 2017.
|
|
|
|
(5) Reflects shares currently
reserved for possible issuance under the Omnibus Plan.
|
|
|
|
(6) Adjusted for the 10% stock
dividend paid December 15, 2017.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTOR INDEPENDENCE
See the sections captioned
“Indebtedness of and Transactions with Management and
Directors” and “Board Leadership Structure and Risk
Oversight” contained in the Proxy Statement, which sections
are incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
See the section captioned
“Proposal 2 - Ratification of Selection of Independent
Registered Public Accounting Firm” contained in the Proxy
Statement, which section is incorporated herein by
reference.
25
PART
IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
15(a)1.
Consolidated Financial Statements
(contained in the Annual Report attached hereto as Exhibit (13) and
incorporated herein by reference)
(a)
Reports of Independent Registered
Public Accounting Firm
(b)
Consolidated Balance Sheets as of
December 31, 2017 and 2016
(c)
Consolidated Statements of
Earnings for the Years Ended December 31, 2017, 2016 and
2015
(d)
Consolidated Statements of
Comprehensive Income for the Years Ended December 31, 2017, 2016
and 2015
(e)
Consolidated Statements of
Changes in Shareholders’ Equity for the Years Ended December
31, 2017, 2016 and 2015
(f)
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2017, 2016 and
2015
(g)
Notes to Consolidated Financial
Statements
15(a)2.
Consolidated Financial Statement
Schedules
All
schedules have been omitted, as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
15(a)3.
Exhibits
Articles of Amendment dated
December 19, 2008, regarding the Series A Preferred Stock,
incorporated by reference to Exhibit (3)(1) to the Form 8-K filed
with the Securities and Exchange Commission on December 29,
2008
Articles of Amendment dated
February 26, 2010 incorporated by reference to Exhibit (3)(2) to
the Form 10-K filed with the Securities and Exchange Commission on
March 25, 2010
Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit (3)(i) to the Form
8-A filed with the Securities and Exchange Commission on September
2, 1999
Second Amended and Restated
Bylaws of the Registrant, incorporated by reference to Exhibit
(3)(ii) to the Form 8-K filed with the Securities and Exchange
Commission on June 24, 2015
Specimen Stock Certificate,
incorporated by reference to Exhibit (4) to the Form 8-A filed with
the Securities and Exchange Commission on September 2,
1999
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Tony W.
Wolfe dated December 18, 2008, incorporated by reference to
Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and
Exchange Commission on December 29, 2008
26
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Joseph F.
Beaman, Jr. dated December 18, 2008, incorporated by reference
to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities
and Exchange Commission on December 29, 2008
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and William D.
Cable, Sr. dated December 18, 2008, incorporated by reference
to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities
and Exchange Commission on December 29, 2008
Employment Agreement dated
January 22, 2015 between the Registrant and William D. Cable, Sr.,
incorporated by reference to Exhibit (10)(c) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and Lance A.
Sellers dated December 18, 2008, incorporated by reference to
Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and
Exchange Commission on December 29, 2008
Employment Agreement dated
January 22, 2015 between the Registrant and Lance A. Sellers,
incorporated by reference to Exhibit (10)(a) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Peoples Bancorp of North
Carolina, Inc. Omnibus Stock Ownership and Long Term Incentive Plan
incorporated by reference to Exhibit (10)(f) to the Form 10-K filed
with the Securities and Exchange Commission on March 30,
2000
Amendment No. 1 to the Peoples
Bancorp of North Carolina, Inc. Omnibus Stock Ownership and Long
Term Incentive Plan incorporated by reference to Exhibit (10)(e)(i)
to the Form 10-K filed with the Securities and Exchange Commission
on March 15, 2007
Amended and Restated Executive
Salary Continuation Agreement between Peoples Bank and A. Joseph
Lampron, Jr. dated December 18, 2008, incorporated by
reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the
Securities and Exchange Commission on December 29,
2008
Employment Agreement dated
January 22, 2015 between the Registrant and A. Joseph Lampron, Jr.,
incorporated by reference to Exhibit (10)(b) to the Form 8-K filed
with the Securities and Exchange Commission on February 9,
2015
Peoples Bank Directors’ and
Officers’ Deferral Plan, incorporated by reference to Exhibit
(10)(h) to the Form 10-K filed with the Securities and Exchange
Commission on March 28, 2002
Rabbi Trust for the Peoples Bank
Directors’ and Officers’ Deferral Plan, incorporated by
reference to Exhibit (10)(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 28,
2002
Description of Service
Recognition Program maintained by Peoples Bank, incorporated by
reference to Exhibit (10)(i) to the Form 10-K filed with the
Securities and Exchange Commission on March 27,
2003
Capital Securities Purchase Agreement dated as of
June 26, 2006, by and among the Registrant, PEBK Capital Trust II
and Bear, Sterns Securities Corp., incorporated by reference to
Exhibit (10)(j) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
27
Amended and Restated Trust
Agreement of PEBK Capital Trust II, dated as of June 28, 2006,
incorporated by reference to Exhibit (10)(k) to the Form 10-Q filed
with the Securities and Exchange Commission on November 13,
2006
Guarantee Agreement of the
Registrant dated as of June 28, 2006, incorporated by reference to
Exhibit (10)(l) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
Indenture, dated as of June 28,
2006, by and between the Registrant and LaSalle Bank National
Association, as Trustee, relating to Junior Subordinated Debt
Securities Due September 15, 2036, incorporated by reference to
Exhibit (10)(m) to the Form 10-Q filed with the Securities and
Exchange Commission on November 13, 2006
Form of Amended and Restated
Director Supplemental Retirement Agreement between Peoples Bank and
Directors Robert C. Abernethy, James S. Abernethy, Douglas S.
Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L
Price, Jr., Larry E Robinson, W. Gregory Terry, Dan Ray Timmerman,
Sr., and Benjamin I. Zachary, incorporated by reference to Exhibit
(10)(n) to the Form 8-K filed with the Securities and Exchange
Commission on December 29, 2008
2009 Omnibus Stock Ownership and
Long Term Incentive Plan incorporated by reference to Exhibit
(10)(o) to the Form 10-K filed with the Securities and Exchange
Commission on March 20, 2009
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and Lance A. Sellers dated February 16,
2018
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and A. Joseph Lampron, Jr. dated February 16,
2018
First Amendment
to Amended and Restated Executive Salary Continuation Agreement
between Peoples Bank and William D. Cable, Jr. dated February 16,
2018
Statement regarding computation
of per share earnings
Statement regarding computation
of ratios
2017 Annual Report of Peoples
Bancorp of North Carolina, Inc.
Code of Business Conduct and
Ethics of Peoples Bancorp of North Carolina, Inc., incorporated by
reference to Exhibit (14) to the Form 10-K filed with the
Securities and Exchange Commission on March 25,
2005
Letter from Porter Keadle Moore,
LLC, regarding change in certifying accountant, dated June 23,
2015, which is incorporated by reference to Exhibit 16.1 of the
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on June 23, 2015
Subsidiaries of the
Registrant
Consent of Elliott Davis,
PLLC
Certification of principal
executive officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002
28
Certification of principal
financial officer pursuant to section 302 of the Sarbanes-Oxley Act
of 2002
Certification Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit
(101)
The
following materials from the Company’s 10-K Report for
the annual period ended December 31, 2017, formatted in XBRL:
(i) the Condensed Consolidated Balance Sheets, (ii) the
Condensed Consolidated Statements of Earnings, (iii) the Condensed
Consolidated Statements of Comprehensive Income, (iv) the Condensed
Consolidated Statements of Changes in Shareholders’ Equity,
(v) the Condensed Consolidated Statements of Cash Flows, and
(vi) the Notes to the Condensed Consolidated Financial
Statements, tagged as blocks of text.*
*Furnished, not
filed.
29
|
SIGNATURES
|
||||||
|
|
||||||
|
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
PEOPLES BANCORP OF NORTH CAROLINA,
INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Lance A.
Sellers
|
|
|
|
|
Lance A.
Sellers
|
|
|
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
Date: March 15,
2018
|
|
Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
|
Signature
|
|
Title
|
|
Date
|
||
|
|
|
|
|
|
||
|
/s/ Lance A.
Sellers
|
|
President and Chief Executive
Officer
|
|
March 15,
2018
|
||
|
Lance A.
Sellers
|
|
(Principal Executive
Officer)
|
|
|
||
|
|
|
|
|
|
||
|
/s/ James S.
Abernethy
|
|
Director
|
|
March 15,
2018
|
||
|
James S.
Abernethy
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Robert C.
Abernethy
|
|
Chairman of the Board and
Director
|
|
March 15,
2018
|
||
|
Robert C.
Abernethy
|
|
|
|
|
||
|
|
|
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|
|
||
|
/s/ Douglas S.
Howard
|
|
Director
|
|
March 15,
2018
|
||
|
Douglas S.
Howard
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ A. Joseph Lampron,
Jr.
|
|
Executive Vice President and
Chief
|
|
March 15,
2018
|
||
|
A. Joseph Lampron,
Jr.
|
|
Financial Officer (Principal
Financial
|
|
|
||
|
|
|
and Principal Accounting
Officer)
|
|
|
||
|
|
|
|
|
|
||
|
/s/ John W. Lineberger,
Jr.
|
|
Director
|
|
March 15,
2018
|
||
|
John W. Lineberger,
Jr.
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Gary E.
Matthews
|
|
Director
|
|
March 15,
2018
|
||
|
Gary E.
Matthews
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Billy L. Price, Jr.,
M.D.
|
|
Director
|
|
March 15,
2018
|
||
|
Billy L. Price, Jr.,
M.D.
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Larry E.
Robinson
|
|
Director
|
|
March 15,
2018
|
||
|
Larry E.
Robinson
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ William Gregory
Terry
|
|
Director
|
|
March 15,
2018
|
||
|
William Gregory
Terry
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Dan Ray Timmerman,
Sr.
|
|
Director
|
|
March 15,
2018
|
||
|
Dan Ray Timmerman,
Sr.
|
|
|
|
|
||
|
|
|
|
|
|
||
|
/s/ Benjamin I.
Zachary
|
|
Director
|
|
March 15,
2018
|
||
|
Benjamin I.
Zachary
|
|
|
|
|
||
29