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EXHIBIT (13)
The
Annual Report to Security Holders is Appendix A to the Proxy
Statement for the 2020 Annual Meeting of Shareholders and is
incorporated herein by reference.
APPENDIX
A
ANNUAL
REPORT
OF
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
General Description of Business
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”, “we”, “our” or
“us” in this Annual Report. Our principal executive
offices are located at 518 West C Street, Newtown, North Carolina,
28658, and our telephone number is (828) 464-5620.
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 18 banking offices, as of December
31, 2020, located in Lincolnton, Newton, Denver, Catawba, Conover,
Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius,
Mooresville, Raleigh, and Cary North Carolina. The Bank also
operates loan production offices in Charlotte and Denver North
Carolina. The Company’s fiscal year ends December 31. At
December 31, 2020, the Company had total assets of $1.4 billion,
net loans of $938.7 million, deposits of $1.2 billion, total
securities of $249.4 million, and shareholders’ equity of
$139.9 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 through 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-25 of the Annual Report.
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”).
At
December 31, 2020, the Company employed 290 full-time employees and
27 part-time employees, which equated to 307 full-time equivalent
employees.
Subsidiaries
The
Bank is a subsidiary of the Company. At December 31, 2020, 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. In 2019, the Company launched PB Insurance
Agency, which is part of CBRES.
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
A-1
junior subordinated debentures of the Company, which pay a floating
rateequal 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, awholly
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 Company redeemed $5.0 million of outstanding trust
preferred securities in 2019.
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.
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and
business of 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 the 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.
A-2
SELECTED FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
|
2020
|
2019
|
2018
|
2017
|
2016
|
Summary of Operations
|
|
|
|
|
|
Interest
income
|
$47,958
|
49,601
|
45,350
|
41,949
|
39,809
|
Interest
expense
|
3,836
|
3,757
|
2,146
|
2,377
|
3,271
|
Net
interest income
|
44,122
|
45,844
|
43,204
|
39,572
|
36,538
|
Provision
for (reduction of) loan losses
|
4,259
|
863
|
790
|
(507)
|
(1,206)
|
Net
interest income after provision
|
|
|
|
|
|
for
loan losses
|
39,863
|
44,981
|
42,414
|
40,079
|
37,744
|
Non-interest
income (1)
|
22,914
|
17,739
|
16,166
|
15,364
|
16,236
|
Non-interest
expense (1)
|
48,931
|
45,517
|
42,574
|
41,228
|
42,242
|
Earnings
before income taxes
|
13,846
|
17,203
|
16,006
|
14,215
|
11,738
|
Income
tax expense
|
2,489
|
3,136
|
2,624
|
3,947
|
2,561
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
10,268
|
9,177
|
|
|
|
|
|
|
Selected Year-End Balances
|
|
|
|
|
|
Assets
|
$1,414,855
|
1,154,882
|
1,093,251
|
1,092,166
|
1,087,991
|
Investment
securities available for sale
|
245,249
|
195,746
|
194,578
|
229,321
|
249,946
|
Net
loans
|
938,731
|
843,194
|
797,578
|
753,398
|
716,261
|
Mortgage
loans held for sale
|
9,139
|
4,417
|
680
|
857
|
5,709
|
Interest-earning
assets
|
1,326,489
|
1,058,937
|
1,007,078
|
996,509
|
999,201
|
Deposits
|
1,221,086
|
966,517
|
877,213
|
906,952
|
892,918
|
Interest-bearing
liabilities
|
805,771
|
668,353
|
657,110
|
679,922
|
698,120
|
Shareholders'
equity
|
$139,899
|
134,120
|
123,617
|
115,975
|
107,428
|
Shares
outstanding
|
5,787,504
|
5,912,300
|
5,995,256
|
5,995,256
|
5,417,800
|
|
|
|
|
|
|
Selected Average Balances
|
|
|
|
|
|
Assets
|
$1,365,642
|
1,143,338
|
1,094,707
|
1,098,992
|
1,076,604
|
Investment
securities available for sale
|
200,821
|
185,302
|
209,742
|
234,278
|
252,725
|
Loans
|
935,970
|
834,517
|
777,098
|
741,655
|
703,484
|
Interest-earning
assets
|
1,271,764
|
1,055,730
|
1,007,484
|
998,821
|
985,236
|
Deposits
|
1,115,019
|
932,647
|
903,120
|
895,129
|
856,313
|
Interest-bearing
liabilities
|
793,188
|
675,992
|
665,165
|
700,559
|
705,291
|
Shareholders'
equity
|
$141,287
|
134,670
|
123,797
|
116,883
|
113,196
|
Shares
outstanding (2)
|
5,808,121
|
5,941,873
|
5,995,256
|
5,988,183
|
6,024,970
|
|
|
|
|
|
|
Profitability Ratios
|
|
|
|
|
|
Return
on average total assets
|
0.83%
|
1.23%
|
1.22%
|
0.93%
|
0.85%
|
Return
on average shareholders' equity
|
8.04%
|
10.45%
|
10.81%
|
8.78%
|
8.11%
|
Dividend
payout ratio
|
38.67%
|
28.00%
|
23.41%
|
25.67%
|
22.95%
|
|
|
|
|
|
|
Liquidity and Capital Ratios (averages)
|
|
|
|
|
|
Loan
to deposit
|
83.94%
|
89.48%
|
86.05%
|
82.85%
|
82.15%
|
Shareholders'
equity to total assets
|
10.35%
|
11.78%
|
11.31%
|
10.64%
|
10.51%
|
|
|
|
|
|
|
Per share of Common Stock (2)
|
|
|
|
|
|
Basic
net earnings
|
$1.95
|
2.37
|
2.23
|
1.71
|
1.53
|
Diluted
net earnings
|
$1.95
|
2.36
|
2.22
|
1.69
|
1.50
|
Cash
dividends
|
$0.75
|
0.66
|
0.52
|
0.44
|
0.35
|
Book
value
|
$24.17
|
22.68
|
20.62
|
19.34
|
18.03
|
(1) Appraisal management fee income and expense from the
Bank’s subsidiary, CBRES, was reported as a net amount prior
to March 31, 2018, which was included in miscellaneous non-interest
income. This income and expense is now reported on separate line
items under non-interest income and non-interest expense. Prior
periods have been restated to reflect this change.
(2) Average shares outstanding and per share computations have been
restated to reflect a 10% stock dividend paid during the fourth
quarter of 2017.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of our financial position and results
of operations and should be read in conjunction with the
information set forth under Item 1A Risk Factors in the
Company’s annual report on Form 10-K and the Company’s
consolidated financial statements and notes thereto on pages A-26
through A-71.
Introduction
Management’s
discussion and analysis of earnings and related data are presented
to assist in understanding the consolidated financial condition and
results of operations of Peoples Bancorp of North Carolina, Inc.
(“Bancorp”), for the years ended December 31, 2020,
2019 and 2018. Bancorp is a registered bank holding company
operating under the supervision of the Federal Reserve Board (the
“FRB”) and the parent company of Peoples Bank (the
“Bank”). The Bank is a North Carolina-chartered bank,
with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell
and Wake counties, operating under the banking laws of North
Carolina and the rules and regulations of the Federal Deposit
Insurance Corporation (the “FDIC”).
Overview
Our
business consists principally of attracting deposits from the
general public and investing these funds in commercial loans, real
estate mortgage loans, real estate construction loans and consumer
loans. Our profitability depends primarily on our net interest
income, which is the difference between the income we receive on
our loan and investment securities portfolios and our cost of
funds, which consists of interest paid on deposits and borrowed
funds. Net interest income also is affected by the relative amounts
of our interest-earning assets and interest-bearing liabilities.
When interest-earning assets approximate or exceed interest-bearing
liabilities, a positive interest rate spread will generate net
interest income. Our profitability is also affected by the level of
other income and operating expenses. Other income consists
primarily of miscellaneous fees related to our loans and deposits,
mortgage banking income and commissions from sales of annuities and
mutual funds. Operating expenses consist of compensation and
benefits, occupancy related expenses, federal deposit and other
insurance premiums, data processing, advertising and other
expenses.
Our
operations are influenced significantly by local economic
conditions and by policies of financial institution regulatory
authorities. The earnings on our assets are influenced by the
effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of
the Federal Reserve System (the “Federal Reserve”),
inflation, interest rates, market and monetary fluctuations.
Lending activities are affected by the demand for commercial and
other types of loans, which in turn is affected by the interest
rates at which such financing may be offered. Our cost of funds is
influenced by interest rates on competing investments and by rates
offered on similar investments by competing financial institutions
in our market area, as well as general market interest rates. These
factors can cause fluctuations in our net interest income and other
income. In addition, local economic conditions can impact the
credit risk of our loan portfolio, in that (1) local employers may
be required to eliminate employment positions of individual
borrowers, and (2) small businesses and commercial borrowers may
experience a downturn in their operating performance and become
unable to make timely payments on their loans. Management evaluates
these factors in estimating the allowance for loan losses and
changes in these economic factors could result in increases or
decreases to the provision for loan losses.
COVID-19 has
adversely affected, and may continue to adversely affect economic
activity globally, nationally and locally. Following the COVID-19
outbreak in December 2019 and January 2020, market interest rates
have declined significantly, with the 10-year Treasury bond falling
below 1.00% on March 3, 2020 for the first time. Such events also
may adversely affect business and consumer confidence, generally,
and the Company and its customers, and their respective suppliers,
vendors and processors may be adversely affected. On March 3, 2020,
the Federal Reserve Federal Open Market Committee
(“FOMC”) reduced the target federal funds rate by 50
basis points to a range of 1.00% to 1.25%. Subsequently on March
16, 2020, the FOMC further reduced the target federal funds rate by
an additional 100 basis points to a range of 0.00% to 0.25%. These
reductions in interest rates and other effects of the COVID-19
pandemic may adversely affect the Company’s financial
condition and results of operations. Prior to the occurrence of the
COVID-19 pandemic, economic conditions, while not as robust as the
economic conditions during the period from 2004 to 2007, had
stabilized such that businesses in our market area were growing and
investing again. The uncertainty expressed in the local, national
and international markets through the primary economic indicators
of activity were previously sufficiently stable to allow for
reasonable economic growth in our markets. See COVID-19 Impact
below for additional information regarding the impact of the
COVID-19 pandemic on the Company’s business.
Although we are unable to
control the external factors that influence our business, by
maintaining high levels
A-4
of balance sheet liquidity, managing our interest rate exposures
and by actively monitoring asset quality, we seek to minimize the
potentially adverse risks of unforeseen and unfavorable economic
trends.
Our
business emphasis has been and continues to be to operate as a
well-capitalized, profitable and independent community-oriented
financial institution dedicated to providing quality customer
service. We are committed to meeting the financial needs of the
communities in which we operate. We expect growth to be achieved in
our local markets and through expansion opportunities in contiguous
or nearby markets. While we would be willing to consider growth by
acquisition in certain circumstances, we do not consider the
acquisition of another company to be necessary for our continued
ability to provide a reasonable return to our shareholders. We
believe that we can be more effective in serving our customers than
many of our non-local competitors because of our ability to quickly
and effectively provide senior management responses to customer
needs and inquiries. Our ability to provide these services is
enhanced by the stability and experience of our Bank officers and
managers.
The
Company does not have specific plans for additional offices in 2021
but will continue to look for growth opportunities in nearby
markets and may expand if considered a worthwhile
opportunity.
COVID 19 Impact
Overview. The COVID-19 pandemic has caused and continues to cause
significant, unprecedented disruption that affects daily living and
negatively impacts the global economy, the banking industry and the
Company. While we are unable to estimate the magnitude, we expect
the COVID-19 pandemic and related global economic crisis will
adversely affect our future operating results. As such, the impact
of the COVID-19 pandemic on future fiscal periods is subject to a
high degree of uncertainty.
Effects on Our Market Areas. Our commercial and consumer banking products and
services are offered primarily in North Carolina where individual
and governmental responses to the COVID-19 pandemic led to a broad
curtailment of economic activity beginning in March 2020. In North
Carolina, schools closed for the remainder of the 2019-2020
academic year, businesses were ordered to temporarily close or
reduce their business operations to accommodate social distancing
and shelter in place requirements, non-critical healthcare services
were significantly curtailed and unemployment levels rose. Since
the initial shut down in March 2020, phased reopening plans began
in mid-May subject to public health reopening guidelines and
limitations on capacity and
limitations continue to remain in place.
Policy and Regulatory Developments. Federal, state and local governments and
regulatory authorities have enacted and issued a range of policy
responses to the COVID-19 pandemic, including the
following:
●
The
Federal Reserve decreased the range for the federal funds target
rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on
March 16, 2020, reaching a current range of 0.0 - 0.25
percent.
●
On March 27, 2020,
President Trump signed the CARES Act, which established a $2
trillion economic stimulus package, including cash payments to
individuals, supplemental unemployment insurance benefits and a
$349 billion loan program administered through the Small Business
Administration (“SBA”), referred to as the Paycheck
Protection Program (“PPP”). Under the PPP, small
businesses, sole proprietorships, independent contractors and
self-employed individuals may apply for loans from existing SBA
lenders and other approved regulated lenders that enroll in the
program, subject to numerous limitations and eligibility criteria.
After the initial $349 billion in funds for the PPP was exhausted,
an additional $310 billion in funding for PPP loans was authorized.
The Bank is participating as a lender in the PPP. In addition, the
CARES Act provides financial institutions the option to temporarily
suspend certain requirements under GAAP related to troubled debt
restructured (“TDR”) loans for a limited period of time
to account for the effects of COVID-19. See Note 3 of the financial
statements for additional disclosure of loan modifications as of
December 31, 2020.
●
On
April 7, 2020, federal banking regulators issued a revised
Interagency Statement on Loan Modifications and Reporting for
Financial Institutions, which, among other things, encouraged
financial institutions to work prudently with borrowers who are or
may be unable to meet their contractual payment obligations because
of the effects of COVID-19, and stated that institutions generally
do not need to categorize COVID-19-related modifications as TDRs
and that the agencies will not direct supervised institutions to
automatically categorize all COVID-19 related loan modifications as
TDRs. See Note 3 of the financial statements for additional
disclosure of loan modifications as of December 31,
2020.
●
On April 9, 2020, the Federal Reserve announced
additional measures aimed at supporting small and mid-sized
businesses, as well as state and local governments impacted by
COVID-19. The Federal Reserve announced the Main Street Business
Lending Program, which established two new loan facilities
intended
A-5
to facilitate lending to small and mid-sized
businesses: (1) the Main Street New Loan Facility, or MSNLF, and
(2) the Main Street Expanded Loan Facility, or MSELF.
MSNLF loans are unsecured term loans
originated on or after April 8, 2020, while MSELF loans are
provided as upsized tranches of existing loans originated before
April 8, 2020. The combined size of the program will be up to $600
billion. The program is designed for businesses with up to 10,000
employees or $2.5 billion in 2019 revenues. To obtain a loan,
borrowers must confirm that they are seeking financial support
because of COVID-19 and that they will not use proceeds from the
loan to pay off debt. The Federal Reserve also stated that it would
provide additional funding to banks offering PPP loans to
struggling small businesses. Lenders participating in the PPP will
be able to exclude loans financed by the facility from their
leverage ratio. In addition, the Federal Reserve created a
Municipal Liquidity Facility to support state and local governments
with up to $500 billion in lending, with the Treasury Department
backing $35 billion for the facility using funds appropriated by
the CARES Act. The facility will make short-term financing
available to cities with a population of more than one million or
counties with a population of greater than two million. The Federal
Reserve expanded both the size and scope of its Primary and
Secondary Market Corporate Credit Facilities to support up to $750
billion in credit to corporate debt issuers. This will allow
companies that were investment grade before the onset of COVID-19
but then subsequently downgraded after March 22, 2020 to gain
access to the facility. Finally, the Federal Reserve announced that
its Term Asset-Backed Securities Loan Facility will be scaled up in
scope to include the triple A-rated tranche of commercial
mortgage-backed securities and newly issued collateralized loan
obligations. The size of the facility is $100 billion. The Bank did
not participate in the MSELF or MSNLF.
●
On
December 27, 2020, the Economic Aid to Hard-Hit Small Businesses,
Nonprofits and Venues Act (the “Economic Aid Act”)
became law. The Economic Aid Act reopens and expands the PPP loan
program through March 31, 2021. The changes to the PPP program
allow new borrowers to apply for a loan under the original PPP loan
program and the creation of an additional PPP loan for eligible
borrowers. The Economic Aid Act also revises certain PPP
requirements, including aspects of loan forgiveness on existing PPP
loans.
●
In
addition to the policy responses described above, the federal bank
regulatory agencies, along with their state counterparts, have
issued a stream of guidance in response to the COVID-19 pandemic
and have taken a number of unprecedented steps to help banks
navigate the pandemic and mitigate its impact. These include,
without limitation: requiring banks to focus on business continuity
and pandemic planning; adding pandemic scenarios to stress testing;
encouraging bank use of capital buffers and reserves in lending
programs; permitting certain regulatory reporting extensions;
reducing margin requirements on swaps; permitting certain otherwise
prohibited investments in investment funds; issuing guidance to
encourage banks to work with customers affected by the pandemic and
encourage loan workouts; and providing credit under the Community
Reinvestment Act (“CRA”) for certain pandemic related
loans, investments and public service. Moreover, because of the
need for social distancing measures, the agencies revamped the
manner in which they conducted periodic examinations of their
regular institutions, including making greater use of off-site
reviews. The Federal Reserve also issued guidance encouraging
banking institutions to utilize its discount window for loans and
intraday credit extended by its Reserve Banks to help households
and businesses impacted by the pandemic and announced numerous
funding facilities. The FDIC has also acted to mitigate the deposit
insurance assessment effects of participating in the PPP and the
Federal Reserve's PPP Liquidity Facility and Money Market Mutual
Fund Liquidity Facility.
Effects on Our Business. The COVID-19 pandemic and the specific
developments referred to above have had and will continue to have a
significant impact on our business. In particular, we anticipate
that a significant portion of the Bank’s borrowers in the
hotel, restaurant and retail industries will continue to endure
significant economic distress, which has caused, and may continue
to cause, them to draw on their existing lines of credit and
adversely affect their ability to repay existing indebtedness, and
is expected to adversely impact the value of collateral. These
developments, together with economic conditions generally, are also
expected to impact our commercial real estate portfolio,
particularly with respect to real estate with exposure to these
industries, and the value of certain collateral securing our loans.
As a result, we anticipate that our financial condition, capital
levels and results of operations could be adversely affected, as
described in further detail below.
Our Response. We have taken
numerous steps in response to the COVID-19 pandemic, including the
following:
●
On
March 13, 2020 we enacted our Pandemic Plan. We used available
physical resources to achieve appropriate social distancing
protocols in all facilities; in addition, we established mandatory
remote work to isolate certain personnel essential to critical
business continuity operations. We also expanded and tested remote
access for the core banking system, funds transfer and loan
operations.
●
We
are actively working with loan customers to evaluate prudent loan
modification terms.
A-6
●
We
continue to promote our digital banking options through our
website. Customers are encouraged to utilize online and mobile
banking tools, and our customer service and retail departments are
fully staffed and available to assist customers
remotely.
●
We
are a participating lender in the PPP. We believe it is our
responsibility as a community bank to assist the SBA in the
distribution of funds authorized under the CARES Act to our
customers and communities.
●
On
March 19, 2020, we restricted branch customer activity to drive-up
and appointment only services. Branch lobbies were reopened on May
20, 2020. One small branch located in an assisted living facility
was permanently closed effective December 31, 2020 due to limited
lobby space and COVID-19 restrictions. All business functions
continue to be operational. We continue to pay all employees
according to their normal work schedule, even if their work has
been reduced. No employees have been furloughed. Employees whose
job responsibilities can be effectively carried out remotely are
working from home. Employees whose critical duties require their
continued presence on-site are observing social distancing and
cleaning protocols.
Summary of Significant and Critical Accounting
Policies
The
consolidated financial statements include the financial statements
of Bancorp and its wholly owned subsidiary, the Bank, along with
the Bank’s wholly owned subsidiaries, Peoples Investment
Services, Inc., Real Estate Advisory Services, Inc.
(“REAS”), Community Bank Real Estate Solutions, LLC
(“CBRES”) and PB Real Estate Holdings, LLC
(collectively called the “Company”). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The
Company’s accounting policies are fundamental to
understanding management’s discussion and analysis of results
of operations and financial condition. Many of the Company’s
accounting policies require significant judgment regarding
valuation of assets and liabilities and/or significant
interpretation of specific accounting guidance. The following is a
summary of some of the more subjective and complex accounting
policies of the Company. A more complete description of the
Company’s significant accounting policies can be found in
Note 1 of the Notes to Consolidated Financial Statements in the
Company’s 2020 Annual Report to Shareholders which is
Appendix A to the Proxy Statement for the May 6, 2021 Annual
Meeting of Shareholders.
The
allowance for loan losses reflects management’s assessment
and estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses.
Many of
the Company’s assets and liabilities are recorded using
various techniques that require significant judgment as to
recoverability. The collectability of loans is reflected through
the Company’s estimate of the allowance for loan losses. The
Company performs periodic and systematic detailed reviews of its
lending portfolio to assess overall collectability. In addition,
certain assets and liabilities are reflected at their estimated
fair value in the consolidated financial statements. Such amounts
are based on either quoted market prices or estimated values
derived from dealer quotes used by the Company, market comparisons
or internally generated modeling techniques. The Company’s
internal models generally involve present value of cash flow
techniques. The various techniques are discussed in greater detail
elsewhere in this management’s discussion and analysis and
the Notes to Consolidated Financial Statements.
There
are other complex accounting standards that require the Company to
employ significant judgment in interpreting and applying certain of
the principles prescribed by those standards. These judgments
include, but are not limited to, the determination of whether a
financial instrument or other contract meets the definition of a
derivative in accordance with U.S. Generally Accepted Accounting
Principles (“GAAP”).
The
disclosure requirements for derivatives and hedging activities are
intended to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged
items are accounted for and (c) how derivative instruments and
related hedged items affect an entity’s financial position,
financial performance, and cash flows. The disclosure requirements
include qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about the fair value
of, and gains and losses, on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative instruments.
The
Company has an overall interest rate risk management strategy that
has, in prior years, incorporated the use of derivative instruments
to minimize significant unplanned fluctuations in earnings that are
caused by interest rate volatility. When using derivative
instruments, the Company is exposed to credit and market risk. If
the
A-7
Management of the
Company has made a number of estimates and assumptions relating to
reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the accompanying
consolidated financial statements in conformity with GAAP. Actual
results could differ from those estimates.
Results of Operations
Summary. The Company reported earnings
of $11.4 million or $1.95 basic and diluted net earnings per share
for the year ended December 31, 2020, as compared to $14.1 million
or $2.37 basic net earnings per share and $2.36 diluted net
earnings per share for the same period one year ago. The decrease
in year-to-date net earnings is primarily attributable to a
decrease in net interest income, an increase in the provision for
loan losses and an increase in non-interest expense, which were
partially offset by an increase in non-interest income, as
discussed below.
The
Company reported earnings of $14.1 million or $2.37 basic net
earnings per share and $2.36 diluted net earnings per share for the
year ended December 31, 2019, as compared to $13.4 million or $2.23
basic net earnings per share and $2.22 diluted net earnings per
share for the same period one year ago. The increase in
year-to-date net earnings is primarily attributable to an increase
in net interest income and an increase in non-interest income,
which were partially offset by an increase in the provision for
loan losses and an increase in non-interest expense.
The
return on average assets in 2020 was 0.83%, as compared to 1.23% in
2019 and 1.22% in 2018. The return on average shareholders’
equity was 8.04% in 2020, as compared to 10.45% in 2019 and 10.81%
in 2018.
Net Interest Income. Net interest
income, the major component of the Company’s net income, is
the amount by which interest and fees generated by interest-earning
assets exceed the total cost of funds used to carry them. Net
interest income is affected by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well
as changes in the yields earned and rates paid. Net interest margin
is calculated by dividing tax-equivalent net interest income by
average interest-earning assets, and represents the Company’s
net yield on its interest-earning assets.
Net
interest income for 2020 was $44.1 million, as compared to $45.8
million in 2019. The decrease in net interest income was primarily
due to a $1.6 million decrease in interest income and a $79,000
increase in interest expense. The decrease in interest income was
primarily due to a $987,000 decrease in interest income on loans
resulting from the 1.50% reduction in the Prime Rate in March 2020.
The increase in interest expense was primarily due to an increase
in average outstanding balances of interest-bearing liabilities,
which was partially offset by a decrease in rates paid on
interest-bearing liabilities. Net interest income increased to
$45.8 million in 2019 from $43.2 million in 2018.
Table 1
sets forth for each category of interest-earning assets and
interest-bearing liabilities, the average amounts outstanding, the
interest incurred on such amounts and the average rate earned or
incurred for the years
ended December 31, 2020, 2019 and 2018. The table also sets forth
the average rate earned on total interest-earning assets, the
average rate paid on total interest-bearing liabilities, and the
net yield on total average interest-earning assets for the same
periods. Yield information does not give effect to changes in fair
value that are reflected as a component of shareholders’
equity. Yields and interest income on tax-exempt investments have
been adjusted to a tax equivalent basis using an effective tax rate
of 22.98% for securities that are both federal and state tax exempt
and an effective tax rate of 20.48% for federal tax-exempt
securities. Non-accrual loans and the interest income that was
recorded on non-accrual loans, if any, are included in the yield
calculations for loans in all periods reported. The Company believes the
presentation of net interest income on a tax-equivalent basis
provides comparability of net interest income from both taxable and
tax-exempt sources and facilitates comparability within the
industry. Although the Company believes these non-GAAP financial
measures enhance investors’ understanding of its business and
performance, these non-GAAP financial measures should not be
considered an alternative to GAAP. The reconciliations of these
non-GAAP financial measures to their most directly comparable GAAP
financial measures are presented below.
A-8
Table 1- Average Balance Table
|
December 31, 2020
|
December 31, 2019
|
December 31, 2018
|
||||||
(Dollars in thousands)
|
Average Balance
|
Interest
|
Yield / Rate
|
Average Balance
|
Interest
|
Yield / Rate
|
Average Balance
|
Interest
|
Yield / Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
Loans
|
$935,970
|
42,314
|
4.52%
|
834,517
|
43,301
|
5.19%
|
777,098
|
38,654
|
4.97%
|
Investments -
taxable
|
132,468
|
2,299
|
1.74%
|
77,945
|
2,254
|
2.89%
|
71,093
|
1,936
|
2.72%
|
Investments -
nontaxable*
|
75,609
|
3,634
|
4.81%
|
113,117
|
4,293
|
3.80%
|
142,832
|
5,508
|
3.86%
|
Federal funds
sold
|
91,166
|
204
|
0.22%
|
19,078
|
331
|
1.73%
|
-
|
-
|
0.00%
|
Other
|
36,551
|
127
|
0.35%
|
11,073
|
213
|
1.92%
|
16,461
|
304
|
1.85%
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
1,271,764
|
48,578
|
3.82%
|
1,055,730
|
50,392
|
4.77%
|
1,007,484
|
46,402
|
4.61%
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
34,569
|
|
|
36,227
|
|
|
41,840
|
|
|
Other
assets
|
67,742
|
|
|
57,880
|
|
|
51,704
|
|
|
Allowance for
loan losses
|
(8,433)
|
|
|
(6,499)
|
|
|
(6,321)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$1,365,642
|
|
|
1,143,338
|
|
|
1,094,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, MMDA
& savings deposits
|
$584,177
|
1,962
|
0.34%
|
495,509
|
1,596
|
0.32%
|
484,180
|
769
|
0.16%
|
Time
deposits
|
103,694
|
947
|
0.91%
|
105,458
|
909
|
0.86%
|
112,398
|
472
|
0.42%
|
FHLB
borrowings
|
60,820
|
357
|
0.59%
|
19,625
|
205
|
1.04%
|
-
|
-
|
0.00%
|
Trust
preferred securities
|
15,478
|
370
|
2.39%
|
20,619
|
844
|
4.09%
|
20,619
|
790
|
3.83%
|
Other
|
29,019
|
200
|
0.69%
|
34,781
|
203
|
0.58%
|
47,968
|
115
|
0.24%
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
793,188
|
3,836
|
0.48%
|
675,992
|
3,757
|
0.56%
|
665,165
|
2,146
|
0.32%
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
427,148
|
|
|
331,680
|
|
|
306,544
|
|
|
Other
liabilities
|
4,019
|
|
|
996
|
|
|
(799)
|
|
|
Shareholders'
equity
|
141,287
|
|
|
134,670
|
|
|
123,797
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholder's equity
|
$1,365,642
|
|
|
1,143,338
|
|
|
1,094,707
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
$44,742
|
3.34%
|
|
$46,635
|
4.21%
|
|
$44,256
|
4.29%
|
|
|
|
|
|
|
|
|
|
|
Net yield on interest-earning assets
|
|
|
3.52%
|
|
|
4.42%
|
|
|
4.39%
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$620
|
|
|
$791
|
|
|
$1,052
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$44,122
|
|
|
$45,844
|
|
|
$43,204
|
|
*Includes
U.S. Government agency securities that are non-taxable for state
income tax purposes of $19.2 million in 2020, $32.0 million in 2019
and $38.0 million in 2018. A tax rate of 2.50% was used to
calculate the tax equivalent yields on these securities in 2020,
2019 and 2018.
Changes
in interest income and interest expense can result from variances
in both volume and rates. Table 2 describes the impact on the
Company’s tax equivalent net interest income resulting from
changes in average balances and average rates for the periods
indicated. The changes in net interest income due to both volume
and rate changes have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of
the changes in each.
A-9
Table 2 - Rate/Volume Variance Analysis-Tax Equivalent
Basis
|
December 31, 2020
|
December 31, 2019
|
||||
(Dollars in thousands)
|
Changes in average volume
|
Changes in average rates
|
Total Increase (Decrease)
|
Changes in average volume
|
Changes in average rates
|
Total Increase (Decrease)
|
Interest income:
|
|
|
|
|
|
|
Loans:
Net of unearned income
|
$4,925
|
(5,912)
|
(987)
|
$2,918
|
1,729
|
4,647
|
|
|
|
|
|
|
|
Investments
- taxable
|
1,261
|
(1,216)
|
45
|
192
|
126
|
318
|
Investments
- nontaxable
|
(1,613)
|
954
|
(659)
|
(1,137)
|
(78)
|
(1,215)
|
Federal
funds sold
|
706
|
(833)
|
(127)
|
166
|
165
|
331
|
Other
|
290
|
(376)
|
(86)
|
(102)
|
12
|
(90)
|
Total interest income
|
5,569
|
(7,383)
|
(1,814)
|
2,037
|
1,954
|
3,991
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
NOW,
MMDA & savings deposits
|
292
|
74
|
366
|
27
|
800
|
827
|
Time
deposits
|
(16)
|
54
|
38
|
(44)
|
481
|
437
|
FHLB
borrowings
|
336
|
(184)
|
152
|
103
|
102
|
205
|
Trust
preferred securities
|
(167)
|
(307)
|
(474)
|
-
|
54
|
54
|
Other
|
(37)
|
34
|
(3)
|
(54)
|
142
|
88
|
Total interest expense
|
408
|
(329)
|
79
|
32
|
1,579
|
1,611
|
Net interest income
|
$5,161
|
(7,054)
|
(1,893)
|
$2,005
|
375
|
2,380
|
Net
interest income on a tax equivalent basis totaled $44.7 million in
2020, as compared to $46.6 million in 2019. The net interest rate
spread, which represents the rate earned on interest-earning assets
less the rate paid on interest-bearing liabilities, was 3.34% in
2020, as compared to a net interest rate spread of 4.21% in 2019.
The net yield on interest-earning assets was 3.52% in 2020 and
4.42% in 2019.
Tax
equivalent interest income decreased $1.8 million in 2020 primarily
due to a decrease in
rates on interest earning assets. The yield on interest-earning
assets was 3.82% in 2020, as compared to 4.77% in
2019.
Interest expense
increased $79,000 in 2020, as compared to 2019. The increase in
interest expense was primarily due to an increase in average
outstanding balances of interest-bearing liabilities, which was
partially offset by a decrease in rates paid on interest-bearing
liabilities. Average interest-bearing liabilities increased by
$117.2 million to $793.2 million in 2020, as compared to $676.0
million in 2019. The cost of funds decreased to 0.48% in 2020 from
0.56% in 2019.
In
2019, net interest income on a tax equivalent basis was $46.6
million, as compared to $44.3 million in 2018. The net interest
spread was 4.21% in 2019, as compared to 4.29% in 2018. The net
yield on interest-earning assets was 4.42% in 2019, as compared to
4.39% in 2018.
Provision for Loan Losses. Provisions
for loan losses are charged to income in order to bring the total
allowance for loan losses to a level deemed appropriate by
management of the Company based on factors such as
management’s judgment as to losses within the Bank’s
loan portfolio, including the valuation of impaired loans, loan
growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies and management’s assessment of the
quality of the loan portfolio and general economic
climate.
The
provision for loan losses for the year ended December 31, 2020 was
$4.3 million, compared to $863,000 for the year ended December 31,
2019. The increase in the provision for loan losses is primarily
attributable to increases in the qualitative factors applied in the
Company’s Allowance for Loan and Lease Losses
(“ALLL”) model due to the impact to the economy from
the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk,
A-10
Table 3
presents a summary of net charge off activity for the years ended
December 31, 2020, 2019, 2018, 2017 and 2016.
Table 3 - Net Charge-off Analysis
|
Net
charge-offs/(recoveries)
|
Net
charge-offs/(recoveries) as a percent of average loans
outstanding
|
||||||||
|
Years
ended December 31,
|
Years
ended December 31,
|
||||||||
(Dollars
in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
2020
|
2019
|
2018
|
2017
|
2016
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development
|
$(31)
|
(24)
|
43
|
(14)
|
(3)
|
-0.03%
|
-0.03%
|
0.05%
|
-0.02%
|
-0.01%
|
Single-family
residential
|
(5)
|
(24)
|
10
|
164
|
220
|
0.00%
|
-0.01%
|
0.00%
|
0.07%
|
0.09%
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
-
|
-
|
-
|
-
|
-
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
Commercial
|
(63)
|
(48)
|
348
|
(21)
|
299
|
-0.02%
|
-0.02%
|
0.13%
|
-0.01%
|
0.12%
|
Multifamily and
farmland
|
-
|
-
|
4
|
66
|
-
|
0.00%
|
0.00%
|
0.01%
|
0.23%
|
0.00%
|
Total real estate
loans
|
(99)
|
(96)
|
405
|
195
|
516
|
-0.01%
|
-0.01%
|
0.06%
|
0.03%
|
0.09%
|
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
869
|
306
|
22
|
163
|
(25)
|
0.54%
|
0.31%
|
0.02%
|
0.19%
|
-0.03%
|
Farm
loans
|
-
|
-
|
-
|
-
|
-
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
Consumer loans
(1)
|
254
|
418
|
284
|
319
|
342
|
3.57%
|
4.95%
|
3.11%
|
3.10%
|
3.38%
|
All other
loans
|
7
|
-
|
-
|
-
|
-
|
0.20%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
Total
loans
|
$1,031
|
628
|
711
|
677
|
833
|
0.11%
|
0.07%
|
0.09%
|
0.09%
|
0.12%
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reduction of) loan losses
|
|
|
|
|
|
|
|
|
|
|
for the
period
|
$4,259
|
863
|
790
|
(507)
|
(1,206)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses at end of period
|
$9,908
|
6,680
|
6,445
|
6,366
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of
period
|
$948,639
|
849,874
|
804,023
|
759,764
|
723,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans at
end of period
|
$3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses as a percent of
|
|
|
|
|
|
|
|
|
|
|
total loans outstanding
at end of period
|
1.04%
|
0.79%
|
0.80%
|
0.84%
|
1.04%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans as a
percent of
|
|
|
|
|
|
|
|
|
|
|
total loans outstanding
at end of period
|
0.40%
|
0.42%
|
0.41%
|
0.49%
|
0.53%
|
|
|
|
|
|
(1) The loss ratio for consumer loans is elevated because overdraft
charge-offs related to DDA and NOW accounts are reported in
consumer loan charge-offs and recoveries. The net overdraft
charge-offs are not considered material and are therefore not shown
separately.
Please
see the section below entitled “Allowance for Loan
Losses” for a more complete discussion of the Bank’s
policy for addressing potential loan losses.
Non-Interest Income. Non-interest
income was $22.9 million for the year ended December 31, 2020,
compared to $17.7 million for the year ended December 31, 2019. The
increase in non-interest income is primarily attributable to a $2.4
million increase in gains on sale of securities, a $2.3 million
increase in appraisal management fee income due to an increase in
the volume of appraisals and a $1.2 million increase in mortgage
banking income due to increased mortgage loan volume, which were
partially offset by a $1.0 million decrease in service charges and
fees primarily due to service charge and fee concessions associated
with the COVID-19 pandemic.
Non-interest income
was $17.7 million for the year ended December 31, 2019, as compared
to $16.2 million for the year ended December 31, 2018. The increase
in non-interest income is primarily attributable to a $1.3 million
increase in appraisal management fee income due to an increase in
the volume of appraisals and a $413,000 increase in mortgage
banking income due to an increase in mortgage loan
volume.
The Company
periodically evaluates its investments for any impairment which
would be deemed other-than-temporary. No investment
impairments were deemed other-than-temporary in 2020, 2019 or
2018.
Table 4 presents a
summary of non-interest income for the years ended December 31,
2020, 2019 and 2018.
A-11
Table 4 - Non-Interest Income
(Dollars in thousands)
|
2020
|
2019
|
2018
|
Service
charges
|
$3,528
|
4,576
|
4,355
|
Other
service charges and fees
|
742
|
714
|
705
|
Gain
on sale of securities
|
2,639
|
226
|
15
|
Mortgage
banking income
|
2,469
|
1,264
|
851
|
Insurance
and brokerage commissions
|
897
|
877
|
824
|
Gain/(loss)
on sale and write-down of other real estate
|
(47)
|
(11)
|
17
|
Visa
debit card income
|
4,237
|
4,145
|
3,911
|
Appraisal
management fee income
|
6,754
|
4,484
|
3,206
|
Miscellaneous
|
1,695
|
1,464
|
2,282
|
Total non-interest income
|
$22,914
|
17,739
|
16,166
|
Non-Interest Expense. Non-interest
expense was $48.9 million for the year ended December 31, 2020,
compared to $45.5 million for the year ended December 31, 2019. The
increase in non-interest expense was primarily attributable to a
$1.9 million increase in appraisal management fee expense due to an
increase in the volume of appraisals and a $570,000 increase in
other non-interest expense. The increase in other non-interest
expense is primarily due to a $1.1 million FHLB borrowings
prepayment penalty in December 2020.
Non-interest
expense was $45.5 million for the year ended December 31, 2019, as
compared to $42.6 million for the year ended December 31, 2018. The
increase in non-interest expense was primarily due to a $1.7
million increase in salaries and benefits expense and a $961,000
increase in appraisal management fee expense. The increase in
salaries and benefits expense was primarily attributable to an
increase in salary expense primarily due to annual salary
increases, an increase in incentive compensation expense, an
increase in insurance costs and an increase in commission expense
primarily due to an increase in mortgage loan production. The
increase in appraisal management fee expense was primarily due to
an increase in the volume of appraisals.
Table 5 presents a summary of
non-interest expense for the years ended December 31, 2020, 2019
and 2018.
Table 5 - Non-Interest Expense
(Dollars in thousands)
|
2020
|
2019
|
2018
|
Salaries
and employee benefits
|
$23,538
|
23,238
|
21,530
|
Occupancy
expense
|
7,933
|
7,364
|
7,170
|
Office
supplies
|
528
|
467
|
503
|
FDIC
deposit insurance
|
263
|
119
|
328
|
Visa
debit card expense
|
1,012
|
890
|
994
|
Professional
services
|
502
|
517
|
513
|
Postage
|
190
|
294
|
249
|
Telephone
|
794
|
802
|
678
|
Director
fees and expense
|
360
|
394
|
312
|
Advertising
|
787
|
1,021
|
922
|
Consulting
fees
|
1,078
|
972
|
1,012
|
Taxes
and licenses
|
295
|
287
|
288
|
Foreclosure/OREO
expense
|
20
|
28
|
58
|
Internet
banking expense
|
729
|
681
|
603
|
FHLB
advance prepayment penalty
|
1,100
|
-
|
-
|
Appraisal
management fee expense
|
5,274
|
3,421
|
2,460
|
Other
operating expense
|
4,528
|
5,022
|
4,954
|
Total non-interest expense
|
$48,931
|
45,517
|
42,574
|
Income Taxes. The Company reported
income tax expense of $2.5 million, $3.1 million and $2.6 million
for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company’s effective tax rates were 17.98%, 18.23% and
16.39% in 2020, 2019 and 2018, respectively.
Liquidity. The objectives of the
Company’s liquidity policy are to provide for the
availability of adequate funds to meet the needs of loan demand,
deposit withdrawals, maturing liabilities and to satisfy regulatory
requirements. Both deposit and loan customer cash needs can
fluctuate significantly depending upon business
cycles,
A-12
economic conditions
and yields and returns available from alternative investment
opportunities. In addition, the Company’s liquidity is
affected by off-balance sheet commitments to lend in the form of
unfunded commitments to extend credit and standby letters of
credit. As of December 31, 2020, such unfunded commitments to
extend credit were $299.0 million, while commitments in the form of
standby letters of credit totaled $4.7 million.
The
Company uses several funding sources to meet its liquidity
requirements. The primary funding source is core deposits, which
includes demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000. The
Company considers these to be a stable portion of the
Company’s liability mix and the result of on-going consumer
and commercial banking relationships. As of December 31, 2020, the
Company’s core deposits totaled $1.2 billion, or 98% of total
deposits.
The
Bank’s five largest deposit relationships, including
securities sold under agreements to repurchase, amounted to $122.0
million and $121.9 million at December 31, 2020 and 2019,
respectively. These balances represent 9.78% of total deposits and
securities sold under agreements to repurchase combined at December
31, 2020, as compared to 12.30% of total deposits and securities
sold under agreements to repurchase combined at December 31, 2019.
Total deposits for the five largest relationships referenced above
amounted to $108.9 million, or 8.92% of total deposits at December
31, 2020, as compared to $107.7 million, or 11.14% of total
deposits at December 31, 2019. Total securities sold under
agreements to repurchase for the five largest relationships
referenced above amounted to $13.1 million, or 49.86% of total
securities sold under agreements to repurchase at December 31,
2020, as compared to $14.2 million, or 58.76% of total securities
sold under agreements to repurchase at December 31,
2019.
The
other sources of funding for the Company are through large
denomination certificates of deposit, including brokered deposits,
federal funds purchased, securities under agreement to repurchase
and FHLB borrowings. The Bank is also able to borrow from the FRB
on a short-term basis. The Bank’s policies include the
ability to access wholesale funding up to 40% of total assets. The
Bank’s wholesale funding includes FHLB borrowings, FRB
borrowings, brokered deposits and internet certificates of deposit.
The Company’s ratio of wholesale funding to total assets was
0.88% as of December 31, 2020.
The
Bank has a line of credit with the FHLB equal to 20% of the
Bank’s total assets, with no balances outstanding at December
31, 2020. At December 31, 2020, the carrying value of loans pledged
as collateral totaled approximately $165.1 million. The remaining
availability under the line of credit with the FHLB was $111.4
million at December 31, 2020. The Bank had no borrowings from the
FRB at December 31, 2020. The FRB borrowings are collateralized by
a blanket assignment on all qualifying loans that the Bank owns
which are not pledged to the FHLB. At December 31, 2020, the
carrying value of loans pledged as collateral to the FRB totaled
approximately $469.5 million. Availability under the line of credit
with the FRB was $340.0 million at December 31, 2020.
The
Bank also had the ability to borrow up to $100.5 million for the
purchase of overnight federal funds from five correspondent
financial institutions as of December 31, 2020.
The
liquidity ratio for the Bank, which is defined as net cash,
interest-bearing deposits with banks, federal funds sold and
certain investment securities, as a percentage of net deposits and
short-term liabilities was 28.12%, 18.20% and 16.09% at December
31, 2020, 2019 and 2018, respectively. The minimum required
liquidity ratio as defined in the Bank’s Asset/Liability and
Interest Rate Risk Management Policy for on balance sheet liquidity
was 10% at December 31, 2020, 2019 and 2018.
As
disclosed in the Company’s Consolidated Statements of Cash
Flows included elsewhere herein, net cash provided by operating
activities was approximately $9.2 million during 2020. Net cash
used in investing activities was $149.0 million during 2020 and net
cash provided by financing activities was $249.0 million during
2020.
Asset Liability and Interest Rate Risk
Management. The objective of the Company’s Asset
Liability and Interest Rate Risk strategies is to identify and
manage the sensitivity of net interest income to changing interest
rates and to minimize the interest rate risk between
interest-earning assets and interest-bearing liabilities at various
maturities. This is done in conjunction with the need to maintain
adequate liquidity and the overall goal of maximizing net interest
income. Table 6 presents an interest rate sensitivity analysis for
the interest-earning assets and interest-bearing liabilities for
the year ended December 31, 2020.
A-13
Table 6 - Interest Sensitivity Analysis
(Dollars in thousands)
|
Immediate
|
1-3 months
|
4-12 months
|
Total Within One Year
|
Over One Year & Non-sensitive
|
Total
|
Interest-earning assets:
|
|
|
|
|
|
|
Loans
|
$255,956
|
8,929
|
19
|
264,904
|
683,735
|
948,639
|
Mortgage loans
held for sale
|
9,139
|
-
|
-
|
9,139
|
-
|
9,139
|
Investment
securities available for sale
|
-
|
3,302
|
7,403
|
10,705
|
234,544
|
245,249
|
Interest-bearing
deposit accounts
|
118,843
|
-
|
-
|
118,843
|
-
|
118,843
|
Other
interest-earning assets
|
-
|
-
|
-
|
-
|
4,619
|
4,619
|
Total interest-earning assets
|
383,938
|
12,231
|
7,422
|
403,591
|
922,898
|
1,326,489
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
NOW, savings,
and money market deposits
|
657,834
|
-
|
-
|
657,834
|
-
|
657,834
|
Time
deposits
|
9,805
|
10,104
|
37,565
|
57,474
|
48,798
|
106,272
|
Securities
sold under
|
|
|
|
|
|
|
agreement to
repurchase
|
26,201
|
-
|
-
|
26,201
|
-
|
26,201
|
Trust
preferred securities
|
-
|
15,464
|
-
|
15,464
|
-
|
15,464
|
Total interest-bearing liabilities
|
693,840
|
25,568
|
37,565
|
756,973
|
48,798
|
805,771
|
|
|
|
|
|
|
|
Interest-sensitive gap
|
$(309,902)
|
(13,337)
|
(30,143)
|
(353,382)
|
874,100
|
520,718
|
|
|
|
|
|
|
|
Cumulative interest-sensitive gap
|
$(309,902)
|
(323,239)
|
(353,382)
|
(353,382)
|
520,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.34%
|
47.84%
|
19.76%
|
53.32%
|
1891.26%
|
|
The
Company manages its exposure to fluctuations in interest rates
through policies established by the Asset/Liability Committee
(“ALCO”) of the Bank. The ALCO meets quarterly and has
the responsibility for approving asset/liability management
policies, formulating and implementing strategies to improve
balance sheet positioning and/or earnings and reviewing the
interest rate sensitivity of the Company. ALCO tries to minimize
interest rate risk between interest-earning assets and
interest-bearing liabilities by attempting to minimize wide
fluctuations in net interest income due to interest rate movements.
The ability to control these fluctuations has a direct impact on
the profitability of the Company. Management monitors this activity
on a regular basis through analysis of its portfolios to determine
the difference between rate sensitive assets and rate sensitive
liabilities.
The
Company’s rate sensitive assets are those earning interest at
variable rates and those with contractual maturities within one
year. Rate sensitive assets therefore include both loans and
available for sale (“AFS”) securities. Rate sensitive
liabilities include interest-bearing checking accounts, money
market deposit accounts, savings accounts, time deposits and
borrowed funds. At December 31, 2020, rate sensitive assets and
rate sensitive liabilities totaled $1.3 billion and $793.2 million,
respectively.
Included in the
rate sensitive assets are $232.7 million in variable rate loans
indexed to prime rate subject to immediate repricing upon changes
by the Federal Open Market Committee (“FOMC”). The Bank
utilizes interest rate floors on certain variable rate loans to
protect against further downward movements in the prime rate. At
December 31, 2020, the Bank had $144.0 million in loans with
interest rate floors. The floors were in effect on $117.4 million
of these loans pursuant to the terms of the promissory notes on
these loans. The weighted average rate on these loans is 0.83%
higher than the indexed rate on the promissory notes without
interest rate floors.
An
analysis of the Company’s financial condition and growth can
be made by examining the changes and trends in interest-earning
assets and interest-bearing liabilities. A discussion of these
changes and trends follows.
Analysis of Financial Condition
Investment Securities. The composition
of the investment securities portfolio reflects the Company’s
investment strategy of maintaining an appropriate level of
liquidity while providing a relatively stable source of income. The
investment portfolio also provides a balance to interest rate risk
and credit risk in other categories of the balance sheet while
providing a vehicle for the investment of available funds,
furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
All of
the Company’s investment securities are held in the AFS
category. At December 31,
2020 the market value of AFS securities totaled $245.2 million, as
compared to $195.7 million and $194.6 million at December 31, 2019
and 2018, respectively. Table 7 presents the fair value of the AFS
securities held at December 31, 2020, 2019 and 2018.
A-14
Table 7 - Summary of Investment Portfolio
(Dollars in thousands)
|
2020
|
2019
|
2018
|
U.
S. Government sponsored enterprises
|
$7,507
|
28,397
|
34,634
|
State
and political subdivisions
|
92,428
|
88,143
|
107,591
|
Mortgage-backed
securities
|
145,314
|
78,956
|
52,103
|
Trust
preferred securities
|
-
|
250
|
250
|
Total securities
|
$245,249
|
195,746
|
194,578
|
The
Company’s investment portfolio consists of U.S. Government
sponsored enterprise securities, municipal securities, U.S.
Government sponsored enterprise mortgage-backed securities,
corporate bonds, trust preferred securities and equity securities.
AFS securities averaged $200.8 million in 2020, $185.3 million in
2019 and $209.7 million in 2018. Table 8 presents the book value of
AFS securities held by the Company by maturity category at December
31, 2020. Yield information does not give effect to changes in fair
value that are reflected as a component of shareholders’
equity. Yields are calculated on a tax equivalent basis. Yields and
interest income on tax-exempt investments have been adjusted to a
tax equivalent basis using an effective tax rate of 22.98% for
securities that are both federal and state tax exempt and an
effective tax rate of 20.48% for federal tax-exempt
securities.
Table 8 - Maturity Distribution and Weighted Average Yield on
Investments
|
|
|
After One Year
|
After 5 Years
|
|
|
|
|
||
|
One Year or Less
|
Through 5 Years
|
Through 10 Years
|
After 10 Years
|
Totals
|
|||||
(Dollars in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Book value:
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
|
|
|
|
|
|
|
|
|
|
|
sponsored
enterprises
|
$-
|
-
|
3,314
|
3.02%
|
1,110
|
0.89%
|
3,083
|
1.99%
|
7,507
|
2.50%
|
State and
political subdivisions
|
10,704
|
3.38%
|
12,684
|
2.40%
|
64,716
|
2.46%
|
4,324
|
3.52%
|
92,428
|
2.56%
|
Mortgage-backed
securities
|
-
|
-
|
-
|
-
|
14,442
|
1.77%
|
130,872
|
2.05%
|
145,314
|
2.01%
|
Total securities
|
$10,704
|
3.38%
|
15,998
|
2.95%
|
80,268
|
1.87%
|
138,279
|
2.44%
|
245,249
|
2.06%
|
Loans. The loan portfolio is the
largest category of the Company’s earning assets and is
comprised of commercial loans, real estate mortgage loans, real
estate construction loans and consumer loans. The Bank grants loans
and extensions of credit primarily within the Catawba Valley region
of North Carolina, which encompasses Catawba, Alexander, Iredell
and Lincoln counties and also in Mecklenburg, Wake and Durham
counties in North Carolina.
Although the
Company has a diversified loan portfolio, a substantial portion of
the loan portfolio is collateralized by real estate, which is
dependent upon the real estate market. Real estate mortgage loans
include both commercial and residential mortgage loans. At December
31, 2020, the Company had $104.2 million in residential mortgage
loans, $96.6 million in home equity loans and $476.7 million in
commercial mortgage loans, which include $375.0 million secured by
commercial property and $101.7 million secured by residential
property. Residential mortgage loans include $26.9 million in
non-traditional mortgage loans from the former Banco division of
the Bank. All residential mortgage loans are originated as fully
amortizing loans, with no negative amortization.
At
December 31, 2020, the Bank had $94.1 million in construction and
land development loans. Table 9 presents a breakout of these
loans.
Table 9 - Construction and Land Development Loans
(Dollars in thousands)
|
Number of Loans
|
Balance Outstanding
|
Non-accrual Balance
|
Land
acquisition and development - commercial purposes
|
36
|
$7,509
|
-
|
Land
acquisition and development - residential purposes
|
161
|
20,444
|
-
|
1
to 4 family residential construction
|
93
|
18,897
|
-
|
Commercial
construction
|
32
|
47,274
|
-
|
Total
acquisition, development and construction
|
322
|
$94,124
|
-
|
The
mortgage loans originated in the traditional banking offices are
generally 15 to 30-year fixed rate loans with attributes that
prevent the loans from being sellable in the secondary market.
These factors may include higher loan-to-value ratio, limited
documentation on income, non-conforming appraisal or non-conforming
property type.
A-15
The
composition of the Bank’s loan portfolio at December 31 is
presented in Table 10.
Table 10 - Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|||||
(Dollars in thousands)
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$94,124
|
9.92%
|
92,596
|
10.90%
|
94,178
|
11.71%
|
84,987
|
11.19%
|
61,749
|
8.53%
|
Single-family
residential
|
272,325
|
28.71%
|
269,475
|
31.71%
|
252,983
|
31.47%
|
246,703
|
32.47%
|
240,700
|
33.25%
|
Single-family
residential- Banco de la
|
|
|
|
|
|
|
|
|
|
|
Gente
non-traditional
|
26,883
|
2.83%
|
30,793
|
3.62%
|
34,261
|
4.26%
|
37,249
|
4.90%
|
40,189
|
5.55%
|
Commercial
|
332,971
|
35.10%
|
291,255
|
34.27%
|
270,055
|
33.59%
|
248,637
|
32.73%
|
247,521
|
34.20%
|
Multifamily
and farmland
|
48,880
|
5.15%
|
48,090
|
5.66%
|
33,163
|
4.12%
|
28,937
|
3.81%
|
21,047
|
2.91%
|
Total real
estate loans
|
775,183
|
81.72%
|
732,209
|
86.16%
|
684,640
|
85.15%
|
646,513
|
85.10%
|
611,206
|
84.44%
|
|
|
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
161,740
|
17.05%
|
100,263
|
11.80%
|
97,465
|
12.12%
|
89,022
|
11.71%
|
87,596
|
12.11%
|
Farm
loans
|
855
|
0.09%
|
1,033
|
0.12%
|
926
|
0.12%
|
1,204
|
0.16%
|
-
|
0.00%
|
Consumer
loans
|
7,113
|
0.75%
|
8,432
|
0.99%
|
9,165
|
1.14%
|
9,888
|
1.30%
|
9,832
|
1.36%
|
All other
loans
|
3,748
|
0.40%
|
7,937
|
0.93%
|
11,827
|
1.47%
|
13,137
|
1.73%
|
15,177
|
2.10%
|
Total loans
|
948,639
|
100.00%
|
849,874
|
100.00%
|
804,023
|
100.00%
|
759,764
|
100.00%
|
723,811
|
100.00%
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Allowance for loan losses
|
9,908
|
|
6,680
|
|
6,445
|
|
6,366
|
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
$938,731
|
|
843,194
|
|
797,578
|
|
753,398
|
|
716,261
|
|
As of
December 31, 2020, gross loans outstanding were $948.6 million, as
compared to $849.9 million at December 31, 2019. Average loans
represented 74% and 79% of average total earning assets for the
years ended December 31, 2020 and 2019, respectively. The Bank had
$9.1 million and $4.4 million in mortgage loans held for sale as of
December 31, 2020 and 2019, respectively.
TDR
loans modified in 2020, past due TDR loans and non-accrual TDR
loans totaled $3.8 million and $4.3 million at December 31, 2020
and December 31, 2019, respectively. The terms of these loans have
been renegotiated to provide a concession to original terms,
including a reduction in principal or interest as a result of the
deteriorating financial position of the borrower. There were no
performing loans classified as TDR loans at December 31, 2020 and
December 31, 2019.
On
March 27, 2020, President Trump signed the CARES Act, which
established a $2 trillion economic stimulus package, including cash
payments to individuals, supplemental unemployment insurance
benefits and a $349 billion loan program administered through the
PPP. Under the PPP, small businesses, sole proprietorships,
independent contractors and self-employed individuals may apply for
loans from existing SBA lenders and other approved regulated
lenders that enroll in the program, subject to numerous limitations
and eligibility criteria. The Bank is participating as a lender in
the PPP. The Bank originated $64.5 million in PPP loans during the
initial round of PPP funding. A second round of PPP funding, signed
into law by President Trump on April 24, 2020, provided $320
billion additional funding for the PPP. As of December 31, 2020,
the Bank had originated $34.5 million in PPP loans during the
second round of PPP funding. Total PPP loans originated as of
December 31, 2020 amounted to $99.0 million. PPP loans outstanding
amounted to $75.8 million at December 31, 2020. PPP loans are
reported in Commercial loans not secured by real estate in Table 10
above. The Bank has received $4.0 million in fees from the SBA for
PPP loans originated as of December 31, 2020. The Bank has
recognized $1.4 million PPP loan fee income as of December 31,
2020. PPP loan fee income is reported in interest and fees on loans
in the Consolidated Statements of Earnings on page
A-31.
The
Bank has continued to modify payments on loans due to the COVID-19
pandemic. At September 30, 2020, loans totaling $119.7 million had
payment modifications due to the COVID-19 pandemic. At December 31,
2020, the balance of loans with existing modifications as a result
of COVID-19 was $18.3 million: the balance of loans under the terms
of a first modification was $12.6 million, and the balance of
outstanding loans under the terms of a second modification was $5.7
million. The Company continues to track all loans that are
currently modified or have been modified under COVID-19. At
December 31, 2020, the balance for all loans that are currently
modified or were modified during 2020 but have returned to their
original terms was $119.6 million. Payment modifications are
primarily interest only payments for three to nine months. Loan
payment modifications associated with the COVID-19 pandemic are not
classified as TDR due to Section 4013 of the CARES Act, which
provides that a qualified loan modification is exempt by law from
classification as a TDR pursuant to GAAP.
Table
11 identifies the maturities of all loans as of December 31, 2020
and addresses the sensitivity of these loans to changes in interest
rates.
A-16
Table 11 - Maturity and Repricing Data for Loans
(Dollars in thousands)
|
Within one year or less
|
After one year through five years
|
After five years
|
Total loans
|
Real estate loans
|
|
|
|
|
Construction
and land development
|
$34,977
|
23,058
|
36,089
|
94,124
|
Single-family
residential
|
120,291
|
78,787
|
73,247
|
272,325
|
Single-family
residential- Banco de la Gente
|
|
|
|
|
stated
income
|
12,497
|
-
|
14,386
|
26,883
|
Commercial
|
70,231
|
158,119
|
104,621
|
332,971
|
Multifamily
and farmland
|
10,289
|
22,011
|
16,580
|
48,880
|
Total
real estate loans
|
248,285
|
281,975
|
244,923
|
775,183
|
|
|
|
|
|
Loans
not secured by real estate
|
|
|
|
|
Commercial
loans
|
36,055
|
105,289
|
20,396
|
161,740
|
Farm
loans
|
776
|
79
|
-
|
855
|
Consumer
loans
|
3,776
|
2,638
|
699
|
7,113
|
All
other loans
|
1,947
|
1,369
|
432
|
3,748
|
Total loans
|
$290,839
|
391,350
|
266,450
|
948,639
|
|
|
|
|
|
Total
fixed rate loans
|
$25,935
|
357,413
|
266,450
|
649,798
|
Total
floating rate loans
|
264,904
|
33,937
|
-
|
298,841
|
|
|
|
|
|
Total loans
|
$290,839
|
391,350
|
266,450
|
948,639
|
In the
normal course of business, there are various commitments
outstanding to extend credit that are not reflected in the
financial statements. At December 31, 2020, outstanding loan
commitments totaled $299.0 million. Commitments to extend credit
are agreements to lend to a customer as long as there is no
violation of any condition established in the commitment contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Additional information regarding commitments is
provided below in the section entitled “Commitments and
Contingencies” and in Note 11 to the Consolidated Financial
Statements.
Allowance for Loan Losses. The
allowance for loan losses reflects management’s assessment
and estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses. In assessing the adequacy of the allowance, size,
quality and risk of loans in the portfolio are reviewed. Other
factors considered are:
● the
Bank’s loan loss experience;
● the
amount of past due and non-performing loans;
● specific
known risks;
● the
status and amount of other past due and non-performing
assets;
● underlying
estimated values of collateral securing loans;
●
current and
anticipated economic conditions (including those arising out of the
COVID-19 pandemic); and
● other
factors which management believes affect the allowance for
potential credit losses.
Management uses
several measures to assess and monitor the credit risks in the loan
portfolio, including a loan grading system that begins upon loan
origination and continues until the loan is collected or
collectability becomes doubtful. Upon loan origination, the
Bank’s originating loan officer evaluates the quality of the
loan and assigns one of eight risk grades. The loan officer
monitors the loan’s performance and credit quality and makes
changes to the credit grade as conditions warrant. When originated
or renewed, all loans over a certain dollar amount receive in-depth
reviews and risk assessments by the Bank’s Credit
Administration. Before making any changes in these risk grades,
management considers assessments as determined by the third-party
credit review firm (as described below), regulatory examiners and
the Bank’s Credit Administration. Any issues regarding the
risk assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
A-17
As an
additional measure, the Bank engages an independent third party to
review the underwriting, documentation and risk grading analyses.
This independent third-party reviews and evaluates loan
relationships greater than $1.0 million as well as a sample of commercial
relationships with exposures below $1.0 million, excluding loans in
default, and loans in process of litigation or liquidation. The
third party’s evaluation and report is shared with management
and the Bank’s Board of Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses the
information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The
allowance for loan losses is comprised of three components:
specific reserves, general reserves and unallocated reserves. After
a loan has been identified as impaired, management measures
impairment. When the measure of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on management’s
current evaluation of the Bank’s loss exposure for each
credit, given the appraised value of any underlying collateral.
Loans for which specific reserves are provided are excluded from
the general allowance calculations as described below.
The
general allowance reflects reserves established under GAAP for
collective loan impairment. These reserves are based upon
historical net charge-offs using the greater of the last two,
three, four, or five years’ loss experience. This charge-off
experience may be adjusted to reflect the effects of current
conditions. The Bank considers information derived from its loan
risk ratings and external data related to industry and general
economic trends in establishing reserves. Qualitative factors
applied in the Company’s Allowance for Loan and Lease Losses
(“ALLL”) model include the impact to the economy from
the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk, and a higher reserve rate has been applied to
that pool. Of all loans modified as a result of COVID-19, $101.3
million of these loans have returned to their original terms;
however, the effects of stimulus in the current environment are
still unknown, and additional losses may be currently present in
loans that are currently modified and that were once
modified.
The
unallocated allowance is determined through management’s
assessment of probable losses that are in the portfolio but are not
adequately captured by the other two components of the allowance,
including consideration of current economic and business conditions
and regulatory requirements. The unallocated allowance also
reflects management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
There
were no significant changes in the estimation methods or
fundamental assumptions used in the evaluation of the allowance for
loan losses for the year ended December 31, 2020, as compared to
the year ended December 31, 2019. Revisions, estimates and
assumptions may be made in any period in which the supporting
factors indicate that loss levels may vary from the previous
estimates.
Effective December
31, 2012, certain mortgage loans from the former Banco division of
the Bank were analyzed separately from other single-family
residential loans in the Bank’s loan portfolio. These loans
are first mortgage loans made to the Latino market, primarily in
Mecklenburg, North Carolina and surrounding counties. These loans
are non-traditional mortgages in that the customer normally did not
have a credit history, so all credit information was accumulated by
the loan officers.
A-18
Various
regulatory agencies, as an integral part of their examination
process, periodically review the Bank’s allowance for loan
losses. Such agencies may require adjustments to the allowance
based on their judgments of information available to them at the
time of their examinations. Management believes it has established
the allowance for credit losses pursuant to GAAP, and has taken
into account the views of its regulators and the current economic
environment. Management considers the allowance for loan losses
adequate to cover the estimated losses inherent in the Bank’s
loan portfolio as of the date of the financial statements. 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.
Net
charge-offs for 2020, 2019 and 2018 were $1.0 million, $628,000 and
$711,000, respectively. The ratio of net charge-offs to average
total loans was 0.11% in 2020, 0.07% in 2018 and 0.09%
in 2018. The years ended December 31, 2018 and 2019 saw net
charge-offs at historically low levels. The current level of past
due and non-accrual loans currently indicate that net charge-offs
may not remain near these historical lows. The allowance for loan
losses was $9.9 million or 1.04% of total loans outstanding at
December 31, 2020. For December 31, 2019 and 2018, the allowance
for loan losses amounted to $6.7 million or 0.79% of total loans
outstanding and $6.4 million, or 0.80% of total loans outstanding,
respectively.
Table
12 presents the percentage of loans assigned to each risk grade at
December 31, 2020 and 2019.
Table 12 - Loan Risk Grade Analysis
|
|
|
|
Percentage of Loans
|
|
|
By Risk Grade
|
|
Risk Grade
|
2020
|
2019
|
Risk
Grade 1 (Excellent Quality)
|
1.18%
|
1.16%
|
Risk
Grade 2 (High Quality)
|
20.45%
|
24.46%
|
Risk
Grade 3 (Good Quality)
|
65.70%
|
62.15%
|
Risk
Grade 4 (Management Attention)
|
9.75%
|
10.02%
|
Risk
Grade 5 (Watch)
|
2.20%
|
1.45%
|
Risk
Grade 6 (Substandard)
|
0.72%
|
0.76%
|
Risk
Grade 7 (Doubtful)
|
0.00%
|
0.00%
|
Risk
Grade 8 (Loss)
|
0.00%
|
0.00%
|
Table
13 presents an analysis of the allowance for loan losses, including
charge-off activity.
Table 13 - Analysis of Allowance for Loan Losses
(Dollars in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
Allowance
for loan losses at beginning
|
$6,680
|
6,445
|
6,366
|
7,550
|
9,589
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
Commercial
|
903
|
389
|
54
|
194
|
146
|
Real
estate - mortgage
|
72
|
43
|
574
|
315
|
593
|
Real
estate - construction
|
5
|
21
|
53
|
-
|
7
|
Consumer
|
434
|
623
|
452
|
473
|
492
|
Total loans charged off
|
1,414
|
1,076
|
1,133
|
982
|
1,238
|
|
|
|
|
|
|
Recoveries
of losses previously charged off:
|
|
|
|
|
|
Commercial
|
34
|
83
|
32
|
31
|
170
|
Real
estate - mortgage
|
141
|
115
|
212
|
106
|
74
|
Real
estate - construction
|
36
|
45
|
10
|
14
|
10
|
Consumer
|
172
|
205
|
168
|
154
|
151
|
Total recoveries
|
383
|
448
|
422
|
305
|
405
|
Net loans charged off
|
1,031
|
628
|
711
|
677
|
833
|
|
|
|
|
|
|
Provision
for loan losses
|
4,259
|
863
|
790
|
(507)
|
(1,206)
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
$9,908
|
6,680
|
6,445
|
6,366
|
7,550
|
|
|
|
|
|
|
Loans
charged off net of recoveries, as
|
|
|
|
|
|
a
percent of average loans outstanding
|
0.11%
|
0.07%
|
0.09%
|
0.09%
|
0.12%
|
|
|
|
|
|
|
Allowance
for loan losses as a percent
|
|
|
|
|
|
of
total loans outstanding at end of year
|
1.04%
|
0.79%
|
0.80%
|
0.84%
|
1.04%
|
A-19
Non-performing Assets. Non-performing
assets were $3.9 million or 0.27% of total assets at December 31,
2020, compared to $3.6 million or 0.31% of total assets at December
31, 2019. Non-performing assets include $3.5 million in commercial
and residential mortgage loans, $226,000 in other loans and
$128,000 in other real estate owned at December 31, 2020, compared
to $3.4 million in commercial and residential mortgage loans and
$154,000 in other loans at December 31, 2019. Other real estate
owned totaled $128,000 at December 31, 2020. The Bank had no other
real estate owned at December 31, 2019. The Bank had no repossessed
assets as of December 31, 2020 and 2019.
At
December 31, 2020, the Bank had non-performing loans, defined as
non-accrual and accruing loans past due more than 90 days, of $3.8
million or 0.40% of total loans. Non-performing loans at December
31, 2019 were $3.6 million or 0.42% of total loans.
Management
continually monitors the loan portfolio to ensure that all loans
potentially having a material adverse impact on future operating
results, liquidity or capital resources have been classified as
non-performing. Should economic conditions deteriorate, the
inability of distressed customers to service their existing debt
could cause higher levels of non-performing loans. Management
expects the level of non-accrual loans to continue to be in-line
with the level of non-accrual loans at December 31, 2020 and
2019.
It is
the general policy of the Bank to stop accruing interest income
when a loan is placed on non-accrual status and any interest
previously accrued but not collected is reversed against current
income. Generally, a loan is placed on non-accrual status when it
is over 90 days past due and there is reasonable doubt that all
principal will be collected.
A
summary of non-performing assets at December 31 for each of the
years presented is shown in Table 14.
Table 14 - Non-performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
Non-accrual
loans
|
$3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
Loans
90 days or more past due and still accruing
|
-
|
-
|
-
|
-
|
-
|
Total non-performing loans
|
3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
All
other real estate owned
|
128
|
-
|
27
|
118
|
283
|
Repossessed
assets
|
-
|
-
|
-
|
-
|
-
|
Total non-performing assets
|
$3,886
|
3,553
|
3,341
|
3,829
|
4,108
|
|
|
|
|
|
|
TDR
loans not included in above,
|
|
|
|
|
|
(not
90 days past due or on nonaccrual)
|
$1,610
|
2,533
|
3,173
|
2,543
|
3,337
|
|
|
|
|
|
|
As a percent of total loans at year end
|
|
|
|
|
|
Non-accrual
loans
|
0.40%
|
0.42%
|
0.41%
|
0.49%
|
0.53%
|
Loans
90 days or more past due and still accruing
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
|
|
|
as a percent of total assets at year end
|
0.27%
|
0.31%
|
0.31%
|
0.35%
|
0.38%
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
as a percent of total loans at year-end
|
0.40%
|
0.42%
|
0.41%
|
0.49%
|
0.53%
|
Deposits. The Company primarily uses
deposits to fund its loan and investment portfolios. The Company
offers a variety of deposit accounts to individuals and businesses.
Deposit accounts include checking, savings, money market and time
deposits. As of December 31, 2020, total deposits were $1.2
billion, as compared to $966.5 million at December 31, 2019.
Core deposits, which
include demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000,
amounted to $1.2 billion at December 31, 2020, as compared to
$932.2 million at December 31, 2019.
Time
deposits in amounts of $250,000 or more totaled $25.8 million and
$34.3 million at December 31, 2020 and 2019, respectively. At
December 31, 2020, brokered deposits amounted to $12.4 million, as
compared to $22.3 million at December 31, 2019. Certificates of
deposit participated through the Certificate of Deposit Account
Registry Service (“CDARS”) included in brokered
deposits amounted to $4.3 million and $3.1 million as of December
31, 2020 and 2019, respectively. Brokered deposits are generally
considered to be more susceptible to withdrawal as a result of
interest rate changes and to be a less stable source of funds, as
compared to deposits from the local market. Brokered deposits
outstanding as of December 31, 2020 have a weighted average rate of
1.43% with a weighted average original term of 32
months.
A-20
Table
15 is a summary of the maturity distribution of time deposits in
amounts of $250,000 or more as of December 31, 2020.
Table 15 - Maturities of Time Deposits of $250,000 or
greater
(Dollars in thousands)
|
2020
|
Three
months or less
|
$3,658
|
Over
three months through six months
|
3,297
|
Over
six months through twelve months
|
3,871
|
Over
twelve months
|
14,945
|
Total
|
$25,771
|
Borrowed Funds. The Company has access
to various short-term borrowings, including the purchase of federal
funds and borrowing arrangements from the FHLB and other financial
institutions. There were no FHLB borrowings outstanding at December
31, 2020 and 2019. Average FHLB borrowings for 2020 and 2019 were
$60.8 million and $19.6 million, respectively. The maximum amount
of outstanding FHLB borrowings was $70.0 million in
2020. Additional
information regarding FHLB borrowings is provided in Note 7 to the
Consolidated Financial Statements.
The
Bank had no borrowings from the FRB at December 31, 2020 and 2019.
FRB borrowings are collateralized by a blanket assignment on all
qualifying loans that the Bank owns which are not pledged to the
FHLB. At December 31, 2020, the carrying value of loans pledged as
collateral totaled approximately $469.5 million.
Securities sold
under agreements to repurchase were $26.2 million at December 31,
2020, as compared to $24.2 million at December 31,
2019.
Junior
subordinated debentures were $15.5 million and $15.6 million as of
December 31, 2020 and 2019, respectively.
Contractual Obligations and Off-Balance Sheet
Arrangements. The Company’s contractual obligations
and other commitments as of December 31, 2020 are summarized in
Table 16 below. The Company’s contractual obligations include
junior subordinated debentures, as well as certain payments under
current lease agreements. Other commitments include commitments to
extend credit. Because not all of these commitments to extend
credit will be drawn upon, the actual cash requirements are likely
to be significantly less than the amounts reported for other
commitments below.
Table 16 - Contractual Obligations and Other
Commitments
(Dollars in thousands)
|
Within One Year
|
One to Three Years
|
Three to Five Years
|
Five Years or More
|
Total
|
Contractual Cash Obligations
|
|
|
|
|
|
Junior
subordinated debentures
|
$-
|
-
|
-
|
15,464
|
15,464
|
Operating
lease obligations
|
601
|
842
|
629
|
1,011
|
3,083
|
Total
|
$601
|
842
|
629
|
16,475
|
18,547
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
Commitments
to extend credit
|
$117,428
|
31,300
|
15,293
|
135,018
|
299,039
|
Standby
letters of credit
|
|
|
|
|
|
and
financial guarantees written
|
4,745
|
-
|
-
|
-
|
4,745
|
Income
tax credits
|
54
|
74
|
12
|
44
|
184
|
Total
|
$122,227
|
31,374
|
15,305
|
135,062
|
303,968
|
The
Company enters into derivative contracts to manage various
financial risks. A derivative is a financial instrument that
derives its cash flows, and therefore its value, by reference to an
underlying instrument, index or referenced interest rate.
Derivative contracts are carried at fair value on the consolidated
balance sheet with the fair value representing the net present
value of expected future cash receipts or payments based on market
interest rates as of the balance sheet date. Derivative contracts
are written in amounts referred to as notional amounts, which only
provide the basis for calculating payments between counterparties
and are not a measure of financial risk. Therefore, the derivative
amounts recorded on the balance sheet do not represent the amounts
that may ultimately be paid under
A-21
these
contracts. Further discussions of derivative instruments are
included above in the section entitled “Asset Liability and
Interest Rate Risk Management” beginning on page A-11 and in
Notes 1, 11 and 16 to the Consolidated Financial Statements. There
were no derivatives at December 31, 2020 or 2019.
Capital Resources. Shareholders’
equity was $139.9 million, or 9.89% of total assets, as of December
31, 2020, as compared to $134.1 million, or 11.61% of total assets,
as of December 31, 2019.
Average
shareholders’ equity as a percentage of total average assets
is one measure used to determine capital strength. Average
shareholders’ equity as a percentage of total average assets
was 9.89%, 11.61% and 11.31% for 2020, 2019 and 2018, respectively.
The return on average shareholders’ equity was 8.04% at
December 31, 2020, as compared to 10.45% and 10.81% at December 31,
2019 and December 31, 2018, respectively. Total cash dividends paid
on common stock were $4.4 million, $3.9 million and $3.1 million
during 2020, 2019 and 2018, respectively.
The
Board of Directors, at its discretion, can issue shares of
preferred stock up to a maximum of 5,000,000 shares. The Board is
authorized to determine the number of shares, voting powers,
designations, preferences, limitations and relative
rights.
In
2019, the Company’s Board of Directors authorized a stock
repurchase program, whereby up to $5 million will be allocated to
repurchase the Company’s common stock. Any purchases
under the Company’s stock repurchase program may be made
periodically as permitted by securities laws and other legal
requirements in the open market or in privately-negotiated
transactions. The timing and amount of any repurchase of shares
will be determined by the Company’s management, based on its
evaluation of market conditions and other factors. The stock
repurchase program may be suspended at any time or from
time-to-time without prior notice. The Company has
repurchased approximately $2.5 million, or 90,354 shares of its
common stock, under this stock repurchase program as of December
31, 2019.
In
2020, the Company’s Board of Directors authorized a stock
repurchase program, whereby up to $3 million will be allocated to
repurchase the Company’s common stock. Any purchases under
the Company’s stock repurchase program may be made
periodically as permitted by securities laws and other legal
requirements in the open market or in privately-negotiated
transactions. The timing and amount of any repurchase of shares
will be determined by the Company’s management, based on its
evaluation of market conditions and other factors. The stock
repurchase program may be suspended at any time or from
time-to-time without prior notice. The Company has repurchased
approximately $3.0 million, or 126,800 shares of its common stock,
under this stock repurchase program as of December 31,
2020.
In
2013, the FRB approved its final rule on the Basel III capital
standards, which implement changes to the regulatory capital
framework for banking organizations. The Basel III capital
standards, which became effective January 1, 2015, include new
risk-based capital and leverage ratios, which were phased in from
2015 to 2019. The new minimum capital level requirements applicable
to the Company and the Bank under the final rules are as follows:
(i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1
capital ratio of 6% (increased from 4%); (iii) a total risk-based
capital ratio of 8% (unchanged from previous rules); and (iv) a
Tier 1 leverage ratio of 4% (unchanged from previous rules). An
additional capital conservation buffer was added to the minimum
requirements for capital adequacy purposes beginning on January 1,
2016 and was phased in through 2019 (increasing by 0.625% on
January 1, 2016 and each subsequent January 1, until it reached
2.5% on January 1, 2019). This resulted in the following minimum
ratios beginning in 2019: (i) a common equity Tier 1 capital ratio
of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total
capital ratio of 10.5%. Under the final rules, institutions would
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 establish a
maximum percentage of eligible retained earnings that could be
utilized for such actions.
Under
the regulatory capital guidelines, financial institutions are
currently required to maintain a total risk-based capital ratio of
8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or
greater and a common equity Tier 1 capital ratio of 4.5% or
greater, as required by the Basel III capital standards referenced
above. Tier 1 capital is generally defined as shareholders’
equity and trust preferred securities less all intangible assets
and goodwill. Tier 1 capital includes $15.0 million in trust
preferred securities at December 31, 2020 and 2019. The
Company’s Tier 1 capital ratio was 15.07% and 15.37% at
December 31, 2020 and December 31, 2019, respectively. Total
risk-based capital is defined as Tier 1 capital plus supplementary
capital. Supplementary capital, or Tier 2 capital, consists of the
Company’s allowance for loan losses, not exceeding 1.25% of
the Company’s risk-weighted assets. Total risk-based capital
ratio is therefore defined as the ratio of total capital (Tier 1
capital and Tier 2 capital) to risk-weighted assets. The
Company’s total risk-based capital ratio was 16.07% and
16.08% at December 31, 2020 and December 31, 2019, respectively.
The Company’s common equity Tier 1 capital consists of common
stock and retained earnings. The Company’s common equity Tier
1 capital ratio was 13.56% and 13.79% at December 31, 2020 and
December 31, 2019, respectively. Financial institutions are also
required to maintain a leverage ratio of Tier 1 capital to
total
A-22
The
Bank’s Tier 1 risk-based capital ratio was 14.85% and 15.09%
at December 31, 2020 and December 31, 2019, respectively. The total
risk-based capital ratio for the Bank was 15.85% and 15.79% at
December 31, 2020 and December 31, 2019, respectively. The
Bank’s common equity Tier 1 capital ratio was 14.85% and
15.09% at December 31, 2020 and December 31, 2019, respectively.
The Bank’s Tier 1 leverage capital ratio was 10.04% and
11.61% at December 31, 2020 and December 31, 2019,
respectively.
A bank
is considered to be “well capitalized” if it has a
total risk-based capital ratio of 10.0% or greater, a Tier 1
risk-based capital ratio of 8.0% or greater, a common equity Tier 1
capital ratio of 6.5% or greater and a leverage ratio of 5.0% or
greater. Based upon these guidelines, the Bank was considered to be
“well capitalized” at December 31, 2020.
Table 17 - Equity Ratios
|
2020
|
2019
|
2018
|
Return
on average assets
|
0.83%
|
1.23%
|
1.22%
|
Return
on average equity
|
8.04%
|
10.45%
|
10.81%
|
Dividend
payout ratio
|
38.67%
|
28.00%
|
23.41%
|
Average
equity to average assets
|
10.35%
|
11.78%
|
11.31%
|
Quarterly Financial Data. The
Company’s consolidated quarterly operating results for the
years ended December 31, 2020 and 2019 are presented in Table
18.
Table 18
(Dollars in thousands, except per share
amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
Total interest
income
|
$12,250
|
11,638
|
11,868
|
12,202
|
$12,183
|
12,375
|
12,430
|
12,613
|
Total interest
expense
|
1,041
|
912
|
942
|
941
|
757
|
781
|
994
|
1,225
|
Net interest income
|
11,209
|
10,726
|
10,926
|
11,261
|
11,426
|
11,594
|
11,436
|
11,388
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
1,521
|
1,417
|
522
|
799
|
178
|
77
|
422
|
186
|
Other
income
|
4,595
|
5,239
|
7,132
|
5,948
|
4,120
|
4,385
|
4,708
|
4,526
|
Other
expense
|
11,449
|
11,452
|
11,914
|
14,116
|
10,916
|
11,244
|
11,267
|
12,090
|
Income before income taxes
|
2,834
|
3,096
|
5,622
|
2,294
|
4,452
|
4,658
|
4,455
|
3,638
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
467
|
535
|
1,113
|
374
|
785
|
845
|
834
|
672
|
Net earnings
|
2,367
|
2,561
|
4,509
|
1,920
|
3,667
|
3,813
|
3,621
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$0.40
|
0.44
|
0.78
|
0.33
|
$0.61
|
0.64
|
0.62
|
0.50
|
Diluted net earnings per share
|
$0.40
|
0.44
|
0.78
|
0.33
|
$0.61
|
0.64
|
0.61
|
0.50
|
A-23
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risk reflects the risk of economic loss resulting from adverse
changes in market prices and interest rates. This risk of loss can
be reflected in either diminished current market values or reduced
potential net interest income in future periods.
The
Company’s market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. The
structure of the Company’s loan and deposit portfolios is
such that a significant decline (increase) in interest rates may
adversely (positively) impact net market values and
interest income. Management seeks to manage the risk through the
utilization of its investment securities and off-balance sheet
derivative instruments. During the years ended December 31, 2020,
2019 and 2018, the Company used interest rate contracts to manage
market risk as discussed above in the section entitled “Asset
Liability and Interest Rate Risk Management.”
Table
19 presents in tabular form the contractual balances and the
estimated fair value of the Company’s on-balance sheet
financial instruments at their expected maturity dates for the
period ended December 31, 2020. The expected maturity categories
take into consideration historical prepayment experience as well as
management’s expectations based on the interest rate
environment at December 31, 2020. For core deposits without
contractual maturity (i.e. interest-bearing checking, savings, and
money market accounts), the table presents principal cash flows
based on management’s judgment concerning their most likely
runoff or repricing behaviors.
Table 19 - Market Risk Table
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Loans Receivable
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total
|
Fair Value
|
Fixed
rate
|
$38,515
|
125,843
|
62,042
|
81,749
|
87,779
|
273,142
|
669,070
|
655,184
|
Average
interest rate
|
4.69%
|
2.53%
|
5.18%
|
4.93%
|
4.37%
|
4.29%
|
|
|
Variable
rate
|
$57,892
|
20,336
|
22,247
|
14,608
|
15,784
|
157,841
|
288,708
|
288,708
|
Average
interest rate
|
3.92%
|
4.34%
|
4.13%
|
4.04%
|
4.00%
|
4.26%
|
|
|
Total
|
|
|
|
|
|
|
957,778
|
943,892
|
|
|
|
|
|
|
|
|
|
Investment Securities
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
$118,843
|
-
|
-
|
-
|
-
|
-
|
118,843
|
118,843
|
Average
interest rate
|
0.11%
|
-
|
-
|
-
|
-
|
-
|
|
|
Securities
available for sale
|
$9,977
|
7,391
|
3,347
|
632
|
1,062
|
222,840
|
245,249
|
245,249
|
Average
interest rate
|
4.42%
|
4.35%
|
4.08%
|
2.63%
|
3.03%
|
3.24%
|
|
|
Nonmarketable
equity securities
|
$-
|
-
|
-
|
-
|
-
|
4,155
|
4,155
|
4,155
|
Average
interest rate
|
-
|
-
|
-
|
-
|
-
|
3.42%
|
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations
|
|
|
|
|
|
|
|
|
Deposits
|
$57,902
|
19,395
|
14,815
|
10,926
|
3,821
|
1,114,227
|
1,221,086
|
1,216,503
|
Average
interest rate
|
0.29%
|
0.60%
|
0.76%
|
1.15%
|
0.93%
|
0.05%
|
|
|
Securities
sold under agreement
|
|
|
|
|
|
|
|
|
to
repurchase
|
$26,201
|
-
|
-
|
-
|
-
|
-
|
26,201
|
26,201
|
Average
interest rate
|
0.39%
|
-
|
-
|
-
|
-
|
-
|
|
|
Junior
subordinated debentures
|
$-
|
-
|
-
|
-
|
-
|
15,464
|
15,464
|
15,464
|
Average
interest rate
|
-
|
-
|
-
|
-
|
-
|
1.85%
|
|
|
A-24
Table
20 presents the simulated impact to net interest income under
varying interest rate scenarios and the theoretical impact of rate
changes over a twelve-month period referred to as “rate
ramps.” The table shows the estimated theoretical impact on
the Company’s tax equivalent net interest income from
hypothetical rate changes of plus and minus 1%, 2% and 3%, as
compared to the estimated theoretical impact of rates remaining
unchanged. The table also shows the simulated impact to market
value of equity under varying interest rate scenarios and the
theoretical impact of immediate and sustained rate changes referred
to as “rate shocks” of plus and minus 1%, 2% and 3%, as
compared to the theoretical impact of rates remaining unchanged.
The prospective effects of the hypothetical interest rate changes
are based upon various assumptions, including relative and
estimated levels of key interest rates. This type of modeling has
limited usefulness because it does not allow for the strategies
management would utilize in response to sudden and sustained rate
changes. Also, management does not believe that rate changes of the
magnitude presented are likely in the forecast period
presented.
Table 20 - Interest Rate Risk
(Dollars in
thousands)
|
|
|
|
Estimated Resulting Theoretical Net
Interest Income
|
|
Hypothetical
rate change (ramp over 12 months)
|
Amount
|
%
Change
|
+3%
|
$44,228
|
4.08%
|
+2%
|
$43,925
|
3.37%
|
+1%
|
$43,302
|
1.90%
|
0%
|
$42,494
|
0.00%
|
-1%
|
$42,159
|
-0.79%
|
-2%
|
$42,107
|
-0.91%
|
-3%
|
$42,105
|
-0.92%
|
|
Estimated Resulting Theoretical Market
Value of Equity
|
|
Hypothetical
rate change (immediate shock)
|
Amount
|
%
Change
|
+3%
|
$179,805
|
37.72%
|
+2%
|
$176,642
|
35.30%
|
+1%
|
$160,149
|
22.67%
|
0%
|
$130,555
|
0.00%
|
-1%
|
$88,296
|
-32.37%
|
-2%
|
$83,689
|
-35.90%
|
-3%
|
$86,198
|
-33.98%
|
A-25
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2020, 2019 and 2018
INDEX
|
PAGE(S)
|
|
|
Reports of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
|
A-27- A-28
|
|
|
Financial Statements
|
|
Consolidated Balance Sheets at December 31, 2020 and
2019
|
A-29
|
|
|
Consolidated Statements of Earnings for the years ended December
31, 2020, 2019 and 2018
|
A-30
|
|
|
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2020, 2019 and 2018
|
A-31
|
|
|
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2020, 2019 and 2018
|
A-32
|
|
|
Consolidated Statements of Cash Flows for the years ended December
31, 2020, 2019 and 2018
|
A-33 - A-34
|
|
|
Notes to Consolidated Financial Statements
|
A-35 - A-71
|
A-26
Report of Independent Registered Public Accounting
Firm
To the
Shareholders and the Board of Directors of Peoples Bancorp of North
Carolina, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of
Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the
Company) as of December 31, 2020 and 2019, the related consolidated
statements of earnings, comprehensive income, changes in
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2020, and the related notes
to the consolidated financial statements (collectively, the
financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
elliottdavis.com
A-27
Allowance for Loan Losses - Qualitative Factors
As discussed in Note 3 to the Company’s financial statements,
the Company had a gross loan portfolio of approximately $948.6
million and associated allowance for loan losses of approximately
$9.9 million as of December 31, 2020. As described by the Company
in Note 1, the allowance for loan losses is evaluated on a regular
basis by management and is based on management’s periodic
review of the collectability of the loans in light of the
Company’s historical loan loss experience, the amount of past
due and non-performing loans, specific known risks, underlying
estimated values of collateral securing loans, current and
anticipated economic conditions, and other factors which management
believes represents the best estimate of the allowance for loan
losses.
We identified the Company’s estimate of qualitative factors
applied to adjust the historical loss experience of the allowance
for loan losses as a critical audit matter. The principal
considerations for our determination of the allowance for loan
losses as a critical audit matter related to the high degree of
subjectivity in the Company’s judgments in determining the
qualitative factors. Auditing these complex judgments and
assumptions by the Company involves especially challenging auditor
judgment due to the nature and extent of audit evidence and effort
required to address these matters, including the extent of
specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit
matter included the following:
●
We
evaluated the relevance and the reasonableness of assumptions
related to evaluation of the loan portfolio, current economic
conditions, and other risk factors used in development of the
qualitative factors for collectively evaluated loans.
●
We
evaluated the reasonableness of assumptions and data used by the
Company in developing the qualitative factors by comparing these
data points to internally developed and third-party sources, and
other audit evidence gathered.
●
Analytical
procedures were performed to evaluate changes that occurred in the
allowance for loan losses for loans collectively evaluated for
impairment.
/s/ Elliott Davis, PLLC
We have served as the Company's auditor since
2015.
Charlotte,
North Carolina
March
19, 2021
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 2020 and December 31, 2019
(Dollars in thousands)
|
December 31,
|
December 31,
|
Assets
|
2020
|
2019
|
|
(Audited)
|
(Audited)
|
|
|
|
Cash
and due from banks, including reserve requirements
|
|
|
of
$0 at 12/31/20 and $13,210 at 12/31/19
|
$42,737
|
48,337
|
Interest-bearing
deposits
|
118,843
|
720
|
Federal
funds sold
|
-
|
3,330
|
Cash
and cash equivalents
|
161,580
|
52,387
|
|
|
|
Investment
securities available for sale
|
245,249
|
195,746
|
Other
investments
|
4,155
|
4,231
|
Total
securities
|
249,404
|
199,977
|
|
|
|
Mortgage
loans held for sale
|
9,139
|
4,417
|
|
|
|
Loans
|
948,639
|
849,874
|
Less
allowance for loan losses
|
(9,908)
|
(6,680)
|
Net
loans
|
938,731
|
843,194
|
|
|
|
Premises
and equipment, net
|
18,600
|
18,604
|
Cash
surrender value of life insurance
|
16,968
|
16,319
|
Other
real estate
|
128
|
-
|
Right
of use lease asset
|
3,423
|
3,622
|
Accrued
interest receivable and other assets
|
16,882
|
16,362
|
Total
assets
|
$1,414,855
|
1,154,882
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
Deposits:
|
|
|
Noninterest-bearing
demand
|
$456,980
|
338,004
|
NOW,
MMDA & savings
|
657,834
|
516,757
|
Time,
$250,000 or more
|
25,771
|
34,269
|
Other
time
|
80,501
|
77,487
|
Total
deposits
|
1,221,086
|
966,517
|
|
|
|
Securities
sold under agreements to repurchase
|
26,201
|
24,221
|
Junior
subordinated debentures
|
15,464
|
15,619
|
Lease
liability
|
3,471
|
3,647
|
Accrued
interest payable and other liabilities
|
8,734
|
10,758
|
Total
liabilities
|
1,274,956
|
1,020,762
|
|
|
|
Commitments
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
Preferred
stock, no par value; authorized
|
|
|
5,000,000
shares; no shares issued and outstanding
|
-
|
-
|
Common
stock, no par value; authorized
|
|
|
20,000,000
shares; issued and outstanding 5,787,504 shares
|
|
|
at
December 31, 2020 and 5,912,300 shares at December 31,
2019
|
56,871
|
59,813
|
Retained
earnings
|
77,628
|
70,663
|
Accumulated
other comprehensive income
|
5,400
|
3,644
|
Total
shareholders' equity
|
139,899
|
134,120
|
|
|
|
Total
liabilities and shareholders' equity
|
$1,414,855
|
1,154,882
|
See accompanying Notes to Consolidated Financial
Statements.
A-29
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands, except per share amounts)
|
2020
|
2019
|
2018
|
|
|
|
|
Interest
income:
|
|
|
|
Interest
and fees on loans
|
$42,314
|
43,301
|
38,654
|
Interest
on due from banks
|
127
|
213
|
304
|
Interest
on federal funds sold
|
204
|
331
|
-
|
Interest
on investment securities:
|
|
|
|
U.S.
Government sponsored enterprises
|
2,361
|
2,670
|
2,333
|
States
and political subdivisions
|
2,691
|
2,915
|
3,877
|
Other
|
261
|
171
|
182
|
Total
interest income
|
47,958
|
49,601
|
45,350
|
|
|
|
|
Interest
expense:
|
|
|
|
NOW,
MMDA & savings deposits
|
1,962
|
1,596
|
769
|
Time
deposits
|
947
|
909
|
472
|
FHLB
borrowings
|
357
|
205
|
-
|
Junior
subordinated debentures
|
370
|
844
|
790
|
Other
|
200
|
203
|
115
|
Total
interest expense
|
3,836
|
3,757
|
2,146
|
|
|
|
|
Net
interest income
|
44,122
|
45,844
|
43,204
|
|
|
|
|
Provision
for loan losses
|
4,259
|
863
|
790
|
|
|
|
|
Net
interest income after provision for loan losses
|
39,863
|
44,981
|
42,414
|
|
|
|
|
Non-interest
income:
|
|
|
|
Service
charges
|
3,528
|
4,576
|
4,355
|
Other
service charges and fees
|
742
|
714
|
705
|
Gain
on sale of securities
|
2,639
|
226
|
15
|
Mortgage
banking income
|
2,469
|
1,264
|
851
|
Insurance
and brokerage commissions
|
897
|
877
|
824
|
Appraisal
management fee income
|
6,754
|
4,484
|
3,206
|
Gain
(loss) on sales and write-downs of
|
|
|
|
other
real estate, net
|
(47)
|
(11)
|
17
|
Miscellaneous
|
5,932
|
5,609
|
6,193
|
Total
non-interest income
|
22,914
|
17,739
|
16,166
|
|
|
|
|
Non-interest
expense:
|
|
|
|
Salaries
and employee benefits
|
23,538
|
23,238
|
21,530
|
Occupancy
|
7,933
|
7,364
|
7,170
|
Professional
fees
|
1,580
|
1,490
|
1,525
|
Advertising
|
787
|
1,021
|
922
|
Debit
card expense
|
1,012
|
890
|
994
|
FDIC
insurance
|
263
|
119
|
328
|
Appraisal
management fee expense
|
5,274
|
3,421
|
2,460
|
Other
|
8,544
|
7,974
|
7,645
|
Total
non-interest expense
|
48,931
|
45,517
|
42,574
|
|
|
|
|
Earnings
before income taxes
|
13,846
|
17,203
|
16,006
|
|
|
|
|
Income
tax expense
|
2,489
|
3,136
|
2,624
|
|
|
|
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
|
|
|
|
Basic
net earnings per share
|
$1.95
|
2.37
|
2.23
|
Diluted
net earnings per share
|
$1.95
|
2.36
|
2.22
|
Cash
dividends declared per share
|
$0.75
|
0.66
|
0.52
|
See accompanying Notes to Consolidated Financial
Statements.
A-30
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
|
|
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
Unrealized
holding gains (losses) on securities
|
|
|
|
available
for sale
|
4,919
|
3,677
|
(3,370)
|
Reclassification
adjustment for gains on
|
|
|
|
securities
available for sale
|
|
|
|
included
in net earnings
|
(2,639)
|
(226)
|
(15)
|
|
|
|
|
Total
other comprehensive gain (loss),
|
|
|
|
before
income taxes
|
2,280
|
3,451
|
(3,385)
|
|
|
|
|
Income
tax expense (benefit) related to other
|
|
|
|
comprehensive
gain (loss):
|
|
|
|
|
|
|
|
Unrealized
holding gain (losses) on securities
|
|
|
|
available
for sale
|
1,130
|
845
|
(774)
|
Reclassification
adjustment for gains on
|
|
|
|
securities
available for sale
|
|
|
|
included
in net earnings
|
(606)
|
(52)
|
(4)
|
|
|
|
|
Total
income tax expense (benefit) related to
|
|
|
|
other
comprehensive gain (loss)
|
524
|
793
|
(778)
|
|
|
|
|
Total
other comprehensive gain (loss),
|
|
|
|
net
of tax
|
1,756
|
2,658
|
(2,607)
|
|
|
|
|
Total
comprehensive income
|
$13,113
|
16,725
|
10,775
|
See accompanying Notes to Consolidated Financial
Statements.
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders'
Equity
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
|
|
Accumulated
|
|
|
Common
|
Common
|
|
Other
|
|
|
Stock
|
Stock
|
Retained
|
Comprehensive
|
|
|
Shares
|
Amount
|
Earnings
|
Income
|
Total
|
Balance,
December 31, 2017
|
5,995,256
|
$62,096
|
50,286
|
3,593
|
115,975
|
|
|
|
|
|
|
Cash
dividends declared on
|
|
|
|
|
|
common
stock
|
-
|
-
|
(3,133)
|
-
|
(3,133)
|
Net
earnings
|
|
|
13,382
|
|
13,382
|
Change
in accumulated other
|
-
|
-
|
-
|
(2,607)
|
(2,607)
|
comprehensive
income due to
|
|
|
|
|
|
Balance,
December 31, 2018
|
5,995,256
|
$62,096
|
60,535
|
986
|
123,617
|
|
|
|
|
|
|
Common
stock repurchase
|
(90,354)
|
(2,490)
|
-
|
-
|
(2,490)
|
Cash
dividends declared on
|
|
|
|
|
|
common
stock
|
-
|
-
|
(3,939)
|
-
|
(3,939)
|
Restricted
stock units exercised
|
7,398
|
207
|
|
|
207
|
Net
earnings
|
-
|
-
|
14,067
|
-
|
14,067
|
Change
in accumulated other
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
net
of tax
|
-
|
-
|
-
|
2,658
|
2,658
|
Balance,
December 31, 2019
|
5,912,300
|
$59,813
|
70,663
|
3,644
|
134,120
|
|
|
|
|
|
|
Common
stock repurchase
|
(126,800)
|
(2,999)
|
-
|
-
|
(2,999)
|
Cash
dividends declared on
|
|
|
|
|
|
common
stock
|
-
|
-
|
(4,392)
|
-
|
(4,392)
|
Restricted
stock units exercised
|
2,004
|
57
|
|
|
57
|
Net
earnings
|
-
|
-
|
11,357
|
-
|
11,357
|
Change
in accumulated other
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
net
of tax
|
-
|
-
|
-
|
1,756
|
1,756
|
Balance,
December 31, 2020
|
5,787,504
|
$56,871
|
77,628
|
5,400
|
139,899
|
See accompanying Notes to Consolidated Financial
Statements.
A-32
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
Adjustments
to reconcile net earnings to
|
|
|
|
net
cash provided by operating activities:
|
|
|
|
Depreciation,
amortization and accretion
|
4,183
|
3,964
|
4,571
|
Provision
for loan losses
|
4,259
|
863
|
790
|
Deferred
income taxes
|
(560)
|
164
|
78
|
Gain
on sale of investment securities
|
(2,639)
|
(226)
|
(15)
|
Gain
on sale of other real estate
|
-
|
(6)
|
(17)
|
Write-down
of other real estate
|
47
|
17
|
-
|
(Gain)
loss on sale and writedowns of premises and equipment
|
-
|
239
|
(544)
|
Restricted
stock expense
|
27
|
270
|
85
|
Proceeds
from sales of loans held for sale
|
112,426
|
56,364
|
35,922
|
Origination
of loans held for sale
|
(117,148)
|
(60,101)
|
(35,745)
|
Change
in:
|
|
|
|
Cash
surrender value of life insurance
|
(380)
|
(383)
|
(384)
|
Right
of use lease asset
|
199
|
787
|
-
|
Other
assets
|
(382)
|
952
|
(3,695)
|
Lease
liability
|
(176)
|
(762)
|
-
|
Other
liabilities
|
(2,051)
|
(3,012)
|
2,759
|
|
|
|
|
Net
cash provided by operating activities
|
9,162
|
13,197
|
17,187
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchases
of investment securities available for sale
|
(127,893)
|
(54,212)
|
(34,692)
|
Proceeds
from sales, calls and maturities of investment
securities
|
|
|
|
available
for sale
|
62,408
|
40,561
|
48,241
|
Proceeds
from paydowns of investment securities available for
sale
|
19,169
|
14,489
|
15,556
|
Purchases
of other investments
|
(45)
|
(45)
|
(2,611)
|
Proceeds
from paydowns of other investment securities
|
176
|
176
|
117
|
Net
change in FHLB stock
|
(55)
|
(1)
|
(4)
|
Net
change in loans
|
(99,971)
|
(46,505)
|
(45,094)
|
Purchases
of premises and equipment
|
(2,492)
|
(2,835)
|
(1,742)
|
Purchases
of bank owned life insurance
|
(269)
|
-
|
-
|
Proceeds
from sale of premises and equipment
|
-
|
149
|
1,410
|
Proceeds
from sale of other real estate and repossessions
|
-
|
42
|
232
|
|
|
|
|
Net
cash used by investing activities
|
(148,972)
|
(48,181)
|
(18,587)
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Net
change in deposits
|
254,569
|
89,304
|
(29,739)
|
Net
change in securities sold under agreement to
repurchase
|
1,980
|
(33,874)
|
20,338
|
Proceeds
from FHLB borrowings
|
70,000
|
184,500
|
-
|
Repayments
of FHLB borrowings
|
(70,000)
|
(184,500)
|
-
|
Proceeds
from FRB borrowings
|
1
|
1
|
1
|
Repayments
of FRB borrowings
|
(1)
|
(1)
|
(1)
|
Proceeds
from Fed Funds Purchased
|
7,011
|
100,252
|
4,277
|
Repayments
of Fed Funds Purchased
|
(7,011)
|
(100,252)
|
(4,277)
|
Repayments
of Junior Subordinated Debentures
|
(155)
|
(5,000)
|
-
|
Common
stock repurchased
|
(2,999)
|
(2,490)
|
-
|
Cash
dividends paid on common stock
|
(4,392)
|
(3,939)
|
(3,133)
|
|
|
|
|
Net
cash (used) provided by financing activities
|
249,003
|
44,001
|
(12,534)
|
|
|
|
|
Net
change in cash and cash equivalents
|
109,193
|
9,017
|
(13,934)
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
52,387
|
43,370
|
57,304
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$161,580
|
52,387
|
43,370
|
A-33
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash
paid during the year for:
|
|
|
|
Interest
|
$3,856
|
3,750
|
2,128
|
Income
taxes
|
$2,781
|
3,206
|
1,163
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
Change
in unrealized gain on investment securities
|
|
|
|
available
for sale, net
|
$1,756
|
2,658
|
(2,607)
|
Transfer
of loans to other real estate
|
$175
|
26
|
124
|
Issuance
of accrued restricted stock units
|
$57
|
207
|
-
|
Recognition
of lease right of use asset and lease liability
|
$942
|
4,401
|
-
|
See accompanying Notes to Consolidated Financial
Statements.
A-34
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Notes to Consolidated Financial Statements
(1)
Summary
of Significant Accounting Policies
Organization
Peoples
Bancorp of North Carolina, Inc. (“Bancorp”) received
regulatory approval to operate as a bank holding company on July
22, 1999, and became effective August 31, 1999. Bancorp is
primarily regulated by the Board of Governors of the Federal
Reserve System, and serves as the one-bank holding company for
Peoples Bank (the “Bank”).
The
Bank commenced business in 1912 upon receipt of its banking charter
from the North Carolina Commissioner of Banks (the
“Commissioner”). The Bank is primarily regulated by the
Commissioner and the Federal Deposit Insurance Corporation (the
“FDIC”) and undergoes periodic examinations by these
regulatory agencies. The Bank, whose main office is in Newton,
North Carolina, provides a full range of commercial and consumer
banking services primarily in Catawba, Alexander, Lincoln,
Mecklenburg, Iredell and Wake counties in North
Carolina.
Peoples
Investment Services, Inc. (“PIS”) is a wholly owned
subsidiary of the Bank and began operations in 1996 to provide
investment and trust services through agreements with an outside
party.
Real
Estate Advisory Services, Inc. (“REAS”) is a wholly
owned subsidiary of the Bank and began operations in 1997 to
provide real estate appraisal and property management services to
individuals and commercial customers of the Bank.
Community Bank Real
Estate Solutions, LLC (“CBRES”) is a wholly owned
subsidiary of the Bank and began operations in 2009 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 is located. In 2019, the Company launched PB Insurance
Agency, which is part of CBRES.
PB Real
Estate Holdings, LLC (“PBREH”) is a wholly owned
subsidiary of the Bank and began operation in 2015. PBREH acquires,
manages and disposes of real property, other collateral and other
assets obtained in the ordinary course of collecting debts
previously contracted.
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.
Principles of Consolidation
The
consolidated financial statements include the financial statements
of Bancorp and its wholly owned subsidiary, the Bank, along with
the Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and
PBREH (collectively called the “Company”). All
significant intercompany balances and transactions have been
eliminated in consolidation.
Basis of Presentation
The
accounting principles followed by the Company, and the methods of
applying these principles, conform with accounting principles
generally accepted in the United States of America
(“GAAP”) and with general practices in the banking
industry. In preparing the financial statements in conformity with
GAAP, management is required to make estimates and assumptions that
affect the reported amounts in the financial statements. Actual
results could differ significantly from these estimates. Material
estimates common to the banking industry that are particularly
susceptible to significant change in the near term include, but are
not limited to, the determination of the allowance for loan losses
and valuation of real estate acquired in connection with or in lieu
of foreclosure on loans.
Cash and Cash Equivalents
Cash,
due from banks, interest-bearing deposits and federal funds sold
are considered cash and cash equivalents for cash flow reporting
purposes.
A-35
Investment Securities
There
are three classifications the Company is able to classify its
investment securities: trading, available for sale, or held to
maturity. Trading securities are bought and held principally for
sale in the near term. Held to maturity securities are those
securities for which the Company has the ability and intent to hold
until maturity. All other securities not included in trading or
held to maturity are classified as available for sale. At December
31, 2020 and 2019, the Company classified all of its investment
securities as available for sale.
Available for sale
securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings
and are reported as a separate component of shareholders’
equity until realized.
Management
evaluates investment securities for other-than-temporary impairment
on a quarterly basis. A decline in the market value of any
investment below cost that is deemed other-than-temporary is
charged to earnings for the decline in value deemed to be credit
related and a new cost basis in the security is established. The
decline in value attributed to non-credit related factors is
recognized in comprehensive income.
Premiums and
discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale are included in
earnings and are derived using the specific identification method
for determining the cost of securities sold.
Other Investments
Other
investments include equity securities with no readily determinable
fair value. These investments are carried at cost.
Loans
Loans
that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at the principal
amount outstanding, net of the allowance for loan losses. Interest
on loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. The recognition of
certain loan origination fee income and certain loan origination
costs is deferred when such loans are originated and amortized over
the life of the loan.
A loan
is impaired when, based on current information and events, it is
probable that all amounts due according to the contractual terms of
the loan will not be collected. Impaired loans are measured based
on the present value of expected future cash flows, discounted at
the loan’s effective interest rate, or at the loan’s
observable market price, or the fair value of the collateral if the
loan is collateral dependent.
Accrual
of interest is discontinued on a loan when management believes,
after considering economic conditions and collection efforts, that
the borrower’s financial condition is such that collection of
interest is doubtful. Interest previously accrued but not collected
is reversed against current period earnings.
Allowance for Loan Losses
The
allowance for loan losses reflects management’s assessment
and estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses. In assessing the adequacy of the allowance, size,
quality and risk of loans in the portfolio are reviewed. Other
factors considered are:
●
the Bank’s
loan loss experience;
●
the amount of past
due and non-performing loans;
●
specific known
risks;
●
the status and
amount of other past due and non-performing assets;
●
underlying
estimated values of collateral securing loans;
●
current and
anticipated economic conditions; and
●
other factors which
management believes affect the allowance for potential credit
losses.
Management uses
several measures to assess and monitor the credit risks in the loan
portfolio, including a loan grading system that begins upon loan
origination and continues until the loan is collected or
collectability becomes doubtful. Upon loan origination, the
Bank’s originating loan officer evaluates the quality of the
loan and assigns one of eight risk grades. The loan officer
monitors the loan’s performance and credit quality and makes
changes to the credit grade as conditions warrant. When originated
or renewed, all loans over a certain dollar amount receive in-depth
reviews and risk assessments by the Bank’s Credit
Administration. Before making any changes in these risk grades,
management considers assessments as determined by the third party
credit review firm (as described below), regulatory examiners and
the Bank’s Credit Administration. Any
issues
A-36
regarding the risk
assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
As an
additional measure, the Bank engages an independent third party to
review the underwriting, documentation and risk grading analyses.
This independent third party reviews and evaluates loan
relationships greater than or equal to $1.0 million as
well as a sample of commercial relationships with exposures below
$1.0 million, excluding loans in default, and loans in process of
litigation or liquidation. The third party’s evaluation and
report is shared with management and the Bank’s Board of
Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses the
information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The
allowance for loan losses is comprised of three components:
specific reserves, general reserves and unallocated reserves. After
a loan has been identified as impaired, management measures
impairment. When the measure of the impaired loan is less than the
recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are
determined on an individual loan basis based on management’s
current evaluation of the Bank’s loss exposure for each
credit, given the appraised value of any underlying collateral.
Loans for which specific reserves are provided are excluded from
the general allowance calculations as described below.
The
general allowance reflects reserves established under GAAP for
collective loan impairment. These reserves are based upon
historical net charge-offs using the greater of the last two,
three, four, or five years’ loss experience. This charge-off
experience may be adjusted to reflect the effects of current
conditions. The Bank considers information derived from its loan
risk ratings and external data related to industry and general
economic trends in establishing reserves. Qualitative
factors applied in the Company’s Allowance for Loan and Lease
Losses (“ALLL”) model include the impact to the economy
from the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk, and a higher reserve rate has been applied to
that pool. Of all loans modified as a result of COVID-19, $101.3
million of these loans have returned to their original terms;
however, the effects of stimulus in the current environment are
still unknown, and additional losses may be currently present in
loans that are currently modified and that were once
modified.
The
unallocated allowance is determined through management’s
assessment of probable losses that are in the portfolio but are not
adequately captured by the other two components of the allowance,
including consideration of current economic and business conditions
and regulatory requirements. The unallocated allowance also
reflects management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
There
were no significant changes in the estimation methods or
fundamental assumptions used in the evaluation of the allowance for
loan losses for the year ended December 31, 2020 as compared to the
year ended
A-37
December 31, 2019. Revisions, estimates and
assumptions may be made in any period in which the supporting
factors indicate that loss levels may vary from the previous
estimates.
Effective December
31, 2012, certain mortgage loans from the former Banco division of
the Bank were analyzed separately from other single family
residential loans in the Bank’s loan portfolio. These loans
are first mortgage loans made to the Latino market, primarily in
Mecklenburg, North Carolina and surrounding counties. These loans
are non-traditional mortgages in that the customer normally did not
have a credit history, so all credit information was accumulated by
the loan officers.
PPP
loans are excluded from the allowance for loan losses as PPP loans
are 100 percent guaranteed by the SBA.
Various
regulatory agencies, as an integral part of their examination
process, periodically review the Bank’s allowance for loan
losses. Such agencies may require adjustments to the allowance
based on their judgments of information available to them at the
time of their examinations. Management believes it has established
the allowance for credit losses pursuant to GAAP, and has taken
into account the views of its regulators and the current economic
environment. Management
considers the allowance for loan losses adequate to cover the
estimated losses inherent in the Bank’s loan portfolio as of
the date of the financial statements. 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.
Mortgage Banking Activities
Mortgage banking
income represents income from the sale of mortgage loans and fees
received from borrowers and loan investors related to the
Bank’s origination of single-family residential mortgage
loans.
Mortgage loans
serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of mortgage loans serviced
for others was approximately $578,000, $729,000 and $866,000 at
December 31, 2020, 2019 and 2018, respectively.
The
Bank originates certain fixed rate mortgage loans and commits these
loans for sale. The commitments to originate fixed rate mortgage
loans and the commitments to sell these loans to a third party are
both derivative contracts. The fair value of these derivative
contracts is immaterial and has no effect on the recorded amounts
in the financial statements.
Mortgage loans held
for sale are carried at lower of aggregate cost or market value.
The cost of mortgage loans held for sale approximates the market
value.
Premises and Equipment
Premises and
equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method
over the estimated useful lives of the assets. When assets are
retired or otherwise disposed, the cost and related accumulated
depreciation are removed from the accounts, and any gain or loss is
reflected in earnings for that period. The cost of maintenance and
repairs that do not improve or extend the useful life of the
respective asset is charged to earnings as incurred, whereas
significant renewals and improvements are capitalized. The range of
estimated useful lives for premises and equipment are generally as
follows:
Buildings and improvements
|
10 - 50 years
|
Furniture and equipment
|
3 - 10 years
|
Other Real Estate
Foreclosed assets
include all assets received in full or partial satisfaction of a
loan. Foreclosed assets are reported at fair value less estimated
selling costs. Any write-downs at the time of foreclosure are
charged to the allowance for loan losses. Subsequent to
foreclosure, valuations are periodically performed by management,
and a valuation allowance is established if fair value less
estimated selling costs declines below carrying value. Costs
relating to the development and improvement of the property are
capitalized. Revenues and expenses from operations are included in
other expenses. Changes in the valuation allowance are included in
loss on sale and write-down of other real estate.
Income Taxes
Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Additionally, the recognition of future tax
benefits, such as net operating loss carryforwards, is required to
the
A-38
extent
that the realization of such benefits is more likely than not to
occur. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which the assets and liabilities are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income tax expense in the
period that includes the enactment date.
In the
event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company’s
assets and liabilities results in a deferred tax asset, an
evaluation of the probability of being able to realize the future
benefits indicated by such asset is required. A valuation allowance
is provided for the portion of the deferred tax asset when it is
more likely than not that some portion or all of the deferred tax
asset will not be realized. In assessing the realizability of a
deferred tax asset, management considers the scheduled reversals of
deferred tax liabilities, projected future taxable income, and tax
planning strategies.
Tax
effects from an uncertain tax position can be recognized in the
financial statements only when it is more likely than not that the
tax position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more likely than not
recognition threshold is measured at the largest amount of benefit
that is greater than fifty percent likely of being realized upon
ultimate settlement. Previously recognized tax positions that no
longer meet the more likely than not recognition threshold should
be derecognized in the first subsequent financial reporting period
in which that threshold is no longer met. The Company assessed the impact of
this guidance and determined that it did not have a material
impact on the Company’s financial position, results of
operations or disclosures.
Derivative Financial Instruments and Hedging
Activities
In the
normal course of business, the Company enters into derivative
contracts to manage interest rate risk by modifying the
characteristics of the related balance sheet instruments in order
to reduce the adverse effect of changes in interest rates. All
material derivative financial instruments are recorded at fair
value in the financial statements. The fair value of derivative
contracts related to the origination of fixed rate mortgage loans
and the commitments to sell these loans to a third party is
immaterial and has no effect on the recorded amounts in the
financial statements.
The
disclosure requirements for derivatives and hedging activities have
the intent to provide users of financial statements with an
enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related
hedged items are accounted for and (c) how derivative instruments
and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The disclosure
requirements include qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about
the fair value of, and gains and losses on, derivative instruments,
and disclosures about credit-risk-related contingent features in
derivative instruments.
On the
date a derivative contract is entered into, the Company designates
the derivative as a fair value hedge, a cash flow hedge, or a
trading instrument. Changes in the fair value of instruments used
as fair value hedges are accounted for in the earnings of the
period simultaneous with accounting for the fair value change of
the item being hedged. Changes in the fair value of the effective
portion of cash flow hedges are accounted for in other
comprehensive income rather than earnings. Changes in the fair
value of instruments that are not intended as a hedge are accounted
for in the earnings of the period of the change.
If a
derivative instrument designated as a fair value hedge is
terminated or the hedge designation removed, the difference between
a hedged item’s then carrying amount and its face amount is
recognized into income over the original hedge period. Likewise, if
a derivative instrument designated as a cash flow hedge is
terminated or the hedge designation removed, related amounts
accumulated in other accumulated comprehensive income are
reclassified into earnings over the original hedge period during
which the hedged item affects income.
The
accounting for changes in the fair value of derivatives depends on
the intended use of the derivative, whether the Company has elected
to designate a derivative in a hedging relationship and apply hedge
accounting and whether the hedging relationship has satisfied the
criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in
the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives designated and qualifying
as a hedge of the exposure to variability in expected future cash
flows, or other types of forecasted transactions, are considered
cash flow hedges. Hedge accounting generally provides for the
matching of the timing of gain or loss recognition on the hedging
instrument with the recognition of the changes in the fair value of
the hedged asset or liability that are attributable to the hedged
risk in a fair value hedge or the earnings effect of the hedged
forecasted transactions in a cash flow hedge. The Company may enter
into derivative contracts that are intended to economically hedge
certain of its risks, even though hedge accounting does not apply
or the Company elects not to apply hedge accounting.
A-39
The
Company formally documents all hedging relationships, including an
assessment that the derivative instruments are expected to be
highly effective in offsetting the changes in fair values or cash
flows of the hedged items.
Advertising
Costs
Advertising costs
are expensed as incurred.
Stock-Based Compensation
The
Company has an Omnibus Stock Ownership and Long Term Incentive Plan
that was approved by shareholders on May 7, 2009 (the “2009
Plan”) whereby certain stock-based rights, such as stock
options, restricted stock, restricted stock units, performance
units, stock appreciation rights or book value shares, may be
granted to eligible directors and employees. The 2009 Plan expired
on May 7, 2019 but still governs the rights and obligations of the
parties for grants made thereunder. As of December 31, 2020, there
were no outstanding shares under the 2009 Plan.
The
Company granted 16,583 restricted stock units under the 2009 Plan
at a grant date fair value of $16.34 per share during the first
quarter of 2015. The Company granted 5,544 restricted stock units
under the 2009 Plan at a grant date fair value of $16.91 per share
during the first quarter of 2016. The Company granted 4,114
restricted stock units under the 2009 Plan at a grant date fair
value of $25.00 per share during the first quarter of 2017. The
Company granted 3,725 restricted stock units under the 2009 Plan at
a grant date fair value of $31.43 per share during the first
quarter of 2018. The Company granted 5,290 restricted stock units
under the 2009 Plan at a grant date fair value of $28.43 per share
during the first quarter of 2019. The number of restricted stock
units granted and grant date fair values for the restricted stock
units granted in 2015 through 2017 have been restated to reflect
the 10% stock dividend that was paid in the fourth quarter of 2017.
The Company recognizes compensation expense on the restricted stock
units over the period of time the restrictions are in place (four
years from the grant date for the 2015, 2016, 2017, 2018 and 2019
grants). The amount of expense recorded each period reflects the
changes in the Company’s stock price during such period. As
of December 31, 2020, the total unrecognized compensation expense
related to the restricted stock unit grants under the 2009 Plan was
$89,000.
The
Company also has an Omnibus Stock Ownership and Long Term Incentive
Plan that was approved by shareholders on May 7, 2020 (the
“2020 Plan”) whereby certain stock-based rights, such
as stock options, restricted stock, restricted stock units,
performance units, stock appreciation rights or book value shares,
may be granted to eligible directors and employees. A total of
292,365 shares are currently reserved for possible issuance under
the 2020 Plan. All stock-based rights under the 2020 Plan must be
granted or awarded by May 7, 2030 (or ten years from the 2020 Plan
effective date).
The
Company granted 7,635 restricted stock units under the 2020 Plan at
a grant date fair value of $17.08 per share during the second
quarter of 2020. The Company recognizes compensation expense on the
restricted stock units over the period of time the restrictions are
in place (four years from the grant date for 2020 grants). As of
December 31, 2020, the total unrecognized compensation expense
related to the restricted stock unit grants under the 2020 Plan was
$146,000.
The
Company recognized compensation expense for restricted stock units
granted under the 2009 Plan and 2020 Plan of $27,000 for the year
ended December 31, 2020. The Company recognized compensation
expense for restricted stock units granted under the 2009 Plan of
$270,000 and $85,000 for the years ended December 31, 2019 and
2018, respectively.
Net Earnings Per Share
Net
earnings per common share is based on the weighted average number
of common shares outstanding during the period while the effects of
potential common shares outstanding during the period are included
in diluted earnings per common share. The average market price
during the year is used to compute equivalent shares.
The
reconciliations of the amounts used in the computation of both
“basic earnings per common share” and “diluted
earnings per common share” for the years ended December 31,
2020, 2019 and 2018 are as follows:
A-40
For the year ended December 31, 2020
|
Net Earnings (Dollars in thousands)
|
Weighted Average Number of Shares
|
Per Share Amount
|
Basic
earnings per share
|
$11,357
|
5,808,121
|
$1.95
|
Effect
of dilutive securities:
|
|
|
|
Restricted
stock units
|
-
|
14,203
|
|
Diluted
earnings per share
|
$11,357
|
5,822,324
|
$1.95
|
For the year ended December 31, 2019
|
Net Earnings (Dollars in thousands)
|
Weighted Average Number of Shares
|
Per Share Amount
|
Basic
earnings per share
|
$14,067
|
5,941,873
|
$2.37
|
Effect
of dilutive securities:
|
|
|
|
Restricted
stock units
|
-
|
25,438
|
|
Diluted
earnings per share
|
$14,067
|
5,967,311
|
$2.36
|
For the year ended December 31, 2018
|
Net Earnings (Dollars in thousands)
|
Weighted Average Number of Shares
|
Per Share Amount
|
Basic
earnings per share
|
$13,382
|
5,995,256
|
$2.23
|
Effect
of dilutive securities:
|
|
|
|
Restricted
stock units
|
-
|
20,240
|
|
Diluted
earnings per share
|
$13,382
|
6,015,496
|
$2.22
|
Revenue
Recognition
The
Company has applied ASU 2014-09 using a modified retrospective
approach. The Company’s revenue is comprised of net interest
income and noninterest income. The scope of ASU 2014-09 explicitly
excludes net interest income as well as many other revenues for
financial assets and liabilities including loans, leases,
securities, and derivatives. Accordingly, the majority of the
Company’s revenues are not affected. Appraisal management fee
income and expense from the Bank’s subsidiary, CBRES, was
reported as a net amount prior to March 31, 2018, which was
included in miscellaneous non-interest income. This income and
expense is now reported on separate line items under non-interest
income and non-interest expense. See below for additional information
related to revenue generated from contracts with
customers.
Revenue and Method of Adoption
The
majority of the Company’s revenue is derived primarily from
interest income from receivables (loans) and securities. Other
revenues are derived from fees received in connection with deposit
accounts, investment advisory, and appraisal services. On January
1, 2018, the Company adopted the requirements of ASU 2014-09. The
core principle of the new standard is that a company should
recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those
goods or services.
The
Company adopted ASU 2014-09 using the modified retrospective
transition approach which does not require restatement of prior
periods. The method was selected as there were no material changes
in the timing of revenue recognition resulting in no comparability
issues with prior periods. This adoption method is considered a
change in accounting principle requiring additional disclosure of
the nature of, and reason for, the change, which is solely a result
of the adoption of the required standard. When applying the
modified retrospective approach under ASU 2014-09, the Company has
elected, as a practical expedient, to apply this approach only to
contracts that were not completed as of January 1, 2018. A
completed contract is considered to be a contract for which all (or
substantially all) of the revenue was recognized in accordance with
revenue guidance that was in effect before January 1, 2018. There
were no uncompleted contracts as of January 1, 2018 for which
application of the new standard required an adjustment to retained
earnings.
A-41
The
following disclosures involve the Company’s material income
streams derived from contracts with customers which are within the
scope of ASU 2014-09. Through the Company’s wholly-owned
subsidiary, PIS, the Company contracts with a registered investment
advisor to perform investment advisory services on behalf of the
Company’s customers. The Company receives commissions from
this third party investment advisor based on the volume of business
that the Company’s customers do with such investment advisor.
Total revenue recognized from these contracts was $896,000,
$876,000 and $823,000 for the years ended December 31, 2020, 2019
and 2018, respectively. The Company utilizes third parties to
contract with the Company’s customers to perform debit and
credit card clearing services. These third parties pay the Company
commissions based on the volume of transactions that they process
on behalf of the Company’s customers. Total revenue
recognized from these contracts with these third
parties was $4.2 million,
$4.1 million and $3.9 million for the years ended December 31,
2020, 2019 and 2018, respectively. Through the Company’s
wholly-owned subsidiary, REAS, the Company provides property
appraisal services for negotiated fee amounts on a per appraisal
basis. Total revenue recognized from these contracts with customers
was $828,000, $692,000 and $597,000 for the years ended December
31, 2020, 2019 and 2018, respectively. Through the Company’s
wholly-owned subsidiary, CBRES, the Company provides appraisal
management services. Total revenue recognized from these contracts
with customers was $6.8 million, $4.5 million and $3.2
million for the years
ended December 31, 2020, 2019 and 2018, respectively. Due to the
nature of the Company’s relationship with the customers that
the Company provides services, the Company does not incur costs to
obtain contracts and there are no material incremental costs to
fulfill these contracts that should be capitalized.
Disaggregation of Revenue. The
Company’s portfolio of services provided to the
Company’s customers consists of over 50,000 active contracts.
The Company has disaggregated revenue according to timing of the
transfer of service. Total revenue for the year ended December 31,
2020 derived from contracts in which services are transferred at a
point in time was approximately $8.1 million. None of the
Company’s revenue is derived from contracts in which services
are transferred over time. Revenue is recognized as the services
are provided to the customers. Economic factors, such as the
financial stress impacting businesses and individuals as a result
of the novel coronavirus (“COVID-19”) pandemic, could
affect the nature, amount, and timing of these cash flows, as
unfavorable economic conditions could impair a customers’
ability to provide payment for services. For the Company’s
deposit contracts, this risk is mitigated as the Company generally
deducts payments from customers’ accounts as services are
rendered. For the Company’s appraisal services, the risk is
mitigated in that the appraisal is not released until payment is
received.
Contract Balances. The timing of
revenue recognition, billings, and cash collections results in
billed accounts receivable on the balance sheet. Most contracts
call for payment by a charge or deduction to the respective
customer account but there are some that require a receipt of
payment from the customer. For fee per transaction contracts, the
customers are billed as the transactions are processed. The Company
has no contracts in which customers are billed in advance for
services to be performed. These types of contracts would create
contract liabilities or deferred revenue, as the customers pay in
advance for services. There are no contract liabilities or accounts
receivables balances that are material to the Company’s
balance sheet.
Performance Obligations. A performance
obligation is a promise in a contract to transfer a distinct good
or service to the customer, and is the unit of account in ASU
2014-09. A contract’s transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or
as, the performance obligation is satisfied. Performance
obligations are satisfied as the service is provided to the
customer at a point in time. There are no significant financing
components in the Company’s contracts. Excluding deposit and
appraisal service revenues which are primarily billed at a point in
time as a fee for services incurred, all other contracts within the
scope of ASU 2014-09 contain variable consideration in that fees
earned are derived from market values of accounts which determine
the amount of consideration to which the Company is entitled. The
variability is resolved when the services are provided. The
contracts do not include obligations for returns, refunds, or
warranties. The contracts are specific to the amounts owed to the
Company for services performed during a period should the contracts
be terminated.
Significant Judgements. All of the
Company’s contracts create performance obligations that are
satisfied at a point in time excluding some immaterial deposit
revenues. Revenue is recognized as services are billed to the
customers. Variable consideration does exist for contracts related
to the Company’s contract with its registered investment
advisor as some revenues earned pursuant to that contract are based
on market values of accounts at the end of the
period.
A-42
Recent Accounting Pronouncements
The
following tables provide a summary of Accounting Standards Updates
(“ASU”) issued by the Financial Accounting Standards
Board (“FASB”) that the Company has recently
adopted.
Recently Adopted Accounting Guidance
ASU
|
Description
|
Effective Date
|
Effect on Financial Statements or Other Significant
Matters
|
ASU 2016-02: Leases
|
Increases transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing
arrangements.
|
January 1, 2019
|
See section titled "ASU 2016-02" below for a description of the
effect on the Company’s results of operations, financial
position and disclosures.
|
ASU 2017-08: Premium Amortization on Purchased Callable Debt
Securities
|
Amended the requirements related to the amortization period for
certain purchased callable debt securities held at a
premium.
|
January 1, 2019
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2018-11: Leases (Topic 842): Targeted Improvements
|
Intended to reduce costs and ease implementation of ASU
2016-02.
|
January 1, 2019
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2018-20: Narrow- Scope Improvements for Lessors
|
Provides narrow-scope improvements for lessors, that provide relief
in the accounting for sales, use and similar taxes, the accounting
for other costs paid by a lessee that may benefit a lessor, and
variable payments when contracts have lease and non-lease
components.
|
January 1, 2019
|
See comments for ASU 2016-02 below.
|
ASU 2019-07: Codification Updates to SEC Sections
|
Guidance updated for various Topics of the ASC to align the
guidance in various SEC sections of the ASC with the requirements
of certain SEC final rules.
|
Effective upon issuance
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU
|
Description
|
Effective Date
|
Effect on Financial Statements or Other Significant
Matters
|
ASU 2018-13: Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement (Topic 820)
|
Updates the disclosure requirements on fair value measurements in
ASC 820, Fair Value Measurement.
|
January 1, 2020
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic
606
|
Clarifies the interaction between the guidance for certain
collaborative arrangements and the new revenue recognition
financial accounting and reporting standard.
|
January 1, 2020 Early adoption permitted
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2018-19: Leases (Topic 842): Codification
Improvements
|
Provides guidance to address concerns companies had raised about an
accounting exception they would lose when assessing the fair value
of underlying assets under the leases standard and clarify that
lessees and lessors are exempt from a certain interim disclosure
requirement associated with adopting the new standard.
|
January 1, 2020
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2016-02
On
January 1, 2019, the Company adopted the requirements of ASU
2016-02, Leases (Topic 842). Topic 842 was subsequently amended by
ASU 2018-01, Land Easement Practical Expedient for Transition to
Topic 842; ASU 2018-10, Codification Improvements to Topic 842,
Leases; and ASU 2018-11, Targeted Improvements. The purpose of
Topic 842 is to increase transparency and comparability between
organizations that enter into lease agreements. The key difference
of Topic 842 from the previous guidance (Topic 840) is the
recognition of a right-of-use (“ROU”) asset and lease
liability on the statement of financial position for those leases
previously classified as operating leases under the previous
guidance. Topic 842 states that a contract is or contains a lease
if the contract conveys the right to control the use of identified
property, plant, or equipment (an identified asset) for a period of
time in exchange for consideration. The Company reviewed its
material non-real estate contracts to determine if they included a
lease and did not note any that would need to be considered under
Topic 842. The Company’s lease agreements in which Topic 842
has been applied are primarily for retail branch real estate
properties. These real estate leases have lease terms from less
than 12 months to leases with options up to 15 years, and payment
terms vary with some being fixed payments or based on a fixed
annual increase while others are variable and the annual increases
are based on market rates or other indexes.
A-43
Initially
transition from Topic 840 to Topic 842 required a modified
retrospective approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented
in the financial statements. ASU 2018-11, which, among other
things, provided an additional transition method that would allow
entities to not apply the initial guidance of ASU 2016-02 to the
comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company
chose the transition method of adoption provided by ASU 2018-11,
therefore, the Company has applied this standard to all existing
leases as of the adoption date of January 1, 2019, recording a ROU
asset and a lease liability and a cumulative-effect adjustment to
the opening balance of retained earnings (if applicable) in the
period of adoption. With this transition method, comparative prior
period disclosures will be under the previous accounting guidance
for leases (Topic 840). This adoption method is considered a change
in accounting principle requiring additional disclosure of the
nature of and reason for the change, which is solely a result of
the adoption of the required standard.
Topic
842 provides a package of practical expedients in applying the
lease standard to be chosen at the date of adoption. The Company
has chosen to elect the package of practical expedients provided
under ASU 2016-02 whereby it will not reassess (i) whether any
expired or existing contracts are or contain leases, (ii) the lease
classification for any expired or existing leases and (iii) initial
direct costs for any existing leases. The Company has also chosen
not to apply the recognition requirements of ASU 2016-02 to any
short-term leases (as defined by related accounting guidance). The
Company will account for lease and non-lease components separately
because such amounts are readily determinable under its lease
contracts. Additionally, the Company has chosen to elect the use of
hindsight, when applicable, in determining the lease term, in
assessing the likelihood that a lessee purchase option will be
exercised; and in assessing the impairment of ROU
assets.
ROU
assets represent the Company’s right to use an underlying
asset for the lease term and lease liabilities represent the
Company’s obligation to make lease payments arising from the
lease. The Company determined that all of its leases are classified
as operating leases under Topic 842. For operating and finance
leases, lease liabilities are initially measured at commencement
date based on the present value of lease payments not yet paid,
discounted using the discount rate for the lease at the lease
commencement date over the lease term. For operating and finance
leases, ROU assets are measured at the commencement date as the
amount of the initial liability, adjusted for lease payments made
to the lessor at or before commencement date, minus incentives; and
for any initial direct costs incurred by the lessee. Based on the
transition method that the Company has chosen to follow, the
initial application date of the lease term for all existing leases
is January 1, 2019.
For
operating leases, after lease commencement, the lease liability is
recorded at the present value of the unpaid lease payments
discounted at the discount rate for the lease established at the
commencement date. Lease expense is determined by the sum of the
lease payments to be recognized on a straight-line basis over the
lease term. The ROU asset is subsequently amortized as the
difference between the straight line lease cost for the period and
the periodic accretion of the lease liability. The lease term used
for the calculation of the initial operating ROU asset and lease
liability will include the initial lease term in addition to one
renewal option the Company thinks it is reasonably certain to
exercise or incur. Regarding the discount rate, Topic 842 requires
that the implicit rate within the lease agreement be used if
available. If not available, the Company should use its incremental
borrowing rate in effect at the time of the lease commencement
date. The Company utilized Federal Home Loan Bank
(“FHLB”) Atlanta’s Fixed Rate Credit rates for
terms consistent with the Company’s lease terms.
The
Company recorded operating ROU assets and operating lease
liabilities of $4.4 million and $4.4 million,
respectively at the
commencement date of January 1, 2019. The Company did not have a
cumulative-effect adjustment to the opening balance of retained
earnings. The adoption of ASU 2016-02 did not have a material
impact on the Company’s results of operations, financial
position or disclosures.
A
director of the Company has a membership interest in a company that
previously leased two branch facilities to the Bank. The Bank
purchased these branch facilities in September 2020.The
Bank’s lease payments for these facilities totaled $173,000
and $231,000 for the years ended December 31, 2020 and 2019,
respectively.
The
following tables provide a summary of ASU’s issued by the
FASB that the Company has not adopted as of December 31, 2020,
which may impact the Company’s financial
statements.
A-44
Recently Issued Accounting Guidance Not Yet Adopted
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
ASU
2016-13: Measurement of Credit Losses on Financial
Instruments
|
Provides
guidance to change the accounting for credit losses and modify the
impairment model for certain debt securities.
|
See
ASU 2019-10 below.
|
The
Company will apply this guidance through a cumulative-effect
adjustment to retained earnings as of the beginning of the year of
adoption. The Company is still evaluating the impact of this
guidance on its consolidated financial statements. The Company has
formed a Current Expected Credit Losses (“CECL”)
committee and implemented a model from a third-party vendor for
running CECL calculations. The Company is currently developing CECL
model assumptions and comparing results to current allowance for
loan loss calculations. The Company plans to run parallel
calculations leading up to the effective date of this guidance to
ensure it is prepared for implementation by the effective date. In
addition to the Company’s allowance for loan losses, it will
also record an allowance for credit losses on debt securities
instead of applying the impairment model currently utilized. The
amount of the adjustments will be impacted by each
portfolio’s composition and credit quality at the adoption
date as well as economic conditions and forecasts at that
time.
|
|
|
|
|
ASU
2018-14: Disclosure Framework—Changes to the Disclosure
Requirements for Defined Benefit Plans (Subtopic
715-20)
|
Updates
disclosure requirements for employers that sponsor defined benefit
pension or other postretirement plans.
|
January
1, 2021
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
ASU
|
Description
|
Effective Date
|
Effect on Financial Statements or Other Significant
Matters
|
ASU 2018-19: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses
|
Aligns the implementation date of the topic for annual financial
statements of nonpublic companies with the implementation date for
their interim financial statements. The guidance also clarifies
that receivables arising from operating leases are not within the
scope of the topic, but rather, should be accounted for in
accordance with the leases topic.
|
See ASU 2019-10 below.
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures. See ASU 2016-13 above.
|
ASU 2019-04: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments
|
Addresses unintended issues accountants flagged when implementing
ASU 2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, and ASU 2017-12, Targeted Improvements to
Accounting for Hedging Activities.
|
See ASU 2019-10 below.
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures. See ASU 2016-13 above.
|
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326):
Targeted Transition Relief
|
Guidance to provide entities with an option to irrevocably elect
the fair value option, applied on an instrument-by-instrument basis
for eligible instruments, upon adoption of ASU 2016-13, Measurement
of Credit Losses on Financial Instruments.
|
See ASU 2019-10 below.
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures. See ASU 2016-13 above.
|
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842):
Effective Dates
|
Guidance to defer the effective dates for private companies,
not-for-profit organizations, and certain smaller reporting
companies applying standards on current expected credit losses
(CECL), leases, hedging.
|
January 1, 2023
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU 2019-11: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses
|
Guidance that addresses issues raised by stakeholders during the
implementation of ASU 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The amendments affect a variety of Topics in the
ASC.
|
January 1, 2023
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
|
|
|
|
|
|
|
|
A-45
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes
|
Guidance to simplify accounting for income taxes by removing
specific technical exceptions that often produce information
investors have a hard time understanding. The amendments also
improve consistent application of and simplify GAAP for other areas
of Topic 740 by clarifying and amending existing
guidance.
|
January 1, 2021
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU 2020-01: Investments—Equity Securities (Topic 321),
Investments—Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)—Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815 (a
consensus of the FASB Emerging Issues Task Force)
|
Guidance to clarify the interaction of the accounting for equity
securities under Topic 321 and investments accounted for under the
equity method of accounting in Topic 323 and the accounting for
certain forward contracts and purchased options accounted for under
Topic 815.
|
January 1, 2021
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU
|
Description
|
Effective Date
|
Effect on Financial Statements or Other Significant
Matters
|
ASU 2020-02: Financial Instruments—Credit Losses (Topic 326)
and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant
to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section
on Effective Date Related to Accounting Standards Update No.
2016-02, Leases (Topic 842) (SEC Update)
|
Guidance to add and amend SEC paragraphs in the Accounting
Standards Codification to reflect the issuance of SEC Staff
Accounting Bulletin No. 119 related to the new credit losses
standard and comments by the SEC staff related to the revised
effective date of the new leases standard.
|
Effective upon issuance
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU 2020-03: Codification Improvements to Financial
Instruments
|
Guidance to clarify that the contractual term of a net investment
in a lease, determined in accordance with the leases standard,
should be the contractual term used to measure expected credit
losses under ASC 326.
|
January 1, 2023
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial
Reporting
|
Guidance that provides optional expedients and exceptions for
applying GAAP to contract modifications and hedging relationships,
subject to meeting certain criteria, that reference LIBOR or
another reference rate expected to be discontinued. The ASU is
intended to help stakeholders during the global market-wide
reference rate transition period. Therefore, it will be in effect
for a limited time through December 31, 2022.
|
March 12, 2020 through December 31, 2022
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
ASU 2020-06: Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity
|
Guidance to improve financial reporting associated with accounting
for convertible instruments and contracts in an entity’s own
equity.
|
January 1, 2022
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
A-46
Other
accounting standards that have been issued or proposed by FASB or
other standards-setting bodies are not expected to have a material
impact on the Company’s results of operations,
financial position or disclosures.
Reclassification
Certain
amounts in the 2019 and 2018 consolidated financial statements have
been reclassified to conform to the 2020 presentation.
(2)
Investment
Securities
Investment
securities available for sale at December 31, 2020 and 2019 are as
follows:
(Dollars
in thousands)
|
December 31, 2020
|
|||
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Mortgage-backed
securities
|
$143,095
|
2,812
|
593
|
145,314
|
U.S.
Government
|
|
|
|
|
sponsored
enterprises
|
7,384
|
331
|
208
|
7,507
|
State
and political subdivisions
|
87,757
|
4,758
|
87
|
92,428
|
Total
|
$238,236
|
7,901
|
888
|
245,249
|
(Dollars
in thousands)
|
December 31, 2019
|
|||
|
Amortized Cost
|
Gross Unrealized Gains
|
Gross Unrealized Losses
|
Estimated Fair Value
|
Mortgage-backed
securities
|
$77,812
|
1,371
|
227
|
78,956
|
U.S.
Government
|
|
|
|
|
sponsored
enterprises
|
28,265
|
443
|
311
|
28,397
|
State
and political subdivisions
|
84,686
|
3,657
|
200
|
88,143
|
Trust
preferred securities
|
250
|
-
|
-
|
250
|
Total
|
$191,013
|
5,471
|
738
|
195,746
|
The
current fair value and associated unrealized losses on investments
in debt securities with unrealized losses at December 31, 2020 and
2019 are summarized in the tables below, with the length of time
the individual securities have been in a continuous loss
position.
(Dollars
in thousands)
|
December 31, 2020
|
|||||
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Mortgage-backed
securities
|
$80,827
|
565
|
4,762
|
28
|
85,589
|
593
|
U.S.
Government
|
|
|
|
|
|
|
sponsored
enterprises
|
-
|
-
|
4,193
|
208
|
4,193
|
208
|
State
and political subdivisions
|
7,126
|
87
|
-
|
-
|
7,126
|
87
|
Total
|
$87,953
|
652
|
8,955
|
236
|
96,908
|
888
|
A-47
(Dollars
in thousands)
|
December 31, 2019
|
|||||
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Mortgage-backed
securities
|
$28,395
|
177
|
6,351
|
50
|
34,746
|
227
|
U.S.
Government
|
|
|
|
|
|
|
sponsored
enterprises
|
2,899
|
10
|
6,151
|
301
|
9,050
|
311
|
State
and political subdivisions
|
7,367
|
200
|
-
|
-
|
7,367
|
200
|
Total
|
$38,661
|
387
|
12,502
|
351
|
51,163
|
738
|
At
December 31, 2020, unrealized losses in the investment securities
portfolio relating to debt securities totaled $888,000. The
unrealized losses on these debt securities arose due to changing
interest rates and are considered to be temporary. From the
December 31, 2020 tables above, six out of 86 securities issued by
state and political subdivisions contained unrealized losses and 29
out of 68 securities issued by U.S. Government sponsored
enterprises, including mortgage-backed securities, contained
unrealized losses. These unrealized losses are considered temporary
because of acceptable financial condition and results of operations
on each security and the repayment sources of principal and
interest on U.S. Government sponsored enterprises, including
mortgage-backed securities, are government backed.
The
Company periodically evaluates its investments for any impairment
which would be deemed other-than-temporary. No
investment impairments were deemed other-than-temporary in 2020,
2019 or 2018.
The
amortized cost and estimated fair value of investment securities
available for sale at December 31, 2020, by contractual maturity,
are shown below. Expected maturities of mortgage-backed securities
will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without call or
prepayment penalties.
December
31, 2020
|
|
|
(Dollars
in thousands)
|
|
|
|
Amortized Cost
|
Estimated Fair Value
|
Due
within one year
|
$10,576
|
10,705
|
Due
from one to five years
|
15,236
|
15,997
|
Due
from five to ten years
|
62,014
|
65,826
|
Due
after ten years
|
7,315
|
7,407
|
Mortgage-backed
securities
|
143,095
|
145,314
|
Total
|
$238,236
|
245,249
|
During
2020, proceeds from sales of securities available for sale were
$56.3 million and resulted in net gains of $2.6 million. During
2019, proceeds from sales of securities available for sale were
$20.7 million and resulted in net gains of $226,000. During 2018,
proceeds from sales of securities available for sale were $36.0
million and resulted in gross gains of $15,000.
Securities with a
fair value of approximately $77.3 million and $66.0 million at
December 31, 2020 and 2019, respectively, were pledged to secure
public deposits, FHLB borrowings and for other purposes as required
by law.
GAAP
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value
measurements. Level 1 inputs are quoted prices in active markets
for identical assets or liabilities that a company has the ability
to access at the measurement date. Level 2 inputs are inputs other
than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly. Level 3
inputs are unobservable inputs for the asset or liability. The
table below presents the balance of securities available for sale,
which are measured at fair value on a recurring basis by level
within the fair value hierarchy as of December 31, 2020 and
2019.
A-48
(Dollars
in thousands)
|
December 31, 2020
|
|||
|
Fair Value Measurements
|
Level 1 Valuation
|
Level 2 Valuation
|
Level 3 Valuation
|
Mortgage-backed
securities
|
$145,314
|
-
|
145,314
|
-
|
U.S.
Government
|
|
|
|
|
sponsored
enterprises
|
$7,507
|
-
|
7,507
|
-
|
State
and political subdivisions
|
$92,428
|
-
|
92,428
|
-
|
(Dollars
in thousands)
|
December 31, 2019
|
|||
|
Fair Value Measurements
|
Level 1 Valuation
|
Level 2 Valuation
|
Level 3 Valuation
|
Mortgage-backed
securities
|
$78,956
|
-
|
78,956
|
-
|
U.S.
Government
|
|
|
|
|
sponsored
enterprises
|
$28,397
|
-
|
28,397
|
-
|
State
and political subdivisions
|
$88,143
|
-
|
88,143
|
-
|
Trust
preferred securities
|
$250
|
-
|
-
|
250
|
Fair
values of investment securities available for sale are determined
by obtaining quoted prices on nationally recognized securities
exchanges when available. If quoted prices are not available, fair
value is determined using matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities
without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’
relationship to other benchmark quoted securities.
The
following is an analysis of fair value measurements of investment
securities available for sale using Level 3, significant
unobservable inputs, for the year ended December 31,
2020.
(Dollars
in thousands)
|
Investment Securities Available for Sale
|
|
Level 3 Valuation
|
Balance,
beginning of period
|
$250
|
Change
in book value
|
-
|
Change
in gain/(loss) realized and unrealized
|
-
|
Purchases/(sales
and calls)
|
(250)
|
Transfers
in and/or (out) of Level 3
|
-
|
Balance,
end of period
|
$-
|
|
|
Change
in unrealized gain/(loss) for assets still held in Level
3
|
$-
|
A-49
(3)
Loans
Major
classifications of loans at December 31, 2020 and 2019 are
summarized as follows:
(Dollars
in thousands)
|
December 31,
2020
|
December 31,
2019
|
Real
estate loans:
|
|
|
Construction
and land development
|
$94,124
|
92,596
|
Single-family
residential
|
272,325
|
269,475
|
Single-family
residential -
|
|
|
Banco
de la Gente non-traditional
|
26,883
|
30,793
|
Commercial
|
332,971
|
291,255
|
Multifamily
and farmland
|
48,880
|
48,090
|
Total
real estate loans
|
775,183
|
732,209
|
|
|
|
Loans
not secured by real estate:
|
|
|
Commercial
loans
|
161,740
|
100,263
|
Farm
loans
|
855
|
1,033
|
Consumer
loans
|
7,113
|
8,432
|
All
other loans
|
3,748
|
7,937
|
|
|
|
Total
loans
|
948,639
|
849,874
|
|
|
|
Less
allowance for loan losses
|
9,908
|
6,680
|
|
|
|
Total
net loans
|
$938,731
|
843,194
|
The
above table includes deferred fees, net of deferred costs, totaling
$1.4 million at December 31, 2020 including $2.6 million in
deferred PPP loan fees. The above table includes deferred costs,
net of deferred fees, totaling $1.5 million at December 31,
2019.
The
Bank grants loans and extensions of credit primarily within the
Catawba Valley region of North Carolina, which encompasses Catawba,
Alexander, Iredell and Lincoln counties and also in Mecklenburg and
Wake counties of North Carolina. Although the Bank has a
diversified loan portfolio, a substantial portion of the loan
portfolio is collateralized by improved and unimproved real estate,
the value of which is dependent upon the real estate market. Risk
characteristics of the major components of the Bank’s loan
portfolio are discussed below:
●
Construction and
land development loans – The risk of loss is largely
dependent on the initial estimate of whether the property’s
value at completion equals or exceeds the cost of property
construction and the availability of take-out financing. During the
construction phase, a number of factors can result in delays or
cost overruns. If the estimate is inaccurate or if actual
construction costs exceed estimates, the value of the property
securing the loan may be insufficient to ensure full repayment when
completed through a permanent loan, sale of the property, or by
seizure of collateral. As of December 31, 2020, construction and
land development loans comprised approximately 10% of the
Bank’s total loan portfolio.
●
Single-family
residential loans – Declining home sales volumes, decreased
real estate values and higher than normal levels of unemployment
could contribute to losses on these loans. As of December 31, 2020,
single-family residential loans comprised approximately 32% of the
Bank’s total loan portfolio, including Banco single-family
residential non-traditional loans which were approximately 3% of
the Bank’s total loan portfolio.
●
Commercial real
estate loans – Repayment is dependent on income being
generated in amounts sufficient to cover operating expenses and
debt service. These loans also involve greater risk because they
are generally not fully amortizing over a loan period, but rather
have a balloon payment due at maturity. A borrower’s ability
to make a balloon payment typically will depend on being able to
either refinance the loan or timely sell the underlying property.
As of December 31, 2020, commercial real estate loans comprised
approximately 35% of the Bank’s total loan
portfolio.
A-50
●
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, 2020, commercial
loans comprised approximately 17% of the Bank’s total loan
portfolio, including $75.8 million in PPP loans.
Loans
are considered past due if the required principal and interest
payments have not been received as of the date such payments were
due. Loans are placed on non-accrual status when, in
management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by
regulatory provisions. Loans may be placed on non-accrual status
regardless of whether or not such loans are considered past due.
When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the
extent cash payments are received in excess of principal due. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
On
March 27, 2020, President Trump signed the CARES Act, which
established a $2 trillion economic stimulus package, including cash
payments to individuals, supplemental unemployment insurance
benefits and a $349 billion loan program administered through the
PPP. Under the PPP, small businesses, sole proprietorships,
independent contractors and self-employed individuals may apply for
loans from existing SBA lenders and other approved regulated
lenders that enroll in the program, subject to numerous limitations
and eligibility criteria. The Bank is participating as a lender in
the PPP. The Bank originated $64.5 million in PPP loans during the
initial round of PPP funding. A second round of PPP funding, signed
into law by President Trump on April 24, 2020, provided $320
billion additional funding for the PPP. As of December 31, 2020,
the Bank had originated $34.5 million in PPP loans during the
second round of PPP funding. Total PPP loans originated as of
December 31, 2020 amounted to $99.0 million. PPP loans outstanding
amounted to $75.8 million at December 31, 2021. The Bank has
received $4.0 million in fees from the SBA for PPP loans originated
as of December 31, 2020. The Bank has recognized $1.4 million PPP
loan fee income as of December 31, 2020.
The
following tables present an age analysis of past due loans, by loan
type, as of December 31, 2020 and 2019:
December
31, 2020
(Dollars
in thousands)
|
Loans 30-89 Days Past Due
|
Loans 90 or More Days Past Due
|
Total Past Due Loans
|
Total Current Loans
|
Total Loans
|
Accruing Loans 90 or More Days Past Due
|
Real
estate loans:
|
|
|
|
|
|
|
Construction
and land development
|
$298
|
-
|
298
|
93,826
|
94,124
|
-
|
Single-family
residential
|
3,660
|
270
|
3,930
|
268,395
|
272,325
|
-
|
Single-family
residential -
|
|
|
|
|
|
|
Banco
de la Gente non-traditional
|
3,566
|
105
|
3,671
|
23,212
|
26,883
|
-
|
Commercial
|
36
|
-
|
36
|
332,935
|
332,971
|
-
|
Multifamily
and farmland
|
-
|
-
|
-
|
48,880
|
48,880
|
-
|
Total
real estate loans
|
7,560
|
375
|
7,935
|
767,248
|
775,183
|
-
|
|
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
|
|
|
Commercial
loans
|
-
|
-
|
-
|
161,740
|
161,740
|
-
|
Farm
loans
|
-
|
-
|
-
|
855
|
855
|
-
|
Consumer
loans
|
45
|
2
|
47
|
7,066
|
7,113
|
-
|
All
other loans
|
-
|
-
|
-
|
3,748
|
3,748
|
-
|
Total
loans
|
$7,605
|
377
|
7,982
|
940,657
|
948,639
|
-
|
A-51
December
31, 2019
(Dollars
in thousands)
|
Loans 30-89 Days Past Due
|
Loans 90 or More Days Past Due
|
Total Past Due Loans
|
Total Current Loans
|
Total Loans
|
Accruing Loans 90 or More Days Past Due
|
Real
estate loans:
|
|
|
|
|
|
|
Construction
and land development
|
$803
|
-
|
803
|
91,793
|
92,596
|
-
|
Single-family
residential
|
3,000
|
126
|
3,126
|
266,349
|
269,475
|
-
|
Single-family
residential -
|
|
|
|
|
|
|
Banco
de la Gente non-traditional
|
4,834
|
413
|
5,247
|
25,546
|
30,793
|
-
|
Commercial
|
504
|
176
|
680
|
290,575
|
291,255
|
-
|
Multifamily
and farmland
|
-
|
-
|
-
|
48,090
|
48,090
|
-
|
Total
real estate loans
|
9,141
|
715
|
9,856
|
722,353
|
732,209
|
-
|
|
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
|
|
|
Commercial
loans
|
432
|
-
|
432
|
99,831
|
100,263
|
-
|
Farm
loans
|
-
|
-
|
-
|
1,033
|
1,033
|
-
|
Consumer
loans
|
170
|
22
|
192
|
8,240
|
8,432
|
-
|
All
other loans
|
-
|
-
|
-
|
7,937
|
7,937
|
-
|
Total
loans
|
$9,743
|
737
|
10,480
|
839,394
|
849,874
|
-
|
The
following table presents the Bank’s non-accrual loans as of
December 31, 2020 and 2019:
(Dollars
in thousands)
|
December 31,
2020
|
December 31,
2019
|
Real
estate loans:
|
|
|
Construction
and land development
|
$-
|
-
|
Single-family
residential
|
1,266
|
1,378
|
Single-family
residential -
|
|
|
Banco
de la Gente non-traditional
|
1,709
|
1,764
|
Commercial
|
440
|
256
|
Multifamily
and farmland
|
117
|
-
|
Total
real estate loans
|
3,532
|
3,398
|
|
|
|
Loans
not secured by real estate:
|
|
|
Commercial
loans
|
212
|
122
|
Consumer
loans
|
14
|
33
|
Total
|
$3,758
|
3,553
|
At each
reporting period, the Bank determines which loans are impaired.
Accordingly, the Bank’s impaired loans are reported at their
estimated fair value on a non-recurring basis. An allowance for
each impaired loan that is collateral-dependent is calculated based
on the fair value of its collateral. The fair value of the
collateral is based on appraisals performed by REAS, a subsidiary
of the Bank. REAS is staffed by certified appraisers that also
perform appraisals for other companies. Factors, including the
assumptions and techniques utilized by the appraiser, are
considered by management. If the recorded investment in the
impaired loan exceeds the measure of fair value of the collateral,
a valuation allowance is recorded as a component of the allowance
for loan losses. An allowance for each impaired loan that is not
collateral dependent is calculated based on the present value of
projected cash flows. If the recorded investment in the impaired
loan exceeds the present value of projected cash flows, a valuation
allowance is recorded as a component of the allowance for loan
losses. Impaired loans under $250,000 are not individually
evaluated for impairment with the exception of the Bank’s TDR
loans in the residential mortgage loan portfolio, which are
individually evaluated for impairment. Impaired loans collectively
evaluated for impairment totaled $5.8 million and $5.3 million at
December 31, 2020 and 2019, respectively. Accruing impaired loans
were $21.3 million at December 31, 2020 and December 31, 2019.
Interest income recognized on accruing impaired loans was $1.2
million and $1.3 million for the years ended December 31, 2020 and
2019, respectively. No interest income is recognized on non-accrual
impaired loans subsequent to their classification as
non-accrual.
A-52
The
following tables present the Bank’s impaired loans as of
December 31, 2020, 2019 and 2018:
December
31, 2020
(Dollars
in thousands)
|
Unpaid Contractual Principal Balance
|
Recorded Investment With No Allowance
|
Recorded Investment With Allowance
|
Recorded Investment in Impaired Loans
|
Related Allowance
|
Average Outstanding Impaired Loans
|
YTD Interest Income Recognized
|
Real estate
loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$108
|
-
|
108
|
108
|
4
|
134
|
8
|
Single-family
residential
|
5,302
|
379
|
4,466
|
4,845
|
33
|
4,741
|
262
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco de la
Gente non-traditional
|
13,417
|
-
|
12,753
|
12,753
|
862
|
13,380
|
798
|
Commercial
|
2,999
|
1,082
|
1,891
|
2,973
|
14
|
2,940
|
139
|
Multifamily
and farmland
|
119
|
-
|
117
|
117
|
-
|
29
|
6
|
Total impaired
real estate loans
|
21,945
|
1,461
|
19,335
|
20,796
|
913
|
21,224
|
1,213
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
515
|
211
|
244
|
455
|
5
|
564
|
32
|
Consumer
loans
|
41
|
-
|
37
|
37
|
1
|
60
|
5
|
Total impaired
loans
|
$22,501
|
1,672
|
19,616
|
21,288
|
919
|
21,848
|
1,250
|
December
31, 2019
(Dollars
in thousands)
|
Unpaid Contractual Principal Balance
|
Recorded Investment With No Allowance
|
Recorded Investment With Allowance
|
Recorded Investment in Impaired Loans
|
Related Allowance
|
Average Outstanding Impaired Loans
|
YTD Interest Income Recognized
|
Real estate
loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$183
|
-
|
183
|
183
|
7
|
231
|
12
|
Single-family
residential
|
5,152
|
403
|
4,243
|
4,646
|
36
|
4,678
|
269
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco de la
Gente non-traditional
|
15,165
|
-
|
14,371
|
14,371
|
944
|
14,925
|
956
|
Commercial
|
1,879
|
-
|
1,871
|
1,871
|
7
|
1,822
|
91
|
Total impaired
real estate loans
|
22,379
|
403
|
20,668
|
21,071
|
994
|
21,656
|
1,328
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
180
|
92
|
84
|
176
|
-
|
134
|
9
|
Consumer
loans
|
100
|
-
|
96
|
96
|
2
|
105
|
7
|
Total impaired
loans
|
$22,659
|
495
|
20,848
|
21,343
|
996
|
21,895
|
1,344
|
December
31, 2018
(Dollars
in thousands)
|
Unpaid Contractual Principal Balance
|
Recorded Investment With No Allowance
|
Recorded Investment With Allowance
|
Recorded Investment in Impaired Loans
|
Related Allowance
|
Average Outstanding Impaired Loans
|
YTD Interest Income Recognized
|
Real estate
loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$281
|
-
|
279
|
279
|
5
|
327
|
19
|
Single-family
residential
|
5,059
|
422
|
4,188
|
4,610
|
32
|
6,271
|
261
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco de la
Gente non-traditional
|
16,424
|
-
|
15,776
|
15,776
|
1,042
|
14,619
|
944
|
Commercial
|
1,995
|
-
|
1,925
|
1,925
|
17
|
2,171
|
111
|
Total impaired
real estate loans
|
23,759
|
422
|
22,168
|
22,590
|
1,096
|
23,388
|
1,335
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
251
|
89
|
1
|
90
|
-
|
96
|
-
|
Consumer
loans
|
116
|
-
|
113
|
113
|
2
|
137
|
7
|
Total impaired
loans
|
$24,126
|
511
|
22,282
|
22,793
|
1,098
|
23,621
|
1,342
|
The
fair value measurements for mortgage loans held for sale, impaired
loans and other real estate on a non-recurring basis at December
31, 2020 and 2019 are presented below. The Company’s
valuation methodology is discussed in Note 16.
A-53
(Dollars
in thousands)
|
Fair Value Measurements December 31, 2020
|
Level 1 Valuation
|
Level 2 Valuation
|
Level 3 Valuation
|
Mortgage
loans held for sale
|
$9,139
|
-
|
-
|
9,139
|
Impaired
loans
|
$20,369
|
-
|
-
|
20,369
|
Other
real estate
|
$128
|
-
|
-
|
128
|
(Dollars
in thousands)
|
Fair Value Measurements December 31, 2019
|
Level 1 Valuation
|
Level 2 Valuation
|
Level 3 Valuation
|
Mortgage
loans held for sale
|
$4,417
|
-
|
-
|
4,417
|
Impaired
loans
|
$20,347
|
-
|
-
|
20,347
|
Other
real estate
|
$-
|
-
|
-
|
-
|
(Dollars
in thousands)
|
Fair Value December 31, 2020
|
Fair Value December 31, 2019
|
Valuation Technique
|
Significant Unobservable Inputs
|
General Range of Significant Unobservable Input Values
|
Mortgage
loans held for sale
|
$9,139
|
4,417
|
Rate
lock commitment
|
N/A
|
N/A
|
Impaired
loans
|
$20,369
|
20,347
|
Appraised
value and discounted cash flows
|
Discounts
to reflect current market conditions and ultimate
collectability
|
0 - 25%
|
Other
real estate
|
$128
|
-
|
Appraised
value
|
Discounts
to reflect current market conditions and estimated costs to
sell
|
0 - 25%
|
The
following table presents changes in the allowance for loan losses
for the year ended December 31, 2020. PPP loans are excluded from
the allowance for loan losses as PPP loans are 100 percent
guaranteed by the SBA.
A-54
(Dollars
in thousands)
|
Real Estate Loans
|
|
|
|
|
|
||||
|
Construction and Land Development
|
Single-Family Residential
|
Single-Family Residential - Banco de la Gente
Non-traditional
|
Commercial
|
Multifamily and Farmland
|
Commercial
|
Farm
|
Consumer and All Other
|
Unallocated
|
Total
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
Charge-offs
|
(5)
|
(65)
|
-
|
(7)
|
-
|
(903)
|
-
|
(434)
|
-
|
(1,414)
|
Recoveries
|
36
|
70
|
-
|
70
|
-
|
34
|
-
|
173
|
-
|
383
|
Provision
|
471
|
564
|
(21)
|
844
|
2
|
1,526
|
-
|
251
|
622
|
4,259
|
Ending
balance
|
$1,196
|
1,843
|
1,052
|
2,212
|
122
|
1,345
|
-
|
128
|
2,010
|
9,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$1
|
4
|
844
|
8
|
-
|
-
|
-
|
-
|
-
|
857
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
1,195
|
1,839
|
208
|
2,204
|
122
|
1,345
|
-
|
128
|
2,010
|
9,051
|
Ending
balance
|
$1,196
|
1,843
|
1,052
|
2,212
|
122
|
1,345
|
-
|
128
|
2,010
|
9,908
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$94,124
|
272,325
|
26,883
|
332,971
|
48,880
|
161,740
|
855
|
10,861
|
-
|
948,639
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$7
|
1,558
|
11,353
|
2,118
|
-
|
212
|
-
|
-
|
-
|
15,248
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$94,117
|
270,767
|
15,530
|
330,853
|
48,880
|
161,528
|
855
|
10,861
|
-
|
933,391
|
Changes
in the allowance for loan losses for the year ended December 31,
2019 were as follows:
(Dollars
in thousands)
|
Real Estate Loans
|
|
|
|
|
|
||||
|
Construction and Land Development
|
Single-Family Residential
|
Single-Family Residential - Banco de la Gente
Non-traditional
|
Commercial
|
Multifamily and Farmland
|
Commercial
|
Farm
|
Consumer and All Other
|
Unallocated
|
Total
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
Charge-offs
|
(21)
|
(42)
|
-
|
(1)
|
-
|
(389)
|
-
|
(623)
|
-
|
(1,076)
|
Recoveries
|
45
|
66
|
-
|
49
|
-
|
83
|
-
|
205
|
-
|
448
|
Provision
|
(143)
|
(75)
|
(104)
|
(21)
|
37
|
368
|
-
|
395
|
406
|
863
|
Ending
balance
|
$694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$2
|
6
|
925
|
4
|
-
|
-
|
-
|
-
|
-
|
937
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
692
|
1,268
|
148
|
1,301
|
120
|
688
|
-
|
138
|
1,388
|
5,743
|
Ending
balance
|
$694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$92,596
|
269,475
|
30,793
|
291,255
|
48,090
|
100,263
|
1,033
|
16,369
|
-
|
849,874
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$10
|
1,697
|
12,899
|
1,365
|
-
|
92
|
-
|
-
|
-
|
16,063
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$92,586
|
267,778
|
17,894
|
289,890
|
48,090
|
100,171
|
1,033
|
16,369
|
-
|
833,811
|
Changes
in the allowance for loan losses for the year ended December 31,
2018 were as follows:
A-55
(Dollars
in thousands)
|
Real Estate Loans
|
|
|
|
|
|
||||
|
Construction and Land Development
|
Single-Family Residential
|
Single-Family Residential - Banco de la Gente
Non-traditional
|
Commercial
|
Multifamily and Farmland
|
Commercial
|
Farm
|
Consumer and All Other
|
Unallocated
|
Total
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
Charge-offs
|
(53)
|
(116)
|
-
|
(453)
|
(5)
|
(54)
|
-
|
(452)
|
-
|
(1,133)
|
Recoveries
|
10
|
106
|
-
|
105
|
1
|
32
|
-
|
168
|
-
|
422
|
Provision
|
52
|
(477)
|
(103)
|
433
|
15
|
74
|
-
|
290
|
506
|
790
|
Ending
balance
|
$813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$-
|
-
|
1,023
|
15
|
-
|
-
|
-
|
-
|
-
|
1,038
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
813
|
1,325
|
154
|
1,263
|
83
|
626
|
-
|
161
|
982
|
5,407
|
Ending
balance
|
$813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$94,178
|
252,983
|
34,261
|
270,055
|
33,163
|
97,465
|
926
|
20,992
|
-
|
804,023
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance: individually
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$96
|
1,779
|
14,310
|
1,673
|
-
|
89
|
-
|
-
|
-
|
17,947
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$94,082
|
251,204
|
19,951
|
268,382
|
33,163
|
97,376
|
926
|
20,992
|
-
|
786,076
|
The
Bank utilizes an internal risk grading matrix to assign a risk
grade to each of its loans. Loans are graded on a scale of 1 to 8.
These risk grades are evaluated on an ongoing basis. A description
of the general characteristics of the eight risk grades is as
follows:
●
Risk Grade 1
– Excellent Quality: Loans are well above average quality and
a minimal amount of credit risk exists. CD or cash secured loans or
properly margined actively traded stock or bond secured loans would
fall in this grade.
●
Risk Grade 2
– High Quality: Loans are of good quality with risk levels
well within the Company’s range of acceptability. The
organization or individual is established with a history of
successful performance though somewhat susceptible to economic
changes.
●
Risk Grade 3
– Good Quality: Loans of average quality with risk levels
within the Company’s range of acceptability but higher than
normal. This may be a new organization or an existing organization
in a transitional phase (e.g. expansion, acquisition, market
change).
●
Risk Grade 4
– Management Attention: These loans have higher risk and
servicing needs but still are acceptable. Evidence of marginal
performance or deteriorating trends is observed. These are not
problem credits presently, but may be in the future if the borrower
is unable to change its present course.
●
Risk Grade 5
– Watch: These loans are currently performing satisfactorily,
but there has been some recent past due history on repayment and
there are potential weaknesses that may, if not corrected, weaken
the asset or inadequately protect the Company’s position at
some future date.
●
Risk Grade 6
– Substandard: A Substandard loan is inadequately protected
by the current sound net worth and paying capacity of the obligor
or the collateral pledged (if there is any). There is a
well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. There is a distinct possibility that the Company will
sustain some loss if the deficiencies are not
corrected.
●
Risk Grade 7
– Doubtful: Loans classified as Doubtful have all the
weaknesses inherent in loans classified Substandard, plus the added
characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions, and
values highly questionable and improbable. Doubtful is a temporary
grade where a loss is expected but is presently not quantified with
any degree of accuracy. Once the loss position is determined, the
amount is charged off.
●
Risk Grade 8
– Loss: Loans classified as Loss
are considered uncollectable and of such little value that their
continuance as bankable assets is not warranted. This
classification does not mean that the asset has absolutely no
recovery or salvage value, but rather that it is not practical or
desirable to defer writing off this worthless loan even though
partial recovery may be realized in the future. Loss is a temporary
grade until the appropriate authority is obtained to charge the
loan off.
A-56
The
following tables present the credit risk profile of each loan type
based on internally assigned risk grades as of December 31, 2020
and 2019.
December
31, 2020
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
|
|
|
||||
|
Construction and Land Development
|
Single-Family Residential
|
Single-Family Residential - Banco de la Gente
non-traditional
|
Commercial
|
Multifamily and Farmland
|
Commercial
|
Farm
|
Consumer
|
All Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent
Quality
|
$228
|
9,867
|
-
|
-
|
-
|
406
|
-
|
678
|
-
|
11,179
|
2- High
Quality
|
9,092
|
121,331
|
-
|
40,569
|
22
|
19,187
|
-
|
2,237
|
1,563
|
194,001
|
3- Good
Quality
|
76,897
|
115,109
|
10,170
|
241,273
|
44,890
|
128,727
|
832
|
3,826
|
1,477
|
623,201
|
4- Management
Attention
|
4,917
|
20,012
|
12,312
|
39,370
|
3,274
|
11,571
|
23
|
336
|
708
|
92,523
|
5-
Watch
|
2,906
|
2,947
|
1,901
|
10,871
|
694
|
1,583
|
-
|
6
|
-
|
20,908
|
6-
Substandard
|
84
|
3,059
|
2,500
|
888
|
-
|
266
|
-
|
30
|
-
|
6,827
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total
|
$94,124
|
272,325
|
26,883
|
332,971
|
48,880
|
161,740
|
855
|
7,113
|
3,748
|
948,639
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
|
|
|
||||
|
Construction and Land Development
|
Single-Family Residential
|
Single-Family Residential - Banco de la Gente
non-traditional
|
Commercial
|
Multifamily and Farmland
|
Commercial
|
Farm
|
Consumer
|
All Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent
Quality
|
$-
|
8,819
|
-
|
-
|
-
|
330
|
-
|
693
|
-
|
9,842
|
2- High
Quality
|
32,029
|
128,757
|
-
|
21,829
|
256
|
20,480
|
-
|
2,708
|
1,860
|
207,919
|
3- Good
Quality
|
52,009
|
107,246
|
12,103
|
231,003
|
42,527
|
72,417
|
948
|
4,517
|
5,352
|
528,122
|
4- Management
Attention
|
5,487
|
18,409
|
13,737
|
35,095
|
4,764
|
6,420
|
85
|
458
|
725
|
85,180
|
5-
Watch
|
3,007
|
3,196
|
2,027
|
3,072
|
543
|
492
|
-
|
8
|
-
|
12,345
|
6-
Substandard
|
64
|
3,048
|
2,926
|
256
|
-
|
124
|
-
|
48
|
-
|
6,466
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total
|
$92,596
|
269,475
|
30,793
|
291,255
|
48,090
|
100,263
|
1,033
|
8,432
|
7,937
|
849,874
|
TDR
loans modified in 2020, past due TDR loans and non-accrual TDR
loans totaled $3.8 million and $4.3 million at December 31, 2020
and December 31, 2019, respectively. The terms of these loans have
been renegotiated to provide a concession to original terms,
including a reduction in principal or interest as a result of the
deteriorating financial position of the borrower. There were no
performing loans classified as TDR loans at December 31, 2020 and
December 31, 2019.
There
were no new TDR modifications during the years ended December 31,
2020 and 2019.
There
were no TDR loans with a payment default occurring within 12 months
of the restructure date, and the payment default occurring during
the years ended December 31, 2020 and 2019. TDR loans are deemed to
be in default if they become past due by 90 days or
more.
At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million, the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. Of all loans modified
as a result of COVID-19, $101.3 million of these loans have
returned to their original terms; however, the effects of stimulus
in the current environment are still unknown, and additional losses
may be currently present in loans that are currently modified and
that were once modified. These payment modifications are primarily
interest only payments for three to nine months. Loan payment
modifications associated with the COVID-19 pandemic are not
classified as TDR due to Section 4013 of the CARES Act, which
provides that a qualified loan modification is exempt by law from
classification as a TDR pursuant to GAAP.
A-57
(4)
Premises
and Equipment
Major
classifications of premises and equipment at December 31, 2020 and
2019 are summarized as follows:
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
|
|
|
Land
|
$3,970
|
3,690
|
Buildings
and improvements
|
18,804
|
18,034
|
Furniture
and equipment
|
26,565
|
24,743
|
Construction
in process
|
10
|
395
|
|
|
|
Total
premises and equipment
|
49,349
|
46,862
|
|
|
|
Less
accumulated depreciation
|
30,749
|
28,258
|
|
|
|
Total
net premises and equipment
|
$18,600
|
18,604
|
The
Company recognized depreciation expense totaling $2.5 million for
the year ended December 31, 2020 and $2.3 million for the years
ended December 31, 2019 and 2018.
The
Company had no gains or losses on the sale of or write-downs on
premises and equipment for the year ended December 31, 2020. The
Company has $239,000 net losses on the sale of and write-downs on
premises and equipment for the year ended December 31,
2019.
(5)
Leases
The
Company leases various office spaces for banking and operational
facilities and equipment under operating lease
arrangements.
Total
rent expense was approximately $880,000, $949,000 and $785,000 for
the years ended December 31, 2020, 2019 and 2018,
respectively.
As of
December 31, 2020, the Company had operating ROU assets of $3.4
million and operating lease liabilities of $3.5 million. The
Company maintains operating leases on land and buildings for some
of the Bank’s branch facilities and loan production offices.
Most leases include one option to renew, with renewal terms
extending up to 15 years. The exercise of renewal options is based
on the judgment of management as to whether or not the renewal
option is reasonably certain to be exercised. Factors in
determining whether an option is reasonably certain of exercise
include, but are not limited to, the value of leasehold
improvements, the value of renewal rates compared to market rates,
and the presence of factors that would cause a significant economic
penalty to the Company if the option is not exercised. As allowed
by the standard, leases with a term of 12 months or less are not
recorded on the balance sheet and instead are recognized in lease
expense on a straight-line basis over the lease term.
The
following table presents lease cost and other lease information as
of December 31, 2020.
(Dollars
in thousands)
|
|
|
December 31,
2020
|
|
|
Operating
lease cost $
|
855
|
|
|
Other
information:
|
|
Cash
paid for amounts included in the measurement of lease
liabilities
|
833
|
Operating
cash flows from operating leases
|
-
|
Right-of-use
assets obtained in exchange for new lease liabilities - operating
leases
|
942
|
Weighted-average
remaining lease term - operating leases
|
6.95
|
Weighted-average
discount rate - operating leases
|
2.69%
|
A-58
The
following table presents lease maturities as of December 31,
2020.
(Dollars
in thousands)
|
|
|
|
Maturity
Analysis of Operating Lease Liabilities:
|
December 31,
2020
|
|
|
2021
|
$754
|
2022
|
588
|
2023
|
567
|
2024
|
489
|
2025
|
433
|
Thereafter
|
1,041
|
Total
|
3,872
|
Less:
Imputed Interest
|
(401)
|
Operating
Lease Liability
|
$3,471
|
(6)
Time
Deposits
At
December 31, 2020, the scheduled maturities of time deposits are as
follows:
(Dollars
in thousands)
|
|
|
|
2021
|
$57,475
|
2022
|
19,235
|
2023
|
14,815
|
2024
|
10,926
|
2025
and thereafter
|
3,821
|
|
|
Total
|
$106,272
|
At
December 31, 2020 and 2019, the Bank had approximately $12.4
million and $22.3 million, respectively, in time deposits purchased
through third party brokers, including certificates of deposit participated
through the Certificate of Deposit Account Registry Service
(“CDARS”) on behalf of local customers. CDARS balances
totaled $4.3 million and $3.1 million as of December 31, 2020 and
2019, respectively. The weighted average rate of brokered
deposits as of December 31, 2020 and 2019 was 1.43% and 1.96%,
respectively.
(7)
Federal
Home Loan Bank and Federal Reserve Bank Borrowings
The
Bank had no borrowings from the FHLB at December 31, 2020 and 2019.
FHLB borrowings are collateralized by a blanket assignment on all
residential first mortgage loans, home equity lines of credit and
loans secured by multi-family real estate that the Bank owns. At
December 31, 2020, the carrying value of loans pledged as
collateral totaled approximately $165.1 million. The remaining
availability under the line of credit with the FHLB was $111.4
million at December 31, 2020. The Bank incurred a $1.1 million
prepayment penalty on the prepayment of a $70.0 million FHLB
advance in 2020.
The
Bank is required to purchase and hold certain amounts of FHLB stock
in order to obtain FHLB borrowings. No ready market exists for the
FHLB stock, and it has no quoted market value. The stock is
redeemable at $100 per share subject to certain limitations set by
the FHLB. The Bank owned $1.0 million and $983,000 of FHLB stock,
included in other investments, at December 31, 2020 and 2019,
respectively.
As of
December 31, 2020 and 2019, the Bank had no borrowings from the
Federal Reserve Bank (“FRB”). FRB borrowings are
collateralized by a blanket assignment on all qualifying loans that
the Bank owns which are not pledged to the FHLB. At December 31,
2020, the carrying value of loans pledged as collateral totaled
approximately $469.5 million. Availability under the line of credit
with the FRB was $340.0 million at December 31, 2020.
A-59
(8)
Junior
Subordinated Debentures
In June
2006, the Company formed a second 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. The proceeds received by the Company
from the sale of the junior subordinated debentures were used to
repay in December 2006 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 assets 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
interest 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 all the documents
entered into in connection with the trust preferred securities is
that the Company is liable 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.
The
Company redeemed $5.0 million of outstanding trust preferred
securities in December 2019.
(9)
Income
Taxes
The
provision for income taxes is summarized as follows:
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
2018
|
Current
expense
|
$3,049
|
2,972
|
2,546
|
Deferred
income tax expense
|
(560)
|
164
|
78
|
Total
income tax
|
$2,489
|
3,136
|
2,624
|
The
differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to
earnings before income taxes are as follows:
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
2018
|
Tax
expense at statutory rate
|
$2,908
|
3,613
|
3,361
|
State
income tax, net of federal income tax effect
|
261
|
351
|
358
|
Tax-exempt
interest income
|
(649)
|
(802)
|
(990)
|
Increase
in cash surrender value of life insurance
|
(80)
|
(81)
|
(81)
|
Nondeductible
interest and other expense
|
46
|
40
|
23
|
Other
|
3
|
15
|
(47)
|
Total
|
$2,489
|
3,136
|
2,624
|
The following
summarizes the tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities. The net deferred tax asset is included as a
component of other assets at December 31, 2020 and
2019.
A-60
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
Deferred
tax assets:
|
|
|
Allowance
for loan losses
|
$2,276
|
1,535
|
Accrued
retirement expense
|
1,190
|
1,150
|
Restricted
stock
|
190
|
217
|
Accrued
bonuses
|
-
|
265
|
Interest
income on nonaccrual loans
|
1
|
2
|
Lease
liability
|
798
|
838
|
Total
gross deferred tax assets
|
4,455
|
4,007
|
|
|
|
Deferred
tax liabilities:
|
|
|
Deferred
loan fees
|
284
|
343
|
Accumulated
depreciation
|
873
|
873
|
Prepaid
expenses
|
5
|
7
|
ROU
Asset
|
787
|
832
|
Other
|
41
|
47
|
Unrealized
gain on available for sale securities
|
1,611
|
1,087
|
Total
gross deferred tax liabilities
|
3,601
|
3,189
|
|
|
|
Net
deferred tax asset
|
$854
|
818
|
The
Company has analyzed the tax positions taken or expected to be
taken in its tax returns and has concluded that it has no liability
related to uncertain tax positions.
The
Company’s Federal income tax filings for years 2017 through
2020 were at year end 2020 open to audit under statutes of
limitations by the Internal Revenue Service. The Company’s
North Carolina income tax returns are currently under audit for tax
year 2014-2016, tax years 2017, 2018 and 2019 are open to audit
under the statutes of limitations by the North Carolina Department
of Revenue.
(10)
Related
Party Transactions
The
Company conducts transactions with its directors and executive
officers, including companies in which they have beneficial
interests, in the normal course of business. It is the policy of
the Company that loan transactions with directors and officers are
made on substantially the same terms as those prevailing at the
time made for comparable loans to other persons. The following is a
summary of activity for related party loans for 2020 and
2019:
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
Beginning
balance
|
$3,472
|
3,192
|
New
loans
|
4,189
|
5,716
|
Repayments
|
(5,809)
|
(5,436)
|
Ending
balance
|
$1,852
|
3,472
|
At
December 31, 2020 and 2019, the Company had deposit relationships
with related parties of approximately $44.5 million and $30.4
million, respectively.
A
director of the Company has a membership interest in a company that
previously leased two branch facilities to the Bank. The Bank
purchased these branch facilities in September 2020.The
Bank’s lease payments for these facilities totaled $173,000
and $231,000 for the years ended December 31, 2020 and 2019,
respectively.
(11)
Commitments
and Contingencies
The
Bank is party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet. The
contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
A-61
The
exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit
and standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
In most
cases, the Bank requires collateral or other security to support
financial instruments with credit risk.
(Dollars
in thousands)
|
|
|
|
Contractual Amount
|
|
|
2020
|
2019
|
Financial
instruments whose contract amount represent credit
risk:
|
|
|
|
|
|
Commitments
to extend credit
|
$299,039
|
276,338
|
|
|
|
Standby
letters of credit and financial guarantees written
|
$4,745
|
3,558
|
Commitments to
extend credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and because they
may expire without being drawn upon, the total commitment amount of
$303.8 million does not necessarily represent future cash
requirements.
Standby
letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
businesses in the Bank’s delineated market area. The credit
risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The
Bank holds real estate, equipment, automobiles and customer
deposits as collateral supporting those commitments for which
collateral is deemed necessary.
In the
normal course of business, the Company is a party (both as
plaintiff and defendant) to a number of lawsuits. In the opinion of
management and counsel, none of these cases should have a material
adverse effect on the financial position of the
Company.
Bancorp
and the Bank have employment agreements with certain key employees.
The agreements, among other things, include salary, bonus,
incentive compensation, and change in control
provisions.
The
Company has $110.5 million available for the purchase of overnight
federal funds from five correspondent financial institutions as of
December 31, 2020.
At
December 31, 2017, the Bank committed to invest $3.0 million in an
income tax credit partnership owning and developing two multifamily
housing developments in Charlotte, North Carolina, with $1.5
million allocated to each property. The Bank has funded $2.8
million of this commitment at December 31, 2020.
(12)
Employee
and Director Benefit Programs
The
Company has a profit sharing and 401(k) plan for the benefit of
substantially all employees subject to certain minimum age and
service requirements. Under the 401(k) plan, the Company matched
employee contributions to a maximum of 4.00% of annual compensation
in 2018, 2019 and 2020. The Company’s contribution pursuant
to this formula was approximately $692,000, $691,000 and $670,000
for the years ended December 31, 2020, 2019 and 2018, respectively.
Investments of the 401(k) plan are determined by a committee
comprised of senior management. No investments in Company stock
have been made by the 401(k) plan. Contributions to the 401(k) plan
are vested immediately.
In
December 2001, the Company initiated a postretirement benefit plan
to provide retirement benefits to key officers and its Board of
Directors and to provide death benefits for their designated
beneficiaries. Under the postretirement benefit plan, the Company
purchased life insurance contracts on the lives of the key officers
and each director. The increase in cash surrender value of the
contracts constitutes the Company’s contribution to the
postretirement benefit plan each year. Postretirement benefit plan
participants are to be paid annual benefits for a specified number
of years commencing upon retirement. Expenses incurred for benefits
relating to the postretirement benefit plan were approximately
$388,000, $361,000 and $423,000 for the years ended December 31,
2020, 2019 and 2018, respectively.
The
Company is currently paying medical benefits for certain retired
employees. The Company did not incur any postretirement medical
benefits expense in 2020, 2019 and 2018 due to an excess accrual
balance.
A-62
The
following table sets forth the change in the accumulated benefit
obligation for the Company’s two postretirement benefit plans
described above:
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
|
|
|
Benefit
obligation at beginning of period
|
$4,700
|
4,566
|
Service
cost
|
323
|
299
|
Interest
cost
|
63
|
58
|
Benefits
paid
|
(216)
|
(223)
|
|
|
|
Benefit
obligation at end of period
|
$4,870
|
4,700
|
The
amounts recognized in the Company’s Consolidated Balance
Sheet as of December 31, 2020 and 2019 are shown in the following
two tables:
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
|
|
|
Benefit
obligation $
|
4,870
|
4,700
|
Fair
value of plan assets
|
-
|
-
|
(Dollars
in thousands)
|
|
|
|
2020
|
2019
|
|
|
|
Funded
status
|
$(4,870)
|
(4,700)
|
Unrecognized
prior service cost/benefit
|
-
|
-
|
Unrecognized
net actuarial loss
|
-
|
-
|
|
|
|
Net
amount recognized
|
$(4,870)
|
(4,700)
|
|
|
|
Unfunded
accrued liability
|
$(4,870)
|
(4,700)
|
Intangible
assets
|
-
|
-
|
|
|
|
Net
amount recognized
|
$(4,870)
|
(4,700)
|
Net
periodic benefit cost of the Company’s postretirement benefit
plans for the years ended December 31, 2020, 2019 and 2018
consisted of the following:
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
2018
|
|
|
|
|
Service
cost
|
$323
|
299
|
362
|
Interest
cost
|
63
|
58
|
70
|
|
|
|
|
Net
periodic cost
|
$386
|
357
|
432
|
|
|
|
|
Weighted
average discount rate assumption
|
|
|
|
used
to determine benefit obligation
|
5.49%
|
5.49%
|
5.49%
|
The Company paid
benefits under the two postretirement plans totaling $216,000 and
$223,000 during the years ended December 31, 2020 and 2019,
respectively. Information about the expected benefit payments for
the Company’s two postretirement benefit plans is as
follows:
A-63
(Dollars
in thousands)
|
|
|
|
Year ending December 31,
|
|
2021
|
$353
|
2022
|
$342
|
2023
|
$342
|
2024
|
$354
|
2025
|
$370
|
Thereafter
|
$8,345
|
(13)
Regulatory
Matters
The
Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company must meet specific capital guidelines that
involve quantitative measures of the assets, liabilities and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of
capital in relation to both on- and off-balance sheet items at
various risk weights. Total capital consists of two tiers of
capital. Tier 1 capital includes common shareholders’ equity
and trust preferred securities less adjustments for intangible
assets. Tier 2 capital consists of the allowance for loan losses,
up to 1.25% of risk-weighted assets and other adjustments.
Management believes, as of December 31, 2020, that the Company and
the Bank meet all capital adequacy requirements to which they are
subject.
As of
December 31, 2020, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table
below. There have been no conditions or events since that
notification that management believes have changed the Bank’s
category.
In
2013, the FRB approved its final rule on the Basel III capital
standards, which implement changes to the regulatory capital
framework for banking organizations. The Basel III capital
standards, which became effective January 1, 2015, include new
risk-based capital and leverage ratios, which were phased in from
2015 to 2019. The new minimum capital level requirements applicable
to the Company and the Bank under the final rules are as follows:
(i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1
capital ratio of 6% (increased from 4%); (iii) a total risk based
capital ratio of 8% (unchanged from previous rules); and (iv) a
Tier 1 leverage ratio of 4% (unchanged from previous rules). An
additional capital conservation buffer was added to the minimum
requirements for capital adequacy purposes beginning on January 1,
2016 and was phased in through 2019 (increasing by 0.625% on
January 1, 2016 and each subsequent January 1, until it reached
2.5% on January 1, 2019). This resulted in the following minimum
ratios beginning in 2019: (i) a common equity Tier 1 capital ratio
of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total
capital ratio of 10.5%. Under the final rules, institutions would
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 establish a
maximum percentage of eligible retained earnings that could be
utilized for such actions.
The Company’s
and the Bank’s actual capital amounts and ratios are
presented below:
A-64
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Actual
|
Minimum Regulatory Capital Ratio
|
Minimum Ratio plus Capital Conservation Buffer
|
|||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
As
of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$159,407
|
16.07%
|
79,372
|
8.00%
|
N/A
|
N/A
|
Bank
|
$157,106
|
15.85%
|
79,283
|
8.00%
|
104,059
|
10.50%
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$149,499
|
15.07%
|
59,529
|
6.00%
|
N/A
|
N/A
|
Bank
|
$147,198
|
14.85%
|
59,462
|
6.00%
|
84,238
|
8.50%
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
Consolidated
|
$149,499
|
10.24%
|
58,378
|
4.00%
|
N/A
|
N/A
|
Bank
|
$147,198
|
10.04%
|
58,662
|
4.00%
|
58,662
|
4.00%
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$134,499
|
13.56%
|
44,647
|
4.50%
|
N/A
|
N/A
|
Bank
|
$147,198
|
14.85%
|
44,597
|
4.50%
|
69,373
|
7.00%
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Actual
|
Minimum Regulatory Capital Ratio
|
Minimum Ratio plus Capital Conservation Buffer
|
|||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
As
of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$152,156
|
16.08%
|
75,710
|
8.00%
|
N/A
|
N/A
|
Bank
|
$149,266
|
15.79%
|
75,602
|
8.00%
|
99,228
|
10.50%
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$145,476
|
15.37%
|
56,783
|
6.00%
|
N/A
|
N/A
|
Bank
|
$142,586
|
15.09%
|
56,702
|
6.00%
|
80,328
|
8.50%
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
Consolidated
|
$145,476
|
11.91%
|
48,872
|
4.00%
|
N/A
|
N/A
|
Bank
|
$142,586
|
11.61%
|
49,106
|
4.00%
|
49,106
|
4.00%
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$130,476
|
13.79%
|
42,587
|
4.50%
|
N/A
|
N/A
|
Bank
|
$142,586
|
15.09%
|
42,526
|
4.50%
|
66,152
|
7.00%
|
(14)
Shareholders’
Equity
Shareholders’
equity was $139.9 million, or 9.89% of total assets, at December
31, 2020, compared to 134.1 million, or 11.61% of total assets, at
December 31, 2019. The increase in shareholders’ equity is
primarily due to an increase in retained earnings due to net
income.
Annualized return
on average equity for the year ended December 31, 2020 was 8.01%
compared to 10.45% for the year ended December 31, 2019. Total cash
dividends paid on common stock were $4.4 million and $3.9 million
for the years ended December 31, 2020 and 2019,
respectively.
The
Board of Directors, at its discretion, can issue shares of
preferred stock up to a maximum of 5,000,000 shares. The Board is
authorized to determine the number of shares, voting powers,
designations, preferences, limitations and relative rights. The
Board of Directors does not currently anticipate issuing shares of
preferred stock.
In
2019, the Company’s Board of Directors authorized a stock
repurchase program, whereby up to $5 million will be allocated to
repurchase the Company’s common stock. Any purchases under
the Company’s stock repurchase program may be made
periodically as permitted by securities laws and other legal
requirements in the open market or in privately-negotiated
transactions. The timing and amount of any repurchase of shares
will be determined by the Company’s management, based on its
evaluation of market conditions and other factors. The stock
repurchase program may be suspended at any time or from
time-to-time without prior notice.
A-65
The
Company has repurchased approximately $2.5 million, or 90,354
shares of its common stock, under this stock repurchase program as
of December 31, 2019.
In
2020, the Company’s Board of Directors authorized a stock
repurchase program, whereby up to $3 million will be allocated to
repurchase the Company’s common stock. Any purchases under
the Company’s stock repurchase program may be made
periodically as permitted by securities laws and other legal
requirements in the open market or in privately-negotiated
transactions. The timing and amount of any repurchase of shares
will be determined by the Company’s management, based on its
evaluation of market conditions and other factors. The stock
repurchase program may be suspended at any time or from
time-to-time without prior notice. The Company has repurchased
approximately $3.0 million, or 126,800 shares of its common stock,
under this stock repurchase program as of December 31,
2020.
(15)
Other
Operating Income and Expense
Miscellaneous
non-interest income for the years ended December 31, 2020, 2019 and
2018 included the following items:
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
2018
|
Visa
debit card income
|
$4,237
|
4,145
|
3,911
|
Bank
owned life insurance income
|
380
|
383
|
384
|
Gain
(loss) on sale of premises and equipment
|
-
|
(239)
|
544
|
Other
|
1,315
|
1,320
|
1,354
|
|
$5,932
|
5,609
|
6,193
|
Other
non-interest expense for the years ended December 31, 2020, 2019
and 2018 included the following items:
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
2018
|
ATM
expense
|
$567
|
579
|
542
|
Consulting
|
1,078
|
972
|
1,012
|
Data
processing
|
635
|
616
|
466
|
Deposit
program expense
|
426
|
515
|
586
|
Dues
and subscriptions
|
538
|
421
|
421
|
FHLB
advance prepayment penalty
|
1,100
|
-
|
-
|
Internet
banking expense
|
729
|
681
|
603
|
Office
supplies
|
538
|
467
|
503
|
Telephone
|
794
|
802
|
678
|
Other
|
2,139
|
2,921
|
2,834
|
|
$8,544
|
7,974
|
7,645
|
(16)
Fair
Value of Financial Instruments
The
Company is required to disclose fair value information about
financial instruments, whether or not recognized on the face of the
balance sheet, for which it is practicable to estimate that value.
The assumptions used in the estimation of the fair value of the
Company’s financial instruments are detailed below. Where
quoted prices are not available, fair values are based on estimates
using discounted cash flows and other valuation techniques. The use
of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the Company, but
rather a good faith estimate of the increase or decrease in the
value of financial instruments held by the Company since purchase,
origination, or issuance.
The
Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine
fair value. These levels are:
●
Level 1 –
Valuation is based upon quoted prices for identical instruments
traded in active markets.
●
Level 2 –
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in
the market.
A-66
●
Level 3 –
Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar
techniques.
Cash and Cash Equivalents
For
cash, due from banks and interest-bearing deposits, the carrying
amount is a reasonable estimate of fair value. Cash and cash
equivalents are reported in the Level 1 fair value
category.
Investment Securities Available for Sale
Fair
values of investment securities available for sale are determined
by obtaining quoted prices on nationally recognized securities
exchanges when available. If quoted prices are not available, fair
value is determined using matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities
without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’
relationship to other benchmark quoted securities. Fair values for
investment securities with quoted market prices are reported in the
Level 1 fair value category. Fair value measurements obtained from
independent pricing services are reported in the Level 2 fair value
category. All other fair value measurements are reported in the
Level 3 fair value category.
Other Investments
For
other investments, the carrying value is a reasonable estimate of
fair value. Other investments are reported in the Level 3 fair
value category.
Mortgage Loans Held for Sale
Mortgage loans held
for sale are carried at lower of aggregate cost or market value.
The cost of mortgage loans held for sale approximates the market
value. Mortgage loans held for sale are reported in the Level 3
fair value category.
Loans
The
fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings. For
variable rate loans, the carrying amount is a reasonable estimate
of fair value. Loans are reported in the Level 3 fair value
category, as the pricing of loans is more subjective than the
pricing of other financial instruments.
Cash Surrender Value of Life Insurance
For
cash surrender value of life insurance, the carrying value is a
reasonable estimate of fair value. Cash surrender value of life
insurance is reported in the Level 2 fair value
category.
Other Real Estate
The
fair value of other real estate is based upon independent market
prices, appraised values of the collateral or management’s
estimation of the value of the collateral. Other real estate is
reported in the Level 3 fair value category.
Deposits
The
fair value of demand deposits, interest-bearing demand deposits and
savings is the amount payable on demand at the reporting date. The
fair value of certificates of deposit is estimated by discounting
the future cash flows using the rates currently offered for
deposits of similar remaining maturities. Deposits are reported in
the Level 2 fair value category.
Securities Sold Under Agreements to Repurchase
For
securities sold under agreements to repurchase, the carrying value
is a reasonable estimate of fair value. Securities sold under
agreements to repurchase are reported in the Level 2 fair value
category.
FHLB Borrowings
The
fair value of FHLB borrowings is estimated based upon discounted
future cash flows using a discount rate comparable to the current
market rate for such borrowings. FHLB borrowings are reported in
the Level 2 fair value category.
Junior Subordinated Debentures
Because
the Company’s junior subordinated debentures were issued at a
floating rate, the carrying amount is a reasonable estimate of fair
value. Junior subordinated debentures are reported in the Level 2
fair value category.
A-67
Commitments
to Extend Credit and Standby Letters of Credit
Commitments to
extend credit and standby letters of credit are generally
short-term and at variable interest rates. Therefore, both the
carrying value and estimated fair value associated with these
instruments are immaterial.
Limitations
Fair
value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the
Company’s entire holdings of a particular financial
instrument. Because no market exists for a significant portion of
the Company’s financial instruments, fair value estimates are
based on many judgments. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair
value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets
and liabilities that are not considered financial instruments
include deferred income taxes and premises and equipment. In
addition, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in the
estimates.
The
fair value presentation for recurring assets is presented in Note
2. There were no recurring liabilities at December 31, 2020 and
2019. The fair value presentation for non-recurring assets is
presented in Note 3. There were no non-recurring liabilities at
December 31, 2020 and 2019. The carrying amount and estimated fair
value of the Company’s financial instruments at December 31,
2020 and 2019 are as follows:
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020
|
|||
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$161,580
|
161,580
|
-
|
-
|
161,580
|
Investment
securities available for sale
|
$245,249
|
-
|
245,249
|
-
|
245,249
|
Other
investments
|
$4,155
|
-
|
-
|
4,155
|
4,155
|
Mortgage
loans held for sale
|
$9,139
|
-
|
-
|
9,139
|
9,139
|
Loans,
net
|
$938,731
|
-
|
-
|
924,845
|
924,845
|
Cash
surrender value of life insurance
|
$16,968
|
-
|
16,968
|
-
|
16,968
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Deposits
|
$1,221,086
|
-
|
-
|
1,216,503
|
1,216,503
|
Securities
sold under agreements
|
|
|
|
|
|
to
repurchase
|
$26,201
|
-
|
26,201
|
-
|
26,201
|
Junior
subordinated debentures
|
$15,464
|
-
|
15,464
|
-
|
15,464
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31,
2019
|
|||
|
Carrying Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
$52,387
|
52,387
|
-
|
-
|
52,387
|
Investment
securities available for sale
|
$195,746
|
-
|
195,496
|
250
|
195,746
|
Other
investments
|
$4,231
|
-
|
-
|
4,231
|
4,231
|
Mortgage
loans held for sale
|
$4,417
|
-
|
-
|
4,417
|
4,417
|
Loans,
net
|
$843,194
|
-
|
-
|
819,397
|
819,397
|
Cash
surrender value of life insurance
|
$16,319
|
-
|
16,319
|
-
|
16,319
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Deposits
|
$966,517
|
-
|
-
|
955,766
|
955,766
|
Securities
sold under agreements
|
|
|
|
|
|
to
repurchase
|
$24,221
|
-
|
24,221
|
-
|
24,221
|
Junior
subordinated debentures
|
$15,619
|
-
|
15,619
|
-
|
15,619
|
A-68
(17)
Peoples
Bancorp of North Carolina, Inc. (Parent Company Only) Condensed
Financial Statements
Balance Sheets
December 31, 2020 and 2019
(Dollars in thousands)
Assets
|
2020
|
2019
|
|
|
|
Cash
|
$664
|
1,187
|
Interest-bearing
time deposit
|
1,000
|
1,000
|
Investment
in subsidiaries
|
152,598
|
146,230
|
Investment
in PEBK Capital Trust II
|
464
|
619
|
Investment
securities available for sale
|
-
|
250
|
Other
assets
|
650
|
476
|
|
|
|
Total
assets
|
$155,376
|
149,762
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
Junior
subordinated debentures
|
$15,464
|
15,619
|
Liabilities
|
13
|
23
|
Shareholders'
equity
|
139,899
|
134,120
|
|
|
|
Total
liabilities and shareholders' equity
|
$155,376
|
149,762
|
Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
Revenues:
|
2020
|
2019
|
2018
|
|
|
|
|
Interest
and dividend income
|
$7,539
|
12,850
|
4,544
|
|
|
|
|
Total
revenues
|
7,539
|
12,850
|
4,544
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Interest
|
370
|
844
|
790
|
Other
operating expenses
|
625
|
629
|
678
|
|
|
|
|
Total
expenses
|
995
|
1,473
|
1,468
|
|
|
|
|
Income
before income tax benefit and equity in
|
|
|
|
undistributed
earnings of subsidiaries
|
6,544
|
11,377
|
3,076
|
|
|
|
|
Income
tax benefit
|
201
|
299
|
299
|
|
|
|
|
Income
before equity in undistributed
|
|
|
|
earnings
of subsidiaries
|
6,745
|
11,676
|
3,375
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
4,612
|
2,391
|
10,007
|
|
|
|
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
A-69
Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
2020
|
2019
|
2018
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
earnings
|
$11,357
|
14,067
|
13,382
|
Adjustments
to reconcile net earnings to net
|
|
|
|
cash
provided by operating activities:
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
(4,612)
|
(2,391)
|
(10,007)
|
Change
in:
|
|
|
|
Other
assets
|
(19)
|
57
|
13
|
Other
liabilities
|
(10)
|
(13)
|
6
|
|
|
|
|
Net
cash provided by operating activities
|
6,716
|
11,720
|
3,394
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from calls and maturities of investment securities
|
|
|
|
available
for sale
|
250
|
-
|
-
|
|
|
|
|
Net
cash provided by investing activities
|
250
|
-
|
-
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Repayment
of junior subordinated debentures
|
(155)
|
(5,000)
|
-
|
Cash
dividends paid on common stock
|
(4,392)
|
(3,939)
|
(3,133)
|
Stock
repurchase
|
(2,999)
|
(2,490)
|
-
|
Proceeds
from exercise of restricted stock units
|
57
|
207
|
-
|
|
|
|
|
Net
cash used by financing activities
|
(7,489)
|
(11,222)
|
(3,133)
|
|
|
|
|
Net
change in cash
|
(523)
|
498
|
261
|
|
|
|
|
Cash
at beginning of year
|
1,187
|
689
|
428
|
|
|
|
|
Cash
at end of year
|
$664
|
1,187
|
689
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
Change
in unrealized gain on investment securities
|
|
|
|
available
for sale, net
|
$1,756
|
2,658
|
(2,607)
|
(18)
Quarterly
Data
|
2020
|
2019
|
||||||
(Dollars in thousands, except per share
amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
Total interest
income
|
$12,250
|
11,638
|
11,868
|
12,202
|
$12,183
|
12,375
|
12,430
|
12,613
|
Total interest
expense
|
1,041
|
912
|
942
|
941
|
757
|
781
|
994
|
1,225
|
Net interest income
|
11,209
|
10,726
|
10,926
|
11,261
|
11,426
|
11,594
|
11,436
|
11,388
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
1,521
|
1,417
|
522
|
799
|
178
|
77
|
422
|
186
|
Other
income
|
4,595
|
5,239
|
7,132
|
5,948
|
4,120
|
4,385
|
4,708
|
4,526
|
Other
expense
|
11,449
|
11,452
|
11,914
|
14,116
|
10,916
|
11,244
|
11,267
|
12,090
|
Income before income taxes
|
2,834
|
3,096
|
5,622
|
2,294
|
4,452
|
4,658
|
4,455
|
3,638
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
467
|
535
|
1,113
|
374
|
785
|
845
|
834
|
672
|
Net earnings
|
2,367
|
2,561
|
4,509
|
1,920
|
3,667
|
3,813
|
3,621
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$0.40
|
0.44
|
0.78
|
0.33
|
$0.61
|
0.64
|
0.62
|
0.50
|
Diluted net earnings per share
|
$0.40
|
0.44
|
0.78
|
0.33
|
$0.61
|
0.64
|
0.61
|
0.50
|
A-70
(19)
Subsequent
Events
The
Company has reviewed and evaluated subsequent events and
transactions for material subsequent events through the date the
financial statements are issued.
On
December 27, 2020, the Economic Aid to Hard-Hit Small Businesses,
Nonprofits and Venues Act (the “Economic Aid Act”)
became law. The Economic Aid Act reopened and expanded the PPP loan
program through March 31, 2021. The changes to the PPP program
allow new borrowers to apply for a loan under the original PPP loan
program and the creation of an additional PPP loan for eligible
borrowers. The Economic Aid Act also revises certain PPP
requirements, including aspects of loan forgiveness on existing PPP
loans. As of March 12, 2021, the Bank had originated $17.9
million in PPP loans under the expanded PPP loan program. The
Bank expects to receive approximately $967,000 in fees from the SBA
for PPP loans originated under the expanded PPP loan program as of
March 12, 2021.
The
outstanding balance of PPP loans originated in 2020 was $55.7
million at March 12, 2021, as compared to $75.8 million at December
31, 2020. The decrease from December 31, 2020 to March 12,
2021 was primarily due to PPP loans being forgiven by the
SBA.
A-71
DIRECTORS AND OFFICERS OF THE COMPANY
DIRECTORS
Robert C. Abernethy – Chairman
Chairman
of the Board, Peoples Bancorp of North Carolina, Inc. and Peoples
Bank;
President,
Secretary and Treasurer, Carolina Glove Company, Inc. (glove
manufacturer)
Secretary
and Assistant Treasurer, Midstate Contractors, Inc. (paving
company)
James S. Abernethy
Vice
President, Carolina Glove Company, Inc. (glove
manufacturer)
President
and Assistant Secretary, Midstate Contractors, Inc. (paving
company)
Vice
President, Secretary and Chairman of the Board of Directors,
Alexander Railroad Company
Douglas S. Howard
Vice
President and Treasurer, Denver Equipment Company of Charlotte,
Inc.
John W. Lineberger, Jr.
President,
Lincoln Bonded Warehouse Company (commercial warehousing
facility)
Gary E. Matthews
President
and Director, Matthews Construction Company, Inc. (general
contractor)
Billy L. Price, Jr. MD
Practitioner
of Internal Medicine, BL Price Jr. Medical Consultants,
PLLC
Larry E. Robinson
Shareholder,
Director, Chairman of the Board and Chief Executive Officer, The
Blue Ridge Distributing Co., Inc. (beer and wine
distributor)
Director
and member of the Board of Directors, United Beverages of North
Carolina, LLC (beer distributor)
William Gregory (Greg) Terry
President,
Hole-In-One Advantage, LLC
Director/Consultant,
Drum & Willis-Reynolds Funeral Homes and Crematory
Dan Ray Timmerman, Sr.
Chairman
of the Board and Chief Executive Officer, Timmerman Manufacturing,
Inc. (wrought iron furniture, railings and gates
manufacturer)
Benjamin I. Zachary
President,
Treasurer, General Manager and Director, Alexander Railroad
Company
OFFICERS
Lance A. Sellers
President
and Chief Executive Officer
Jeffrey N. Hooper
Executive
Vice President, Chief Financial Officer, Corporate Treasurer and
Assistant Corporate Secretary
William D. Cable, Sr.
Executive
Vice President, Corporate Secretary and Assistant Corporate
Treasurer
A-72