PEOPLES BANCORP OF NORTH CAROLINA INC
10-Ks and 10-Qs
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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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SCHEDULE 14A
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(Rule 14a-101)
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Proxy Statement Pursuant to Section 14(a)
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of the Securities Exchange Act of 1934
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Filed by the Registrant
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[X ]
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Filed by a Party other than the Registrant
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[ ]
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Check the appropriate box:
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Preliminary Proxy Statement
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[ ]
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Confidential, for Use of the Commission
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[X]
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Definitive Proxy Statement
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Only (as permitted by Rule 14a-6(e)(2))
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[ ]
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Definitive Additional Materials
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Soliciting Material Pursuant to
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§240.14a-1
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Peoples
Bancorp of North Carolina, Inc.
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(Name
of Registrant as Specified In Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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[X]
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No fee required.
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[ ]
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title of each class of securities to which transaction
applies:
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(2)
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Aggregate number of securities to which transaction
applies:
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(3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was
determined):
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(4)
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Proposed maximum aggregate value of transaction:
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(5)
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Total fee paid:
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[ ]
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Fee paid previously with preliminary materials:
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[ ]
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Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No:
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(3)
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Filing Party:
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(4)
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Date Filed:
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Notice
of 2019 Annual Meeting,
Proxy
Statement and
Annual
Report
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
PROXY STATEMENT
Table
of Contents
Page
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Notice
of 2019 Annual Meeting of Shareholders
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iii
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Proxy
Statement
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1
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Information
About The Annual Meeting
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1
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Security
Ownership Of Certain Beneficial Owners and Management
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5
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Section
16(a) Beneficial Ownership Reporting Compliance
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7
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Proposal
1 - Election of Directors
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7
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Director
Nominees
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8
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Executive Officers
of the Company
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10
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How
often did our Board of Directors meet during 2018?
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10
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What
is our policy for director attendance at Annual
Meetings?
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10
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How
can you communicate with the Board or its members?
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10
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Board
Leadership Structure and Risk Oversight
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10
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Code
of Business Conduct and Ethics
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11
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Diversity
of the Board of Directors
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11
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How
can a shareholder nominate someone for election to the Board of
Directors?
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11
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Who
serves on the Board of Directors of the Bank?
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12
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Board
Committees
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12
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Executive
Committee
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12
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Governance
Committee
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12
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Audit
and Enterprise Risk Committee
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12
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Compensation
Discussion and Analysis
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14
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Summary
Compensation Table
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18
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Grants
of Plan-Based Awards
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19
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Outstanding
Equity Awards at Fiscal Year End
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19
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Option
Exercises and Stock Vested
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19
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Pension
Benefits
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20
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Nonqualified
Deferred Compensation
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21
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Employment
Agreements
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21
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Potential
Payments upon Termination or Change in Control
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22
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Omnibus Stock
Option and Long Term Incentive Plan
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22
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Director
Compensation
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25
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Indebtedness
of and Transactions with Management and Directors
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26
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Equity
Compensation Plan Information
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28
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i
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Stock performance Graph
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29
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Advisory (Non-Binding) Proposal to Approve the Compensation of the
Company's Named Executive Officers
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30
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Advisory
(Non-Binding) Proposal on the Frequency in Which Shareholders
Approve the Compensation of the Company's Named Executive
Officers
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30
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Proposal
4 - Ratification of Selection of Independent Registered Public
Accounting Firm
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31
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Audit
Fees Paid to Independent Auditors
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31
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Date
for Receipt of Shareholder Proposals
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32
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Other
Matters
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32
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Miscellaneous
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32
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Appendix
A Annual Report
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33
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ii
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Post Office Box 467
518 West C Street
Newton, North Carolina 28658-0467
(828) 464-5620
NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 2, 2019
NOTICE
IS HEREBY GIVEN that the 2019 Annual Meeting of Shareholders of
Peoples Bancorp of North Carolina, Inc. (the “
Company
”) will be held as
follows:
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Place:
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Catawba
Country Club
1154
Country Club Road
Newton,
North Carolina
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Date:
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May 2,
2019
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Time:
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11:00
a.m., Eastern Time
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The
purposes of the Annual Meeting are to consider and vote upon the
following matters:
●
To elect ten
persons who will serve as members of the Board of Directors until
the 2020 Annual Meeting of Shareholders or until their successors
are duly elected and qualified;
●
To participate in
an advisory (non-binding) vote to approve the compensation of the
Company’s named executive officers, as disclosed in the Proxy
Statement;
●
To participate in
an advisory (non-binding) vote on the frequency in which
shareholders approve the compensation of the Company’s named
executive officers.
●
To ratify the
appointment of Elliott Davis, PLLC as the Company’s
independent registered public accounting firm for the fiscal year
ending December 31, 2019; and
●
To consider and act
on any other matters that may properly come before the Annual
Meeting or any adjournment.
The
Board of Directors has established March 8, 2019, as the record
date for the determination of shareholders entitled to notice of
and to vote at the Annual Meeting. If an insufficient number of
shares is present in person or by proxy to constitute a quorum at
the time of the Annual Meeting, the Annual Meeting may be adjourned
in order to permit further solicitation of proxies by the
Company.
Your vote is important and will help protect your account from
escheatment. We urge you to vote as soon as possible so that your
shares may be voted in accordance with your wishes. You may vote by
executing and returning your proxy card in the accompanying
envelope, or by voting electronically over the Internet or by
telephone. Please refer to the proxy card enclosed for information
on voting electronically. If you attend the Annual Meeting, you may
vote in person and the proxy will not be used.
By
Order of the Board of Directors,
Lance
A. Sellers
President and Chief
Executive Officer
Newton,
North Carolina
March
25, 2019
iii
PEOPLES BANCORP OF NORTH CAROLINA, INC.
______________________________________
PROXY STATEMENT
______________________________________
Annual Meeting of Shareholders
To Be Held On May 2, 2019
_____________________________________
This
Proxy Statement is being mailed to our shareholders on or about
March 25, 2019, for solicitation of proxies by the Board of
Directors of Peoples Bancorp of North Carolina, Inc. Our principal
executive offices are located at 518 West C Street, Newton, North
Carolina 28658. Our telephone number is (828)
464-5620.
In this
Proxy Statement, the terms “
we
,” “
us
,” “
our
” and the
“
Company
” refer to Peoples
Bancorp of North Carolina, Inc. The term “
Bank
” means Peoples Bank,
our wholly-owned, North Carolina-chartered bank subsidiary. The
terms “
you
” and
“
your
”
refer to the shareholders of the Company.
Important Notice Regarding the Availability of Proxy Materials for
the Shareholder Meeting to Be Held on
May 2, 2019. The Notice, Proxy Statement and the Annual Report to
Shareholders for the year ended
December 31, 2018 are also available at
https://www.snl.com/IRWebLinkX/GenPage.aspx?IID=4050385&GKP=202713
You may also access the above off-site website by going to
www.peoplesbanknc.com
and click on the link.
INFORMATION ABOUT THE ANNUAL MEETING
Your
vote is very important. For this reason, our Board of Directors is
requesting that you allow your common stock to be represented at
the 2019 Annual Meeting of Shareholders by the proxies named on the
enclosed proxy card.
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When is the Annual
Meeting?
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May 2, 2019, at 11
a.m., Eastern Time.
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Where will the Annual Meeting be
held?
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At the Catawba
Country Club, 1154 Country Club Road, Newton, North
Carolina.
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What
items will be voted on at the
Annual Meeting?
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1.
ELECTION OF
DIRECTORS. To elect ten directors to serve until the 2020 Annual
Meeting of Shareholders.
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2.
PARTICIPATION IN
ADVISORY VOTE (“SAY ON PAY”). To participate in
an advisory (non-binding) vote to approve the compensation of the
Company’s named executive officers, as disclosed in the Proxy
Statement.
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3.
PARTICIPATION IN
ADVISORY VOTE (“SAY ON FREQUENCY”). To
participate in an advisory (non-binding) vote to determine the
frequency in which shareholders approve the compensation of the
Company’s named executive officers, as disclosed in the Proxy
Statement
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1
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4.
RATIFICATION OF
SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. To
ratify the appointment of Elliott Davis, PLLC ("Elliott Davis") as
the Company's independent registered public
accounting firm for
fiscal year 2019.
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5.
OTHER
BUSINESS. To consider any other business as may properly come
before the Annual Meeting or any adjournment.
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Who can vote?
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Only
holders of record of our common stock at the close of business on
March 8, 2019 (the “Record Date”) will be entitled to
notice of and to vote at the Annual Meeting and any adjournment of
the Annual Meeting. On the Record Date, there were 5,997,136 shares
of our common stock outstanding and entitled to vote and 658
shareholders of record.
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How do I vote by proxy?
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You may
vote your shares by marking, signing and dating the enclosed proxy
card and returning it in the enclosed postage-paid envelope or by
voting electronically over the Internet or by telephone using the
information on the proxy card. If you return your signed proxy card
before the Annual Meeting, the proxies will vote your shares as you
direct. The Board of Directors has appointed proxies to represent
shareholders who cannot attend the Annual Meeting in
person.
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For the
election of directors, you may vote for (1) all of the nominees,
(2) none of the nominees, or (3) all of the nominees except those
you designate. If a nominee for election as a director becomes
unavailable for election at any time at or before the Annual
Meeting, the proxies will vote your shares for a substitute
nominee. For each other item of business, you may vote
“FOR” or “AGAINST” or you may
“ABSTAIN” from voting.
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If you
return your signed proxy card but do not specify how you want to
vote your shares, the proxies will vote them “FOR” the
election of all of our nominees for directors and “FOR”
all other proposals presented in this Proxy Statement in accordance
with recommendations from the Board of Directors.
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If your
shares are held in the name of a broker or other nominee
(
i.e.,
held in
“street name”), you will need to obtain a proxy
instruction card from the broker holding your shares and return the
card as directed by your broker.
Your broker is not
permitted to vote on your behalf on the election of directors
unless you provide specific instructions by following the
instructions from your broker about voting your shares by telephone
or Internet or completing and returning the voting instruction card
provided by your broker. For your vote to be counted in the
election of directors you will need to communicate your voting
decision to your bank, broker or other holder of record before the
date of the Annual Meeting.
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2
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We are
not aware of any other matters to be brought before the Annual
Meeting. If matters other than those discussed above are properly
brought before the Annual Meeting, the proxies may vote your shares
in accordance with their best judgment.
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How do I change or revoke my proxy?
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You can
change or revoke your proxy at any time before it is voted at the
Annual Meeting in any of three ways: (1) by delivering a written
notice of revocation to the Secretary of the Company; (2) by
delivering another properly signed proxy card to the Secretary of
the Company with a more recent date than your first proxy card or
by changing your vote by telephone or the Internet; or (3) by
attending the Annual Meeting and voting in person. You should
deliver your written notice or superseding proxy to the Secretary
of the Company at our principal executive offices listed
above.
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How many votes can I cast?
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You are
entitled to one vote for each share held as of the Record Date on
each nominee for election and each other matter presented for a
vote at the Annual Meeting. You may not vote your shares
cumulatively in the election of directors.
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How many votes are required to approve the proposals?
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If a
quorum is present at the Annual Meeting, each director nominee will
be elected by a plurality of the votes cast in person or by proxy.
If you withhold your vote on a nominee, your shares will not be
counted as having voted for that nominee. The proposal to ratify
the appointment of the Company’s independent registered
public accounting firm for 2019 will be approved if the votes cast
in favor exceed the votes cast in opposition.
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The
proposal to approve the compensation of the Company’s named
executive officers is advisory only; however, the Company’s
Compensation Committee will consider the outcome of the vote when
evaluating compensation arrangements for executive
compensation.
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The
proposal to vote on the frequency in which the shareholders approve
the compensation of the Company’s named executive officers is
advisory only; however the Board of Directors will consider the
outcome of the vote when determining the frequency in which the
compensation of the Company’s named executive officers is
submitted to the shareholders for approval.
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Any
other matters properly coming before the Annual Meeting for a vote
will require the affirmative vote of the holders of a majority of
the shares represented in person or by proxy at the Annual Meeting
and entitled to vote on that matter.
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In the
event there are insufficient votes present at the Annual Meeting
for a quorum or to approve or ratify any proposal, the Annual
Meeting may be adjourned in order to permit the further
solicitation of proxies.
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3
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What constitutes a “quorum” for the Annual
Meeting?
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A
majority of the outstanding shares of our common stock entitled to
vote at the Annual Meeting, present in person or represented by
proxy, constitutes a quorum (a quorum is necessary to conduct
business at the Annual Meeting). Your shares will be considered
part of the quorum if you have voted your shares by proxy or by
telephone or Internet. Abstentions, broker non-votes and votes
withheld from any director nominee count as shares present at the
Annual Meeting for purposes of determining a quorum.
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Who pays for the solicitation of proxies?
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We will
pay the cost of preparing, printing and mailing materials in
connection with this solicitation of proxies. In addition to
solicitation by mail, our officers, directors and regular
employees, as well as those of the Bank, may make solicitations
personally, by telephone or otherwise without additional
compensation for doing so. We reserve the right to engage a proxy
solicitation firm to assist in the solicitation of proxies for the
Annual Meeting. We will, upon request, reimburse brokerage firms,
banks and others for their reasonable out-of-pocket expenses in
forwarding proxy materials to beneficial owners of stock or
otherwise in connection with this solicitation of
proxies.
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4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The
Exchange Act requires that any person who acquires the beneficial
ownership of more than five percent (5%) of the Company’s
common stock notify the Securities and Exchange Commission (the
“
SEC
”)
and the Company. Following is certain information, as of the Record
Date, regarding those persons or groups who held of record, or who
are known to the Company to own beneficially, more than five
percent (5%) of the Company’s outstanding common
stock.
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Name and Address
of Beneficial Owner
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Amount and
Nature of
Beneficial
Ownership
1
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Percent of
Class
2
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Christine
S. Abernethy
P.O.
Box 386
Newton,
NC 28658
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725,338
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3
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12.09
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%
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Tontine
Financial Partners, LP
55
Railroad Avenue, 3rd Floor
Greenwich,
CT 06830-6378
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387,936
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4
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6.47
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% |
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Tontine
Management, LLC
55
Railroad Avenue
Greenwich,
CT 06830
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387,936
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5
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6.47
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%
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Tontine
Asset Associates, LLC
55
Railroad Avenue
Greenwich,
CT 06830
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144,475
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6
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2.41
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%
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Jeffrey
L. Gendell
55
Railroad Avenue
Greenwich,
CT 06830
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532,411
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7
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8.88
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%
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________________________________
1
Unless otherwise
noted, all shares are owned directly of record by the named
individuals, by their spouses and minor children, or by other
entities controlled by the named individuals. Voting and investment
power is not shared unless otherwise indicated.
2
Based upon a total
of 5,997,136 shares of common stock outstanding as of the Record
Date.
3
Carolina Glove
Company, Inc. owns 118,363 shares of common stock. These shares are
included in the calculation of Ms. Abernethy’s total
beneficial ownership interest. Ms. Abernethy owns approximately 50%
of the stock of Carolina Glove Company, Inc. The business is
operated by a family committee. Ms. Abernethy has no active
day-to-day participation in the business affairs of Carolina Glove
Company, Inc.
4
Based on a Schedule
13G/A (Amendment No. 8) filed by Tontine Financial Partners, L.P.,
Tontine Management, LLC, Tontine Overseas Associates, LLC, Tontine
Asset Associates, LLC and Jeffrey L. Gendell with the SEC on
February 14, 2019 (the “
2019 Schedule 13G/A
”).
Represents the number of shares of common stock owned directly by
Tontine Financial Partners, L.P.
5
Based
on the 2019 Schedule 13G/A, Tontine Management, LLC is the general
partner of Tontine Financial Partners, L.P. Represents the number
of shares of common stock owned by Tontine Financial Partners,
L.P.
6
Based
on the 2019 Schedule 13G/A, Tontine Asset Associates, LLC is the
general partner of Tontine Capital Overseas Master Fund II, LP.
Represents the number of shares of common stock owned by Tontine
Capital Overseas Master Fund II, LP.
7
Represents the
number of shares of common stock owned directly by Tontine
Financial Partners, L.P. and Tontine Capital Overseas Master Fund
II, LP.
5
Set
forth below is certain information, as of the Record Date (unless
otherwise indicated), regarding those shares of common stock owned
beneficially by each of the persons who currently serves as a
member of the Board of Directors, is a nominee for election to the
Board of Directors at the Annual Meeting, or is a named executive
officer of the Company. Also shown is the number of shares of
common stock owned by the directors and executive officers of the
Company as a group.
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Name and
Address
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Amount and
Nature of
Beneficial
Ownership
1
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Percentage
of Class
2
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James
S. Abernethy
Post
Office Box 327
Newton,
NC 28658
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157,369
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3
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2.62
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%
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Robert
C. Abernethy
Post
Office Box 366
Newton,
NC 28658
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172,386
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4
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2.87
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%
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William
D. Cable, Sr.
Post
Office Box 467
Newton,
NC 28658
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22,984
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*
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Douglas
S. Howard
Post
Office Box 587
Denver,
NC 28037
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19,673
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5
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*
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A.
Joseph Lampron, Jr.
Post
Office Box 467
Newton,
NC 28658
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16,803
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*
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John W.
Lineberger, Jr.
Post
Office Box 481
Lincolnton,
NC 28092
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4,352
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*
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Gary E.
Matthews
210
First Avenue South
Conover,
NC 28613
|
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25,701
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*
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Billy
L. Price, Jr., M.D.
540
11
th
Ave. Place
NW
Hickory,
NC 28601
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9,868
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*
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Larry
E. Robinson
Post
Office Box 723
Newton,
NC 28658
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66,799
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6
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1.11
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%
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Lance
A. Sellers
Post
Office Box 467
Newton,
NC 28658
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25,510
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*
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William
Gregory Terry
Post
Office Box 610
Newton,
NC 28658
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19,498
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*
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Dan Ray
Timmerman, Sr.
Post
Office Box 1148
Conover,
NC 28613
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97,410
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7
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1.62
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%
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Benjamin
I. Zachary
Post
Office Box 277
Taylorsville,
NC 28681
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108,820
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8
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1.81
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%
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6
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All
current directors and nominees and executive officers as a group
(13 people)
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676,732
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9
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11.28
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%
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*Does
not exceed one percent of the common stock
outstanding.
______________________________________________
1
Unless otherwise
noted, all shares are owned directly of record by the named
individuals, by their spouses and minor children, or by other
entities controlled by the named individuals. Voting and investment
power is not shared unless otherwise indicated.
2
Based upon a total
of 5,997,136 shares of common stock outstanding as of the Record
Date.
3
Includes 70,441
shares of common stock owned by Alexander Railroad Company. Mr. J.
Abernethy is Vice President, Secretary and Chairman of the Board of
Directors of Alexander Railroad Company.
4
Includes 6,988
shares of common stock owned by Mr. R. Abernethy’s spouse,
for which Mr. R. Abernethy disclaims beneficial
ownership.
5
Includes 495 shares
of common stock owned by Mr. Howard’s spouse, for which Mr.
Howard disclaims beneficial ownership.
6
Includes 19,344
shares of common stock owned by Mr. Robinson’s spouse, for
which Mr. Robinson disclaims beneficial ownership.
7
Includes 2,994
shares of common stock owned by Timmerman Manufacturing, Inc. Mr.
Timmerman is a shareholder, director, Chairman of the Board and the
Chief Executive Officer of Timmerman Manufacturing,
Inc.
8
Includes 70,441
shares of common stock owned by Alexander Railroad Company. Mr.
Zachary is President, Treasurer, General Manager and a Director of
Alexander Railroad Company.
9
The 70,441 shares
owned by Alexander Railroad Company and attributed to Mr. J.
Abernethy and Mr. Zachary are only included once in calculating
this total.
Directors
James S. Abernethy and Robert C. Abernethy are brothers and are
sons of Christine S. Abernethy, who owns in excess of ten percent
(10%) of the common stock of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section
16(a) of the Exchange Act requires the Company’s executive
officers and directors, and persons who own more than ten percent
(10%) of the common stock, to file reports of ownership and changes
in ownership with the SEC. Executive officers, directors and
greater than ten percent (10%) beneficial owners are required by
SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based
solely on a review of the copies of such forms furnished to the
Company and written representations from the Company’s
executive officers and directors, the Company believes that during
the fiscal year ended December 31, 2018, its executive officers and
directors and greater than ten percent (10%) beneficial owners
complied with all applicable Section 16(a) filing
requirements.
PROPOSAL 1
ELECTION OF DIRECTORS
Our
Board of Directors has set its number at ten members. Our current
Bylaws provide that in order to be eligible for consideration at
the Annual Meeting of Shareholders, all nominations of directors,
other than those made by the Governance Committee or the Board of
Directors, must be in writing and must be delivered to the
Secretary of the Company not less than 50 days nor more than 90
days prior to the meeting at which such nominations will be made;
provided, however, that if less than 60 days’ notice of the
meeting is given to the shareholders, such nominations must be
delivered to the Secretary of the Company not later than the close
of business on the tenth day following the day on which the notice
of meeting was mailed.
7
Information about
the nominees for election to the Board of Directors for a one-year
term until the 2020 Annual Meeting of Shareholders appears below.
All of the nominees are currently serving on the Board of
Directors.
Director Nominees
James S. Abernethy
, age 64 (as of February 1, 2019), is
employed by Carolina Glove Company, Inc., a glove manufacturing
company as its Vice President. Mr. Abernethy continues to serve as
President and Assistant Secretary of Midstate Contractors, Inc., a
paving company and also as Vice President, Secretary and Chairman
of the Board of Directors of Alexander Railroad Company. He has
served as a director of the Company since 1992. Mr. Abernethy has a
total of 26 years of banking experience and is a graduate of the
North Carolina Bank Directors’ College and attended the
initial Advanced Directors’ Training session offered by the
North Carolina Bank Directors’ College in association with
the College of Management at North Carolina State University. Mr.
Abernethy earned a business administration degree from Gardner Webb
University in North Carolina. Over his 26 years of service on the
Board of Directors, Mr. Abernethy has served on all the
Bank’s and the Company’s committees.
Robert C. Abernethy
, age 68 (as of February 1, 2019), is
employed by Carolina Glove Company, Inc., a glove manufacturing
company, as its President, Secretary and Treasurer. Mr. Abernethy
continues to serve as Secretary and Assistant Treasurer of Midstate
Contractors, Inc., a paving company. He has served as a director of
the Company since 1976 and as Chairman since 1991.
Mr. Abernethy has a total of 42 years
of banking experience and is a graduate of the North Carolina Bank
Directors’ College and attended the initial Advanced
Directors’ Training session offered by the North Carolina
Bank Directors’ College in association with the College of
Management at North Carolina State University. Mr. Abernethy earned
a B.S. degree from Gardner Webb University in North Carolina. He
serves on the Finance Committee and Investment Committee of Grace
United Church of Christ. Mr. Abernethy also serves on the board of
directors of Carolina Glove Company, Inc. and Midstate Contractors,
Inc. both privately held companies.
Douglas S. Howard
, age 60 (as of February 1, 2019), is
employed by Denver Equipment Company of Charlotte, Inc. as Vice
President and Treasurer. Mr. Howard is currently serving as the
Chairman of the Catawba Valley Medical Group. He has served as a
director of the Company since 2004. Mr. Howard has a total of 20
years of banking experience and is a graduate of the North Carolina
Bank Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank
Directors’ College in association with the College of
Management at North Carolina State University. Mr. Howard also
serves as the Chairman of the Board of Trustees of Catawba Valley
Medical Center.
John W. Lineberger, Jr.
, age 68 (as of February 1, 2019), is
employed by Lincoln Bonded Warehouse Company, a commercial
warehousing facility, as President. He has served as a director of
the Company since 2004. Mr. Lineberger has a total of 14 years of
banking experience and is a graduate of the North Carolina Bank
Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank
Directors’ College in association with the College of
Management at North Carolina State University. Mr. Lineberger
earned a B.S. degree in business administration from Western
Carolina University.
Gary E. Matthews
, age 63 (as of February 1, 2019), is
employed by Matthews Construction Company, Inc. as its President
and a Director. He has served as a director of the Company since
2001. Mr. Matthews has a total of 17 years of banking experience,
is a graduate of the North Carolina Bank Directors’ College,
and attended the initial Advanced Directors’ Training session
offered by the NC Bank Directors’ College in association with
the College of Management at North Carolina State University. Mr.
Matthews is also a director of Conover Metal Products, a privately
held company. Mr. Matthews earned a B.S. degree in civil
engineering/construction from North Carolina State
University.
8
Billy L. Price, Jr., M.D.
, age 62 (as of February 1, 2019),
is a Practitioner of Internal Medicine at BL Price Jr Medical
Consultants, PLLC. Dr. Price served on the Board of Trustees of
Catawba Valley Medical Center through 2018. He has served as a
director of the Company since 2004. Dr. Price has a total of 14
years of banking experience and is a graduate of the North Carolina
Bank Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank
Directors’ College in association with the College of
Management at North Carolina State University. Dr. Price was
previously the owner/pharmacist of Conover Drug Company. He is also
a Medical Director of Healthgram Medical, a private company. Dr.
Price earned a B.S. degree in pharmacy from the University of North
Carolina at Chapel Hill and his MD from East Carolina University
School of Medicine. He serves as Medical Director and Assistant
Professor to Lenoir Rhyne University Physician Assistants Master of
Science Program.
Larry E. Robinson
, age 73 (as of February 1, 2019), is a
shareholder, director and President of The Blue Ridge Distributing
Company, Inc., a beer and wine distributor. He is also a director
and member of the Board of Directors of United Beverages of North
Carolina, LLC, a malt beverage beer distributor. He has served as a
director of the Company since 1993. Mr. Robinson has a total of 25
years of banking experience and is a graduate of the North Carolina
Bank Directors’ College. Mr. Robinson attended Western
Carolina University and received an Associate Degree in Business
and Accounting from Catawba Valley Community College in North
Carolina.
William Gregory Terry
, age 51 (as of February 1, 2019), is
President of DFH Holdings and Operator/General Manager of Drum
& Willis-Reynolds Funeral Homes and Crematory. He has served as
a director of the Company since 2004. Mr. Terry has a total of 14
years of banking experience and is a graduate of the North Carolina
Bank Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank
Directors’ College in association with the College of
Management at North Carolina State University. Mr. Terry graduated
with a B.S. degree in business management from Clemson University
in South Carolina. Mr. Terry serves on numerous civic and community
boards.
Dan Ray Timmerman, Sr.
, age 71 (as of February 1, 2019), is
a shareholder, director, Chairman of the Board of Directors and the
Chief Executive Officer of Timmerman Manufacturing, Inc., a wrought
iron furniture, railings and gates manufacturer. He has served as a
director of the Company since 1995. Mr. Timmerman has a total of 23
years of banking experience and is a graduate of the North Carolina
Bank Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank
Directors’ College in association with the College of
Management at North Carolina State University. Mr. Timmerman earned
a B.S. degree in business administration with a concentration in
accounting from Lenoir-Rhyne University in North Carolina. Mr.
Timmerman serves as member of the Board of the Catawba County
Economic Development Commission.
Benjamin I. Zachary
, age 62 (as of February 1, 2019), is
employed by Alexander Railroad Company as its President, Treasurer,
General Manager and Director. He has served as a director of the
Company since 1995. Mr. Zachary has a total of 23 years of banking
experience and is a graduate of the North Carolina Bank
Directors’ College. Mr. Zachary earned a B.S. degree in
business administration with a concentration in accounting from the
University of North Carolina at Chapel Hill. He worked as a CPA for
a national accounting firm for eight years following graduation
where his assignments included financial statement audits of
several banks. Mr. Zachary is a member of the Taylorsville
Rotary Club and has served as Treasurer for the Taylorsville Rotary
Club and its Foundation.
We have
no reason to believe that any of the nominees for election will be
unable or will decline to serve if elected. In the event of death
or disqualification of any nominee or the refusal or inability of
any nominee to serve as a director, however, the proxies will vote
for the election of another person as they determine in their
discretion or may allow the vacancy to remain open until filled by
the Board of Directors. In no circumstance will any proxy be voted
for more than two nominees who are not named in this Proxy
Statement. Properly executed and returned proxies, unless revoked,
will be voted as directed by you or, in the absence of direction,
will be voted in favor of the election of the recommended nominees.
An affirmative vote of a plurality of votes cast at the Annual
Meeting is necessary to elect a nominee as a director.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE “
FOR
” ALL OF THE NOMINEES
NAMED ABOVE AS DIRECTORS
9
Executive Officers of the Company
During
2018, our executive officers were:
Lance A. Sellers
, age 56 (as of February 1, 2019), serves as
the President and Chief Executive Officer of the Company and the
Bank. Prior to becoming the President and Chief Executive Officer
of the Company and the Bank, Mr. Sellers served as Executive Vice
President and Assistant Corporate Secretary of the Company and
Executive Vice President and Chief Credit Officer of the Bank. He
has been employed by the Company and the Bank since 1998. Mr.
Sellers has a total of 34 years of banking experience. He is a
graduate of the University of North Carolina at Chapel Hill and
served as a senior credit officer at a regional bank headquartered
in North Carolina.
William D. Cable, Sr.
, age 50 (as of February 1, 2019),
serves as Executive Vice President, Assistant Corporate Treasurer
and Corporate Secretary of the Company and Executive Vice President
and Chief Operating Officer of the Bank. He has been employed by
the Company and the Bank since 1995, where he has served as Senior
Vice President-Information Services. Mr. Cable has a total of 27
years of banking experience. Prior to joining the Company, Mr.
Cable was a regulatory examiner with the Federal Deposit Insurance
Corporation. He is a graduate of Western Carolina University and
the School of Banking of the South at Louisiana State
University.
A. Joseph Lampron, Jr.
, age 64 (as of February 1, 2019),
serves as Executive Vice President, Chief Financial Officer,
Corporate Treasurer and Assistant Corporate Secretary of the
Company and Executive Vice President and Chief Financial Officer of
the Bank. He has been employed by the Company and the Bank since
2001. Mr. Lampron is a graduate of the University of North Carolina
at Chapel Hill and upon graduation worked as a certified public
accountant with a national accounting firm. His work with the firm
included audits of banks and thrift institutions. Mr. Lampron has
also served as Chief Financial Officer of a thrift institution and
as a senior change manager in the finance group of a large North
Carolina bank. Mr. Lampron has a total of 39 years of banking
experience.
How often did our Board of Directors meet during 2018
Our
Board of Directors held 14 meetings during 2018. All incumbent
directors attended more than 75% of the total number of meetings of
the Board of Directors and its committees on which they served
during the year.
What is our policy for director attendance at Annual
Meetings?
Although it is
customary for all of our directors to attend Annual Meetings of
Shareholders, we have no formal policy in place requiring
attendance. All members of the Board of Directors attended our 2018
Annual Meeting of Shareholders held on May 3, 2018.
How can you communicate with the Board or its members?
We do
not have formal procedures for shareholder communication with our
Board of Directors. In general, our directors and officers are
easily accessible by telephone, postal mail or e-mail. Any matter
intended for your Board of Directors, or any individual director,
can be directed to Lance Sellers, our President and Chief Executive
Officer, or Joe Lampron, our Chief Financial Officer, at our
principal executive offices at 518 West C Street, Newton, North
Carolina 28658. You also may direct correspondence to our Board of
Directors, or any of its members, in care of the Company at the
foregoing address. Your communication will be forwarded to the
intended recipient unopened.
Board Leadership Structure and Risk Oversight
Our
Company and the Bank have traditionally operated with separate
Chief Executive Officer and Chairman of the Board of Directors
positions. We believe it is our Chief Executive Officer’s
responsibility to manage the Company and the Chairman’s
responsibility to lead the Board of Directors. Robert Abernethy is
currently serving as Chairman of the Board of Directors, and James
Abernethy is currently serving as the Vice Chairman of the Board of
Directors. Other than Directors Lineberger and Matthews, all of the
members of the Board of Directors are independent under
applicable
10
NASDAQ listing
requirements. The Company has five standing committees: Executive,
Loan Sub-Committee, Governance, Audit and Compensation. The Chief
Executive Officer serves on the Executive
Committee.
addition to the
above-named committees has a Loan Committee and a Loan
Sub-Committee. The duties of the Company’s committees are
described below. Each of the Company’s and the Bank’s
committees considers risk within its area of responsibility. The
Audit Committee and the full Board of Directors focus on the
Company’s most significant risks in the areas of liquidity,
credit, interest rate and general risk management strategy. The
Board of Directors sets policy guidelines in the areas of loans and
asset/liability management which are reviewed on an on-going basis.
While the Board of Directors oversees the Company’s risk
management, the Company’s and the Bank’s management are
responsible for day-to-day risk management following the dictates
of the policy decisions set by the Board of Directors.
The
Governance Committee, as part of its annual review, evaluates the
Board of Directors leadership structure and performance and reports
its findings to the whole Board of Directors. The Board of
Directors believes that having separate persons serving as Chief
Executive Officer and Chairman and all independent directors
provides the optimal board leadership structure for the Company and
its shareholders.
Code of Business Conduct and Ethics
The
Company and the Bank have a Code of Business Conduct and Ethics for
its directors, officers and employees. The Code of Business Conduct
and Ethics requires that individuals avoid conflicts of interest,
comply with all laws and other legal requirements, conduct business
in an honest and ethical manner and otherwise act with integrity
and in the best interests of the Company and the Bank. The Code of
Business Conduct and Ethics is a guide to help ensure that all
employees live up to the highest ethical standards of
behavior.
A copy
of the Code of Business Conduct and Ethics is available on the
Bank’s website (
www.peoplesbanknc.com
)
under Investor Relations.
As is
permitted by SEC rules, the Company intends to post on its website
any amendment to or waiver from any provision in the Code of
Business Conduct and Ethics that applies to the Chief Executive
Officer, the Chief Financial Officer, the Controller, or persons
performing similar functions, and that relates to any element of
the standards enumerated in the rules of the SEC.
Diversity of the Board of Directors
The Company and the Bank do not have written
diversity policies. However, the Company and the Bank value
diversity in society, and believe that the virtues and pursuit of
diversity are just as important within the Company and the
Bank. The Company and the Bank adhere to a policy prohibiting
discrimination and harassment on the basis of legally protected
characteristics, including sex, pregnancy, race, color, religion,
national origin, veteran status, age, and disability.
While
there are currently no women or minorities serving on the Board of
Directors, any qualified candidate receives equal
consideration.
How can a shareholder nominate someone for election to the Board of
Directors
Our
Bylaws provide that in order to be eligible for consideration at
the Annual Meeting of Shareholders, all nominations of directors,
other than those made by the Governance Committee or the Board of
Directors, must be in writing and must be delivered to the
Secretary of the Company not less than 50 days nor more than 90
days prior to the meeting at which such nominations will be made.
However, if less than 60 days’ notice of the meeting is given
to the shareholders, such nominations must be delivered to the
Secretary of the Company not later than the close of business on
the tenth day following the day on which the notice of meeting was
mailed.
The Board of
Directors may disregard any nominations that do not comply with
these requirements. Upon the instruction of the Board of Directors,
the inspector of voting for the Annual Meeting may disregard all
votes cast for a nominee if the nomination does not comply with
these requirements. Written notice of nominations should be
directed to the Secretary of the Company.
11
The
Bank has ten directors currently serving on its Board of Directors,
who are the same people who are currently directors of the
Company.
Board Committees
During
2018, our Board of Directors had five standing committees, the
Audit and Enterprise Risk Committee, the Governance Committee, the
Compensation Committee, the Executive Committee and the Loan
Sub-Committee. The voting members of these Committees are appointed
by the Board of Directors annually from among its members. Certain
of our executive officers also serve as non-voting, advisory
members of these committees.
Executive Committee
Executive Committee. The Executive Committee performs duties as
assigned by the full Board of Directors. Actions taken by the
Executive Committee must be approved by the full Board of
Directors. The following persons currently serve on the Executive
Committee: Directors R. Abernethy, J. Abernethy, Lineberger,
Robinson and Terry, as well as the President and Chief Executive
Officer of the Company in a non-voting capacity. It meets on an
“as needed” basis and did not meet during
2018.
Governance Committee
Governance Committee. The Governance Committee is responsible for
developing and maintaining the corporate governance policy, as well
as acting as the nominating committee for the Board of Directors.
The following persons currently serve on the Governance Committee:
Directors R. Abernethy, J. Abernethy, Howard, Terry, and Timmerman.
All of the members of the Governance Committee are independent as
defined in the applicable NASDAQ listing standards. The Board of
Directors determines on an annual basis each director’s
independence.
The
Governance Committee, serving as the nominating committee of the
Board of Directors, interviews candidates for membership to the
Board of Directors, recommends candidates to the full Board of
Directors, slates candidates for shareholder votes, and fills any
vacancies on the Board of Directors which occur between shareholder
meetings. The Governance Committee’s identification of
candidates for director typically results from the business
interactions of the members of the Governance Committee or from
recommendations received from other directors or from the
Company’s management.
If a
shareholder recommends a director candidate to the Governance
Committee in accordance with the Company’s Bylaws, the
Governance Committee will consider the candidate and apply the same
considerations that it would to its own candidates. The
recommendation of a candidate by a shareholder should be made in
writing, addressed to the attention of the Governance Committee at
the Company’s corporate headquarters. The recommendation
should include a description of the candidate’s background,
his or her contact information, and any other information the
shareholder considers useful and appropriate for the Governance
Committee’s consideration of the candidate. The criteria
which have been established by the Governance Committee as bearing
on the consideration of a candidate’s qualification to serve
as a director include the following: the candidate’s ethics,
integrity, involvement in the community, success in business,
relationship with the Bank, investment in the Company, place of
residence (
i.e.
, proximity
to the Bank’s market area), and financial
expertise.
The
Governance Committee met once during the year ended December 31,
2018.
The
Governance Committee has a written charter which is reviewed
annually, and amended as needed, by the Governance Committee. A
copy of the Governance Committee Charter is available onthe
Bank’s website (
www.peoplesbanknc.com
)
under Investor Relations.
Audit and Enterprise Risk
Committee
Audit and Enterprise Risk Committee. The Company
has a separately designated standing Audit and Risk Enterprise
Committee (the “
Audit Committee
”) which
was established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The Audit Committee’s responsibilities include
oversight of enterprise risk. The Audit Committee has a written
charter which is reviewed annually, and amended as needed, by the
Audit Committee. A copy of the Audit Committee Charter is available
on the Bank’s website (
www.peoplesbanknc.com
)
under Investor Relations. The
12
The
Board of Directors has determined that each member of the Audit
Committee is independent as that term is defined in the applicable
NASDAQ listing standards and the SEC’s regulations. The Board
of Directors determines on an annual basis each director’s
independence. In addition, the Board of Directors has determined
that each member of the Audit Committee qualifies as an
“audit committee financial expert” based on each of the
member’s educational background and business
experience.
The
Audit Committee meets at least quarterly and, among other
responsibilities, oversees (i) the independent auditing of the
Company; (ii) the system of internal controls that management has
established; and (iii) the quarterly and annual financial
information to be provided to shareholders and the SEC. The Audit
Committee met eight times during the year ended December 31,
2018.
Audit Committee
Report
.
The Audit
Committee has reviewed and discussed the audited financial
statements with management of the Company and has discussed with
the independent auditors the matters required to be discussed by
Auditing Standards No. 16 as amended (AICPA, Professional
Standards, Vol. 1 AU section 380) as adopted by the Public Company
Accounting Oversight Board in Rule 3200T. In addition, the Audit
Committee has received the written disclosures and the letter from
the independent accountants required by the applicable requirements
of the Public Company Accounting Oversight Board regarding the
independent accountant’s communications with the Audit
Committee concerning independence, and has discussed with the
independent accountant the independent accountant’s
independence. Based upon these reviews and discussions, the Audit
Committee recommended to the Board of Directors that the audited
financial statements be included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2018 for
filing with the SEC.
|
|
Robert C.
Abernethy
|
Dan R. Timmerman,
Sr.
|
|
|
|
Benjamin I.
Zachary
Douglas
S. Howard
|
James
S. Abernethy
Billy L
Price, Jr. MD, Committee Chair
|
|
Compensation
Committee
.
The
Company’s Compensation Committee is responsible for
developing, reviewing, implementing and maintaining the
Bank’s salary, bonus, and incentive award programs and for
making recommendations to the Company’s and the Bank’s
Board of Directors regarding compensation of the executive
officers. Upon recommendation from the Compensation Committee, the
Company’s Board of Directors ultimately determines such
compensation.
All of
the members of the Compensation Committee are independent as
defined in the applicable NASDAQ’s listing standards. The
Board of Directors determines on an annual basis each
director’s independence. The following persons currently
serve on the Compensation Committee: Directors R. Abernethy, J.
Abernethy, Howard, Terry and Timmerman. The Compensation Committee
met three times during the year ended December 31,
2018.
The
Compensation Committee has a written charter which is reviewed
annually, and amended as needed, by the Compensation Committee. A
copy of the Compensation Committee’s Charter is available on
the Bank’s website (
www.peoplesbanknc.com
)
under Investor Relations.
Compensation Committee
Interlocks and Insider Participation
. No member of the
Compensation Committee is now, or formerly was, an officer or
employee of the Company or the Bank. None of the named executive
officers serve as a member of the board of directors of another
entity whose executive officers or directors serve on the
Company’s Board of Directors.
13
Compensation Committee
Report
.
The
Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis in this Proxy Statement with management and
has recommended that it be included in this Proxy Statement and our
Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2018.
Compensation
Committee
Robert
C. Abernethy
James
S. Abernethy
Douglas
S. Howard
William
Gregory Terry
Dan R.
Timmerman, Sr., Committee Chair
Compensation Discussion and Analysis
The
following Compensation Discussion and Analysis provides information
with respect to the compensation paid during the year ended
December 31, 2018 to our President and Chief Executive Officer,
Lance A. Sellers, our Chief Financial Officer, A. Joseph Lampron,
Jr. and William D. Cable, Sr. (together, our “
named executive
officers
”).
Compensation Committee
Processes and Procedures
.
The Compensation Committee
assists the Board of Directors in determining appropriate
compensation levels for the members of the Board of Directors and
our named executive officers. It also has strategic and
administrative responsibility for a broad range of compensation
issues. It seeks to ensure that we compensate key management
employees effectively and in a manner consistent with the
Compensation Committee’s stated compensation strategy and
relevant requirements of various regulatory entities. A part of
these responsibilities is overseeing the administration of
executive compensation and employee benefit plans, including the
design, selection of participants, establishment of performance
measures, and evaluation of awards pursuant to our annual and
long-term incentive programs.
Compensation
Philosophy
.
The
overall objective of our executive compensation program is to align
total compensation so that the individual executive believes it is
fair and equitable and provides the highest perceived value to our
shareholders and to that individual. In order to accomplish this
overall objective, our executive compensation program is designed
to: (i) attract qualified executives necessary to meet our needs as
defined by the Company’s strategic plans, and (ii) retain and
motivate executives whose performance supports the achievement of
our long-term plans and short-term goals. The executive
compensation program is founded upon the idea that a strong,
performance-oriented compensation program, which is generally
consistent with the practices of our peers, is a key ingredient in
becoming a leading performer among financial institutions of
similar size, and is, therefore, in the best interests of our
shareholders.
The
Compensation Committee considers a number of factors specific to
each executive’s role when determining the amount and mix of
compensation to be paid. These factors are:
●
compensation of the
comparable executives at comparable financial
institutions;
●
financial
performance of the Company (especially on a “net
operating” basis, which excludes the effect of one-time gains
and expenses) over the most recent fiscal year and the prior three
years;
●
composition of
earnings;
●
asset quality
relative to the banking industry;
●
responsiveness to
the economic environment;
●
the Company’s
achievement compared to its corporate, financial, strategic and
operational objectives and business plans; and
●
cumulative
shareholder return.
Elements of the
Executive Compensation Program
.
The Company’s and the
Bank’s compensation program consists of the following
elements:
14
Base
Salary
. The salaries of our named executive officers are
designed to provide a reasonable level of compensation that is
affordable to the Company and fair to the executive. Salaries are
reviewed annually, and adjustments, if any, are made based on the
review of competitive salaries in our peer group, as well as an
evaluation of the individual officer’s responsibilities, job
scope, and individual performance. For example, we assess each
officer’s success in achieving budgeted earnings and return
ratios, business conduct and integrity, and leadership and team
building skills.
Annual Cash
Incentive Awards
. We believe that annual cash incentive
awards encourage our named executive officers to achieve short-term
targets that are critical to achievement of our long-term strategic
plan. The Bank has a Management Incentive Plan for officers of the
Bank. Participants in the Management Incentive Plan are recommended
annually by the President and Chief Executive Officer to the
Bank’s Board of Directors. Each individual’s incentive
pool is determined by a formula which links attainment of corporate
budget with attainment of individual goals and objectives.
Incentives under the Management Incentive Plan are paid annually.
No named executive officer earned or was paid a cash incentive
under the Management Incentive Plan during the fiscal year ended
December 31, 2018.
Discretionary
Bonus and Service Awards
.
From
time to time the Compensation Committee may recommend to the Board
of Directors that additional bonuses be paid based on
accomplishments that significantly exceed expectations during the
fiscal year. These bonuses are totally discretionary as to who will
receive a bonus and the amount of any such bonus. In 2018, the
Compensation Committee recommended, and the Board of Directors
approved, discretionary bonuses as follows: $90,000 for Mr.
Sellers; $55,000 for Mr. Lampron; and $50,000 for Mr. Cable. These
discretionary bonuses were paid in January of 2019.
Under
the Service Recognition Program, the Bank gives service awards to
each employee and director for every five years of service with the
Bank to promote longevity of service for both directors and
employees. Service awards are made in the form of shares of the
Company’s common stock plus cash in the amount necessary to
pay taxes on the award. The number of shares awarded increases with
the number of years of service to the Bank.
Long-Term Equity
Incentive Awards
. The Company maintains the 2009 Omnibus
Stock Ownership and Long Term Incentive Plan (“
Omnibus Plan
”), under
which it is permitted to grant incentive stock options, restricted
stock, restricted stock units, stock appreciation rights, book
value shares, and performance units. The purpose of the Omnibus
Plan is to promote the interests of the Company by attracting and
retaining directors and employees of outstanding ability and to
provide executives of the Company greater incentive to make
material contributions to the success of the Company by providing
them with stock-based compensation which will increase in value
based upon the market performance of the common stock and/or the
corporate achievement of financial and other performance
objectives.
In
making its decision to grant awards to the Company’s named
executive officers under the Omnibus Plan, the Compensation
Committee considers all elements of such named executive
officer’s compensation. In considering the number of awards
to grant to the Company’s named executive officers, the
Compensation Committee considers each named executive
officer’s contribution to the Company’s
performance.
The
Company did not grant any plan-based awards to its named executive
officers during the fiscal year ended December 31, 2018. See
“Outstanding Equity Awards at Fiscal Year-End” on page
19 of this Proxy Statement and “Option Exercises and Stock
Vested” on page 19 of this Proxy Statement for information on
grants and vesting of restricted stock units to the named executed
officers during the fiscal years ended December 31, 2012, 2013,
2014, 2015 and 2017. See “Omnibus Plan and Long Term
Incentive Plan” starting on page 22 of this Proxy Statement
for additional information on the Omnibus Plan.
Supplemental
Executive Retirement Agreements
. The Bank provides
non-qualified supplemental executive retirement benefit in the form
of Amended and Restated Executive Salary Continuation Agreements
with Messrs. Sellers, Lampron and Cable. The Committee’s goal
is to provide competitive retirement benefits given the
restrictions on executives within tax-qualified plans. In prior
years, the Compensation Committee worked with a compensation
consultant in analyzing the possible benefits of using supplemental
retirement benefits to address the issues of internal and external
equity in terms of retirement benefits offered to all employees at
the Company as a percentage of
15
final
average pay and executives in our peer group. In connection with
the non-qualified supplemental executive retirement benefits, the
Bank purchased life insurance contracts on the lives of the named
executive officers. The increase
in cash surrender value of
the life insurance contracts constitutes the Bank’s
contribution to the plan each year. The Bank will pay benefits to
participating officers for a period between 13 years and the life
of the officer. The Bank is the sole owner of all of the insurance
contracts.
Profit Sharing
Plan and 401(k) Plan
.
The Bank has a Profit Sharing Plan
and 401(k) Plan for all eligible employees. The Bank made no
contribution to the Profit Sharing Plan for the year ended December
31, 2018.
No
investments in Bank stock have been made by the plan. Under the
Bank’s 401(k) Plan, the Bank matches employee contributions
to a maximum of 4.00% of annual compensation. The Bank’s 2018
contribution to the 401(k) Plan pursuant to this formula was
approximately $670,000. All contributions to the 401(k) Plan are
tax deferred. The Profit Sharing Plan and 401(k) Plan permit
participants to choose from investment funds which are selected by
a committee comprised of senior management. Employees are eligible
to participate in both the 401(k) Plan and Profit Sharing Plan
beginning in the second month of employment. Both plans are now
“safe harbor” plans, and all participants are
immediately 100% vested in all employer contributions.
Deferred
Compensation Plan
. The Bank
maintains a non-qualified deferred compensation plan for directors
and certain officers. Eligible officers selected by the
Bank’s Board of Directors may elect to contribute a
percentage of their compensation to the plan. Participating
officers may elect to invest their deferred compensation in a
restricted list of investment funds. The Bank may make matching or
other contributions to the plan as well, in amounts determined at
the discretion of the Bank. Participants are fully vested in all
amounts contributed to the plan by them or on their behalf. The
Bank has established a Rabbi Trust to hold the accrued benefits of
the participants under the plan. There are no
“above-market” returns provided for in this plan. The
Bank made no contributions to the plan in 2018.
Benefits under the plan are payable in the event
of the participant’s retirement, death, termination, or as a
result of hardship. Benefit payments may be made in a lump sum or
in installments, as selected by the
participant.
Employment
Agreements
. The Company has employment agreements with each
named executive officer, which the Board of Directors believes
serve a number of functions, including (i) retention of the
executive team; (ii) mitigation of any uncertainty about future
employment and continuity of management in the event of a change in
control; and (iii) protection of the Company and customers through
non-compete and non-solicitation covenants. Additional information
regarding the employment agreements, including a description of key
terms may be found starting on page 21 of this Proxy
Statement.
Other
Benefits
.
Executive officers
are entitled to participate in fringe benefit plans offered to
employees including health and dental insurance plans and life,
accidental death and dismemberment and long-term disability plans.
In addition, the Bank has paid country club dues for each named
executive officer and provides a car allowance to Mr.
Sellers.
The
above elements of each named executive officer’s compensation
are not inter-related. For example, if vesting standards on
restricted stock awards are not achieved, the executive’s
base salary is not increased to make up the difference. Similarly,
the value of previously granted options is not considered by the
Compensation Committee in recommending the other elements of the
compensation package.
The
Compensation Committee did not engage a compensation consultant
during the year ended December 31, 2018. The President and Chief
Executive Officer of the Company and the Bank makes recommendations
to the Committee regarding the compensation of the executive
officers other than his own. The President and Chief Executive
Officer participates in the deliberations, but not in the
decisions, of the Compensation Committee regarding compensation of
executive officers. He does not participate in the Compensation
Committee’s discussion or decisions regarding his own
compensation. The Compensation Committee reports its actions to the
Board of Directors and keeps written minutes of its meetings, which
minutes are maintained with the books and records of the
Company.
The
Compensation Committee also considers the results of the
shareholders’ non-binding vote on executive compensation. At
the 2013 Annual
Meeting of
Shareholders, 52% of the shareholders who voted at the 2013
Annual
16
Meeting
of Shareholders elected to review the executive compensation of the
Company’s named executive officers once every three years. As
a result, the Company submitted, in a non-binding advisory
proposal, the executive compensation of the Company’s named
executive officers at the 2016 Annual Meeting of Shareholders. At
the 2016 Annual Meeting of Shareholders, 94% of the shareholders
who voted at the 2016 Annual Meeting of Shareholders approved the
executive
compensation of the Company’s named
executive officers as presented to the shareholders in the 2016
proxy statement. The Company, pursuant to this Proxy Statement,
submits a vote to the shareholders on the compensation of its named
executive officers and the frequency on which shareholders review
such compensation.
2018
Compensation Disclosure Ratio of the Median Annual Total
Compensation of All Company Employees to the Annual Total
Compensation of the Company’s Chief Executive
Officer
We
believe our executive compensation program must be consistent and
internally equitable to motivate our employees to perform in ways
that enhance shareholder value. We are committed to internal pay
equity, and the Compensation Committee monitors the relationship
between the pay of our executive officers and the pay of our
non-executive employees. The Compensation Committee reviewed
a comparison of our Chief Executive Officer’s annual total
compensation in fiscal year 2018 to that of all other Company
employees (including all employees of the Bank) for the same
period. The calculation of annual total compensation of all
employees was determined in the same manner as the “Total
Compensation” shown for our Chief Executive Officer in the
“Summary Compensation Table” on page 18 of this Proxy
Statement.
The
calculation below includes all employees as of October 31,
2018.
The
2018 compensation disclosure ratio of the median annual total
compensation of all Company employees to the annual total
compensation of the Company’s chief executive officer is as
follows:
|
Median
Annual Total Compensation of All Employees (excluding Lance A.
Sellers, Chief Executive Officer)
|
$
45,051
|
|
|
|
|
Annual
Total Compensation of Lance A. Sellers, Chief Executive
Officer
|
$
517,278
|
|
|
|
|
Ratio
of the Median Annual Total Compensation of All Employees to the
Annual Total Compensation of Lance A. Sellers, Chief Executive
Officer
|
11.48
|
17
Summary Compensation Table
The
executive officers of the Company are not paid any cash
compensation by the Company. However, the executive officers of the
Company also are executive officers of the Bank and receive
compensation from the Bank. The table on the following page show,
for the fiscal years ended December 31, 2018, 2017 and 2016, the
cash compensation received by, as well as certain other
compensation paid or accrued for those years, to each named
executive officer.
SUMMARY COMPENSATION TABLE
|
Name and
Principal Position
|
Year
|
Salary($)
|
Bonus($)
|
Stock Awards($)1
|
Change in Pension Value and
Nonqualified Deferred Compensation Earnings($)
|
All Other
Compensation($)2
|
Total($)
|
|
|
|
|
|
|
|
|
|
|
Lance A.
Sellers
|
2018
|
328,760
|
90,000
|
-
|
68,064
|
30,454
|
517,278
|
|
President and Chief
Executive
|
2017
|
319,185
|
55,000
|
-
|
62,493
|
29,080
|
465,758
|
|
Officer
|
2016
|
319,185
|
50,000
|
-
|
57,312
|
31,775
|
458,271
|
|
|
|
|
|
|
|
|
|
|
A. Joseph Lampron,
Jr.
|
2018
|
210,009
|
55,000
|
-
|
120,772
|
22,224
|
408,005
|
|
Executive Vice
President,
|
2017
|
203,892
|
45,000
|
-
|
112,658
|
23,020
|
384,570
|
|
Chief Financial
Officer
|
2016
|
197,653
|
40,000
|
-
|
102,893
|
24,307
|
365,153
|
|
|
|
|
|
|
|
|
|
|
William D. Cable,
Sr.
|
2018
|
216,125
|
50,000
|
-
|
26,837
|
24,365
|
317,327
|
|
Executive Vice
President,
|
2017
|
209,830
|
45,000
|
-
|
24,608
|
24,506
|
303,944
|
|
Chief Operating
Officer
|
2016
|
203,179
|
40,000
|
-
|
22,540
|
25,500
|
291,759
|
________________
1
Amount represents the aggregate
grant date fair value computed in accordance with FASB ASC Topic
718. See Note 1 in the Notes to the Company’s Consolidated
Financial Statements included in the Company’s Annual Report,
which Annual Report is attached here to as Appendix A.
2
All other
compensation is comprised of the following:
|
Name and Principal
Position
|
Year
|
Employer
Match($)
|
Car
Allowance($)
|
Country
Club Dues($)
|
Split Dollar
Death Benefit($)
|
Group Term
Life($)(a)
|
Disability and
LTC Premiums($)(b)
|
Dividends
Accrued on Restricted Stock Units($)
|
Other($)
|
|
Lance A.
Sellers
President and Chief
Executive Officer
|
2018
|
11,000
|
2,888
|
3,730
|
539
|
2,900
|
5,628
|
1,270
|
2,500
(c)
|
|
|
2017
|
10,800
|
2,888
|
3,636
|
501
|
3,456
|
5,628
|
2,171
|
0
|
|
|
2016
|
10,600
|
4,113
|
3,576
|
480
|
2,376
|
5,628
|
5,002
|
0
|
|
A. Joseph Lampron,
Jr.
Executive Vice
President, Chief Financial Officer
|
2018
|
10,610
|
0
|
3,630
|
1,359
|
3,688
|
1,984
|
952
|
0
|
|
|
2017
|
10,800
|
0
|
3,460
|
1,234
|
3,951
|
1,984
|
1,591
|
0
|
|
|
2016
|
9,096
|
0
|
3,380
|
1,139
|
3,863
|
1,984
|
3,570
|
1,275
(d)
|
|
William D. Cable,
Sr.
Executive Vice
President, Chief Operating Officer
|
2018
|
10,795
|
0
|
3,730
|
463
|
2.050
|
6,375
|
952
|
0
|
|
|
2017
|
10,675
|
0
|
3,636
|
433
|
1,796
|
6,375
|
1,591
|
0
|
|
|
2016
|
8,699
|
0
|
4,676
|
405
|
1,775
|
6,375
|
3,570
|
0
|
_________
(a)
Represents amounts
paid by the Bank for premiums on group term life insurance in
excess of $50,000 for each named executive officer.
(b)
Represents amounts
paid by the Bank for premiums on disability and long-term care
insurance for each named executive officer.
(c)
In
2018, Mr. Sellers received 68 shares for 20 years of service with
the Bank and $528 in cash to pay taxes associated with the award
under the Bank’s Service Recognition Program.
(d)
In 2016, Mr. Lampron
received 42 shares for 15 years of service with the Bank and $288
in cash to pay the taxes associated with the award under the
Bank’s Service Recognition Program.
18
Grants of Plan-Based Awards
The
Company did not grant any plan-based awards to the named executive
officers during the fiscal year ended December 31,
2018.
Outstanding Equity Awards at Fiscal Year End
The
following table shows certain information for those outstanding
equity awards at December 31, 2018.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END TABLE
|
|
Stock Awards
|
|||
|
Name
|
Number of Shares or Units of Stock
That Have Not Vested (#)
|
Market Value of Shares or Units of
Stock That Have Not Vested ($)
|
Equity Incentive Plan Awards:
Number of Unearned Shares, Units or Other Rights That Have Not
Vested (#)
|
Equity Incentive Plan Awards:
Market or Payout Value of Unearned Shares, Units or Other Rights
That Have Not Vested(3) ($)
|
|
Lance A.
Sellers
|
--
|
--
|
2,442
(1)
|
59,731
|
|
A. Joseph Lampron,
Jr.
|
--
|
--
|
1,832
(2)
|
44,798
|
|
William D. Cable,
Sr.
|
--
|
--
|
1,832
(2)
|
44,798
|
______________________________________
(1)
Represents 2,442
restricted stock units (adjusted for the 10% stock dividend granted
in December 2017) that were granted on February 19, 2015 (with a
grant date fair value for each restricted stock unit of $16.36 on
February 19, 2015 (adjusted for the 10% stock dividend granted in
December 2017)) and vested on February 19, 2019.
(2)
Represents 1,832
restricted stock units (adjusted for the 10% stock dividend granted
in December 2017) that were granted on February 19, 2015 (with a
grant date fair value for each restricted stock unit of $16.36 on
February 19, 2015 (adjusted for the 10% stock dividend granted in
December 2017)) and vested on February 19, 2019.
(3)
Based on a stock
price of $24.46 per share on December 31, 2018.
Option Exercises and Stock
Vested
No
stock options or restricted stock units vested for each Messrs.
Sellers, Lampron and Cable during the fiscal year ended December
31, 2018.
19
Pension Benefits
The
following table shows, for the fiscal year ended December 31,
2018, the pension benefits paid or earned by Messrs. Sellers,
Lampron and Cable.
|
PENSION BENEFITS
TABLE
|
||||
|
Name
|
Plan Name
|
Number of Years Credited
Service
|
Present Value of Accumulated
Benefit($)
|
Payments During Last Fiscal
Year($)
|
|
Lance
A. Sellers
|
Amended and Restated Executive Salary Continuation
Agreement
1
|
17
|
501,171
|
--
|
|
A.
Joseph Lampron, Jr.
|
Amended and Restated Executive Salary Continuation
Agreement
1,2
|
17
|
758,505
|
--
|
|
William
D. Cable, Sr.
|
Amended and Restated Executive Salary Continuation
Agreement
1
|
17
|
188,590
|
--
|
_______________________
1
The Bank entered into Amended and Restated Executive
Salary Continuation Agreement with Messrs. Sellers, Lampron and
Cable effective on December 18, 2008. The Amended and Restated
Executive Salary Continuation Agreements for Messrs. Sellers,
Lampron and Cable were further amended on December 10, 2014, and
such amendments were memorialized in a First Amendment to the
Amended and Restated Executive Salary Continuation Agreements
effective February 16, 2018. Unless a separation from service or a
change in control (as defined in the Amended and Restated Executive
Salary Continuation Agreements) occurs before the retirement age
set forth in each Amended and Restated Executive Salary
Continuation Agreement, the Amended and Restated Executive Salary
Continuation Agreements provide for an annual supplemental
retirement benefit to be paid to each of the named executive
officers in 12 equal monthly installments payable on the first day
of each month, beginning with the month immediately after the month
in which the named executive officer attains the normal retirement
age and for the named executive officer’s lifetime, or if
longer, a 13-year term. Under the terms of the Amended and Restated
Executive Salary Continuation Agreements, Mr. Sellers will receive
an annual supplemental retirement benefit of $130,495, Mr. Lampron
will receive an annual supplemental retirement benefit of $76,554
and Mr. Cable will receive an annual supplemental retirement
benefit of $93,872.
2
As of December 31, 2018, Mr. Lampron was the only named
executive officer eligible to withdraw funds from the plan. Mr.
Lampron, if he elected, could withdrawal 100% of the annual benefit
of $76,554.
20
Nonqualified Deferred Compensation
The
below table shows the compensation deferred by Messrs. Lampron and
Cable during the year ended December 31, 2018. Mr. Sellers elected
not to defer any portion of his compensation during the year ended
December 31, 2018.
NONQUALIFIED
DEFERRED COMPENSATION TABLE
|
Name
|
Executive Contributions in the Last
FY ($)(1)
|
Registrant Contributions In Last FY
($)
|
Aggregate Earnings in Last FY
($)(2)
|
Aggregate Withdrawals/
Distributions ($) |
Aggregate Balance at Last FYE
($)(3)
|
|
A. Joseph Lampron,
Jr.
|
$
6,612
|
--
|
$
(49,297
)
|
0
|
$
212,773
|
|
William D. Cable,
Sr.
|
$
17,830
|
--
|
$
(84,529
)
|
0
|
$
488,990
|
___________________
(1)
The above
contributions were based on the named executive officer’s
deferral elections and the salaries shown in the Summary
Compensation Table. The salaries in the Summary Compensation Table
include these contributions.
(2)
This column
reflects earnings or losses on plan balances in 2018. Earnings may
increase or decrease depending on the performance of the elected
hypothetical investment options. Earnings on these plans are not
“above-market” and thus are not reported in the Summary
Compensation Table. Plan balances may be hypothetically invested in
various mutual funds and common stock as described below.
Investment returns on those funds and common stock ranged from
(19.6%) to 2.40% for the year ended December 31, 2018.
(3)
This column
represents the year-end balances of the named executive
officer’s nonqualified deferred compensation accounts. These
balances include contributions that were included in the Summary
Compensation Tables in previous years. Amounts in this column
include earnings that were not previously reported in the Summary
Compensation Table because they were not “above-market”
earnings.
Employment Agreements
On
January 22, 2015, the Company, the Bank and each of (i) Lance A.
Sellers, the President and Chief Executive Officer of the Company
and the Bank, (ii) A. Joseph Lampron, Jr., Executive Vice President
and Chief Financial Officer of the Bank and Executive Vice
President, Chief Financial Officer and Corporate Treasurer of the
Company and (iii) William D. Cable, Sr., Executive Vice President
and Chief Operating Officer of the Bank and Executive Vice
President, Assistant Corporate Treasurer and Assistant Corporate
Secretary of the Company executed an Employment Agreement which
replaced and superseded such executive’s prior employment
agreement (collectively, the “
Employment
Agreements
”).
Each
Employment Agreement provides for an initial term of 36 months
beginning on January 22, 2015 (the “
Effective Date
”). On the
first anniversary of the Effective Date and on each anniversary
thereafter (the “
Renewal Date
”), each
Employment Agreement shall be extended automatically for one
additional year unless the Board of Directors of the Company (or
the executive determines, and prior to the Renewal Date sends to
the other party written notice, that the term shall not be
extended. If the Board of Directors of the Company decides not to
extend the term, the Employment Agreement shall nevertheless remain
in force until its existing term expires. Under the Employment
Agreements, the Bank will pay Mr. Sellers a base salary at the rate
of at least $311,400 per year, Mr. Lampron a base salary at the
rate of at least $193,125 per year and Mr. Cable a base salary at
the rate of at least $198,750 per year (“
Base Salary
”). The Bank
will review each executive’s total compensation at least
annually and in its sole discretion may adjust an executive’s
total compensation from year to year, but during the term of the
Employment Agreement, Mr. Sellers’s Base Salary may not
decrease below $311,400, Mr. Lampron’s Base Salary may not
decrease below $193,125 and Mr. Cable’s Base Salary may not
decrease below $198,750; provided, however, that periodic increases
in Base Salary, once granted, may not be subject to revocation. In
addition, the Employment Agreements provide for discretionary
bonuses and participation in other management incentive, pension,
profit-sharing, medical and retirement plans maintained by the
Bank, as well as fringe benefits normally associated with such
executive’s office.
Under
the Employment Agreements, each executive’s employment will
terminate automatically upon death. Otherwise, the Company and the
Bank may terminate each executive’s employment for
“cause”, “without cause” or in
the
21
In
addition, each Employment Agreement contains certain restrictive
covenants prohibiting the executive from competing against the
Company and the Bank or soliciting the Company’s or the
Bank’s customers for a period of time following termination
of employment, all as more particularly set forth in the Employment
Agreements.
Potential Payments upon Termination or Change in
Control
Each of
the Employment Agreements provide that in the event the Company
terminates the employment of a named executive officers Without
Cause (as defined in the Employment Agreements), or the officer
terminates his or her employment for Good Reason (as defined in the
Employment Agreements), in any such case during the employment and
at the time of or within one year after a “change of
control” (as defined in the Employment Agreements), the
officer will be entitled to receive the following payments and
benefits: (1) the Company will pay the officer the aggregate of the
following amounts: (a) the sum of his accrued obligations; (b) the
greater of his base salary, divided by 365 and multiplied by the
number of days remaining in the employment period, or an amount
equal to 2.99 times his base salary; and (c) the product of his
aggregate cash bonus for the last completed fiscal year, and a
fraction, the numerator of which is the number of days in the
current fiscal year through the date of termination, and the
denominator of which is 365; (2) all restricted stock or restricted
stock unit awards previously granted to the executive and which
have not already become vested and released from restrictions on
transfer and repurchase an forfeiture rights, either as a result of
the change of control or otherwise, shall immediately vest and be
released from such restrictions as of the change of control
termination date; and (3) all options previously granted to the
officer that are unvested as of the change of control termination
date will be deemed vested, fully exercisable and non-forfeitable
as of the change of control termination date (other than transfer
restrictions applicable to incentive stock options) and all
previously granted options that are vested, but unexercised, on the
change of control termination date will remain exercisable, in each
case for the period during which they would have been exercisable
absent the termination of his or her employment, except as
otherwise specifically provided by the Internal Revenue Code; and
(4) his benefits under all benefit plans that are non-qualified
plans will be 100% vested, regardless of his age or years of
service, as of the change of control termination date.
If the
named executive officers were terminated on December 31, 2018,
“without cause” or for “good reason” at the
time of or within one year after a “change of control”,
Mr. Sellers, Mr. Lampron and Mr. Cable would have been entitled to
receive compensation of approximately $1,256,000, $795,000 and
$798,000, respectively, pursuant to their Employment Agreements.
These amounts are calculated based on each officer’s 2018
base salary and bonus as shown in the Summary Compensation Table.
In addition, if a “change in control” (as defined in
the Omnibus Plan) had occurred on December 31, 2018, all unvested
restricted stock units previously granted to each of Mr. Sellers,
Mr. Lampron and Mr. Cable would have vest immediately. On December
31, 2018, these unvested restricted stock units had a fair market
value of $59,731, $44,798 and $44,798, respectively.
Omnibus Stock Option and Long Term Incentive
Plan
The
purpose of the Omnibus Plan is to promote the interests of the
Company by attracting and retaining directors and employees of
outstanding ability and to provide executive and other key
employees of the Company and its subsidiaries greater incentive to
make material contributions to the success of the Company by
providing them with stock-based compensation which will increase in
value based upon the market performance of the common stock and/or
the corporate achievement of financial and other performance
objectives.
22
Rights Which May Be
Granted
.
Under the
Omnibus Plan, the Committee may grant or award eligible
participants stock options, rights to receive restricted shares of
common stock, restricted stock units, performance
units
(each equivalent to one share of common
stock), SARs, and/or book value shares. These grants and awards are
referred to herein as “
Rights
.” All Rights must
be granted or awarded by February 19, 2019, the tenth anniversary
of the date the Board of Directors adopted the Omnibus Plan. The
Board of Directors has provided for 360,000 shares of the
Company’s common stock to be included in the Omnibus Plan to
underlie Rights which may be granted thereunder.
Options
.
Options granted under the Omnibus Plan to eligible directors and
employees may be either incentive stock options
(“
ISOs
”)
or non-qualified stock options (“
NSOs
”). The exercise
price of an ISO or NSO may not be less than 100% of the
last-transaction price for the common stock quoted by the NASDAQ
Stock Market on the date of grant.
Restricted Stock
and Restricted Stock Units
. The Committee may award Rights
to acquire shares of common stock or restricted stock units,
subject to certain transfer restrictions (“
Restricted Stock
” or
“
Restricted Stock
Unit
”) to eligible participants under the Omnibus Plan
for such purchase price per share, if any, as the Committee, in its
discretion, may determine appropriate. The Committee will determine
the expiration date for each Restricted Stock or Restricted Stock
Unit award, up to a maximum of ten years from the date of grant. In
the Committee’s discretion, it may specify the period or
periods of time within which each Restricted Stock or Restricted
Stock Unit award will first become exercisable, which period or
periods may be accelerated or shortened by the Committee. Under the
terms of the Omnibus Plan, the Committee also has the discretion to
pay out awards of Restricted Stock or Restricted Stock Units in the
Company’s common stock, cash or a combination of stock and
cash.
Performance
Units
. Under the Omnibus Plan, the Committee may grant to
eligible directors and employees awards of long term incentive
performance units, each equivalent in value to one share of common
stock (“
Units
”). Except as
otherwise provided, Units awarded may be distributed only after the
end of a performance period of two or more years, as determined by
the Committee, beginning with the year in which the awards are
granted.
The
percentage of the Units awarded that are to be distributed will
depend on the level of financial and other performance goals
achieved by the Company during the performance period. The
Committee may adopt one or more performance categories in addition
to, or in substitution for, a performance category or may eliminate
all performance categories other than financial
performance.
As soon
as practicable after each performance period, the percentage of
Units awarded that are to be distributed, based on the levels of
performance achieved, will be determined and distributed to the
recipients of such awards in the form of a combination of shares of
common stock and cash or cash only. Units awarded, but which the
recipients are not entitled to receive, will be
cancelled.
In the
event of the death or disability of a Unit recipient prior to the
end of any performance period, the number of Units awarded for such
performance period will be reduced in proportion to the number of
months remaining in the performance period after the date of death
or disability. The remaining portion of the award, if any, may, in
the discretion of the Committee, be adjusted based upon the levels
of performance achieved prior to the date of death or disability,
and distributed within a reasonable time after death or disability.
In the event a recipient of Units ceases to be an eligible director
or employee for any reason other than death or disability, all
Units awarded, but not yet distributed, will be
cancelled.
In the
event of a change in control (as that term is defined in the
Omnibus Plan), any outstanding Units will immediately and
automatically be reduced as appropriate to reflect a shorter
performance period.
An
amount equal to the dividend payable on one share of common stock
(a “
dividend
equivalent credit
”) will be determined and credited on
the payment date to each Unit recipient’s account for each
Unit awarded and not yet distributed or cancelled. Such amount will
be converted within the account to an additional number of Units
equal to the number of shares of common stock which could be
purchased at the last-transaction price of the common stock on the
NASDAQ Market on the dividend payment date.
23
If an
extraordinary event occurs during a performance period which
significantly alters the basis upon which the performance levels
were established, the Committee may make adjustments which it deems
appropriate in the performance levels. Such events may include
changes in accounting practices, tax, financial institution laws or
regulations or other laws or regulations, economic changes not in
the ordinary course of business cycles, or compliance with judicial
decrees or other legal requirements.
Stock Appreciation
Rights
. The Omnibus Plan provides that the Committee may
award to eligible directors and employees Rights to receive cash
based upon increases in the market price of common stock over the
last transaction price of the common stock on the NASDAQ Stock
Market (the “
Base
Price
”) on the date of the award. The Committee may
adjust the Base Price of a stock appreciation right
(“
SAR
”)
based upon the market value performance of the common stock in
comparison with the aggregate market value performance of a
selected index or at a stated annual percentage rate. The
expiration date of a SAR may be no more than ten years from the
date of award.
Each
SAR awarded by the Committee may be exercisable immediately or may
become vested over such period or periods as the Committee may
establish, which periods may be accelerated or shortened in the
Committee’s discretion. Each SAR awarded will terminate upon
the expiration date established by the Committee, termination of
the employment or directorship of the SAR recipient, or in the
event of a change in control, as described above in connection with
the termination of Options.
Book Value
Shares
.
The Omnibus
Plan provides that the Committee may award to eligible directors
and eligible employees long term incentive units, each equivalent
in value to the book value of one share of common stock on the date
of award (“
Book
Value Shares
”). The Committee will specify the period
or periods of time within which each Book Value Share will vest,
which period or periods may be accelerated or shortened by the
Committee. Upon redemption, the holder of a Book Value Share will
receive an amount equal to the difference between the book value of
the common stock at the time the Book Value Share is awarded and
the book value of the common stock at the time the Book Value Share
is redeemed, adjusted for the effects of dividends, new share
issuances, and mark-to-market valuations of the Company’s
investment securities portfolio in accordance with generally
accepted accounting principles.
The
expiration date of each Book Value Share awarded will be
established by the Committee, up to a maximum of ten years from the
date of award. However, awards of Book Value Shares will terminate
earlier in the same manner as described above in connection with
the termination of Options.
Adjustments
.
In the event the outstanding shares of the common stock are
increased, decreased, changed into or exchanged for a different
number or kind of securities as a result of a stock split, reverse
stock split, stock dividend, recapitalization, merger, share
exchange acquisition, or reclassification, appropriate
proportionate adjustments will be made in (i) the aggregate number
or kind of shares which may be issued pursuant to exercise of, or
which underlie, Rights; (ii) the exercise or other purchase price,
or Base Price, and the number and/or kind of shares acquirable
under, or underlying, Rights; and (iii) rights and matters
determined on a per share basis under the Omnibus Plan. Any such
adjustment will be made by the Committee, subject to ratification
by the Board of Directors. As described above, the Base Price of a
SAR may also be adjusted by the Committee to reflect changes in a
selected index. Except with regard to Units and Book Value Shares
awarded under the Omnibus Plan, no adjustment in the Rights will be
required by reason of the issuance of common stock, or securities
convertible into common stock, by the Company for cash or the
issuance of
24
shares of common stock by the Company in exchange for shares of the
capital stock of any corporation, financial institution or other
organization acquired by the Company or a subsidiary thereof in
connection therewith.
Any shares of
common stock allocated to Rights granted under the Omnibus Plan
which are subsequently cancelled or forfeited will be available for
further allocation upon such cancellation or
forfeiture.
Director Compensation
Directors’
Fees
. Members of the Company’s Board of Directors
receive no fees or compensation for their service. However, all
members of the Board of Directors are also directors of the Bank
and are compensated for that service.
During
the year ended December 31, 2018, each director received a fee of
$1,000 for each Bank Board of Directors meeting attended, an
additional fee of $750 for each committee meeting attended and a
retainer of $12,000. In addition, the Chairman of the Bank’s
Board of Directors received an additional $250 per meeting attended
and the chairpersons of each committee received an additional $150
per meeting attended. Directors receive $500 for special meetings
held via conference call in lieu of the Board of Director and
committee meeting fees set forth above.
Directors who are
members of the Board of Directors of Real Estate Advisory Services,
Inc., Peoples Investment Services, Inc. and PB Real Estate
Holdings, LLC, and Community Bank Real Estate Solutions, LLC,
subsidiaries of the Bank, receive $750 per meeting.
The
Bank maintains a Service Recognition Program, under which
directors, officers and employees are eligible for awards. Under
the Service Recognition Program, directors, officers and employees
are awarded a combination of common stock of the Company and cash
in the amount necessary to pay taxes on the award, with the amount
of the award based upon the length of service to the Bank. Any
common stock awarded under the Service Recognition Program is
purchased by the Bank on the open market, and no new shares are
issued by the Company under the Service Recognition
Program.
Directors’ Stock
Benefits Plan
.
Members of the Board of Directors are eligible to participate in
the Company’s Omnibus Plan. On March 22, 2012, the Company
granted 891 Restricted Stock Units, each Restricted Stock Unit
being comprised of the right to receive one share of the
Company’s common stock, to each director. The Restricted
Stock Units awarded to directors on March 22, 2012 vested in full
on March 22, 2017, and upon vesting, each Restricted Stock Unit had
a market value of $25.91 for a total value of $23,085, which was
distributed to each director in a combination of stock or cash, as
chosen by each director. On May 23, 2013, the Company granted 891
Restricted Stock Units, each Restricted Stock Unit being comprised
of the right to receive one share of the Company’s common
stock, to each director. The Restricted Stock Units awarded to
directors on May 23, 2013 vested in full on May 23, 2017, and upon
vesting, each Restricted Stock Unit had a market value of $24.94
for a total value of $22,218, which was distributed to each
director in a combination of stock or cash, as chosen by each
director. On February 20, 2014, the Company granted 715 Restricted
Stock Units, each Restricted Stock Unit being comprised of the
right to receive one share of the Company’s common stock, to
each director. The Restricted Stock Units awarded to directors on
February 20, 2014 vested in full on February 20, 2017, and upon
vesting, each Restricted Stock Unit had a market value of $24.78
for a total value of $17,719, which was distributed to each
director in a combination of stock or cash, as chosen by each
director. On February 19, 2015, the Company granted 413 Restricted
Stock Units, each unit being comprised of the right to receive one
share of the Company’s common stock, to each director. The
Restricted Stock Units awarded to directors on February 19, 2015
vested in full on February 19, 2019. The number of Restricted Stock
Units granted and the grant date fair value of each Restricted
Stock Unit have been restated to reflect the 10% stock dividend
issued in December, 2017. The Company did not grant any plan-based
awards to directors during the fiscal year ended December 31,
2018.
Directors’ Deferred
Compensation Plan
.
The Bank maintains a non-qualified deferred compensation plan for
all of its directors. The Bank’s directors are also directors
of the Company. Under the deferred compensation plan, each director
may defer all or a portion of his fees to the plan each year. The
director may elect to invest the deferred compensation in a
restricted list of investment funds. The Bank may make matching
contributions to the plan for the benefit of the director from time
to time at the discretion of the Bank. Directors are fully vested
in all amounts they
25
contribute to the plan and in any amounts contributed by the Bank.
The Bank has established a Rabbi Trust to hold the directors’
accrued benefits under the plan. There are no
“above-market” returns provided for in the deferred
compensation plan. The Bank made no contributions to this plan in
2018.
Benefits under the
plan are payable in the event of the director’s death,
resignation, removal, failure to be re-elected, retirement or in
cases of hardship. Directors may elect to receive deferred
compensation payments in one lump sum or in
installments.
Directors’
Supplemental Retirement Plan
. The Bank maintains a
non-qualified supplemental retirement benefits plan for all its
directors. The supplemental retirement benefits plan is designed to
provide a retirement benefit to the directors while at the same
time minimizing the financial impact on the Bank’s earnings.
Under the supplemental retirement benefits plan, the Company
purchased life insurance contracts on the lives of each director.
The increase in cash surrender value of the contracts constitutes
the Company’s contribution to the supplemental retirement
benefits plan each year. The Bank will pay annual benefits to each
director for 15 years beginning upon retirement from the Board of
Directors. The Bank is the sole owner of all of the insurance
contracts.
The
following table reports all forms of compensation paid to or
accrued for the benefit of each director during the 2018 fiscal
year.
DIRECTOR
COMPENSATION
|
Name
|
Fees Earned or Paid in Cash
($)
|
Stock Awards1
($)
|
Option Awards
($)
|
Non-Equity Incentive Plan
Compensation ($)
|
Change in Pension Value and
Nonqualified Deferred Compensation Earnings2 ($)
|
All Other Compensation3
($)
|
Total ($)
|
|
James S.
Abernethy
|
33.550
|
--
|
--
|
--
|
8,106
|
--
|
41,656
|
|
Robert C.
Abernethy
|
40,200
|
--
|
--
|
--
|
12,273
|
--
|
52,473
|
|
Douglas S.
Howard
|
34,300
|
--
|
--
|
--
|
5,032
|
--
|
39,332
|
|
John W. Lineberger,
Jr.
|
25,800
|
--
|
--
|
--
|
11,954
|
--
|
37,754
|
|
Gary E.
Matthews
|
24,800
|
--
|
--
|
--
|
7,349
|
--
|
32.149
|
|
Billy L. Price,
Jr., M.D.
|
32,250
|
--
|
--
|
--
|
6,647
|
--
|
38,897
|
|
Larry E.
Robinson
|
26,550
|
--
|
--
|
--
|
6,279
|
3,750
|
36,579
|
|
William Gregory
Terry
|
28,050
|
--
|
--
|
--
|
2,463
|
--
|
30,513
|
|
Dan Ray Timmerman,
Sr.
|
36,100
|
--
|
--
|
--
|
6,625
|
--
|
42,725
|
|
Benjamin I.
Zachary
|
30,800
|
--
|
--
|
--
|
6.676
|
--
|
37,476
|
_________________________
1
The Company did not
grant any plan-based awards to directors during the fiscal year
ended December 31, 2018. At December 31, 2018, each director had an
aggregate of 413 Restricted Stock Units (as adjusted for the 10%
stock dividend granted in December of 2017) outstanding. See
information above under the heading “Directors Stock Benefit
Plan” for information on each individual grant of restricted
stock units.
2
Change in Pension
Value and Nonqualified Deferred Compensation Earnings represents
the expense accrued by the Bank for each director under the
Directors’ Supplemental Retirement Plan as described
above.
3
In 2018, Director
Robinson received 104 shares of PEBK stock and $750.00 in cash for
his 25 years of service as a director under the Bank’s
Service Recognition Program.
26
Indebtedness of and Transactions with Management
and Directors
The
Company is a “listed issuer” under the rules and
regulations of the Exchange Act whose common stock is listed on
NASDAQ. The Company uses the definition of independence contained
in NASDAQ’s listing standards to determine the independence
of its directors and that the Board of Directors and each standing
committee of the Board of Directors is in compliance with NASDAQ
listing standards for independence.
Certain directors and executive
officers of the Bank and their immediate families and associates
were customers of and had transactions with the Bank in the
ordinary course of business during 2018. All outstanding loans,
extensions of credit or overdrafts, endorsements and guarantees
outstanding at any time during 2018 to the Bank’s executive
officers
and directors and their family members were made in
the ordinary course of its business. These loans are currently made
on substantially the same terms, including interest rates and
collateral, as those then prevailing for comparable transactions
with persons not related to the lender, and did not involve
and directors and their
family members were made in the ordinary course of its business.
These loans are currently made on substantially the same terms,
including interest rates and collateral, as those then prevailing
for comparable transactions with persons not related to the lender,
and did not involve
more
than the normal risk of collectability or present any other
unfavorable features.
The
Board of Directors routinely, and no less than annually, reviews
all transactions, direct and indirect, between the Company or the
Bank and any employee or director, or any of such person’s
immediate family members. The standard applied to such transactions
are to review such transactions for comparable market values for
similar transactions. All material facts of the transactions and
the director’s interest are discussed by all disinterested
directors and a decision is made about whether the transaction is
fair to the Company and the Bank. A majority vote of all
disinterested directors is required to approve the transaction. See
“Code of Business Conduct and Ethics” on page 11 of
this Proxy Statement. During the fiscal year ended December 31,
2018, there were no related party transactions that would be
required to be reported that were not reviewed in accordance with
the above.
The
Bank leases two of its facilities from Shortgrass Associates,
L.L.C. (“
Shortgrass
”). Director
John W. Lineberger, Jr. owns 25% of the membership interests in
Shortgrass. Each of the facilities is subject to a 20-year lease
between the Bank and Shortgrass. Pursuant to the terms of the
leases for the two facilities leased by the Bank, during 2018 the
Bank paid a total of $230,232 to Shortgrass in lease payments for
these facilities, and the dollar value of Director John W.
Lineberger, Jr.’s interest in such lease payments was
approximately $57,558 (or 25% x $230,232). The total aggregate
dollar value of all lease payments due by the Bank to Shortgrass
starting on January 1, 2018 and continuing until the end of each
lease, is $906,136, and the total aggregate dollar value of
Director John W. Lineberger, Jr.’s interest in all such lease
payments is approximately $226,534 (or 25% x
$906,136).
The
Board of Directors also evaluates the influence family
relationships may have on the independence of directors who are
related by blood or marriage. Christine S. Abernethy, a greater
than ten percent (10%) shareholder of the Company, has two sons,
Robert C. Abernethy and James S. Abernethy, who serve on the Board
of Directors. All of the non-related directors have determined that
the family relationships among Christine S. Abernethy, James S.
Abernethy and Robert C. Abernethy do not affect the brothers’
independence as directors.
27
Equity Compensation Plan Information
The following table sets forth certain information regarding
outstanding options and shares for future issuance under the Equity
Compensation Plans as of December 31, 2018. Individual equity
compensation arrangements are aggregated and included within this
table. This table excludes any plan, contract or arrangement that
provides for the issuance of options, warrants or other rights that
are given to our shareholders on a pro rata basis and any employee
benefit plan that is intended to meet the qualification
requirements of Section 401(a) of the Internal Revenue
Code.
|
Plan
Category
|
Number of securities to be issued
upon exercise of outstanding option, warrants and rights (1), (2),
(3) and (4)
|
Weighted-average exercise price of
outstanding options, warrants and rights (3)
|
Number of securities remaining
available for future issuance under equity compensation plans
(excluding securities reflected in column (a)) (5)
(6)
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation
plans approved by security holders
|
29,526
|
$
24.46
|
280,933
|
|
Equity compensation
plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
29,526
|
$
24.46
|
280,933
|
|
(1)
Includes 16,583 restricted stock units (adjusted for the 10% stock
dividend granted in December of 2017) granted on February 19, 2015
under the Omnibus Plan. These restricted stock grants vested on
February 19, 2019.
|
|||
|
(2)
Includes 5,104 restricted stock units (adjusted for the 10% stock
dividend granted in December of 2017) granted on February 18, 2016
under the Omnibus Plan. These restricted stock grants vest on
February 20, 2020
|
|||
|
|
|
|
|
|
(3)
Includes 4,144 restricted stock units (adjusted for the 10% stock
dividend granted in December, 2017) granted on March 1, 2017 under
the Omnibus Plan. The restricted stock grants vest on March 1,
2021.
|
|||
|
|
|
|
|
|
(4)
Includes 3,725 restricted stock units granted on January 24, 2018
under the Omnibus Plan. These restricted stock units vest on
January 24, 2022.
|
|||
|
|
|
|
|
|
(5) The
exercise price used for the grants of restricted stock units under
the Omnibus Plan is $24.46, the closing price for the
Company’s stock on December 31, 2018.
|
|||
|
|
|
|
|
|
(6)
Reflects shares currently reserved for possible issuance under the
Omnibus Plan (adjusted for the 10% stock dividend granted in
December, 2017).
|
|||
28
STOCK PERFORMANCE GRAPH
The
following graph compares the Company’s cumulative shareholder
return on its common stock with a NASDAQ index and with a
southeastern bank index. The graph was prepared by S&P Global
Market Intelligence, Charlottesville, Virginia, using data as of
December 31, 2018
COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS
Performance Report for
Peoples Bancorp of North Carolina, Inc.
29
PROPOSAL 2
ADVISORY (NON-BINDING) PROPOSAL TO APPROVE THE COMPENSATION OF
THE
COMPANY’S NAMED EXECUTIVE OFFICERS
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“
Dodd-Frank
Act
”) was signed into law on July 21, 2010. The
Dodd-Frank Act requires that our shareholders be provided an
opportunity to cast a separate advisory vote on the compensation
paid to our named executive officers as disclosed in the
compensation tables and related matches in this Proxy
Statement.
The
Company believes that our 2018 compensation policies and procedures
are centered on a pay-for-performance culture and are strongly
aligned with the long-term interests of our shareholders.
These policies and procedures are described in detail in this Proxy
Statement.
This
proposal, commonly known as a “say-on-pay” proposal,
gives you as a shareholder the opportunity to vote on the
compensation of our named executive officers through the following
resolution:
“RESOLVED,
that the shareholders of Peoples Bancorp of North Carolina, Inc.
approve the compensation of its Named Executive Officers named in
the Summary Compensation Table in this Proxy Statement, as
described in the narrative and the tabular disclosure regarding the
compensation of the Named Executive Officers contained in this
Proxy Statement.”
Under
the Dodd-Frank Act, your vote on this matter is advisory and will
therefore not be binding upon the Board of Directors. However, the
Compensation Committee will take the outcome of the vote into
account when determining further executive compensation
arrangements.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR
THE APPROVAL OF THIS
PROPOSAL.
PROPOSAL 3
ADVISORY (NON-BINDING) PROPOSAL ON THE FREQUENCY IN
WHICH
SHAREHOLDERS APPROVE THE COMPENSATION OF THE COMPANY’S
NAMED
EXECUTIVE OFFICERS
The
Company is presenting the following proposal, which gives the
shareholders the opportunity to inform the Company as to how often
you wish the Company to include a proposal, similar to Proposal 2,
in its Proxy Statement. This resolution is required pursuant
to the Dodd-Frank Act. While our Board intends to carefully
consider the shareholder vote resulting from the proposal, the
final vote will not be binding on us and is advisory in
nature.
“RESOLVED,
that the shareholders wish the company to include an advisory vote
on the overall compensation of the Company’s named executive
officers: (i) every year; (ii) every other year; or (iii) every
three years.”
The
Board of Directors recommends that shareholders vote to hold an
advisory vote on the overall compensation of the Company’s
named executive officers every three years.
The
Board of Directors believes the three-year option is best as
shareholder feedback would be more useful if the success of a
compensation program is judged over a period of time.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE TO
HOLD AN
ADVISORY VOTE ON THE OVERALL COMPENSATION OF THE COMPANY’S
NAMED EXECUTIVE
OFFICERS
EVERY THREE
YEARS
.
30
PROPOSAL 4
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Elliott
Davis, our registered independent public accounting firm for the
fiscal year ended December 31, 2018, has been appointed by the
Audit Committee as our registered independent public accounting
firm for the fiscal year ending December 31, 2019, and you are
being asked to ratify this appointment. Fees charged by this firm
are at rates and upon terms that are customarily charged by other
registered independent public accounting firms. A representative of
the firm will be present at the Annual Meeting and will have an
opportunity to make a statement if he or she desires to do so and
to respond to appropriate questions.
Audit Fees Paid to Independent Auditors
The
following table represents the approximate fees for professional
services rendered by Elliott Davis for the audit of our annual
financial statements and review of our financial statements
included in our Forms 10-Q for the fiscal years ended December 31,
2018 and 2017 and fees billed for audit-related services, tax
services and all other services rendered, for each of such
years.
|
|
Year Ended December
31
|
|
|
|
2018
|
2017
|
|
|
||
|
Audit
Fees
1
|
$
194,626
|
$
188,250
|
|
|
||
|
Audit-Related
Fees
2
|
$
10,593
|
$
10,545
|
|
|
||
|
Tax
Fees
3
|
$
38,500
|
$
23,392
|
|
|
||
|
All Other
Fees
|
--
|
--
|
__________________________
1
Includes amounts for the testing of
management’s assertions regarding internal controls in
accordance with the Federal Deposit Insurance Corporation
Improvement Act. Audit Fees include amounts for the integrated
audit of the consolidated financial statements and internal control
over financial reporting (Sarbanes-Oxley Section 404).
2
Represents amounts
for the audit of the Company’s Profit Sharing and 401(k) Plan
and the testing of management’s assertions regarding internal
controls in accordance with the Federal Deposit Insurance
Corporation Improvement Act.
3
Represents amounts
for assistance in the preparation of our various federal, state and
local tax returns.
All
audit related services, tax services and other services giving rise
to the fees listed under “Audit-Related Fees”,
“Tax Fees” and “All Other Fees” in the
table above were pre-approved by the Audit Committee, which
concluded that the provision of such services was compatible with
the maintenance of that firm’s independence in the conduct of
its auditing functions. The Audit Committee’s Charter
provides for pre-approval of all audit and non-audit services to be
provided by our independent auditors. The Charter authorizes the
Audit Committee to delegate to one or more of its members
pre-approval authority with respect to permitted services, provided
that any such approvals are presented to the Audit Committee at its
next scheduled meeting.
THE
BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR
RATIFICATION OF
THE APPOINTMENT OF ELLIOTT DAVIS AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING
DECEMBER 31, 2019.
31
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
It is
presently anticipated that the 2020 Annual Meeting of Shareholders
of the Company will be held on May 7, 2020. In order for
shareholder proposals to be included in the Company’s proxy
materials for that meeting, such proposals must be received by the
Secretary of the Company at the Company’s principal executive
office no later than November 25, 2019 and meet all other
applicable requirements for inclusion in the Proxy
Statement.
In the
alternative, a shareholder may commence his or her own proxy
solicitation and present a proposal from the floor at the 2020
Annual Meeting of Shareholders of the Company. In order to do so,
the shareholder must notify the Secretary of the Company in
writing, at the Company’s principal executive office no later
than February 7, 2020, of his or her proposal. If the Secretary of
the Company is not notified of the shareholder’s proposal by
February 7, 2020, the Board of Directors may vote on the proposal
pursuant to the discretionary authority granted by the proxies
solicited by the Board of Directors for the 2020 Annual Meeting of
Shareholders.
OTHER MATTERS
Management knows of
no other matters to be presented for consideration at the Annual
Meeting or any adjournments thereof. If any other matters shall
properly come before the Annual Meeting, it is intended that the
proxyholders named in the enclosed form of proxy will vote the
shares represented thereby in accordance with their judgment,
pursuant to the discretionary authority granted
therein.
MISCELLANEOUS
The
Annual Report of the Company for the year ended December 31, 2018,
which includes financial statements audited and reported upon by
the Company’s registered independent public accounting firm,
is being mailed as Appendix A to this Proxy Statement; however, it
is not intended that the Annual Report be deemed a part of this
Proxy Statement or a solicitation of proxies.
THE
FORM 10-K FILED BY THE COMPANY WITH THE SEC, INCLUDING THE
FINANCIAL STATEMENTS AND SCHEDULES THERETO, WILL BE PROVIDED FREE
OF CHARGE UPON WRITTEN REQUEST DIRECTED TO: PEOPLES BANCORP OF
NORTH CAROLINA, INC., POST OFFICE BOX 467, 518 WEST C STREET,
NEWTON, NORTH CAROLINA 28658-0467, ATTENTION: A. JOSEPH LAMPRON,
JR.
By
Order of the Board of Directors,
Lance
A. Sellers
President and Chief
Executive Officer
Newton,
North Carolina
March
25, 2019
32
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”.
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 20 banking offices, as of December
31, 2018, 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 Denver and Durham, North
Carolina. At December 31, 2018, the Company had total assets of
$1.1 billion, net loans of $797.6 million, deposits of $877.2
million, total securities of $198.9 million, and
shareholders’ equity of $123.6 million.
The
Bank operates three banking offices focused on the Latino
population that were formerly operated as a division of the Bank
under the name Banco de la Gente (“Banco”). These
offices are now branded as Bank branches and considered a separate
market territory of the Bank as they offer normal and customary
banking services as are offered in the Bank’s other branches
such as the taking of deposits and the making of
loans.
The
Bank has a diversified loan portfolio, with no foreign loans and
few agricultural loans. Real estate loans are predominately
variable rate and fixed rate commercial property loans, which
include residential development loans to commercial customers.
Commercial loans are spread throughout a variety of industries with
no one particular industry or group of related industries
accounting for a significant portion of the commercial loan
portfolio. The majority of the Bank’s deposit and loan
customers are individuals and small to medium-sized businesses
located in the Bank’s market area. The Bank’s loan
portfolio also includes Individual Taxpayer Identification Number
(ITIN) mortgage loans generated thorough the Bank’s Banco
offices. Additional discussion of the Bank’s loan portfolio
and sources of funds for loans can be found in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on pages
A-4 through A-23
of the Annual
Report, which is included in this Form 10-K as Exhibit
(13).
The
operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by
related monetary and fiscal policies of depository institution
regulatory agencies, including the Federal Reserve, the Federal
Deposit Insurance Corporation (the “FDIC”) and the
North Carolina Commissioner of Banks (the
“Commissioner”).
The
Company’s fiscal year ends December 31. This Form 10-K is
also being used as the Bank’s Annual Disclosure Statement
under FDIC Regulations. This Form 10-K has not been reviewed, or
confirmed for accuracy or relevance by the FDIC.
At
December 31, 2018, the Company employed 310 full-time employees and
35 part-time employees, which equated to 334 full-time equivalent
employees.
Subsidiaries
The
Bank is a subsidiary of the Company. At December 31, 2018, 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.
A-1
In June
2006, the Company formed a wholly owned Delaware statutory trust,
PEBK Capital Trust II (“PEBK Trust II”), which issued
$20.0 million of guaranteed preferred beneficial interests in the
Company’s junior subordinated deferrable interest debentures.
All of the common securities of PEBK Trust II are owned by the
Company. The proceeds from the issuance of the common securities
and the trust preferred securities were used by PEBK Trust II to
purchase $20.6 million of junior subordinated debentures of the
Company, which pay a floating rate equal to three-month LIBOR plus
163 basis points. The proceeds received by the Company from the
sale of the junior subordinated debentures were used in December
2006 to repay the trust preferred securities issued in December
2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust
of the Company, and for general purposes. The debentures represent
the sole asset of PEBK Trust II. PEBK Trust II is not included in
the consolidated financial statements.
The
trust preferred securities issued by PEBK Trust II accrue and pay
quarterly at a floating rate of three-month LIBOR plus 163 basis
points. The Company has guaranteed distributions and other payments
due on the trust preferred securities to the extent PEBK Trust II
does not have funds with which to make the distributions and other
payments. The net combined effect of the trust preferred securities
transaction is that the Company is obligated to make the
distributions and other payments required on the trust preferred
securities.
These
trust preferred securities are mandatorily redeemable upon maturity
of the debentures on June 28, 2036, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the
debentures purchased by PEBK Trust II, in whole or in part, which
became effective on June 28, 2011. As specified in the indenture,
if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount plus any accrued but unpaid
interest.
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
|
|
2018
|
2017
|
2016
|
2015
|
2014
|
|
Summary of Operations
|
|
|
|
|
|
|
Interest
income
|
$
45,350
|
41,949
|
39,809
|
38,666
|
38,420
|
|
Interest
expense
|
2,146
|
2,377
|
3,271
|
3,484
|
4,287
|
|
Net
interest income
|
43,204
|
39,572
|
36,538
|
35,182
|
34,133
|
|
Provision
for loan losses
|
790
|
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
|
Net
interest income after provision
|
|
|
|
|
|
|
for
loan losses
|
42,414
|
40,079
|
37,744
|
35,199
|
34,832
|
|
Non-interest
income (1)
|
16,166
|
15,364
|
16,236
|
15,256
|
13,824
|
|
Non-interest
expense (1)
|
42,574
|
41,228
|
42,242
|
37,722
|
37,331
|
|
Earnings
before income taxes
|
16,006
|
14,215
|
11,738
|
12,733
|
11,325
|
|
Income
tax expense
|
2,624
|
3,947
|
2,561
|
3,100
|
1,937
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
9,633
|
9,388
|
|
|
|
|
|
|
|
|
Selected Year-End Balances
|
|
|
|
|
|
|
Assets
|
$
1,093,251
|
1,092,166
|
1,087,991
|
1,038,481
|
1,040,494
|
|
Investment
securities available for sale
|
194,578
|
229,321
|
249,946
|
268,530
|
281,099
|
|
Net
loans
|
797,578
|
753,398
|
716,261
|
679,502
|
640,809
|
|
Mortgage
loans held for sale
|
680
|
857
|
5,709
|
4,149
|
1,375
|
|
Interest-earning
assets
|
1,007,078
|
996,509
|
999,201
|
977,079
|
956,900
|
|
Deposits
|
877,213
|
906,952
|
892,918
|
832,175
|
814,700
|
|
Interest-bearing
liabilities
|
657,110
|
679,922
|
698,120
|
679,937
|
722,991
|
|
Shareholders'
equity
|
$
123,617
|
115,975
|
107,428
|
104,864
|
98,665
|
|
Shares
outstanding
|
5,995,256
|
5,995,256
|
5,417,800
|
5,510,538
|
5,612,588
|
|
|
|
|
|
|
|
|
Selected Average Balances
|
|
|
|
|
|
|
Assets
|
$
1,094,707
|
1,098,992
|
1,076,604
|
1,038,594
|
1,036,486
|
|
Investment
securities available for sale
|
209,742
|
234,278
|
252,725
|
266,830
|
287,371
|
|
Net
loans
|
777,098
|
741,655
|
703,484
|
669,628
|
631,025
|
|
Interest-earning
assets
|
1,007,484
|
998,821
|
985,236
|
952,251
|
949,537
|
|
Deposits
|
903,120
|
895,129
|
856,313
|
816,628
|
808,399
|
|
Interest-bearing
liabilities
|
665,165
|
700,559
|
705,291
|
707,611
|
731,786
|
|
Shareholders'
equity
|
$
123,797
|
116,883
|
113,196
|
106,644
|
96,877
|
|
Shares
outstanding (2)
|
5,995,256
|
5,988,183
|
6,024,970
|
6,115,159
|
6,177,233
|
|
|
|
|
|
|
|
|
Profitability Ratios
|
|
|
|
|
|
|
Return
on average total assets
|
1.22
%
|
0.93
%
|
0.85
%
|
0.93
%
|
0.91
%
|
|
Return
on average shareholders' equity
|
10.81
%
|
8.78
%
|
8.11
%
|
9.03
%
|
9.69
%
|
|
Dividend
payout ratio
|
23.41
%
|
25.67
%
|
22.95
%
|
16.34
%
|
10.89
%
|
|
|
|
|
|
|
|
|
Liquidity and Capital Ratios (averages)
|
|
|
|
|
|
|
Loan
to deposit
|
86.05
%
|
82.85
%
|
82.15
%
|
82.00
%
|
78.06
%
|
|
Shareholders'
equity to total assets
|
11.31
%
|
10.64
%
|
10.51
%
|
10.27
%
|
9.35
%
|
|
|
|
|
|
|
|
|
Per share of Common Stock (2)
|
|
|
|
|
|
|
Basic
net earnings
|
$
2.23
|
1.71
|
1.53
|
1.57
|
1.52
|
|
Diluted
net earnings
|
$
2.22
|
1.69
|
1.50
|
1.56
|
1.51
|
|
Cash
dividends
|
$
0.52
|
0.44
|
0.35
|
0.25
|
0.16
|
|
Book
value
|
$
20.62
|
19.34
|
18.03
|
17.30
|
15.98
|
(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-24 through
A-68
.
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, 2018,
2017 and 2016. 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,
Wake and Durham 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.
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
Federal Reserve maintained the Federal Funds rate at 0.25% from
December 2008 to December 2015 before increasing the Fed Funds rate
nine times since December 2015 to the Fed Funds rate of 2.50% at
December 31, 2018. These increases have had a positive impact on
earnings in recent periods and should continue to have a positive
impact on the Bank’s net interest income in future
periods.
The
Company plans to open a Loan Production Office in the Ballantyne
area of Charlotte, North Carolina during 2019. The Company does not
have specific plans for additional offices in 2019 but will
continue to look for growth opportunities in nearby markets and may
expand if considered a worthwhile opportunity.
A-4
On
August 31, 2015, the FDIC and the North Carolina Office of the
Commissioner of Banks (“Commissioner”) issued a Consent
Order (the “Order”) in connection with compliance by
the Bank with the Bank Secrecy Act and its implementing regulations
(collectively, the “BSA”). The Order was issued
pursuant to the consent of the Bank. In consenting to the issuance
of the Order, the Bank did not admit or deny any unsafe or unsound
banking practices or violations of law or regulation.
The
Order required the Bank to take certain affirmative actions to
comply with its obligations under the BSA, including, without
limitation, strengthening its Board of Directors’ oversight
of BSA activities; reviewing, enhancing, adopting and implementing
a revised BSA compliance program; completing a BSA risk assessment;
developing a revised system of internal controls designed to ensure
full compliance with the BSA;reviewing and revising customer due
diligence and risk assessment processes, policies and procedures;
developing, adopting and implementing effective BSA training
programs; assessing BSA staffing needs and resources and appointing
a qualified BSA officer;establishing an independent BSA testing
program; ensuring that all reports required by the BSA are
accurately and properly filed and engaging an independent firm to
review past account activity to determine whether suspicious
activity was properly identified and reported.
During
the third quarter of 2017 the Bank received notice that the Order
was terminated effective August 30, 2017.
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 2018 Annual Report to Shareholders which is
Appendix A to the Proxy Statement for the May 2, 2019 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.
A-5
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 counterparty fails to perform, credit risk is equal to the
extent of the fair-value gain in the derivative. The Company
minimized the credit risk in derivative instruments by entering
into transactions with high-quality counterparties that were
reviewed periodically by the Company. The Company did not have any
interest rate derivatives outstanding as of December 31, 2018 or
2017.
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 $13.4 million or $2.23 basic net earnings per share and $2.22
diluted net earnings per share for the year ended December 31,
2018, as compared to $10.3 million or $1.71 basic net earnings per
share and $1.69 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, an
increase in non-interest income and a decrease in income tax
expense, which were partially offset by an increase in the
provision for loan losses and an increase in non-interest expense,
as discussed below.
The
Company reported earnings of $10.3 million or $1.71 basic net
earnings per share and $1.69 diluted net earnings per share for the
year ended December 31, 2017, as compared to $9.2 million or $1.53
basic net earnings per share and $1.50 diluted net earnings per
share for the year ended December 31, 2016. The increase in
year-to-date net earnings from 2016 to 2017 is primarily
attributable to an increase in net interest income and a decrease
in non-interest expense, which were partially offset by a decrease
in non-interest income and a decrease in the credit to the
provision for loan losses, as discussed below. Earnings for the
year ended December 31, 2017 were reduced by a charge to income tax
expense of $588,000 due to the revaluation of deferred taxes as
required due to the passing of the Tax Cuts and Jobs Act
(“TCJA”) in December, 2017. Without this charge to
earnings, the Company would have had net earnings totaling $10.9
million for the year ended December 31, 2017.
The
return on average assets in 2018 was 1.22%, compared to 0.93% in
2017 and 0.85% in 2016. The return on average shareholders’
equity was 10.81% in 2018 compared to 8.78% in 2017 and 8.11% in
2016.
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 2018 was $43.2 million compared to $39.6
million in 2017. The increase in net interest income was primarily
due to a $3.4 million increase in interest income, which was
primarily attributable to an increase in the average outstanding
balance of loans and a 1.00% increase in the prime rate since
December 31, 2017, combined with a $231,000 decrease in interest
expense, which was primarily attributable to a decrease in the
average outstanding balances of Federal Home Loan Bank
(“FHLB”) borrowings during the year ended December 31,
2018, as compared to the same period one year ago due to the payoff
of remaining FHLB borrowings in October 2017. Net interest income
increased to $39.6 million in 2017 from $36.5 million in
2016.
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, 2018, 2017 and 2016. 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.
A-6
|
Table 1- Average Balance Table
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
December 31,
2017
|
December 31,
2016
|
||||||
|
(Dollars
in thousands)
|
Average Balance
|
Interest
|
Yield / Rate
|
Average Balance
|
Interest
|
Yield / Rate
|
Average Balance
|
Interest
|
Yield / Rate
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
777,098
|
38,654
|
4.97
%
|
$
741,655
|
34,888
|
4.70
%
|
703,484
|
32,452
|
4.61
%
|
|
Investments -
taxable
|
71,093
|
1,936
|
2.72
%
|
64,341
|
1,693
|
2.63
%
|
78,575
|
1,925
|
2.45
%
|
|
Investments -
nontaxable*
|
142,832
|
5,508
|
3.86
%
|
173,069
|
7,314
|
4.23
%
|
178,379
|
7,577
|
4.25
%
|
|
Other
|
16,461
|
304
|
1.85
%
|
19,756
|
219
|
1.11
%
|
24,798
|
123
|
0.50
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
1,007,484
|
46,402
|
4.61
%
|
998,821
|
44,114
|
4.42
%
|
985,236
|
42,077
|
4.27
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
41,840
|
|
|
53,805
|
|
|
44,732
|
|
|
|
Other
assets
|
51,704
|
|
|
53,557
|
|
|
59,537
|
|
|
|
Allowance for loan
losses
|
(6,321
)
|
|
|
(7,191
)
|
|
|
(8,884
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
1,094,707
|
|
|
1,098,992
|
|
|
1,080,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, MMDA &
savings deposits
|
$
484,180
|
769
|
0.16
%
|
$
481,455
|
598
|
0.12
%
|
447,582
|
495
|
0.11
%
|
|
Time
deposits
|
112,398
|
472
|
0.42
%
|
132,626
|
466
|
0.35
%
|
150,641
|
586
|
0.39
%
|
|
FHLB
borrowings
|
-
|
-
|
-
|
16,329
|
662
|
4.05
%
|
42,903
|
1,661
|
3.87
%
|
|
Trust preferred
securities
|
20,619
|
790
|
3.83
%
|
20,619
|
590
|
2.86
%
|
20,619
|
485
|
2.35
%
|
|
Other
|
47,968
|
115
|
0.24
%
|
49,530
|
61
|
0.12
%
|
43,546
|
44
|
0.10
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
665,165
|
2,146
|
0.32
%
|
700,559
|
2,377
|
0.34
%
|
705,291
|
3,271
|
0.46
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
306,544
|
|
|
281,048
|
|
|
258,091
|
|
|
|
Other
liabilities
|
(799
)
|
|
|
502
|
|
|
4,043
|
|
|
|
Shareholders'
equity
|
123,797
|
|
|
116,883
|
|
|
113,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholder's equity
|
$
1,094,707
|
|
|
1,098,992
|
|
|
1,080,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
$
44,256
|
4.29
%
|
|
$
41,737
|
4.08
%
|
|
$
38,806
|
3.81
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
yield on interest-earning assets
|
|
|
4.39
%
|
|
|
4.18
%
|
|
|
3.94
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
1,052
|
|
|
$
2,165
|
|
|
$
2,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
43,204
|
|
|
$
39,572
|
|
|
$
36,538
|
|
*Includes U.S.
Government agency securities that are non-taxable for state income
tax purposes of $38.0 million in 2018, $40.3 million in 2017 and
$38.7 million in 2016. The tax rates of 2.50%, 3.00% and 4.00% were
used to calculate the tax equivalent yields on these securities in
2018, 2017 and 2016, respectively.
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 interest due to both volume and rate have
been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the changes in
each.
A-7
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
December 31,
2017
|
||||
|
(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
|
$
1,715
|
2,051
|
3,766
|
1,778
|
658
|
2,436
|
|
|
|
|
|
|
|
|
|
Investments -
taxable
|
181
|
62
|
243
|
(362
)
|
130
|
(232
)
|
|
Investments -
nontaxable
|
(1,222
)
|
(584
)
|
(1,806
)
|
(225
)
|
(38
)
|
(263
)
|
|
Other
|
(49
)
|
134
|
85
|
(40
)
|
136
|
96
|
|
Total
interest income
|
625
|
1,663
|
2,288
|
1,151
|
886
|
2,037
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
NOW, MMDA &
savings deposits
|
4
|
167
|
171
|
40
|
63
|
103
|
|
Time
deposits
|
(78
)
|
84
|
6
|
(66
)
|
(54
)
|
(120
)
|
|
FHLB / FRB
Borrowings
|
(331
)
|
(331
)
|
(662
)
|
(1,053
)
|
54
|
(999
)
|
|
Trust Preferred
Securities
|
-
|
200
|
200
|
-
|
105
|
105
|
|
Other
|
(3
)
|
57
|
54
|
7
|
10
|
17
|
|
Total
interest expense
|
(408
)
|
177
|
(231
)
|
(1,072
)
|
178
|
(894
)
|
|
Net
interest income
|
$
1,033
|
1,486
|
2,519
|
2,223
|
708
|
2,931
|
Net
interest income on a tax equivalent basis totaled $44.3 million in
2018 as compared to $41.7 million in 2017. The net interest rate
spread, which represents the rate earned on interest-earning assets
less the rate paid on interest-bearing liabilities, was 4.29% in
2018, as compared to a net interest rate spread of 4.08% in 2017.
The net yield on interest-earning assets was 4.39% in 2018 and
4.18% in 2017.
Tax
equivalent interest income increased $2.3 million in 2018 primarily
due to
an increase in
interest income resulting from an increase in the average
outstanding principal balance of loans, which was partially offset
by
a decrease in the
average outstanding balance of investment securities. The average
outstanding principal balance of loans increased $35.4 million to
$777.1 million in 2018 compared to $741.7 million in 2017. The
average outstanding balance of investment securities decreased
$23.5 million to $213.9 million in 2018 compared to $237.4 million
in 2017. The yield on interest-earning assets was 4.61% in 2018
compared to 4.42% in 2017.
Interest expense
decreased $231,000 in 2018 compared to 2017. The decrease in
interest expense is primarily due to a decrease in the average
outstanding balance of FHLB borrowings. Average interest-bearing
liabilities decreased by $35.4 million to $665.2 million in 2018
compared to $700.6 million in 2017. The cost of funds decreased to
0.32% in 2018 from 0.34% in 2017.
In 2017
net interest income on a tax equivalent basis was $41.7 million
compared to $38.8 million in 2016. The net interest spread was
4.08% in 2017 compared to 3.81% in 2016. The net yield on
interest-earning assets was 4.18% in 2017 compared to 3.94% in
2016.
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, 2018 was an expense of
$790,000, as compared to a credit of $507,000 for the year ended
December 31, 2017. The increase in the provision for loan losses is
primarily attributable to a $44.2 million increase in loans from
December 31, 2017 to December 31, 2018. The credits to provision
for loan losses for the years ended December 31, 2017 and 2016
resulted from, and were considered appropriate as part of,
management’s assessment and estimate of the risks in the
total loan portfolio and determination of the total allowance for
loan losses. The primary factors contributing to the continued
decrease in the allowance for loan losses as a percent of total
loans outstanding were the continuing positive trends in indicators
of potential losses on loans, primarily non-accrual loans and the
reduction in the level of net charge-offs since 2014, as shown in
Table 3 below:
A-8
|
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)
|
2018
|
2017
|
2016
|
2015
|
2014
|
2018
|
2017
|
2016
|
2015
|
2014
|
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
|
Construction
and land development
|
$
43
|
(14
)
|
(3
)
|
153
|
456
|
0.05
%
|
(0.02
%)
|
(0.01
%)
|
0.25
%
|
0.78
%
|
|
Single-family
residential
|
10
|
164
|
220
|
584
|
237
|
0.00
%
|
0.07
%
|
0.09
%
|
0.27
%
|
0.12
%
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
|
|
|
Banco de la
Gente non-traditional
|
-
|
-
|
-
|
95
|
174
|
0.00
%
|
0.00
%
|
0.00
%
|
0.21
%
|
0.36
%
|
|
Commercial
|
348
|
(21
)
|
299
|
308
|
119
|
0.13
%
|
(0.01
%)
|
0.12
%
|
0.13
%
|
0.05
%
|
|
Multifamily
and farmland
|
4
|
66
|
-
|
-
|
-
|
0.01
%
|
0.23
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Total real
estate loans
|
405
|
195
|
516
|
1,140
|
986
|
0.06
%
|
0.03
%
|
0.09
%
|
0.20
%
|
0.18
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not
secured by real estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
22
|
163
|
(25
)
|
(64
)
|
376
|
0.02
%
|
(0.03
%)
|
(0.03
%)
|
(0.07
%)
|
0.53
%
|
|
Farm
loans
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Consumer loans
(1)
|
284
|
319
|
342
|
400
|
358
|
3.11
%
|
3.10
%
|
3.38
%
|
4.00
%
|
3.63
%
|
|
All other
loans
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Total
loans
|
$
711
|
677
|
833
|
1,476
|
1,720
|
0.09
%
|
0.09
%
|
0.12
%
|
0.22
%
|
0.27
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reduction of) loan losses
|
|
|
|
|
|
|
|
|
|
|
|
for the
period
|
$
790
|
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses at end of period
|
$
6,445
|
6,366
|
7,550
|
9,589
|
11,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at
end of period
|
$
804,023
|
759,764
|
723,811
|
689,091
|
651,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans at end of period
|
$
3,314
|
3,711
|
3,825
|
8,432
|
10,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.80
%
|
0.84
%
|
1.04
%
|
1.39
%
|
1.70
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans
outstanding at end of period
|
0.41
%
|
0.49
%
|
0.53
%
|
1.22
%
|
1.65
%
|
|
|
|
|
|
(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 $16.2 million for the year ended December 31, 2018,
compared to $15.4 million for the year ended December 31, 2017. The
increase in non-interest income is primarily attributable to a
$893,000 increase in miscellaneous non-interest income, which was
partially offset by a $339,000 decrease in mortgage banking income
during the year ended December 31, 2018, as compared to the year
ended December 31, 2017. The increase in miscellaneous non-interest
income is primarily due to a $576,000 increase in net gains
associated with the disposal of premises and equipment, as compared
to the year ended December 31, 2017. The decrease in mortgage
banking income is primarily due to a decrease in mortgage loan
volume resulting from an increase in mortgage loan
rates.
Non-interest income
was $15.4 million for the year ended December 31, 2017, compared to
$16.2 million for the year ended December 31, 2016. The decrease in
non-interest income is primarily attributable to a $729,000
decrease in gains on the sale of securities, a $341,000 decrease in
service charges and fees and a $238,000 decrease in mortgage
banking income during the year ended December 31, 2017, as compared
to the year ended December 31, 2016.
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 2018, 2017 or
2016.
A-9
Table 4
presents a summary of non-interest income for the years ended
December 31, 2018, 2017 and 2016.
|
Table
4 - Non-Interest Income
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
2018
|
2017
|
2016
|
|
Service
charges
|
$
4,355
|
4,453
|
4,497
|
|
Other service
charges and fees
|
705
|
593
|
890
|
|
Gain on sale of
securities
|
15
|
-
|
729
|
|
Mortgage banking
income
|
851
|
1,190
|
1,428
|
|
Insurance and
brokerage commissions
|
824
|
761
|
632
|
|
Gain/(loss) on sale
and write-down of other real estate
|
17
|
(239
)
|
64
|
|
Visa debit card
income
|
3,911
|
3,757
|
3,589
|
|
Appraisal
management fee income
|
3,206
|
3,306
|
3,146
|
|
Miscellaneous
|
2,282
|
1,543
|
1,261
|
|
Total
non-interest income
|
$
16,166
|
15,364
|
16,236
|
Non-Interest Expense.
Non-interest
expense was $42.6 million for the year ended December 31, 2018, as
compared to $41.2 million for the year ended December 31, 2017. The
increase in non-interest expense was primarily due to a $1.5
million increase in salaries and benefits expense and a $469,000
increase in occupancy expense, which were partially offset by
decreases in adverting expense, debit card expense and other
non-interest expense, during the year ended December 31, 2018, as
compared to the year ended December 31, 2017. The increase in
salaries and benefits expense is primarily due to an increase in
the number of full-time equivalent employees and annual salary
increases. The increase in occupancy expense is primarily due to an
increase in depreciation expense during the year ended December 31,
2018, as compared to the year ended December 31, 2017.
Non-interest
expense was $41.2 million for the year ended December 31, 2017, as
compared to $42.2 million for the year ended December 31, 2016. The
decrease in non-interest expense was primarily due to a $1.2
million decrease in professional fees and a $878,000 decrease in
other non-interest expense, which were partially offset by a
$794,000 increase in salaries and benefits expense during the year
ended December 31, 2017, as compared to the year ended December 31,
2016. The decrease in professional fees is primarily due to a $1.5
million decrease in consulting fees resulting from the termination
of the Order. The decrease in other non-interest expense is
primarily due to a $752,000 decrease in FHLB prepayment penalties
and the increase in salaries and benefits expense is primarily due
to an increase in the number of full-time equivalent employees,
annual salary increases and an increase in expenses associated with
restricted stock units due to an increase in the Company’s
stock price.
Table 5
presents a summary of non-interest expense for the years ended
December 31, 2018, 2017 and 2016.
|
Table
5 - Non-Interest Expense
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
2018
|
2017
|
2016
|
|
Salaries and
employee benefits
|
$
21,530
|
20,058
|
19,264
|
|
Occupancy
expense
|
7,170
|
6,701
|
6,765
|
|
Office
supplies
|
503
|
517
|
465
|
|
FDIC deposit
insurance
|
328
|
347
|
494
|
|
Visa debit card
expense
|
994
|
1,248
|
1,141
|
|
Professional
services
|
513
|
451
|
182
|
|
Postage
|
249
|
258
|
224
|
|
Telephone
|
678
|
855
|
754
|
|
Director fees and
expense
|
312
|
317
|
326
|
|
Advertising
|
922
|
1,195
|
1,136
|
|
Consulting
fees
|
1,012
|
785
|
2,257
|
|
Taxes and
licenses
|
288
|
263
|
272
|
|
Foreclosure/OREO
expense
|
58
|
46
|
120
|
|
Internet banking
expense
|
603
|
720
|
710
|
|
FHLB advance
prepayment penalty
|
-
|
508
|
1,260
|
|
Appraisal
management fee expense
|
2,460
|
2,526
|
2,260
|
|
Other operating
expense
|
4,954
|
4,433
|
4,612
|
|
Total
non-interest expense
|
$
42,574
|
41,228
|
42,242
|
A-10
Income Taxes.
The Company reported
income tax expense of $2.6 million, $3.9 million and $2.6 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company’s effective tax rates were 16.39%, 28.03% and
21.82% in 2018, 2017 and 2016, respectively. Income tax expense for
the year ended December 31, 2017 includes $588,000 additional tax
expense due to the revaluation of the Company’s deferred tax
asset as a result of the TCJA, which reduced the Company’s
federal corporate tax rate from 34% to 21% effective January 1,
2018.
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, 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, 2018, such unfunded
commitments to extend credit were $268.7 million, while commitments
in the form of standby letters of credit totaled $3.7
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, 2018, the
Company’s core deposits totaled $859.2 million, or 98% of
total deposits.
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, 2018. At December 31, 2018, the carrying value of loans pledged
as collateral totaled approximately $140.0 million. The remaining
availability under the line of credit with the FHLB was $84.9
million at December 31, 2018. The Bank had no borrowings from the
FRB at December 31, 2018. 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, 2018, the
carrying value of loans pledged as collateral to the FRB totaled
approximately $442.6 million.
The
Bank also had the ability to borrow up to $82.5 million for the
purchase of overnight federal funds from six correspondent
financial institutions as of December 31, 2018.
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 16.09%, 20.62% and 24.78% at December
31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016.
As
disclosed in the Company’s Consolidated Statements of Cash
Flows included elsewhere herein, net cash provided by operating
activities was approximately $17.2 million during 2018. Net cash
used in investing activities was $18.6 million during 2018 and net
cash used by financing activities was $12.5 million during
2018.
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, 2018.
A-11
|
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
|
$
284,260
|
12,993
|
16,371
|
313,624
|
490,399
|
804,023
|
|
Mortgage loans held
for sale
|
680
|
-
|
-
|
680
|
-
|
680
|
|
Investment
securities available for sale
|
-
|
5,261
|
22,383
|
27,644
|
166,934
|
194,578
|
|
Interest-bearing
deposit accounts
|
2,817
|
-
|
-
|
2,817
|
-
|
2,817
|
|
Other
interest-earning assets
|
-
|
-
|
-
|
-
|
4,980
|
4,980
|
|
Total
interest-earning assets
|
287,757
|
18,254
|
38,754
|
344,765
|
662,313
|
1,007,078
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
NOW, savings, and
money market deposits
|
475,223
|
-
|
-
|
475,223
|
-
|
475,223
|
|
Time
deposits
|
11,574
|
13,990
|
36,365
|
61,929
|
41,244
|
103,173
|
|
FHLB
borrowings
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Securities sold
under
|
|
|
|
|
|
|
|
agreement to
repurchase
|
58,095
|
-
|
-
|
58,095
|
-
|
58,095
|
|
Trust preferred
securities
|
-
|
20,619
|
-
|
20,619
|
-
|
20,619
|
|
Total
interest-bearing liabilities
|
544,892
|
34,609
|
36,365
|
615,866
|
41,244
|
657,110
|
|
|
|
|
|
|
|
|
|
Interest-sensitive
gap
|
$
(257,135
)
|
(16,355
)
|
2,389
|
(271,101
)
|
621,069
|
349,968
|
|
|
|
|
|
|
|
|
|
Cumulative
interest-sensitive gap
|
$
(257,135
)
|
273,490
)
|
(271,101
)
|
(271,101
)
|
349,968
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets as a percentage of interest-bearing liabilities
|
52.81
%
|
52.74
%
|
106.57
%
|
55.98
%
|
1605.84
%
|
|
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, 2018, rate sensitive assets and
rate sensitive liabilities totaled $1.0 billion and $657.1 million,
respectively.
Included in the
rate sensitive assets are $279.1 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, 2018, the Bank had $161.4 million in loans with
interest rate floors. The floors were in effect on $2.5 million of
these loans pursuant to the terms of the promissory notes on these
loans. The weighted average rate on these loans is 0.47% 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,
2018, the market value of AFS securities totaled $194.6 million,
compared to $229.3 million and $249.9 million at December 31, 2017
and 2016, respectively. Table 7 presents the fair value of the AFS
securities held at December 31, 2018, 2017 and 2016.
A-12
|
Table 7 - Summary of Investment Portfolio
|
|||
|
|
|
|
|
|
(Dollars in thousands)
|
2018
|
2017
|
2016
|
|
U.
S. Government sponsored enterprises
|
$
34,634
|
40,380
|
38,222
|
|
State
and political subdivisions
|
107,591
|
133,570
|
141,856
|
|
Mortgage-backed
securities
|
52,103
|
53,609
|
67,585
|
|
Corporate
bonds
|
-
|
1,512
|
1,533
|
|
Trust
preferred securities
|
250
|
250
|
750
|
|
Total securities
|
$
194,578
|
229,321
|
249,946
|
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 $209.7 million in 2018, $234.3 million in
2017 and $252.7 million in 2016. Table 8 presents the book value of
AFS securities held by the Company by maturity category at December
31, 2018. 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
|
$
2,356
|
-0.86
%
|
13,956
|
2.01
%
|
16,307
|
2.94
%
|
2,737
|
4.34
%
|
35,356
|
1.35
%
|
|
State and political
subdivisions
|
19,023
|
3.80
%
|
66,976
|
3.17
%
|
15,965
|
3.28
%
|
3,581
|
3.95
%
|
105,545
|
3.52
%
|
|
Mortgage-backed
securities
|
6,215
|
3.29
%
|
20,056
|
3.29
%
|
12,534
|
3.34
%
|
13,340
|
3.33
%
|
52,145
|
3.30
%
|
|
Trust preferred
securities
|
-
|
-
|
-
|
-
|
-
|
-
|
250
|
8.11
%
|
250
|
8.11
%
|
|
Total
securities
|
$
27,594
|
2.99
%
|
100,988
|
3.05
%
|
44,806
|
3.10
%
|
19,908
|
3.91
%
|
193,296
|
3.14
%
|
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, 2018, the Company had $102.1 million in residential mortgage
loans, $106.9 million in home equity loans and $376.6 million in
commercial mortgage loans, which include $300.3 million secured by
commercial property and $76.3 million secured by residential
property. Residential mortgage loans include $34.3 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, 2018, 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
|
44
|
$
9,777
|
-
|
|
Land acquisition
and development - residential purposes
|
196
|
19,097
|
1
|
|
1 to 4 family
residential construction
|
137
|
26,933
|
-
|
|
Commercial
construction
|
25
|
38,371
|
-
|
|
Total acquisition,
development and construction
|
402
|
$
94,178
|
1
|
A-13
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. These loans are generally made to existing Bank
customers and have been originated throughout the Bank’s
seven county service area, with no geographic
concentration.
The
composition of the Bank’s loan portfolio at December 31 is
presented in Table 10.
|
Table
10 - Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
2015
|
2014
|
|||||
|
(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
|
$
94,178
|
11.71
%
|
84,987
|
11.19
%
|
61,749
|
8.53
%
|
65,791
|
9.55
%
|
57,617
|
8.84
%
|
|
Single-family
residential
|
252,983
|
31.47
%
|
246,703
|
32.47
%
|
240,700
|
33.25
%
|
220,690
|
32.03
%
|
206,417
|
31.66
%
|
|
Single-family residential- Banco de
la
|
|
|
|
|
|
|
|
|
|
|
|
Gente
non-traditional
|
34,261
|
4.26
%
|
37,249
|
4.90
%
|
40,189
|
5.55
%
|
43,733
|
6.35
%
|
47,015
|
7.21
%
|
|
Commercial
|
270,055
|
33.59
%
|
248,637
|
32.73
%
|
247,521
|
34.20
%
|
228,526
|
33.16
%
|
228,558
|
35.06
%
|
|
Multifamily and
farmland
|
33,163
|
4.12
%
|
28,937
|
3.81
%
|
21,047
|
2.91
%
|
18,080
|
2.62
%
|
12,400
|
1.90
%
|
|
Total real estate
loans
|
684,640
|
85.15
%
|
646,513
|
85.10
%
|
611,206
|
84.44
%
|
576,820
|
83.71
%
|
552,007
|
84.68
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by real
estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
97,465
|
12.12
%
|
89,022
|
11.71
%
|
87,596
|
12.11
%
|
91,010
|
13.22
%
|
76,262
|
11.71
%
|
|
Farm loans
|
926
|
0.12
%
|
1,204
|
0.16
%
|
-
|
0.00
%
|
3
|
0.00
%
|
7
|
0.00
%
|
|
Consumer loans
|
9,165
|
1.14
%
|
9,888
|
1.30
%
|
9,832
|
1.36
%
|
10,027
|
1.46
%
|
10,060
|
1.54
%
|
|
All other loans
|
11,827
|
1.47
%
|
13,137
|
1.73
%
|
15,177
|
2.10
%
|
11,231
|
1.63
%
|
13,555
|
2.08
%
|
|
Total
loans
|
804,023
|
100.00
%
|
759,764
|
100.00
%
|
723,811
|
100.00
%
|
689,091
|
100.00
%
|
651,891
|
100.00
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan
losses
|
6,445
|
|
6,366
|
|
7,550
|
|
9,589
|
|
11,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
$
797,578
|
|
753,398
|
|
716,261
|
|
679,502
|
|
640,809
|
|
As of
December 31, 2018, gross loans outstanding were $804.0 million,
compared to $759.8 million at December 31, 2017. Average loans
represented 71% and 74% of total earning assets for the years ended
December 31, 2018 and 2017, respectively. The Bank had $680,000 and
$857,000 in mortgage loans held for sale as of December 31, 2018
and 2017, respectively.
Troubled debt
restructured (“TDR”) modified in 2018, past due TDR
loans and non-accrual TDR loans totaled $4.7 million and $4.5
million at December 31, 2018 and December 31, 2017, 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 $92,000 and $21,000 in performing loans
classified as TDR loans at December 31, 2018 and December 31, 2017,
respectively.
Table 11 identifies
the maturities of all loans as of December 31, 2018 and addresses
the sensitivity of these loans to changes in interest
rates.
A-14
|
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
|
$
44,536
|
17,357
|
32,285
|
94,178
|
|
Single-family
residential
|
118,229
|
88,338
|
46,416
|
252,983
|
|
Single-family
residential- Banco de la Gente
|
|
|
|
|
|
stated
income
|
15,061
|
-
|
19,200
|
34,261
|
|
Commercial
|
82,210
|
141,347
|
46,498
|
270,055
|
|
Multifamily
and farmland
|
4,560
|
14,761
|
13,842
|
33,163
|
|
Total
real estate loans
|
264,596
|
261,803
|
158,241
|
684,640
|
|
|
|
|
|
|
|
Loans not secured
by real estate
|
|
|
|
|
|
Commercial
loans
|
56,679
|
23,910
|
16,876
|
97,465
|
|
Farm
loans
|
691
|
235
|
-
|
926
|
|
Consumer
loans
|
5,127
|
3,777
|
261
|
9,165
|
|
All other
loans
|
6,130
|
3,042
|
2,655
|
11,827
|
|
Total
loans
|
$
333,223
|
292,767
|
178,033
|
804,023
|
|
|
|
|
|
|
|
Total fixed rate
loans
|
$
19,599
|
245,838
|
178,033
|
443,470
|
|
Total floating rate
loans
|
313,624
|
46,929
|
-
|
360,553
|
|
|
|
|
|
|
|
Total
loans
|
$
333,223
|
292,767
|
178,033
|
804,023
|
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, 2018, outstanding loan
commitments totaled $272.4 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 “Contractual
Obligations and Off-Balance Sheet Arrangements” and in Note
10 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; 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-15
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, 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.
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, 2018 as compared to the
year ended December 31, 2017. 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.
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.
A-16
Net
charge-offs for 2018, 2017 and 2016 were $711,000, $677,000 and
$833,000, respectively. The ratio of net charge-offs to average
total loans was 0.09%
in 2018, 0.09% in 2017 and 0.12%
in 2016. The Bank strives to proactively work with its customers to
identify potential problems. If found, the Bank works to quickly
recognize identifiable losses and to establish a plan, with the
borrower, if possible, to have the loans paid off. This process of
early identification increased the levels of charge-offs and
provision for loan losses in 2009 through 2013 as compared to
historical periods prior to 2009. The years ended December 31,
2016, 2017 and 2018 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 remain near these
historical lows. The allowance for loan losses was $6.4 million or
0.80% of total loans outstanding at December 31, 2018. For December
31, 2017 and 2016, the allowance for loan losses amounted to $6.4
million or 0.84% of total loans outstanding and $7.6 million, or
1.04% of total loans outstanding, respectively.
Table
12 presents the percentage of loans assigned to each risk grade at
December 31, 2018 and 2017.
|
Table
12 - Loan Risk Grade Analysis
|
|
|
|
|
Percentage of
Loans
|
|
|
|
By Risk
Grade
|
|
|
Risk
Grade
|
2018
|
2017
|
|
Risk Grade 1
(Excellent Quality)
|
0.94
%
|
1.31
%
|
|
Risk Grade 2 (High
Quality)
|
25.47
%
|
26.23
%
|
|
Risk Grade 3 (Good
Quality)
|
60.85
%
|
60.67
%
|
|
Risk Grade 4
(Management Attention)
|
10.19
%
|
8.19
%
|
|
Risk Grade 5
(Watch)
|
1.72
%
|
2.54
%
|
|
Risk Grade 6
(Substandard)
|
0.84
%
|
1.04
%
|
|
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)
|
2018
|
2017
|
2016
|
2015
|
2014
|
|
Allowance for loan
losses at beginning
|
$
6,366
|
7,550
|
9,589
|
11,082
|
13,501
|
|
|
|
|
|
|
|
|
Loans charged
off:
|
|
|
|
|
|
|
Commercial
|
54
|
194
|
146
|
38
|
430
|
|
Real estate -
mortgage
|
574
|
315
|
593
|
1,064
|
789
|
|
Real estate -
construction
|
53
|
-
|
7
|
197
|
884
|
|
Consumer
|
452
|
473
|
492
|
545
|
534
|
|
Total
loans charged off
|
1,133
|
982
|
1,238
|
1,844
|
2,637
|
|
|
|
|
|
|
|
|
Recoveries of
losses previously charged off:
|
|
|
|
|
|
|
Commercial
|
32
|
31
|
170
|
101
|
54
|
|
Real estate -
mortgage
|
212
|
106
|
74
|
77
|
259
|
|
Real estate -
construction
|
10
|
14
|
10
|
45
|
428
|
|
Consumer
|
168
|
154
|
151
|
145
|
176
|
|
Total
recoveries
|
422
|
305
|
405
|
368
|
917
|
|
Net
loans charged off
|
711
|
677
|
833
|
1,476
|
1,720
|
|
|
|
|
|
|
|
|
Provision for loan
losses
|
790
|
(507
)
|
(1,206
)
|
(17
)
|
(699
)
|
|
|
|
|
|
|
|
|
Allowance
for loan losses at end of year
|
$
6,445
|
6,366
|
7,550
|
9,589
|
11,082
|
|
|
|
|
|
|
|
|
Loans charged off
net of recoveries, as
|
|
|
|
|
|
|
a percent of
average loans outstanding
|
0.09
%
|
0.09
%
|
0.12
%
|
0.22
%
|
0.27
%
|
|
|
|
|
|
|
|
|
Allowance for loan
losses as a percent
|
|
|
|
|
|
|
of total loans
outstanding at end of year
|
0.80
%
|
0.84
%
|
1.04
%
|
1.39
%
|
1.70
%
|
A-17
Non-performing Assets.
Non-performing
assets were $3.3 million or 0.31% of total assets at December 31,
2018, compared to $3.8 million or 0.35% of total assets at December
31, 2017. Non-performing loans include $3.2 million in commercial
and residential mortgage loans, $1,000 in construction and land
development loans and $99,000 in other loans at December 31, 2018,
as compared to $3.6 million in commercial and residential mortgage
loans, $14,000 in construction and land development loans and
$112,000 in other loans at December 31, 2017. Other real estate
owned totaled $27,000 and $118,000 as of December 31, 2018 and
2017, respectively. The Bank had no repossessed assets as of
December 31, 2018 and 2017.
At
December 31, 2018, the Bank had non-performing loans, defined as
non-accrual and accruing loans past due more than 90 days, of $3.3
million or 0.41% of total loans. Non-performing loans at December
31, 2017 were $3.7 million or 0.49% 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, 2018 and
2017.
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)
|
2018
|
2017
|
2016
|
2015
|
2014
|
|
Non-accrual
loans
|
$
3,314
|
3,711
|
3,825
|
8,432
|
10,728
|
|
Loans 90 days or
more past due and still accruing
|
-
|
-
|
-
|
17
|
-
|
|
Total
non-performing loans
|
3,314
|
3,711
|
3,825
|
8,449
|
10,728
|
|
All other real
estate owned
|
27
|
118
|
283
|
739
|
2,016
|
|
Repossessed
assets
|
-
|
-
|
-
|
-
|
-
|
|
Total
non-performing assets
|
$
3,341
|
3,829
|
4,108
|
9,188
|
12,744
|
|
|
|
|
|
|
|
|
TDR loans not
included in above,
|
|
|
|
|
|
|
(not 90 days past
due or on nonaccrual)
|
3,173
|
2,543
|
3,337
|
5,102
|
7,217
|
|
|
|
|
|
|
|
|
As
a percent of total loans at year end
|
|
|
|
|
|
|
Non-accrual
loans
|
0.41
%
|
0.49
%
|
0.53
%
|
1.22
%
|
1.65
%
|
|
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
|
0.31
%
|
0.35
%
|
0.38
%
|
0.88
%
|
1.22
%
|
|
|
|
|
|
|
|
|
Total
non-performing loans
|
|
|
|
|
|
|
as
a percent of total loans at year-end
|
0.41
%
|
0.49
%
|
0.53
%
|
1.23
%
|
1.65
%
|
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, 2018, total deposits were $877.2
million, compared to $907.0 million at December 31, 2017.
Core deposits, which
include demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000,
amounted to $859.2 million at December 31, 2018, compared to $887.4
million at December 31, 2017.
Time
deposits in amounts of $250,000 or more totaled $16.2 million and
$18.8 million at December 31, 2018 and 2017, respectively. At
December 31, 2018, brokered deposits amounted to $3.4 million as
compared to $5.2 million at December 31, 2017. Certificates of
deposit participated through the Certificate of Deposit Account
Registry Service (“CDARS”) included in brokered
deposits amounted to $3.4 million and $5.2 million as of December
31, 2018 and 2017, 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, 2018 have a weighted average rate of
0.07% with a weighted average original term of 41
months.
A-18
Table
15 is a summary of the maturity distribution of time deposits in
amounts of $250,000 or more as of December 31, 2018.
|
Table
15 - Maturities of Time Deposits of $250,000 or
greater
|
|
|
|
|
|
(Dollars
in thousands)
|
2018
|
|
Three months or
less
|
$
4,199
|
|
Over three months
through six months
|
1,347
|
|
Over six months
through twelve months
|
2,176
|
|
Over twelve
months
|
8,517
|
|
Total
|
$
16,239
|
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, 2018 and 2017. Average FHLB borrowings for 2018 and 2017 were
zero and $16.3 million, respectively. The maximum amount of
outstanding FHLB borrowings was $20.0 million in 2017.
Additional information regarding
FHLB borrowings is provided in Note 6 to the Consolidated Financial
Statements.
The
Bank had no borrowings from the FRB at December 31, 2018 and 2017.
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, 2018, the carrying value of loans pledged as
collateral totaled approximately $442.6 million.
Securities sold
under agreements to repurchase were $58.1 million at December 31,
2018, as compared to $37.8 million at December 31,
2017.
Junior
subordinated debentures were $20.6 million as of December 31, 2018
and 2017.
Contractual Obligations and Off-Balance Sheet
Arrangements.
The Company’s contractual obligations
and other commitments as of December 31, 2018 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
|
$
-
|
-
|
-
|
20,619
|
20,619
|
|
Operating lease
obligations
|
734
|
1,416
|
703
|
1,465
|
4,318
|
|
Total
|
$
734
|
1,416
|
703
|
22,084
|
24,937
|
|
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
|
Commitments to
extend credit
|
$
104,152
|
27,335
|
24,902
|
112,319
|
268,708
|
|
Standby letters of
credit
|
|
|
|
|
|
|
and financial
guarantees written
|
3,651
|
-
|
-
|
-
|
3,651
|
|
Income tax
credits
|
535
|
101
|
63
|
56
|
755
|
|
Total
|
$
108,338
|
27,436
|
24,965
|
112,375
|
273,114
|
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 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, 10 and 15 to the Consolidated Financial Statements. There were
no derivatives at December 31, 2018 or 2017.
A-19
Capital Resources
. Shareholders’
equity was $123.6 million, or 11.31% of total assets, as of
December 31, 2018, compared to $116.0 million, or 10.62% of total
assets, as of December 31, 2017. The increase in
shareholders’ equity is primarily due to an increase in
retained earnings due to net income.
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 11.31%, 10.64% and 10.51% for 2018, 2017 and 2016,
respectively. The return on average shareholders’ equity was
10.81% at December 31, 2018 as compared to 8.78% and 8.11% at
December 31, 2017 and December 31, 2016, respectively. Total cash
dividends paid on common stock were $3.1 million, $2.6 million and
$2.1 million during 2018, 2017 and 2016 respectively. The Company
did not pay any dividends on preferred stock during 2018 and
2017.
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
2016, the Company’s Board of Directors authorized a stock
repurchase program, pursuant to which up to $2.0 million was
allocated to repurchase the Company’s common stock. Any
purchases under the Company’s stock repurchase program were
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
were determined by the Company’s management, based on its
evaluation of market conditions and other factors. The Company has
repurchased approximately $2.0 million, or 92,738 shares of its
common stock, under this program as of December 31,
2017.
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 are being 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 at 0.625% and is being phased in through 2019 (increasing by
0.625% on each subsequent January 1, until it reaches 2.5% on
January 1, 2019). This will result 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 at December 31, 2018 and December 31,
2017 includes $20.0 million in trust preferred securities. The
Company’s Tier 1 capital ratio was 15.46% and 15.32% at
December 31, 2018 and December 31, 2017, 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 16.15% and
16.06% at December 31, 2018 and December 31, 2017, 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 13.29% and 13.00% at December 31, 2018 and
December 31, 2017, respectively. Financial institutions are also
required to maintain a leverage ratio of Tier 1 capital to total
average assets of 4.0% or greater. The Company’s Tier 1
leverage capital ratio was 13.05% and 11.94% at December 31, 2018
and December 31, 2017, respectively.
The
Bank’s Tier 1 risk-based capital ratio was 15.21% and 15.09%
at December 31, 2018 and December 31, 2017, respectively. The total
risk-based capital ratio for the Bank was 15.91% and 15.83% at
December 31, 2018 and December 31, 2017, respectively. The
Bank’s common equity Tier 1 capital ratio was 15.21% and
15.09% at December 31, 2018 and December 31, 2017, respectively.
The Bank’s Tier 1 leverage capital ratio was 12.76% and
11.69% at December 31, 2018 and December 31, 2017,
respectively.
A-20
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, 2018.
The
Company’s key equity ratios as of December 31, 2018, 2017 and
2016 are presented in Table 17.
|
Table
17 - Equity Ratios
|
|
|
|
|
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Return on average
assets
|
1.22
%
|
0.93
%
|
0.85
%
|
|
Return on average
equity
|
10.81
%
|
8.78
%
|
8.11
%
|
|
Dividend payout
ratio
|
23.41
%
|
25.67
%
|
22.95
%
|
|
Average equity to
average assets
|
11.31
%
|
10.64
%
|
10.51
%
|
Quarterly Financial Data.
The
Company’s consolidated quarterly operating results for the
years ended December 31, 2018 and 2017 are presented in Table
18.
Table
18 - Quarterly Financial Data
|
|
2018
|
2017
|
||||||
|
(Dollars
in thousands, except per share amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
|
Total interest
income
|
$
10,759
|
11,059
|
11,608
|
11,924
|
$
10,064
|
10,461
|
10,698
|
10,726
|
|
Total interest
expense
|
467
|
513
|
557
|
609
|
598
|
622
|
650
|
507
|
|
Net
interest income
|
10,292
|
10,546
|
11,051
|
11,315
|
9,466
|
9,839
|
10,048
|
10,219
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction of)
provision for loan losses
|
31
|
231
|
110
|
418
|
(236
)
|
49
|
(218
)
|
(102
)
|
|
Other
income
|
3,736
|
4,016
|
3,915
|
4,499
|
3,442
|
3,929
|
4,159
|
3,834
|
|
Other
expense
|
10,042
|
10,560
|
10,702
|
11,270
|
10,361
|
9,983
|
10,006
|
10,878
|
|
Income
before income taxes
|
3,955
|
3,771
|
4,154
|
4,126
|
2,783
|
3,736
|
4,419
|
3,277
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
652
|
595
|
687
|
690
|
578
|
925
|
1,177
|
1,267
|
|
Net
earnings
|
3,303
|
3,176
|
3,467
|
3,436
|
2,205
|
2,811
|
3,242
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
$
0.55
|
0.53
|
0.58
|
0.57
|
$
0.36
|
0.47
|
0.54
|
0.34
|
|
Diluted
net earnings per share
|
$
0.55
|
0.53
|
0.57
|
0.57
|
$
0.36
|
0.46
|
0.53
|
0.34
|
A-21
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, 2018,
2017 and 2016, 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, 2018. 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, 2018. 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
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Total
|
Fair Value
|
|
Fixed
rate
|
$
34,451
|
33,452
|
54,215
|
66,253
|
91,918
|
180,479
|
460,768
|
411,427
|
|
Average interest
rate
|
4.90
%
|
4.95
%
|
4.78
%
|
4.88
%
|
5.24
%
|
5.03
%
|
|
|
|
Variable
rate
|
$
65,371
|
31,409
|
22,619
|
22,166
|
33,255
|
169,115
|
343,935
|
344,615
|
|
Average interest
rate
|
6.10
%
|
5.90
%
|
6.11
%
|
6.12
%
|
5.87
%
|
5.51
%
|
|
|
|
Total
|
|
|
|
|
|
|
804,703
|
756,042
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
Interest bearing
cash
|
$
2,817
|
-
|
-
|
-
|
-
|
-
|
2,817
|
2,817
|
|
Average interest
rate
|
2.35
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Securities
available for sale
|
$
21,207
|
18,467
|
16,674
|
22,980
|
22,387
|
92,863
|
194,578
|
194,578
|
|
Average interest
rate
|
4.36
%
|
4.03
%
|
4.56
%
|
4.44
%
|
4.46
%
|
4.27
%
|
|
|
|
Nonmarketable
equity securities
|
$
-
|
-
|
-
|
-
|
-
|
4,361
|
4,361
|
4,361
|
|
Average interest
rate
|
-
|
-
|
-
|
-
|
-
|
2.87
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Obligations
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
58,782
|
21,661
|
14,093
|
2,655
|
3,145
|
776,877
|
877,213
|
857,999
|
|
Average interest
rate
|
0.24
%
|
0.42
%
|
0.62
%
|
0.65
%
|
0.98
%
|
0.05
%
|
|
|
|
Securities sold
under agreement
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
$
58,095
|
-
|
-
|
-
|
-
|
-
|
58,095
|
58,095
|
|
Average interest
rate
|
0.44
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Junior subordinated
debentures
|
$
-
|
-
|
-
|
-
|
-
|
20,619
|
20,619
|
20,619
|
|
Average interest
rate
|
-
|
-
|
-
|
-
|
-
|
4.42
%
|
|
|
A-22
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%
|
$50,196
|
3.32%
|
|
+2%
|
$50,008
|
2.94%
|
|
+1%
|
$49,363
|
1.61%
|
|
0%
|
$48,582
|
0.00%
|
|
-1%
|
$47,315
|
-2.61%
|
|
-2%
|
$46,160
|
-4.99%
|
|
-3%
|
$45,727
|
-5.88%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Resulting Theoretical Market Value of Equity
|
|
|
Hypothetical rate change (immediate shock)
|
Amount
|
% Change
|
|
+3%
|
$183,598
|
8.06%
|
|
+2%
|
$188,528
|
10.96%
|
|
+1%
|
$184,838
|
8.79%
|
|
0%
|
$169,908
|
0.00%
|
|
-1%
|
$145,669
|
-14.27%
|
|
-2%
|
$114,949
|
-32.35%
|
|
-3%
|
$91,103
|
-46.38%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-23
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2018, 2017 and 2016
INDEX
|
|
|
PAGE(S)
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
|
|
A-25 - A-27
|
|
|
|
|
|
Financial Statements
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets at December 31, 2018 and 2017
|
|
A-28
|
|
|
|
|
|
Consolidated
Statements of Earnings for the years ended December 31, 2018, 2017
and 2016
|
|
A-29
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31,
2018, 2017 and 2016
|
|
A-30
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2018, 2017 and 2016
|
|
A-31
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2018,
2017 and 2016
|
|
A-32 - A-33
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
A-34 - A-68
|
A-24
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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control
over financial reporting as of December 31, 2018, based on criteria
established in
Internal Control —
Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway
Commission in 2013, and our report dated March 14, 2019 expressed
an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
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 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 audits
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. 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.
/s/ Elliott Davis, PLLC
We have
served as the Company's auditor since 2015.
Charlotte,
North Carolina
March
14, 2019
elliottdavis.com
A-25
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 Internal Control Over Financial
Reporting
We have audited Peoples Bancorp of North Carolina, Inc.'s (the
Company) internal control over financial reporting as of December
31, 2018, based on criteria established in
Internal Control —
Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway
Commission in 2013. In our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established
in
Internal
Control — Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission in
2013.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (PCAOB),
t
he consolidated balance sheets of the Company as of
December 31, 2018 and 2017, 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, 2018, and the related notes to the consolidated financial
statements and our report dated March 14, 2019 expressed an
unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting in the accompanying Management’s Annual Report on
Internal Controls over Financial Reporting Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting
firm registered with the 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 audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
elliottdavis.com
A-26
Definition and Limitations of Internal Control Over Financial
Reporting
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/
Elliott Davis, PLLC
Charlotte,
North Carolina
March
14, 2019
A-27
P
EOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated
Balance Sheets
December
31, 2018 and December 31, 2017
(Dollars
in thousands)
|
|
December
31,
|
December
31,
|
|
Assets
|
2018
|
2017
|
|
|
|
|
|
Cash and due from
banks, including reserve requirements
|
$
40,553
|
53,186
|
|
of $8,918 at
12/31/18 and $7,472 at 12/31/17
|
|
|
|
Interest-bearing
deposits
|
2,817
|
4,118
|
|
Cash and cash
equivalents
|
43,370
|
57,304
|
|
|
|
|
|
Investment
securities available for sale
|
194,578
|
229,321
|
|
Other
investments
|
4,361
|
1,830
|
|
Total
securities
|
198,939
|
231,151
|
|
|
|
|
|
Mortgage loans held
for sale
|
680
|
857
|
|
|
|
|
|
Loans
|
804,023
|
759,764
|
|
Less allowance for
loan losses
|
(6,445
)
|
(6,366
)
|
|
Net
loans
|
797,578
|
753,398
|
|
|
|
|
|
Premises and
equipment, net
|
18,450
|
19,911
|
|
Cash surrender
value of life insurance
|
15,936
|
15,552
|
|
Other real
estate
|
27
|
118
|
|
Accrued interest
receivable and other assets
|
18,271
|
13,875
|
|
Total
assets
|
$
1,093,251
|
1,092,166
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
demand
|
$
298,817
|
285,406
|
|
NOW, MMDA &
savings
|
475,223
|
498,445
|
|
Time, $250,000 or
more
|
16,239
|
18,756
|
|
Other
time
|
86,934
|
104,345
|
|
Total
deposits
|
877,213
|
906,952
|
|
|
|
|
|
Securities sold
under agreements to repurchase
|
58,095
|
37,757
|
|
Junior subordinated
debentures
|
20,619
|
20,619
|
|
Accrued interest
payable and other liabilities
|
13,707
|
10,863
|
|
Total
liabilities
|
969,634
|
976,191
|
|
|
|
|
|
Commitments (Note
10)
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
Series A preferred
stock, $1,000 stated value; authorized
|
|
|
|
5,000,000 shares;
no shares issued and outstanding
|
-
|
-
|
|
Common stock, no
par value; authorized
|
|
|
|
20,000,000 shares;
issued and outstanding 5,995,256 shares
|
|
|
|
at December 31,
2018 and December 31, 2017
|
62,096
|
62,096
|
|
Retained
earnings
|
60,535
|
50,286
|
|
Accumulated other
comprehensive income
|
986
|
3,593
|
|
Total shareholders'
equity
|
123,617
|
115,975
|
|
|
|
|
|
Total liabilities
and shareholders' equity
|
$
1,093,251
|
1,092,166
|
See accompanying
Notes to Consolidated Financial Statements.
A-28
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Consolidated
Statements of Earnings
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands, except per share amounts)
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
Interest and fees
on loans
|
$
38,654
|
34,888
|
32,452
|
|
Interest on due
from banks
|
304
|
219
|
123
|
|
Interest on
investment securities:
|
|
|
|
|
U.S. Government
sponsored enterprises
|
2,333
|
2,404
|
2,531
|
|
States and
political subdivisions
|
3,877
|
4,236
|
4,454
|
|
Other
|
182
|
202
|
249
|
|
Total interest
income
|
45,350
|
41,949
|
39,809
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
NOW, MMDA &
savings deposits
|
769
|
598
|
495
|
|
Time
deposits
|
472
|
466
|
586
|
|
FHLB
borrowings
|
-
|
662
|
1,661
|
|
Junior subordinated
debentures
|
790
|
590
|
485
|
|
Other
|
115
|
61
|
44
|
|
Total interest
expense
|
2,146
|
2,377
|
3,271
|
|
|
|
|
|
|
Net interest
income
|
43,204
|
39,572
|
36,538
|
|
|
|
|
|
|
Provision for
(reduction of) loan losses
|
790
|
(507
)
|
(1,206
)
|
|
|
|
|
|
|
Net interest income
after provision for loan losses
|
42,414
|
40,079
|
37,744
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
Service
charges
|
4,355
|
4,453
|
4,497
|
|
Other service
charges and fees
|
705
|
593
|
890
|
|
Gain on sale of
securities
|
15
|
-
|
729
|
|
Mortgage banking
income
|
851
|
1,190
|
1,428
|
|
Insurance and
brokerage commissions
|
824
|
761
|
632
|
|
Appraisal
management fee income
|
3,206
|
3,306
|
3,146
|
|
Gain (loss) on
sales and write-downs of
|
|
|
|
|
other real
estate
|
17
|
(239
)
|
64
|
|
Miscellaneous
|
6,193
|
5,300
|
4,850
|
|
Total non-interest
income
|
16,166
|
15,364
|
16,236
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
Salaries and
employee benefits
|
21,530
|
20,058
|
19,264
|
|
Occupancy
|
7,170
|
6,701
|
6,765
|
|
Professional
fees
|
1,525
|
1,236
|
2,439
|
|
Advertising
|
922
|
1,195
|
1,136
|
|
Debit card
expense
|
994
|
1,248
|
1,141
|
|
FDIC
insurance
|
328
|
347
|
494
|
|
Appraisal
management fee expense
|
2,460
|
2,526
|
2,260
|
|
Other
|
7,645
|
7,917
|
8,743
|
|
Total non-interest
expense
|
42,574
|
41,228
|
42,242
|
|
|
|
|
|
|
Earnings before
income taxes
|
16,006
|
14,215
|
11,738
|
|
|
|
|
|
|
Income tax
expense
|
2,624
|
3,947
|
2,561
|
|
|
|
|
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
|
|
|
|
|
|
Basic net earnings
per share
|
$
2.23
|
1.71
|
1.53
|
|
Diluted net
earnings per share
|
$
2.22
|
1.69
|
1.50
|
|
Cash dividends
declared per share
|
$
0.52
|
0.44
|
0.35
|
See accompanying
Notes to Consolidated Financial Statements.
A-29
Consolidated
Statements of Comprehensive Income
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands)
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
|
|
|
|
|
|
Other comprehensive
income (loss):
|
|
|
|
|
Unrealized holding
losses on securities
|
|
|
|
|
available for
sale
|
(3,370
)
|
(355
)
|
(3,274
)
|
|
Reclassification
adjustment for gains on
|
|
|
|
|
securities
available for sale
|
|
|
|
|
included in net
earnings
|
(15
)
|
-
|
(729
)
|
|
|
|
|
|
|
Total other
comprehensive loss,
|
|
|
|
|
before income
taxes
|
(3,385
)
|
(355
)
|
(4,003
)
|
|
|
|
|
|
|
Income tax benefit
related to other
|
|
|
|
|
comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
Unrealized holding
losses on securities
|
|
|
|
|
available for
sale
|
(774
)
|
(354
)
|
(1,196
)
|
|
Reclassification
adjustment for gains on
|
|
|
|
|
securities
available for sale
|
|
|
|
|
included in net
earnings
|
(4
)
|
-
|
(284
)
|
|
|
|
|
|
|
Total income tax
benefit related to
|
|
|
|
|
other comprehensive
loss
|
(778
)
|
(354
)
|
(1,480
)
|
|
|
|
|
|
|
Total other
comprehensive loss,
|
|
|
|
|
net of
tax
|
(2,607
)
|
(1
)
|
(2,523
)
|
|
|
|
|
|
|
Total comprehensive
income
|
$
10,775
|
10,267
|
6,654
|
See accompanying
Notes to Consolidated Financial Statements.
A-30
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Consolidated
Statements of Changes in Shareholders' Equity
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands)
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
Common
|
|
Other
|
|
|
|
Stock
|
Stock
|
Retained
|
Comprehensive
|
|
|
|
Shares
|
Amount
|
Earnings
|
Income
|
Total
|
|
Balance, December
31, 2015
|
5,510,538
|
$
46,171
|
53,183
|
5,510
|
104,864
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
|
|
repurchase
|
(92,738
)
|
(1,984
)
|
-
|
-
|
(1,984
)
|
|
Cash dividends
declared on
|
|
|
|
|
|
|
common
stock
|
-
|
-
|
(2,106
)
|
-
|
(2,106
)
|
|
Net
earnings
|
-
|
-
|
9,177
|
-
|
9,177
|
|
Change in
accumulated other
|
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
|
net of
tax
|
-
|
-
|
-
|
(2,523
)
|
(2,523
)
|
|
Balance, December
31, 2016
|
5,417,800
|
$
44,187
|
60,254
|
2,987
|
107,428
|
|
|
|
|
|
|
|
|
Cash dividends
declared on
|
|
|
|
|
|
|
common
stock
|
-
|
-
|
(2,629
)
|
-
|
(2,629
)
|
|
10% stock
dividend
|
544,844
|
16,994
|
(17,000
)
|
-
|
(6
)
|
|
Restricted stock
units exercised
|
32,612
|
915
|
-
|
-
|
915
|
|
Net
earnings
|
-
|
-
|
10,268
|
-
|
10,268
|
|
Change in
accumulated other
|
|
|
|
|
|
|
comprehensive
income due to
|
|
|
|
|
|
|
Tax Cuts and Jobs
Act
|
-
|
-
|
(607
)
|
607
|
-
|
|
Change in
accumulated other
|
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
|
net of
tax
|
-
|
-
|
-
|
(1
)
|
(1
)
|
|
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
|
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
|
net of
tax
|
-
|
-
|
-
|
(2,607
)
|
(2,607
)
|
|
Balance, December
31, 2018
|
5,995,256
|
$
62,096
|
60,535
|
986
|
123,617
|
See accompanying
Notes to Consolidated Financial Statements.
A-31
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands)
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
|
Adjustments to
reconcile net earnings to
|
|
|
|
|
net cash provided
by operating activities:
|
|
|
|
|
Depreciation,
amortization and accretion
|
4,571
|
5,018
|
5,423
|
|
Provision for
(reduction of) loan losses
|
790
|
(507
)
|
(1,206
)
|
|
Deferred income
taxes
|
78
|
2,120
|
1,097
|
|
Gain on sale of
investment securities
|
(15
)
|
-
|
(729
)
|
|
Gain on sale of
other real estate
|
(17
)
|
-
|
(81
)
|
|
Write-down of other
real estate
|
-
|
239
|
17
|
|
Gain on sale of
premises and equipment
|
(544
)
|
-
|
-
|
|
Restricted stock
expense
|
85
|
592
|
932
|
|
Proceeds from sales
of loans held for sale
|
35,922
|
59,193
|
67,764
|
|
Origination of
loans held for sale
|
(35,745
)
|
(54,341
)
|
(69,324
)
|
|
Change
in:
|
|
|
|
|
Cash surrender
value of life insurance
|
(384
)
|
(600
)
|
(406
)
|
|
Other
assets
|
(3,695
)
|
(3,982
)
|
(636
)
|
|
Other
liabilities
|
2,759
|
594
|
211
|
|
|
|
|
|
|
Net cash provided
by operating activities
|
17,187
|
18,594
|
12,239
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
Purchases of
investment securities available for sale
|
(34,692
)
|
(10,014
)
|
(12,707
)
|
|
Proceeds from
sales, calls and maturities of investment securities
|
|
|
|
|
available for
sale
|
48,241
|
10,162
|
4,053
|
|
Proceeds from
paydowns of investment securities available for sale
|
15,556
|
17,202
|
20,675
|
|
Purchases of other
investments
|
(2,611
)
|
(45
)
|
(255
)
|
|
Proceeds from
paydowns of other investment securities
|
117
|
-
|
-
|
|
Net change in FHLB
stock
|
(4
)
|
850
|
1,256
|
|
Net change in
loans
|
(45,094
)
|
(36,748
)
|
(36,116
)
|
|
Purchases of
premises and equipment
|
(1,742
)
|
(5,557
)
|
(1,610
)
|
|
Proceeds from sale
of premises and equipment
|
1,410
|
-
|
-
|
|
Proceeds from sale
of other real estate and repossessions
|
232
|
44
|
1,083
|
|
|
|
|
|
|
Net cash used by
investing activities
|
(18,587
)
|
(24,106
)
|
(23,621
)
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
Net change in
deposits
|
(29,739
)
|
14,034
|
60,743
|
|
Net change in
securities sold under agreement to repurchase
|
20,338
|
1,323
|
8,560
|
|
Proceeds from FHLB
borrowings
|
-
|
1
|
6,000
|
|
Repayments of FHLB
borrowings
|
-
|
(20,001
)
|
(29,500
)
|
|
Proceeds from FRB
borrowings
|
1
|
1
|
1
|
|
Repayments of FRB
borrowings
|
(1
)
|
(1
)
|
(1
)
|
|
Proceeds from Fed
Funds Purchased
|
4,277
|
187
|
9,112
|
|
Repayments of Fed
Funds Purchased
|
(4,277
)
|
(187
)
|
(9,112
)
|
|
Common stock
repurchased
|
-
|
-
|
(1,984
)
|
|
Cash dividends paid
in lieu of fractional shares
|
-
|
(6
)
|
-
|
|
Cash dividends paid
on common stock
|
(3,133
)
|
(2,629
)
|
(2,106
)
|
|
|
|
|
|
|
Net cash (used)
provided by financing activities
|
(12,534
)
|
(7,278
)
|
41,713
|
|
|
|
|
|
|
Net change in cash
and cash equivalents
|
(13,934
)
|
(12,790
)
|
30,331
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
57,304
|
70,094
|
39,763
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
$
43,370
|
57,304
|
70,094
|
A-32
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Consolidated
Statements of Cash Flows, continued
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands)
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Cash paid during
the year for:
|
|
|
|
|
Interest
|
$
2,128
|
2,526
|
3,415
|
|
Income
taxes
|
$
1,163
|
2,408
|
2,028
|
|
|
|
|
|
|
Noncash investing
and financing activities:
|
|
|
|
|
Change in
unrealized (loss) gain on investment securities
|
|
|
|
|
available for
sale, net
|
$
(2,607
)
|
(1
)
|
(2,523
)
|
|
Transfer of loans
to other real estate and repossessions
|
$
124
|
118
|
563
|
|
Issuance of accrued
restricted stock units
|
$
-
|
(915
)
|
-
|
See accompanying
Notes to Consolidated Financial Statements.
A-33
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, Wake and Durham counties in North
Carolina.
Peoples
Investment Services, Inc. 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.
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, Peoples Investment
Services, Inc., 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 and interest-bearing deposits are considered cash
and cash equivalents for cash flow reporting purposes.
A-34
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, 2018 and 2017, 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 an annual 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.
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.
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.
A-35
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.
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, 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.
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, 2018 as compared to the
year ended December 31, 2017. 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.
A-36
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.
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 net gains 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 $866,000, $1.0 million and $1.4
million at December 31, 2018, 2017 and 2016,
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.
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 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
A-37
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 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.
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.
A-38
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
“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
280,933 shares are currently reserved for possible issuance under
the Plan. All stock-based rights under the Plan must be granted or
awarded by May 7, 2019 (i.e., ten years from the Plan effective
date).
The
Company granted 32,465 restricted stock units under the Plan at a
grant date fair value of $7.18 per share during the first quarter
of 2012, of which 5,891 restricted stock units were forfeited by
the executive officers of the Company as required by the agreement
with the U.S. Department of the Treasury in conjunction with the
Company’s participation in the Capital Purchase Program under
the Troubled Asset Relief Program. In July 2012, the Company
granted 5,891 restricted stock units at a grant date fair value of
$7.50 per share. The Company granted 29,475 restricted stock units
under the Plan at a grant date fair value of $10.82 per share
during the second quarter of 2013. The Company granted 23,162
restricted stock units under the Plan at a grant date fair value of
$14.27 per share during the first quarter of 2014. The Company
granted 16,583 restricted stock units under the 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
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 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 Plan at a grant date fair value of
$31.43 per share during the first quarter of 2018. The number of
restricted stock units granted and grant date fair values have been
restated to reflect the 10% stock dividend during 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 (five years from the grant date for the 2012 grants, four
years from the grant date for the 2013, 2015, 2016, 2017 and 2018
grants and three years from the grant date for the 2014 grants).
The amount of expense recorded each period reflects the changes in
the Company’s stock price during such period. As of December
31, 2018, the total unrecognized compensation expense related to
the restricted stock unit grants under the Plan was
$165,000.
The
Company recognized compensation expense for restricted stock units
granted under the Plan of $85,000, $592,000 and $932,000 for the
years ended December 31, 2018, 2017 and 2016,
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,
2018, 2017 and 2016 are as follows:
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
|
A-39
For the year ended December 31,
2017
|
|
Net
Earnings (Dollars in thousands)
|
Weighted
Average Number of Shares
|
Per Share
Amount
|
|
Basic earnings per
share
|
$
10,268
|
5,988,183
|
$
1.71
|
|
Effect of dilutive
securities:
|
|
|
|
|
Restricted stock
units
|
-
|
74,667
|
|
|
Diluted earnings
per share
|
$
10,268
|
6,062,850
|
$
1.69
|
For the year ended December 31,
2016
|
|
Net
Earnings (Dollars in thousands)
|
Weighted
Average Number of Shares
|
Per Share
Amount
|
|
Basic earnings per
share
|
$
9,177
|
6,024,970
|
$
1.53
|
|
Effect of dilutive
securities:
|
|
|
|
|
Restricted stock
units
|
-
|
77,807
|
|
|
Diluted earnings
per share
|
$
9,177
|
6,102,777
|
$
1.50
|
In
November 2017, the Board of Directors of the Company declared a 10%
stock dividend. As a result of the stock dividend, each shareholder
received one new share of stock for every ten shares of stock they
held as of the record date of December 4, 2017. The payable date
for the stock dividend was December 15, 2017. All previously
reported per share amounts have been restated to reflect this stock
dividend.
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 2014-09: Revenue from Contracts with Customers
|
|
Provides guidance on the recognition of revenue from contracts with
customers. The core principle of this guidance is that an entity
should recognize revenue to reflect the transfer of goods and
services to customers in an amount equal to the consideration the
entity receives or expects to receive.
|
|
January 1, 2018
|
|
See section titled "ASU 2014-09" below for a despription of the
effect on the Company’s results of operations, financial
position and disclosures.
|
|
ASU 2016-01: Recognition and Measurement of Financial Assets and
Financial Liabilities
|
|
Addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU 2017-01: Clarifying the Definition of a Business
|
|
Adds guidance to assist companies and other reporting organizations
with evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU 2017-05: Clarifying the Scope of Asset Derecognition Guidance
and Accounting for Partial Sales of Nonfinancial
Assets
|
|
Clarifies the scope of established guidance on nonfinancial asset
derecognition (issued as part of the new revenue standard, ASU
2014-09, Revenue from Contracts with Customers), as well as the
accounting for partial sales of nonfinancial assets.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
|
|
|
|
|
|
|
A-40
|
ASU
|
|
Description
|
|
Effective Date
|
|
Effect on Financial Statements or Other Significant
Matters
|
|
ASU 2017-07: Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Costs
|
|
Amended the requirements related to the income statement
presentation of the components of net periodic benefit cost
for an entity’s sponsored defined benefit pension
and other postretirement plans.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU 2017-09: Scope of Modification Accounting
|
|
Amended the requirements related to changes to the terms or
conditions of a share-based payment award.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU 2017-13: Revenue Recognition (Topic 605), Revenue from
Contracts with Customers (Topic 606), Leases (Topic 840), and
Leases (Topic 842)
|
|
Updated the Revenue from Contracts with Customers and the Leases
Topics of the Accounting Standards Codification
(“ASC”). The amendments incorporate into the ASC recent
Securities Exchange Commission (“SEC”) guidance about
certain public business entities (“PBEs”) electing to
use the non-PBE effective dates solely to adopt the FASB’s
new standards on revenue and leases.
|
|
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 2017-14: Income Statement—Reporting Comprehensive, Income
(Topic 220), Revenue Recognition (Topic 605), and Revenue from
Contracts with Customers (Topic 606)
|
|
Incorporates into the ASC recent SEC guidance related to revenue
recognition.
|
|
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 2018-02: Income Statement (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive
Income
|
|
Requires companies to reclassify the stranded effects in other
comprehensive income to retained earnings as a result of the change
in the tax rates under the Tax Cuts and Jobs Act
(“TCJA”).
|
|
Effective upon issuance
|
|
The Company opted to early adopt this pronouncement by
retrospective application to each period in which the effect of the
change in the tax rate under the TCJA is recognized. The impact of
the reclassification from other comprehensive income to retained
earnings at December 31, 2017 was $607,000.
|
|
ASU 2018-03: Technical Corrections and Improvements to Financial
Instruments—Overall (Subtopic 825-10) Recognition and
Measurement of Financial Assets and Financial
Liabilities
|
|
Clarifies certain aspects of the guidance issued in ASU
2016-01.
|
|
January 1, 2018
|
|
The adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU 2018-04: Investments—Debt Securities (Topic 320) and
Regulated Operations (Topic 980): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release
No. 33-9273 (SEC Update)
|
|
Incorporates recent SEC guidance which was issued in order to make
the relevant interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and
regulation.
|
|
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 2018-05: Income Taxes (Topic 740): Amendments to SEC Paragraphs
Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC
Update)
|
|
Incorporates recent SEC guidance related to the income tax
accounting implications of the TCJA.
|
|
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 2018-06: Codification Improvements to Topic 942: Financial
Services—Depository and Lending
|
|
Eliminates a reference to the Office of the Comptroller of the
Currency’s Banking Circular 202, Accounting for Net Deferred
Tax Charges, from the ASC. The Office of the Comptroller of the
Currency published the guidance in 1985 but has since rescinded
it.
|
|
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.
|
A-41
ASU 2014-09
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.
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 for the year ended
December 31, 2018 was $823,000. 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 for the year ended December 31, 2018 from the contract
with these third parties
was $3.9 million. 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 for the year ended
December 31, 2018 from these contracts with customers was $597,000.
Through the Company’s wholly-owned subsidiary, CBRES, the
Company provides appraisal management services. Total revenue
recognized for the year ended December 31, 2018 from these
contracts with customers was $3.2 million. 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,
2018 derived from contracts in which services are transferred at a
point in time was approximately $8.5 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 impacting the
customers could affect the nature, amount, and timing of these cash
flows, as unfavorable economic conditions could impair the
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
A-42
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.
The following
tables provide a summary of ASU’s issued by the FASB that the
Company has not adopted as of December 31, 2018, which may impact
the Company’s financial statements.
Recently Issued Accounting Guidance Not Yet Adopted
|
|
|
|
|
|
|
|
|
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
|
|
The Company expects to adopt this guidance using the modified
retrospective method and practical expedients for transition. The
practical expedients allow the Company to largely account for its
existing leases consistent with current guidance except for the
incremental balance sheet recognition for lessees. The adoption of
this guidance is not expected to have a material impact on the
Company’s results of operations, financial position or
disclosures. The Company epects to record an increase in assets and
liabilities of approximatley $4.4 million as a result of recording
lease contracts where the Company is lessee and expects to adopt
the new guidance prospectively as of January 1, 2019 and to not
restate comparative periods.
|
|
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.
|
|
January 1, 2020 Early adoption permitted
|
|
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 2017-04: Simplifying the Test for Goodwill
Impairment
|
|
Provides guidance to simplify the accounting related to goodwill
impairment.
|
|
January 1, 2020
|
|
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 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 is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
A-43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASU
|
|
Description
|
|
Effective Date
|
|
Effect on Financial Statements or Other Significant
Matters
|
|
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 is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
|
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 is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
|
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 2018-15: Intangibles—Goodwill and
Other—Internal-Use Software (Subtopic 350-40)
|
|
Reduces complexity of the accounting for costs of implementing a
cloud computing service arrangement.
|
|
January 1, 2020
|
|
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 2018-16: Inclusion of the Secured Overnight Financing Rate
(SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate
for Hedge Accounting Purposes
|
|
Expand the list of U.S. benchmark interest rates permitted in the
application of hedge accounting.
|
|
January 1, 2019
|
|
The adoption of this guidance is not expected to have a material
impact on the Company’s results of operations, financial
position or disclosures.
|
|
ASU 2018-17: Targeted Improvements to Related Party Guidance for
Variable Interest Entities
|
|
Amended the Consolidation topic of the ASC for determining whether
a decision-making fee is a variable interest. The amendments
require organizations to consider indirect interests held through
related parties under common control on a proportional basis rather
than as the equivalent of a direct interest in its
entirety.
|
|
January 1, 2020 Early adoption permitted
|
|
The Company does not intend to adopt this guidance early. 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 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 Company does not intend to adopt this guidance early. 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 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.
|
|
January 1, 2020 Early adoption permitted
|
|
See comments for ASU 2016-13 above.
|
|
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 above.
|
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 2017 and 2016 consolidated financial statements have
been reclassified to conform to the 2018 presentation.
A-44
(2)
Investment
Securities
Investment
securities available for sale at December 31, 2018 and 2017 are as
follows:
(Dollars in
thousands)
|
|
December
31, 2018
|
|||
|
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|
Mortgage-backed
securities
|
$
52,145
|
516
|
558
|
52,103
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
35,356
|
71
|
793
|
34,634
|
|
State and political
subdivisions
|
105,545
|
2,089
|
43
|
107,591
|
|
Trust preferred
securities
|
250
|
-
|
-
|
250
|
|
Total
|
$
193,296
|
2,676
|
1,394
|
194,578
|
(Dollars in
thousands)
|
|
December
31, 2017
|
|||
|
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|
Mortgage-backed
securities
|
$
53,124
|
814
|
329
|
53,609
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
40,504
|
140
|
264
|
40,380
|
|
State and political
subdivisions
|
129,276
|
4,310
|
16
|
133,570
|
|
Corporate
bonds
|
1,500
|
12
|
-
|
1,512
|
|
Trust preferred
securities
|
250
|
-
|
-
|
250
|
|
Total
|
$
224,654
|
5,276
|
609
|
229,321
|
The
current fair value and associated unrealized losses on investments
in debt securities with unrealized losses at December 31, 2018 and
2017 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,
2018
|
|||||
|
|
Less than
12 Months
|
12 Months
or More
|
Total
|
|||
|
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|
Mortgage-backed
securities
|
$
6,932
|
56
|
17,670
|
502
|
24,602
|
558
|
|
U.S.
Government
|
|
|
|
|
|
|
|
sponsored
enterprises
|
1,784
|
69
|
25,172
|
724
|
26,956
|
793
|
|
State and political
subdivisions
|
4,815
|
26
|
1,578
|
17
|
6,393
|
43
|
|
Total
|
$
13,531
|
151
|
44,420
|
1,243
|
57,951
|
1,394
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|||||
|
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||
|
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
Fair Value
|
Unrealized Losses
|
|
Mortgage-backed
securities
|
$
8,701
|
75
|
11,259
|
254
|
19,960
|
329
|
|
U.S.
Government
|
|
|
|
|
|
|
|
sponsored
enterprises
|
12,661
|
98
|
10,067
|
166
|
22,728
|
264
|
|
State
and political subdivisions
|
798
|
2
|
1,501
|
14
|
2,299
|
16
|
|
Total
|
$
22,160
|
175
|
22,827
|
434
|
44,987
|
609
|
At
December 31, 2018, unrealized losses in the investment securities
portfolio relating to debt securities totaled $1.4 million. The
unrealized losses on these debt securities arose due to changing
interest rates and are considered
A-45
to be temporary. From the December 31, 2018 tables above, 11 out of
130 securities issued by state and political subdivisions contained
unrealized losses and 31 out of 46 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 2018,
2017 or 2016.
The
amortized cost and estimated fair value of investment securities
available for sale at December 31, 2018, 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,
2018
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
Amortized
Cost
|
Estimated
Fair Value
|
|
Due within one
year
|
$
21,379
|
21,426
|
|
Due from one to
five years
|
80,932
|
82,325
|
|
Due from five to
ten years
|
32,271
|
32,174
|
|
Due after ten
years
|
6,569
|
6,550
|
|
Mortgage-backed
securities
|
52,145
|
52,103
|
|
Total
|
$
193,296
|
194,578
|
During
2018, proceeds from sales of securities available for sale were
$36.0 million and resulted in gross gains of $15,000. No securities
available for sale were sold during the year ended December 31,
2017. During 2016, proceeds from sales of securities available for
sale were $1.5 million and resulted in gross gains of
$729,000.
Securities with a
fair value of approximately $93.0 million and $105.6 million at
December 31, 2018 and 2017, respectively, were pledged to secure
public deposits, Federal Home Loan Bank of Atlanta
(“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, 2018 and
2017.
|
(Dollars in
thousands)
|
|
|
|
|
|
|
December 31,
2018
|
|||
|
|
Fair Value
Measurements
|
Level 1
Valuation
|
Level 2
Valuation
|
Level 3
Valuation
|
|
Mortgage-backed
securities
|
$
52,103
|
-
|
52,103
|
-
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
$
34,634
|
-
|
34,634
|
-
|
|
State and political
subdivisions
|
$
107,591
|
-
|
107,591
|
-
|
|
Trust preferred
securities
|
$
250
|
-
|
-
|
250
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
December 31,
2017
|
|||
|
|
Fair Value
Measurements
|
Level 1
Valuation
|
Level 2
Valuation
|
Level 3
Valuation
|
|
Mortgage-backed
securities
|
$
53,609
|
-
|
53,609
|
-
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
$
40,380
|
-
|
40,380
|
-
|
|
State and political
subdivisions
|
$
133,570
|
-
|
133,570
|
-
|
|
Corporate
bonds
|
$
1,512
|
-
|
1,512
|
-
|
|
Trust preferred
securities
|
$
250
|
-
|
-
|
250
|
A-46
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,
2018.
|
(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)
|
-
|
|
Transfers in and/or
(out) of Level 3
|
-
|
|
Balance, end of
period
|
$
250
|
|
|
|
|
Change in
unrealized gain/(loss) for assets still held in Level
3
|
$
-
|
(3)
Loans
Major
classifications of loans at December 31, 2018 and 2017 are
summarized as follows:
|
(Dollars in
thousands)
|
|
|
|
|
December
31,
2018
|
December
31,
2017
|
|
Real estate
loans:
|
|
|
|
Construction and
land development
|
$
94,178
|
84,987
|
|
Single-family
residential
|
252,983
|
246,703
|
|
Single-family
residential -
|
|
|
|
Banco de la Gente
non-traditional
|
34,261
|
37,249
|
|
Commercial
|
270,055
|
248,637
|
|
Multifamily and
farmland
|
33,163
|
28,937
|
|
Total real estate
loans
|
684,640
|
646,513
|
|
|
|
|
|
Loans not secured
by real estate:
|
|
|
|
Commercial
loans
|
97,465
|
89,022
|
|
Farm
loans
|
926
|
1,204
|
|
Consumer
loans
|
9,165
|
9,888
|
|
All other
loans
|
11,827
|
13,137
|
|
|
|
|
|
Total
loans
|
804,023
|
759,764
|
|
|
|
|
|
Less allowance for
loan losses
|
6,445
|
6,366
|
|
|
|
|
|
Net
loans
|
$
797,578
|
753,398
|
The
above table includes deferred costs, net of deferred fees, totaling
$1.6 million at December 31, 2018 and 2017.
The
Bank grants loans and extensions of credit primarily within the
Catawba Valley region of North Carolina, which encompasses Catawba,
Alexander, Iredell and Lincoln counties and also in Mecklenburg,
Wake and Durham counties of North Carolina. Although the Bank has a
diversified loan portfolio, a substantial portion of the loan
portfolio is collateralized by improved and unimproved real estate,
the value of which is dependent upon the real estate market. Risk
characteristics of the major components of the Bank’s loan
portfolio are discussed below:
A-47
●
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, 2018, construction and
land development loans comprised approximately 12% 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, 2018,
single-family residential loans comprised approximately 36% of the
Bank’s total loan portfolio, including Banco single-family
residential non-traditional loans which were approximately 4% 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, 2018, commercial real estate loans comprised
approximately 34% of the Bank’s total loan
portfolio.
●
Commercial loans
– Repayment is generally dependent upon the successful
operation of the borrower’s business. In addition, the
collateral securing the loans may depreciate over time, be
difficult to appraise, be illiquid, or fluctuate in value based on
the success of the business. As of December 31, 2018, commercial
loans comprised approximately 12% of the Bank’s total loan
portfolio.
Loans
are considered past due if the required principal and interest
payments have not been received as of the date such payments were
due. Loans are placed on non-accrual status when, in
management’s opinion, the borrower may be unable to meet
payment obligations as they become due, as well as when required by
regulatory provisions. Loans may be placed on non-accrual status
regardless of whether or not such loans are considered past due.
When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the
extent cash payments are received in excess of principal due. Loans
are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments
are reasonably assured.
The
following tables present an age analysis of past due loans, by loan
type, as of December 31, 2018 and 2017:
|
December 31,
2018
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
Loans
30-89 Days Past Due
|
Loans 90
or More Days Past Due
|
Total Past
Due Loans
|
Total
Current Loans
|
Total
Loans
|
Accruing
Loans 90 or More Days Past Due
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
Construction and
land development
|
$
3
|
-
|
3
|
94,175
|
94,178
|
-
|
|
Single-family
residential
|
4,162
|
570
|
4,732
|
248,251
|
252,983
|
-
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
4,627
|
580
|
5,207
|
29,054
|
34,261
|
-
|
|
Commercial
|
228
|
-
|
228
|
269,827
|
270,055
|
-
|
|
Multifamily and
farmland
|
-
|
-
|
-
|
33,163
|
33,163
|
-
|
|
Total real estate
loans
|
9,020
|
1,150
|
10,170
|
674,470
|
684,640
|
-
|
|
|
|
|
|
|
|
|
|
Loans not secured
by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
445
|
90
|
535
|
96,930
|
97,465
|
-
|
|
Farm
loans
|
-
|
-
|
-
|
926
|
926
|
-
|
|
Consumer
loans
|
99
|
4
|
103
|
9,062
|
9,165
|
-
|
|
All other
loans
|
-
|
-
|
-
|
11,827
|
11,827
|
-
|
|
Total
loans
|
$
9,564
|
1,244
|
10,808
|
793,215
|
804,023
|
-
|
A-48
|
December
31, 2017
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Loans 30-89 Days Past Due
|
Loans 90 or More Days Past Due
|
Total Past Due Loans
|
Total Current Loans
|
Total Loans
|
Accruing Loans 90 or More Days Past Due
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$
277
|
-
|
277
|
84,710
|
84,987
|
-
|
|
Single-family
residential
|
3,241
|
193
|
3,434
|
243,269
|
246,703
|
-
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco
de la Gente non-traditional
|
4,078
|
465
|
4,543
|
32,706
|
37,249
|
-
|
|
Commercial
|
588
|
-
|
588
|
248,049
|
248,637
|
-
|
|
Multifamily
and farmland
|
-
|
12
|
12
|
28,925
|
28,937
|
-
|
|
Total
real estate loans
|
8,184
|
670
|
8,854
|
637,659
|
646,513
|
-
|
|
|
|
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
53
|
100
|
153
|
88,869
|
89,022
|
-
|
|
Farm
loans
|
-
|
-
|
-
|
1,204
|
1,204
|
-
|
|
Consumer
loans
|
113
|
5
|
118
|
9,770
|
9,888
|
-
|
|
All
other loans
|
-
|
-
|
-
|
13,137
|
13,137
|
-
|
|
Total
loans
|
$
8,350
|
775
|
9,125
|
750,639
|
759,764
|
-
|
The
following table presents the Bank’s non-accrual loans as of
December 31, 2018 and 2017:
|
(Dollars in
thousands)
|
|
|
|
|
December
31,
2018
|
December
31,
2017
|
|
Real estate
loans:
|
|
|
|
Construction and
land development
|
$
1
|
14
|
|
Single-family
residential
|
1,530
|
1,634
|
|
Single-family
residential -
|
|
|
|
Banco de la Gente
non-traditional
|
1,440
|
1,543
|
|
Commercial
|
244
|
396
|
|
Multifamily
and farmland
|
-
|
12
|
|
Total real estate
loans
|
3,215
|
3,599
|
|
|
|
|
|
Loans not secured
by real estate:
|
|
|
|
Commercial
loans
|
89
|
100
|
|
Consumer
loans
|
10
|
12
|
|
Total
|
$
3,314
|
3,711
|
At each
reporting period, the Bank determines which loans are impaired.
Accordingly, the Bank’s impaired loans are reported at their
estimated fair value on a non-recurring basis. An allowance for
each impaired loan that is collateral-dependent is calculated based
on the fair value of its collateral. The fair value of the
collateral is based on appraisals performed by REAS, a subsidiary
of the Bank. REAS is staffed by certified appraisers that also
perform appraisals for other companies. Factors, including the
assumptions and techniques utilized by the appraiser, are
considered by management. If the recorded investment in the
impaired loan exceeds the measure of fair value of the collateral,
a valuation allowance is recorded as a component of the allowance
for loan losses. An allowance for each impaired loan that is not
collateral dependent is calculated based on the present value of
projected cash flows. If the recorded investment in the impaired
loan exceeds the present value of projected cash flows, a valuation
allowance is recorded as a component of the allowance for loan
losses. Impaired loans under $250,000 are not individually
evaluated for impairment with the exception of the Bank’s
troubled debt restructured (“TDR”) loans in the
residential mortgage loan portfolio, which are individually
evaluated for impairment. Impaired loans collectively evaluated for
impairment totaled $4.8 million and $4.9 million at December 31,
2018 and 2017, respectively. Accruing impaired loans were $22.8
million and $24.6 million at December 31, 2018 and December 31,
2017, respectively. Interest income recognized on accruing impaired
loans was $1.3 million and $1.4 million for the years ended
December 31, 2018 and 2017, respectively. No interest income is
recognized on non-accrual impaired loans subsequent to their
classification as non-accrual.
A-49
The
following tables present the Bank’s impaired loans as of
December 31, 2018, 2017 and 2016:
|
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
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Contractual Principal Balance
|
Recorded
Investment With No Allowance
|
Recorded
Investment With Allowance
|
Recorded
Investment in Impaired Loans
|
Related
Allowance
|
Average
Outstanding Impaired Loans
|
YTD
Interest Income Recognized
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
282
|
-
|
277
|
277
|
6
|
253
|
17
|
|
Single-family
residential
|
5,226
|
1,135
|
3,686
|
4,821
|
41
|
5,113
|
265
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
17,360
|
-
|
16,805
|
16,805
|
1,149
|
16,867
|
920
|
|
Commercial
|
2,761
|
807
|
1,661
|
2,468
|
1
|
3,411
|
148
|
|
Multifamily and
farmland
|
78
|
-
|
12
|
12
|
-
|
28
|
-
|
|
Total impaired real
estate loans
|
25,707
|
1,942
|
22,441
|
24,383
|
1,197
|
25,672
|
1,350
|
|
|
|
|
|
|
|
|
|
|
Loans not secured
by real estate:
|
|
|
|
|
|
|
|
|
Commercial
loans
|
264
|
100
|
4
|
104
|
-
|
149
|
3
|
|
Consumer
loans
|
158
|
-
|
154
|
154
|
2
|
194
|
9
|
|
Total impaired
loans
|
$
26,129
|
2,042
|
22,599
|
24,641
|
1,199
|
26,015
|
1,362
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Contractual Principal Balance
|
Recorded
Investment With No Allowance
|
Recorded
Investment With Allowance
|
Recorded
Investment in Impaired Loans
|
Related
Allowance
|
Average
Outstanding Impaired Loans
|
YTD
Interest Income Recognized
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
282
|
-
|
278
|
278
|
11
|
330
|
13
|
|
Single-family
residential
|
5,354
|
703
|
4,323
|
5,026
|
47
|
7,247
|
164
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
18,611
|
-
|
18,074
|
18,074
|
1,182
|
17,673
|
861
|
|
Commercial
|
3,750
|
1,299
|
2,197
|
3,496
|
166
|
4,657
|
152
|
|
Multifamily and
farmland
|
78
|
-
|
78
|
78
|
-
|
78
|
-
|
|
Total impaired real
estate loans
|
28,075
|
2,002
|
24,950
|
26,952
|
1,406
|
29,985
|
1,190
|
|
|
|
|
|
|
|
|
|
|
Loans not secured
by real estate:
|
|
|
|
|
|
|
|
|
Commercial
loans
|
27
|
-
|
27
|
27
|
-
|
95
|
-
|
|
Consumer
loans
|
211
|
-
|
202
|
202
|
3
|
222
|
8
|
|
Total impaired
loans
|
$
28,313
|
2,002
|
25,179
|
27,181
|
1,409
|
30,302
|
1,198
|
The
fair value measurements for mortgage loans held for sale, impaired
loans and other real estate on a non-recurring basis at December
31, 2018 and 2017 are presented below. The Company’s
valuation methodology is discussed in Note 15.
A-50
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Fair Value
Measurements December 31,
2018
|
Level 1
Valuation
|
Level 2
Valuation
|
Level 3
Valuation
|
|
Mortgage loans held
for sale
|
$
680
|
-
|
-
|
680
|
|
Impaired
loans
|
$
21,695
|
-
|
-
|
21,695
|
|
Other real
estate
|
$
27
|
-
|
-
|
27
|
|
|
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
Fair Value
Measurements December 31,
2017
|
Level 1
Valuation
|
Level 2
Valuation
|
Level 3
Valuation
|
|
Mortgage loans held
for sale
|
$
857
|
-
|
-
|
857
|
|
Impaired
loans
|
$
23,442
|
-
|
-
|
23,442
|
|
Other real
estate
|
$
118
|
-
|
-
|
118
|
|
|
|
|
|
|
Changes
in the allowance for loan losses for the year ended December 31,
2018 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
|
$
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
|
A-51
Changes
in the allowance for loan losses for the year ended December 31,
2017 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
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
Charge-offs
|
-
|
(249
)
|
-
|
-
|
(66
)
|
(194
)
|
-
|
(473
)
|
-
|
(982
)
|
|
Recoveries
|
14
|
85
|
-
|
21
|
-
|
31
|
-
|
154
|
-
|
305
|
|
Provision
|
(362
)
|
(150
)
|
(97
)
|
(421
)
|
86
|
62
|
-
|
270
|
105
|
(507
)
|
|
Ending
balance
|
$
804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
-
|
-
|
1,093
|
37
|
-
|
-
|
-
|
-
|
-
|
1,130
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
804
|
1,812
|
187
|
1,156
|
72
|
574
|
-
|
155
|
476
|
5,236
|
|
Ending
balance
|
$
804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
84,987
|
246,703
|
37,249
|
248,637
|
28,937
|
89,022
|
1,204
|
23,025
|
-
|
759,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
98
|
1,855
|
15,460
|
2,251
|
-
|
100
|
-
|
-
|
-
|
19,764
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
84,889
|
244,848
|
21,789
|
246,386
|
28,937
|
88,922
|
1,204
|
23,025
|
-
|
740,000
|
Changes
in the allowance for loan losses for the year ended December 31,
2016 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
|
$
2,185
|
2,534
|
1,460
|
1,917
|
-
|
842
|
-
|
172
|
479
|
9,589
|
|
Charge-offs
|
(7
)
|
(275
)
|
-
|
(318
)
|
-
|
(146
)
|
-
|
(492
)
|
-
|
(1,238
)
|
|
Recoveries
|
10
|
55
|
-
|
19
|
-
|
170
|
-
|
151
|
-
|
405
|
|
Provision
|
(1,036
)
|
(188
)
|
(83
)
|
(25
)
|
52
|
(191
)
|
-
|
373
|
(108
)
|
(1,206
)
|
|
Ending
balance
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
-
|
-
|
1,160
|
159
|
-
|
-
|
-
|
-
|
-
|
1,319
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
1,152
|
2,126
|
217
|
1,434
|
52
|
675
|
-
|
204
|
371
|
6,231
|
|
Ending
balance
|
$
1,152
|
2,126
|
1,377
|
1,593
|
52
|
675
|
-
|
204
|
371
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
61,749
|
240,700
|
40,189
|
247,521
|
21,047
|
87,596
|
-
|
25,009
|
-
|
723,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
-
|
935
|
16,718
|
3,648
|
-
|
-
|
-
|
-
|
-
|
21,301
|
|
Ending
balance: collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated
for impairment
|
$
61,749
|
239,765
|
23,471
|
243,873
|
21,047
|
87,596
|
-
|
25,009
|
-
|
702,510
|
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.
A-52
●
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.
The
following tables present the credit risk profile of each loan type
based on internally assigned risk grades as of December 31, 2018
and 2017.
|
December 31,
2018
|
|
|
||||||||
|
(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
|
$
504
|
5,795
|
-
|
-
|
-
|
605
|
-
|
673
|
-
|
7,577
|
|
2- High
Quality
|
24,594
|
128,588
|
-
|
25,321
|
395
|
20,520
|
-
|
3,229
|
2,145
|
204,792
|
|
3- Good
Quality
|
59,549
|
92,435
|
13,776
|
211,541
|
27,774
|
69,651
|
785
|
4,699
|
8,932
|
489,142
|
|
4- Management
Attention
|
5,707
|
19,200
|
15,012
|
30,333
|
3,906
|
6,325
|
141
|
529
|
750
|
81,903
|
|
5-
Watch
|
3,669
|
3,761
|
2,408
|
2,616
|
1,088
|
264
|
-
|
18
|
-
|
13,824
|
|
6-
Substandard
|
155
|
3,204
|
3,065
|
244
|
-
|
100
|
-
|
17
|
-
|
6,785
|
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$
94,178
|
252,983
|
34,261
|
270,055
|
33,163
|
97,465
|
926
|
9,165
|
11,827
|
804,023
|
|
December 31,
2017
|
||||||||||
|
(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
|
$
152
|
8,590
|
-
|
-
|
-
|
446
|
-
|
791
|
-
|
9,979
|
|
2- High
Quality
|
20,593
|
120,331
|
-
|
34,360
|
561
|
17,559
|
-
|
3,475
|
2,410
|
199,289
|
|
3- Good
Quality
|
53,586
|
89,120
|
14,955
|
196,439
|
25,306
|
65,626
|
1,085
|
5,012
|
9,925
|
461,054
|
|
4- Management
Attention
|
4,313
|
20,648
|
15,113
|
13,727
|
1,912
|
5,051
|
119
|
562
|
802
|
62,247
|
|
5-
Watch
|
6,060
|
4,796
|
3,357
|
3,671
|
1,146
|
223
|
-
|
23
|
-
|
19,276
|
|
6-
Substandard
|
283
|
3,218
|
3,824
|
440
|
12
|
117
|
-
|
25
|
-
|
7,919
|
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$
84,987
|
246,703
|
37,249
|
248,637
|
28,937
|
89,022
|
1,204
|
9,888
|
13,137
|
759,764
|
A-53
TDR
loans modified in 2018, past due TDR loans and non-accrual TDR
loans totaled $4.7 million and $4.5 million at December 31, 2018
and December 31, 2017, 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
$92,000 and $21,000 in performing loans classified as TDR loans at
December 31, 2018 and December 31, 2017, respectively.
The
following table presents an analysis of loan modifications during
the year ended December 31, 2018:
|
Year ended December
31, 2018
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
Number of
Contracts
|
Pre-Modification
Outstanding Recorded Investment
|
Post-Modification
Outstanding Recorded Investment
|
|
Real estate
loans:
|
|
|
|
|
Single-family
residential
|
2
|
$
94
|
94
|
|
|
|
|
|
|
Total TDR
loans
|
2
|
$
94
|
94
|
During
the year ended December 31, 2018, two loans were modified that were
considered to be new TDR loans. The interest rate was modified on
these TDR loans.
The
following table presents an analysis of loan modifications during
the year ended December 31, 2017:
|
Year ended December
31, 2017
|
|
|
|
|
(Dollars in
thousands)
|
|
|
|
|
|
Number of
Contracts
|
Pre-Modification
Outstanding Recorded Investment
|
Post-Modification
Outstanding Recorded Investment
|
|
Real estate
loans:
|
|
|
|
|
Single-family
residential
|
2
|
$
22
|
22
|
|
|
|
|
|
|
Total TDR
loans
|
2
|
$
22
|
22
|
During
the year ended December 31, 2017, two loans were modified that were
considered to be new TDR loans. The interest rate was modified on
these TDR loans.
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, 2018 and 2017. TDR loans are deemed to
be in default if they become past due by 90 days or
more.
(4)
Premises
and Equipment
Major
classifications of premises and equipment at December 31, 2018 and
2017 are summarized as follows:
|
(Dollars in
thousands)
|
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Land
|
$
3,456
|
3,700
|
|
Buildings and
improvements
|
19,357
|
19,312
|
|
Furniture and
equipment
|
22,315
|
21,115
|
|
Construction in
process
|
381
|
847
|
|
|
|
|
|
Total premises and
equipment
|
45,509
|
44,974
|
|
|
|
|
|
Less accumulated
depreciation
|
27,059
|
25,063
|
|
|
|
|
|
Total net premises
and equipment
|
$
18,450
|
19,911
|
A-54
The
Company recognized approximately $2.3 million in depreciation
expense for the year ended December 31, 2018. Depreciation expense
was approximately $2.1 million and $2.1 million for the years ended
December 31, 2017 and 2016, respectively.
The
Company had $544,000 net gains on the sale of premises and
equipment for the year ended December 31, 2018, which was primarily
due to the sale of a Bank building that housed primarily
administrative staff. Staff working at this location have been
relocated to other Bank locations.
(5)
Time
Deposits
At
December 31, 2018, the scheduled maturities of time deposits are as
follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
2019
|
$
61,723
|
|
2020
|
21,566
|
|
2021
|
14,121
|
|
2022
|
2,618
|
|
2023 and
thereafter
|
3,145
|
|
|
|
|
Total
|
$
103,173
|
At
December 31, 2018 and 2017, the Bank had approximately $3.4 million
and $5.2 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 $3.4 million and $5.2 million as of December 31, 2018 and
2017, respectively
. The weighted average rate of brokered
deposits as of December 31, 2018 and 2017 was 0.07% and 0.07%,
respectively.
(6)
Federal
Home Loan Bank and Federal Reserve Bank Borrowings
The
Bank had no borrowings from the FHLB at December 31, 2018 and 2017.
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, 2018, the carrying value of loans pledged as
collateral totaled approximately $140.0 million. The remaining
availability under the line of credit with the FHLB was $84.9
million at December 31, 2018.
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 $982,000 and $978,000 of FHLB stock,
included in other investments, at December 31, 2018 and 2017,
respectively.
The
Bank prepaid FHLB borrowings totaling $20.0 million in 2017 with
prepayment penalties totaling $508,000.
As of
December 31, 2018 and 2017, 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,
2018, the carrying value of loans pledged as collateral totaled
approximately $442.6 million. Availability under the line of credit
with the FRB was $335.8 million at December 31, 2018.
(7)
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.
A-55
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.
(8)
Income
Taxes
On
December 22, 2017, the President of the United States signed into
law the TCJA. The TCJA includes a number of changes to existing
U.S. tax laws that impact the Company, most notably a reduction of
the U.S. corporate income tax rate from 34 percent to 21 percent
for tax years beginning after December 31, 2017.
The
Company recognized the income tax effects of the TCJA in its 2017
financial statements in accordance with Staff Accounting Bulletin
No. 118, which provides SEC staff guidance for the application of
ASC Topic 740,
Income
Taxes
, in the reporting period in which the TCJA was signed
into law. As such, the Company’s financial results reflect
the income tax effects of the TCJA for which the accounting under
ASC Topic 740 is complete and provisional amounts for those
specific income tax effects of the TCJA for which the accounting
under ASC Topic 740 is incomplete but a reasonable estimate could
be determined. The Company did not identify items for which the
income tax effects of the TCJA have not been completed and a
reasonable estimate could not be determined as of December 31,
2017.
The
provision for income taxes is summarized as follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Current
expense
|
$
2,546
|
1,827
|
1,464
|
|
Deferred income tax
expense
|
78
|
2,120
|
1,097
|
|
Total income
tax
|
$
2,624
|
3,947
|
2,561
|
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)
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Tax expense at
statutory rate (21% in 2018)
|
$
3,361
|
4,833
|
3,991
|
|
State income tax,
net of federal income tax effect
|
358
|
307
|
339
|
|
Tax-exempt interest
income
|
(990
)
|
(1,594
)
|
(1,681
)
|
|
Increase in cash
surrender value of life insurance
|
(81
)
|
(136
)
|
(138
)
|
|
Nondeductible
interest and other expense
|
23
|
46
|
78
|
|
Impact of
TCJA
|
-
|
588
|
-
|
|
Other
|
(47
)
|
(97
)
|
(28
)
|
|
Total
|
$
2,624
|
3,947
|
2,561
|
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, 2018 and
2017.
A-56
|
(Dollars in
thousands)
|
|
|
|
|
2018
|
2017
|
|
Deferred tax
assets:
|
|
|
|
Allowance for loan
losses
|
$
1,481
|
1,463
|
|
Accrued retirement
expense
|
1,119
|
1,073
|
|
Federal credit
carryforward
|
-
|
88
|
|
Restricted
stock
|
262
|
243
|
|
Accrued
bonuses
|
211
|
171
|
|
Interest income on
nonaccrual loans
|
1
|
5
|
|
Other than
temporary impairment
|
-
|
9
|
|
Total gross
deferred tax assets
|
3,074
|
3,052
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Deferred loan
fees
|
379
|
365
|
|
Accumulated
depreciation
|
610
|
498
|
|
Prepaid
expenses
|
10
|
14
|
|
Other
|
5
|
28
|
|
Unrealized gain on
available for sale securities
|
294
|
1,072
|
|
Total gross
deferred tax liabilities
|
1,298
|
1,977
|
|
|
|
|
|
Net deferred tax
asset
|
$
1,776
|
1,075
|
The
Company measures deferred tax assets and liabilities using enacted
tax rates that will apply in the years in which the temporary
differences are expected to be recovered or paid. Accordingly, the
Company’s deferred tax assets and liabilities were remeasured
to reflect the reduction in the U.S. corporate income tax rate from
34 percent to 21 percent, resulting in a $588,000 increase in
income tax expense for the year ended December 31, 2017 and a
corresponding $588,000 decrease in net deferred tax assets as of
December 31, 2017.
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 2015 through
2018 were at year end 2018 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 years
2014-2016, tax years 2017 and 2018 are open to audit under the
statutes of limitations by the North Carolina Department of
Revenue.
(9)
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 2018 and
2017:
|
(Dollars in
thousands)
|
|
|
|
|
2018
|
2017
|
|
Beginning
balance
|
$
3,679
|
4,503
|
|
New
loans
|
8,030
|
5,879
|
|
Repayments
|
(8,517
)
|
(6,703
)
|
|
Ending
balance
|
$
3,192
|
3,679
|
At
December 31, 2018 and 2017, the Company had deposit relationships
with related parties of approximately $31.6 million and $26.6
million, respectively.
A
director of the Company is an officer and partial owner of the
construction company that renovated the Bank’s Corporate
Center located at 518 West C Street, Newton, North Carolina during
2017. During 2017 the
Company
paid a total of approximately $2.6 million to this construction
company for such renovation work. The Company did not make any
payments to this construction company during 2018.
A
director of the Company has a membership interest in a company that
leases two branch facilities to the Bank. The Bank’s lease
payments for these facilities totaled $230,000 and $215,000 during
2018 and 2017, respectively.
A-57
(10)
Commitments
and Contingencies
The
Company leases various office spaces for banking and operational
facilities and equipment under operating lease arrangements. Future
minimum lease payments required for all operating leases having a
remaining term in excess of one year at December 31, 2018 are as
follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
Year ending
December 31,
|
|
|
2019
|
$
820
|
|
2020
|
809
|
|
2021
|
793
|
|
2022
|
501
|
|
2023
|
393
|
|
Thereafter
|
1,624
|
|
Total minimum
obligation
|
$
4,940
|
Total
rent expense was approximately $785,000, $756,000 and $752,000 for
the years ended December 31, 2018, 2017 and 2016,
respectively.
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.
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
|
|
|
|
2018
|
2017
|
|
Financial
instruments whose contract amount represent credit
risk:
|
|
|
|
|
|
|
|
Commitments to
extend credit
|
$
268,708
|
233,972
|
|
|
|
|
|
Standby letters of
credit and financial guarantees written
|
$
3,651
|
3,325
|
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
$272.4 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.
A-58
The
Company has $82.5 million available for the purchase of overnight
federal funds from six correspondent financial institutions as of
December 31, 2018.
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 $2.4
million of this commitment at December 31, 2018.
(11)
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 2016, 2017 and 2018. The Company’s contribution pursuant
to this formula was approximately $670,000, $622,000 and $565,000
for the years 2018, 2017 and 2016, 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
$423,000, $411,000 and $428,000 for the years 2018, 2017 and 2016,
respectively.
The
Company is currently paying medical benefits for certain retired
employees. The Company did not incur any postretirement medical
benefits expense in 2018, 2017 and 2016 due to an excess accrual
balance.
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)
|
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Benefit obligation
at beginning of period
|
$
4,361
|
4,174
|
|
Service
cost
|
362
|
348
|
|
Interest
cost
|
70
|
68
|
|
Benefits
paid
|
(227
)
|
(229
)
|
|
|
|
|
|
Benefit obligation
at end of period
|
$
4,566
|
4,361
|
The
amounts recognized in the Company’s Consolidated Balance
Sheet as of December 31, 2018 and 2017 are shown in the following
two tables:
|
(Dollars in
thousands)
|
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Benefit
obligation
|
$
4,566
|
4,361
|
|
Fair value of plan
assets
|
-
|
-
|
A-59
|
(Dollars in
thousands)
|
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Funded
status
|
$
(4,566
)
|
(4,361
)
|
|
Unrecognized prior
service cost/benefit
|
-
|
-
|
|
Unrecognized net
actuarial loss
|
-
|
-
|
|
|
|
|
|
Net amount
recognized
|
$
(4,566
)
|
(4,361
)
|
|
|
|
|
|
Unfunded accrued
liability
|
$
(4,566
)
|
(4,361
)
|
|
Intangible
assets
|
-
|
-
|
|
|
|
|
|
Net amount
recognized
|
$
(4,566
)
|
(4,361
)
|
Net
periodic benefit cost of the Company’s postretirement benefit
plans for the years ended December 31, 2018, 2017 and 2016
consisted of the following:
|
(Dollars in
thousands)
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Service
cost
|
$
362
|
348
|
346
|
|
Interest
cost
|
70
|
68
|
67
|
|
|
|
|
|
|
Net periodic
cost
|
$
432
|
416
|
413
|
|
|
|
|
|
|
Weighted average
discount rate assumption
|
|
|
|
|
used to determine
benefit obligation
|
5.49
%
|
5.49
%
|
5.47
%
|
The
Company paid benefits under the two postretirement plans totaling
$227,000 and $229,000 during the years ended December 31, 2018 and
2017, respectively. Information about the expected benefit payments
for the Company’s two postretirement benefit plans is as
follows:
|
(Dollars in
thousands)
|
|
|
|
|
|
Year ending
December 31,
|
|
|
2019
|
$
235
|
|
2020
|
$
353
|
|
2021
|
$
353
|
|
2022
|
$
342
|
|
2023
|
$
342
|
|
Thereafter
|
$
8,709
|
|
|
|
(12)
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, 2018, that the Company and
the Bank meet all capital adequacy requirements to which they are
subject.
A-60
As of
December 31, 2018, 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 Federal Reserve Board 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 are being
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 at 0.625% and is being phased in
through 2019 (increasing by 0.625% on each subsequent January 1,
until it reaches 2.5% on January 1, 2019). This will result 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:
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
Actual
|
For
Capital Adequacy Purposes
|
To Be Well
Capitalized Under Prompt Corrective Action Provisions
|
|||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
As of December 31,
2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
149,076
|
16.15
%
|
91,133
|
9.88
%
|
N/A
|
N/A
|
|
Bank
|
$
146,640
|
15.91
%
|
90,995
|
9.88
%
|
92,147
|
10.00
%
|
|
Tier 1 Capital (to
Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
142,631
|
15.46
%
|
72,676
|
7.88
%
|
N/A
|
N/A
|
|
Bank
|
$
140,195
|
15.21
%
|
72,566
|
7.88
%
|
73,717
|
8.00
%
|
|
Tier 1 Capital (to
Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
142,631
|
13.05
%
|
43,723
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
140,195
|
12.76
%
|
43,950
|
4.00
%
|
54,937
|
5.00
%
|
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
122,631
|
13.29
%
|
58,833
|
6.38
%
|
N/A
|
N/A
|
|
Bank
|
$
140,195
|
15.21
%
|
58,744
|
6.38
%
|
59,895
|
6.50
%
|
A-61
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
Actual
|
For
Capital Adequacy Purposes
|
To Be Well
Capitalized Under Prompt Corrective Action Provisions
|
|||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
As of December 31,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
138,492
|
16.06
%
|
79,758
|
9.25
%
|
N/A
|
N/A
|
|
Bank
|
$
136,299
|
15.83
%
|
79,627
|
9.25
%
|
86,084
|
10.00
%
|
|
Tier 1 Capital (to
Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
132,126
|
15.32
%
|
62,513
|
7.25
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
15.09
%
|
62,411
|
7.25
%
|
68,867
|
8.00
%
|
|
Tier 1 Capital (to
Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
132,126
|
11.94
%
|
44,255
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
11.69
%
|
44,475
|
4.00
%
|
55,594
|
5.00
%
|
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
112,126
|
13.00
%
|
49,579
|
5.75
%
|
N/A
|
N/A
|
|
Bank
|
$
129,933
|
15.09
%
|
49,498
|
5.75
%
|
55,954
|
6.50
%
|
(13)
Shareholders’
Equity
Shareholders’
equity was $123.6 million, or 11.31% of total assets, as of
December 31, 2018, compared to $116.0 million, or 10.62% of total
assets, as of December 31, 2017. 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, 2018 was 10.81%
compared to 8.78% for the year ended December 31, 2017. Total cash
dividends paid on common stock were $3.1 million and $2.6 million
for the years ended December 31, 2018 and 2017,
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
2016, the Company’s Board of Directors authorized a stock
repurchase program, pursuant to which up to $2 million was
allocated to repurchase the Company’s common stock. Any
purchases under the Company’s stock repurchase program were
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
were determined by the Company’s management, based on its
evaluation of market conditions and other factors. The Company
repurchased approximately $2.0 million, or 92,738 shares of its
common stock, under this program as of December 31,
2017.
(14)
Other
Operating Income and Expense
Miscellaneous
non-interest income for the years ended December 31, 2018, 2017 and
2016 included the following items:
|
(Dollars in
thousands)
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
Visa debit card
income
|
$
3,911
|
3,757
|
3,589
|
|
Bank owned life
insurance income
|
384
|
400
|
407
|
|
Gain (loss) on sale
of capital assets
|
544
|
(32
)
|
-
|
|
Other
|
1,354
|
1,175
|
854
|
|
|
$
6,193
|
5,300
|
4,850
|
A-62
Other
non-interest expense for the years ended December 31, 2018, 2017
and 2016 included the following items:
|
(Dollars in
thousands)
|
|
|
|
|
|
2018
|
2017
|
2016
|
|
ATM
expense
|
$
542
|
673
|
658
|
|
Consulting
|
1,012
|
785
|
2,257
|
|
Data
processing
|
466
|
426
|
418
|
|
Deposit program
expense
|
586
|
539
|
371
|
|
Dues and
subscriptions
|
421
|
354
|
451
|
|
FHLB advance
prepayment penalty
|
-
|
508
|
1,260
|
|
Internet banking
expense
|
603
|
720
|
710
|
|
Office
supplies
|
503
|
517
|
465
|
|
Telephone
|
678
|
855
|
754
|
|
Other
|
2,834
|
2,540
|
1,399
|
|
|
$
7,645
|
7,917
|
8,743
|
(15)
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.
●
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.
A-63
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.
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, 2018 and
2017. The fair value presentation for non-recurring assets is
presented in Note 3. There were no non-recurring liabilities at
December 31, 2018 and 2017. The carrying amount and estimated fair
value of the Company’s financial instruments at December 31,
2018 and 2017 are as follows:
A-64
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2018
|
|||
|
|
Carrying
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
43,370
|
43,370
|
-
|
-
|
43,370
|
|
Investment
securities available for sale
|
$
194,578
|
-
|
194,328
|
250
|
194,578
|
|
Other
investments
|
$
4,361
|
-
|
-
|
4,361
|
4,361
|
|
Mortgage loans held
for sale
|
$
680
|
-
|
-
|
680
|
680
|
|
Loans,
net
|
$
797,578
|
-
|
-
|
748,917
|
748,917
|
|
Cash surrender
value of life insurance
|
$
15,936
|
-
|
15,936
|
-
|
15,936
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
877,213
|
-
|
-
|
857,999
|
857,999
|
|
Securities sold
under agreements
|
|
|
|
|
|
|
to
repurchase
|
$
58,095
|
-
|
58,095
|
-
|
58,095
|
|
Junior subordinated
debentures
|
$
20,619
|
-
|
20,619
|
-
|
20,619
|
|
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
Fair Value
Measurements at December 31, 2017
|
|||
|
|
Carrying
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
57,304
|
57,304
|
-
|
-
|
57,304
|
|
Investment
securities available for sale
|
$
229,321
|
-
|
229,071
|
250
|
229,321
|
|
Other
investments
|
$
1,830
|
-
|
-
|
1,830
|
1,830
|
|
Mortgage loans held
for sale
|
$
857
|
-
|
-
|
857
|
857
|
|
Loans,
net
|
$
753,398
|
-
|
-
|
735,837
|
735,837
|
|
Cash surrender
value of life insurance
|
$
15,552
|
-
|
15,552
|
-
|
15,552
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
906,952
|
-
|
-
|
894,932
|
894,932
|
|
Securities sold
under agreements
|
|
|
|
|
|
|
to
repurchase
|
$
37,757
|
-
|
37,757
|
-
|
37,757
|
|
Junior subordinated
debentures
|
$
20,619
|
-
|
20,619
|
-
|
20,619
|
A-65
(16)
Peoples
Bancorp of North Carolina, Inc. (Parent Company Only) Condensed
Financial Statements
Balance
Sheets
December
31, 2018 and 2017
(Dollars
in thousands)
|
Assets
|
2018
|
2017
|
|
|
|
|
|
Cash
|
$
689
|
428
|
|
Interest-bearing
time deposit
|
1,000
|
1,000
|
|
Investment in
subsidiaries
|
141,181
|
133,781
|
|
Investment in PEBK
Capital Trust II
|
619
|
619
|
|
Investment
securities available for sale
|
250
|
250
|
|
Other
assets
|
533
|
546
|
|
|
|
|
|
Total
assets
|
$
144,272
|
136,624
|
|
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
|
|
Junior subordinated
debentures
|
$
20,619
|
20,619
|
|
Liabilities
|
36
|
30
|
|
Shareholders'
equity
|
123,617
|
115,975
|
|
|
|
|
|
Total liabilities
and shareholders' equity
|
$
144,272
|
136,624
|
Statements
of Earnings
For
the Years Ended December 31, 2018, 2017 and 2016
(Dollars
in thousands)
|
Revenues:
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
Interest and
dividend income
|
$
4,544
|
1,839
|
4,569
|
|
Gain on sale of
securities
|
-
|
-
|
405
|
|
|
|
|
|
|
Total
revenues
|
4,544
|
1,839
|
4,974
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
790
|
590
|
485
|
|
Other operating
expenses
|
678
|
725
|
513
|
|
|
|
|
|
|
Total
expenses
|
1,468
|
1,315
|
998
|
|
|
|
|
|
|
Income before
income tax benefit and equity in
|
|
|
|
|
undistributed
earnings of subsidiaries
|
3,076
|
524
|
3,976
|
|
|
|
|
|
|
Income tax
benefit
|
299
|
434
|
178
|
|
|
|
|
|
|
Income before
equity in undistributed
|
|
|
|
|
earnings of
subsidiaries
|
3,375
|
958
|
4,154
|
|
|
|
|
|
|
Equity in
undistributed earnings of subsidiaries
|
10,007
|
9,310
|
5,023
|
|
|
|
|
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
A-66
Statements
of Cash Flows
For
the Years Ended December 31, 20178, 2017 and 2016
(Dollars
in thousands)
|
|
2018
|
2017
|
2016
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
13,382
|
10,268
|
9,177
|
|
Adjustments to
reconcile net earnings to net
|
|
|
|
|
cash provided by
operating activities:
|
|
|
|
|
Equity in
undistributed earnings of subsidiaries
|
(10,007
)
|
(9,310
)
|
(5,023
)
|
|
Gain on sale of
investment securities
|
-
|
-
|
(405
)
|
|
Change
in:
|
|
|
|
|
Other
assets
|
13
|
(272
)
|
61
|
|
Other
liabilities
|
6
|
5
|
5
|
|
|
|
|
|
|
Net cash provided
by operating activities
|
3,394
|
691
|
3,815
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from calls
and maturities of investment securities
|
|
|
|
|
available for
sale
|
-
|
500
|
669
|
|
In kind transfer
from parent to Bank
|
-
|
-
|
10
|
|
|
|
|
|
|
Net cash provided
by investing activities
|
-
|
500
|
679
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
on common stock
|
(3,133
)
|
(2,629
)
|
(2,106
)
|
|
Cash in lieu stock
dividend
|
-
|
(6
)
|
-
|
|
Stock
repurchase
|
-
|
-
|
(1,984
)
|
|
Proceeds from
exercise of restricted stock units
|
-
|
915
|
-
|
|
|
|
|
|
|
Net cash used by
financing activities
|
(3,133
)
|
(1,720
)
|
(4,090
)
|
|
|
|
|
|
|
Net change in
cash
|
261
|
(529
)
|
404
|
|
|
|
|
|
|
Cash at beginning
of year
|
428
|
957
|
553
|
|
|
|
|
|
|
Cash at end of
year
|
$
689
|
428
|
957
|
|
|
|
|
|
|
Noncash investing
and financing activities:
|
|
|
|
|
Change in
unrealized gain on investment securities
|
|
|
|
|
available for
sale, net
|
$
(2,607
)
|
(1
)
|
(2,523
)
|
A-67
(17)
Quarterly
Data
|
(Dollars in
thousands, except per share amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
|
Total interest
income
|
$
10,759
|
11,059
|
11,608
|
11,924
|
$
10,064
|
10,461
|
10,698
|
10,726
|
|
Total interest
expense
|
467
|
513
|
557
|
609
|
598
|
622
|
650
|
507
|
|
Net interest
income
|
10,292
|
10,546
|
11,051
|
11,315
|
9,466
|
9,839
|
10,048
|
10,219
|
|
|
|
|
|
|
|
|
|
|
|
(Reduction of) provision for loan
losses
|
31
|
231
|
110
|
418
|
(236
)
|
49
|
(218
)
|
(102
)
|
|
Other income
|
3,736
|
4,016
|
3,915
|
4,499
|
3,442
|
3,929
|
4,159
|
3,834
|
|
Other expense
|
10,042
|
10,560
|
10,702
|
11,270
|
10,361
|
9,983
|
10,006
|
10,878
|
|
Income before
income taxes
|
3,955
|
3,771
|
4,154
|
4,126
|
2,783
|
3,736
|
4,419
|
3,277
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
(benefit)
|
652
|
595
|
687
|
690
|
578
|
925
|
1,177
|
1,267
|
|
Net
earnings
|
3,303
|
3,176
|
3,467
|
3,436
|
2,205
|
2,811
|
3,242
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net
earnings per share
|
$
0.55
|
0.53
|
0.58
|
0.57
|
$
0.36
|
0.47
|
0.54
|
0.34
|
|
Diluted net
earnings per share
|
$
0.55
|
0.53
|
0.57
|
0.57
|
$
0.36
|
0.46
|
0.53
|
0.34
|
A-68
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,
DFH Holdings
Operator/General
Manager, 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
A. Joseph Lampron, Jr.
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-69
TABLE OF CONTENTS