PEOPLES BANCORP OF NORTH CAROLINA INC
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
(Amendment No. __)
Filed by a Party
other than the Registrant ☐
Check the
appropriate box:
☐
Preliminary Proxy Statement
☐
Confidential, For Use of the Commission Only (As Permitted by Rule
14a-6(e)(2))
☒
Definitive Proxy Statement
☐
Definitive Additional Materials
☐
Soliciting Material under Rule 14a-12
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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):
☒ No
fee required
☐ Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title
of each class of securities to which transaction
applies:
(2) Aggregate
number of securities to which transaction applies:
(3) 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):
(4) Proposed
maximum aggregate value of transaction:
(5) Total
fee paid:
☐ Fee
paid previously with preliminary materials.
☐ 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.
(1) Amount
Previously Paid:
(2) Form,
Schedule or Registration Statement No.:
(3) Filing
Party:
(4) Date
Filed:
Notice
of 2021 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 2021 Annual Meeting of Shareholders
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ii
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Proxy Statement
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3
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Information About The Annual Meeting
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3
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Security Ownership Of Certain Beneficial Owners and
Management
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7
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Section 16(a) Beneficial Ownership Reporting
Compliance
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9
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Proposal 1 - Election of Directors
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10
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Director Nominees
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10
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Executive Officers of the Company
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12
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How often did our Board of Directors meet during 2020?
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12
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What is our policy for director attendance at Annual
Meetings?
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12
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How can you communicate with the Board or its members?
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12
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Board Leadership Structure and Risk Oversight
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13
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Code of Business Conduct and Ethics
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13
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Diversity of the Board of Directors
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13
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How can a shareholder nominate someone for election to the Board of
Directors?
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14
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Who serves on the Board of Directors of the Bank?
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14
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Board Committees
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14
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Executive Committee
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14
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Governance Committee
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14
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Audit and Enterprise Risk Committee
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15
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Compensation Discussion and Analysis
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15
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Summary Compensation Table
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20
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Grants of Plan-Based Awards
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21
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Outstanding Equity Awards at Fiscal Year End
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21
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Option Exercises and Stock Vested
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22
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Pension Benefits
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22
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Nonqualified Deferred Compensation
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23
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Employment Agreements
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23
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Potential Payments upon Termination or Change in
Control
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24
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Omnibus Stock Option and Long Term Incentive Plan
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25
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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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27
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Equity Compensation Plan Information
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29
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i
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Stock Performance Graph
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32
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Proposal 2 –Amendment to Articles of Incorporation to
Implement a Majority Voting Standard in Uncontested Elections of
Directors
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33
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Proposal 3 - Ratification of Selection of Independent Registered
Public Accounting Firm
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34
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Audit Fees Paid to Independent Auditors
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34
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Date for Receipt of Shareholder Proposals
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35
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Other Matters
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35
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Miscellaneous
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35
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Appendices
Appendix A –
Annual Report
Appendix B –
Proposed Amendment to Articles of Incorporation
ii
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Post
Office Box 467
518
West C Street
Newton,
North Carolina 28658-0467
(828)
464-5620
NOTICE
IS HEREBY GIVEN that the 2021 Annual Meeting of Shareholders of
Peoples Bancorp of North Carolina, Inc. (the “
Company
”) will be held
virtually on May 6, 2021 at 11:00 a.m., Eastern Time. 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 2022 Annual Meeting of Shareholders or until their successors
are duly elected and qualified;
●
To approve an
amendment to the Company’s Articles of Incorporation to
implement a majority voting standard in uncontested elections of
directors;
●
To ratify the
appointment of Elliott Davis, PLLC as the Company’s
independent registered public accounting firm for the fiscal year
ending December 31, 2021; and
●
To consider and act
on any other matters that may properly come before the Annual
Meeting or any adjournment.
This year, out of an abundance of caution and to continue to deal
with the health impact of the coronavirus disease known as
“COVID-19”, and in an effort to mitigate risks to the
health and safety or our communities, shareholders, employees and
other stakeholders, we will hold our Annual Meeting in a virtual
only format, which will be conducted via live audio webcast.
Shareholders will have an equal opportunity to participate at the
Annual Meeting online regardless of their geographic
location.
Shareholders desiring to attend in the Annual
Meeting must email the Company’s Assistant Corporate
Secretary, Krissy Price,
kprice@peoplesbanknc.com
,
on or before 5:30 p.m., Eastern Time, on Wednesday, May 5, 2021,
stating (1) such shareholder’s name, address, phone number
and the 15-digit identification code that appears on such
shareholder’s proxy card, (2) the number of shares of the
Company’s common stock that they held of record as of March
5, 2021 and (3) that they desire to attend in the Annual Meeting.
The Company will then take measures to verify such
shareholder’s identity. After verifying such
shareholder’s identity, those shareholders desiring to attend
in the Annual Meeting will be sent a response email providing the
information which will enable them to attend the Annual Meeting via
remote participation. In addition, rules of conduct for remote
participation in the Annual Meeting will be provided in the
response email. Shareholders are encouraged to vote their
shares
prior
to the Annual Meeting, as directed on
the proxy cards received by them.
The
Board of Directors has established March 5, 2021, 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. We urge you to vote as soon as possible so that
your votes will be properly recorded. 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 and by phone. If you attend the Annual Meeting, you
may vote in person and the proxy will not be used.
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By
Order of the Board of Directors,
Lance
A. Sellers
President
and Chief Executive Officer
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Newton,
North Carolina
March
24, 2021
iii
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
______________________________________
PROXY STATEMENT
______________________________________
Annual
Meeting of Shareholders
To Be
Held On May 6, 2021
_____________________________________
This
Proxy Statement is being mailed to our shareholders on or about
March 24, 2021, 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 6, 2021. The Notice,
Proxy Statement and the Annual Report to Shareholders for the year
ended December 31, 2020 are also available at
https://pebk.q4ir.com/filings-financials/proxy-material-and-annual-report/default.aspx
.
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 2021 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 6, 2021, at 11 a.m., Eastern Time.
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What items will be voted on at the
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Annual Meeting?
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1
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ELECTION OF DIRECTORS. To elect ten directors to serve until the
2022 Annual Meeting of Shareholders.
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2
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APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION. To approve an
amendment to the Company’s Articles of Incorporation to
implement a majority voting standard in uncontested elections of
directors.
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3
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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 2021.
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4
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OTHER BUSINESS. To consider any other business as may properly come
before the Annual Meeting or any adjournment.
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4
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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 5, 2021 (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
5,789,166 shares of our common stock outstanding and entitled to
vote and 675 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.
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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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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
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5
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t
o
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 at the
Annual Meeting. You should deliver your written notice or
superseding proxy to the Secretary of the Company at our principal
executive offices listed above. See information under the heading
“How do I attend and participate at the Annual
Meeting?” below for information on how to attend and vote at
the Annual Meeting.
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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
approve the amendment to the Company’s Articles of
Incorporation will be approved by the affirmative vote of the
holders of a majority of the shares present, or represented by
proxy, at the Annual Meeting. The proposal to ratify the
appointment of the Company’s independent registered public
accounting firm for 2021 will be approved if the votes cast in
favor exceed the votes cast in opposition.
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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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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
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6
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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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How do I attend and participate at the
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Annual Meeting?
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The Company is holding the Annual Meeting in a virtual only format,
which will be conducted via live audio webcast. Shareholders will
not be able to attend the Annual Meeting in person. Attending the
Annual Meeting online enables registered shareholders and duly
appointed proxyholders, including beneficial shareholders who have
duly appointed themselves as proxyholder, to participate at the
Annual Meeting and ask questions, all in real time. Registered
shareholders and duly appointed proxyholders can vote at the
appropriate times during the Annual Meeting.
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Shareholders desiring to participate in the Annual Meeting must
email the Company’s Assistant Corporate Secretary, Krissy
Price, kprice@peoplesbanknc.com, on or before 5:30 p.m., Eastern
Time, on Wednesday, May 5, 2021, stating (1) such
shareholder’s name, address, phone number and the 15-digit
identification code that appears on such shareholder’s proxy
card, (2) the number of shares of the Company’s common stock
that they held of record as of March 5, 2021 and (3) that they
desire to participate in the Annual Meeting. The Company will then
take measures to verify such shareholder’s identity. After
verifying such shareholder’s identity, those shareholders
desiring to participate in the Annual Meeting will be sent a
response email providing the information which will enable them to
join in the Annual Meeting via remote participation. In addition,
rules of conduct for remote participation in the Annual Meeting
will be provided in the response email. Shareholders are encouraged
to vote their shares prior to the Annual Meeting, as directed on
the proxy cards received by them.
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7
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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Percentof
Class
2
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Estate
of Christine S. Abernethy
P.O.
Box 386
Newton,
NC 28658
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726,390
3
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12.55%
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James
S. Abernethy
Post
Office Box 327
Newton,
NC 28658
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861,380
4
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14.88%
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Robert
C. Abernethy
Post
Office Box 366
Newton,
NC 28658
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900,999
5
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15.56%
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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 5,789,166
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 estate’s
total beneficial ownership interest. Ms. Abernethy’s estate
owns approximately 50% of the stock of Carolina Glove Company, Inc.
Mr. R. Abernethy, a co-executor of Ms. Abernethy’s estate and
a director of the Company, is the President, Secretary and
Treasurer of Carolina Glove Company, Inc.
4
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. Includes 726,390 shares of
common stock owned by the Estate of Christine Abernethy for which
Mr. J. Abernethy serves as a co-executor. The Estate of Christine
S. Abernethy owns approximately 50% of the stock of Carolina Glove
Company, Inc.
5
Includes 7,373
shares of common stock owned by Mr. R. Abernethy’s spouse,
for which Mr. R. Abernethy disclaims beneficial ownership. Includes
726,390 shares of common stock owned by the Estate of Christine S.
Abernethy for which Mr. R. Abernethy serves as a co-executor. The
Estate of Christine S. Abernethy owns approximately 50% of the
stock of Carolina Glove Company, Inc. Mr. R. Abernethy is the
President, Secretary and Treasurer of Carolina Glove Company, Inc.
and a director of the Company.
8
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 or was during the
fiscal year ended December 31, 2020 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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861,380
3
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14.88%
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Robert
C. Abernethy
Post
Office Box 366
Newton,
NC 28658
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900,999
4
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15.56%
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William
D. Cable, Sr.
Post
Office Box 467
Newton,
NC 28658
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25,347
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*
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Jeffrey
N. Hooper
10
Post
Office Box 467
Newton,
NC 28658
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0
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*
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Douglas
S. Howard
Post
Office Box 587
Denver,
NC 28037
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20,425
5
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*
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A.
Joseph Lampron, Jr.
11
Post
Office Box 467
Newton,
NC 28658
|
17,492
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*
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John W.
Lineberger, Jr.
Post
Office Box 481
Lincolnton, NC
28092
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4,795
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*
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Gary E.
Matthews
210
First Avenue South
Conover, NC
28613
|
25,846
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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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10,792
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*
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Larry
E. Robinson
Post
Office Box 723
Newton,
NC 28658
|
67,058
6
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1.16%
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Lance
A. Sellers
Post
Office Box 467
Newton,
NC 28658
|
26,325
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*
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William
Gregory Terry
Post
Office Box 610
Newton,
NC 28658
|
22,111
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*
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Dan Ray
Timmerman, Sr.
Post
Office Box 1148
Conover, NC
28613
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103,245
7
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1.78%
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9
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Benjamin I.
Zachary
Post
Office Box 277
Taylorsville, NC
28681
|
114,428
8
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1.98%
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All
current directors and nominees and
Executive officers
(or former executive officers) as a group (14 people)
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1,401,326
9
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24.21%
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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
5,789,166 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. Includes 726,390 shares of
common stock owned by the Estate of Christine S. Abernethy for
which Mr. J. Abernethy serves as a co-executor. The Estate of
Christine S. Abernethy owns approximately 50% of the stock of
Carolina Glove Company, Inc.
4
Includes 7,373
shares of common stock owned by Mr. R. Abernethy’s spouse,
for which Mr. R. Abernethy disclaims beneficial ownership. Includes
726,390 shares of common stock owned by the Estate of Christine S.
Abernethy for which Mr. R. Abernethy serves as a co-executor. The
Estate of Christine S. Abernethy owns approximately 50% of the
stock of Carolina Glove Company, Inc. Mr. R. Abernethy is the
President, Secretary and Treasurer of Carolina Glove Company,
Inc.
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. The 726,390 shares owned by the Estate of Christine S.
Abernethy and attributed to Mr. J. Abernethy and Mr. R. Abernethy
are included once in calculating this total.
10
Mr. Hooper was
appointed the Chief Financial Officer of the Company on May 7, 2020
to be effective on May 11, 2020, following the transition of Mr.
Lampron to Chief Administrative Officer in anticipation of his
retirement on June 30, 2020.
11
Mr. Lampron
transitioned from Chief Financial Officer to Chief Administrative
Officer on May 7, 2020, and retired from the Company on June 30,
2020.
Directors
James S. Abernethy and Robert C. Abernethy are brothers and are
sons of Christine S. Abernethy, who passed away in November of 2020
and owned in excess of ten percent (10%) of the common stock of the
Company at the time of her death. Directors James S. Abernethy and
Robert C. Abernethy are co-executors of Ms. Abernethy’s
estate.
10
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, 2020, 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.
Information about
the nominees for election to the Board of Directors for a one-year
term until the 2022 Annual Meeting of Shareholders appears below.
All of the nominees are currently serving on the Board of
Directors.
Director
Nominees
James S.
Abernethy
, age 66 (as of February 1, 2021), 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 28
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 27 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 70 (as of February 1, 2021), 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
44 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 62 (as of February 1, 2021), is employed by
Denver Equipment Company of Charlotte, Inc. as Vice President and
Treasurer. Mr. Howard is also an owner of Howard, Helderman,
Howard, LLC. He has served as a director of the Company since 2004.
Mr. Howard has a total of 22 years of banking experience and is a
graduate of the North Carolina Bank Directors’ College and
attended the initial Advanced Directors’ Training
session
11
offered by the NC Bank Directors’ College in association with
the College of Management at North Carolina State University. Mr.
Howard formerly served as the Chairman of the Board of Trustees of
Catawba Valley Medical Center and as the Chairman of the Board of
Directors of Catawba Valley Medical Group. Mr. Howard continues to
serve as a director of Catawba Valley Medical
Center.
John W.
Lineberger, Jr.
, age 70 (as of February 1, 2021), 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 16 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 65 (as of February 1, 2021), 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 19 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.
Billy L. Price,
Jr., M.D.
, age 64 (as of February 1, 2021), 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 16
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 75 (as of February 1, 2021, is a shareholder,
director and Chief Executive Officer 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 27
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 53 (as of February 1, 2021), is President of
Hole-in-One Advantage, LLC and a consultant/director of Drum &
Willis-Reynolds Funeral Homes and Crematory. Mr. Terry also served
as President of DFH Holdings from July 2007 through December of
2019. He has served as a director of the Company since 2004. Mr.
Terry has a total of 16 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 73 (as of February 1, 2021), 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 25
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.
12
Benjamin I.
Zachary
, age 64 (as of February 1, 2021), 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 25 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 serves 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
Executive
Officers of the Company
During
2020, our executive officers were:
Lance A.
Sellers
, age 58 (as of February 1, 2021), 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 36 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 52 (as of February 1, 2021), 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 29 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 66 (as of February 1, 2021), served 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
until May 11, 2020. On May 11, 2020, Mr. Lampron transitioned from
the Company’s and the Bank’s Chief Financial Officer to
the Company’s and the Bank’s Chief Administrative
Officer until his retirement on June 30, 2020. Prior to retirement,
Mr. Lampron had 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.
Jeffrey
Hooper,
age 51
(as of February 1, 2021) serves as an 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. Mr. Hooper joined the Company
and the Bank on March 2, 2020. Prior to joining the Company and the
Bank, Mr. Hooper was an Executive Vice President and Chief
Financial Officer of First South
13
B
ancorp, Inc. and
First South Bank. He is a Certified Public Accountant and a
graduate of the University of Alaska. Mr. Hooper has a total of 15
years of banking experience.
How
often did our Board of Directors meet during 2020?
Our
Board of Directors held 13 meetings during 2020. 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 virtually
attended our 2020 Annual Meeting of Shareholders held on May 7,
2020.
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 Jeffrey Hooper, 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, during the
year ended December 31, 2020, the Board of Directors has determined
that all of the members of the Board of Directors are independent
under applicable NASDAQ listing requirements.
The Company has five standing
committees: Executive, Loan Sub-Committee, Governance, Audit and
Enterprise Risk and Compensation. The Chief Executive Officer
serves on the Executive Committee. The Bank, in 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 and Enterprise Risk 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 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
14
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
Bank has adopted a written diversity policy in its employee
handbook, and such diversity policy was approved by the Board of
Directors of the Bank. 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.
Who
serves on the Board of Directors of the Bank?
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
2020, 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 2020.
15
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.
Notwithstanding that Directors J. Abernethy and R. Abernethy each
beneficially own more than 10% of the issued and outstanding common
stock of the Company, the Board of Directors has determined that
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 twice during the year ended December 31,
2020.
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 on the
Bank’s website (
www.peoplesbanknc.com
)
under Investor Relations.
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 following persons currently serve on
the Audit Committee: Directors R. Abernethy, J. Abernethy, Howard,
Price, Timmerman and Zachary.
Notwithstanding
that Directors J. Abernethy and R. Abernethy are deemed to
beneficially own more than 10% of the issued and outstanding common
stock of the Company by virtue of serving as co-executors of the
Estate of Christine S. Abernethy, the Board of Directors has
determined that neither Director J. Abernethy nor Director R.
Abernethy are affiliates of the Company as defined in Rule 10A-3.
As a result, 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 nine times during the year ended December 31,
2020.
16
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, 2020 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.
The
Board of Directors has determined that 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 two times during the year ended
December 31, 2020.
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. See
Indebtedness of and Transactions with Management and Directors
starting on page 29 of this Proxy Statement.
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, 2020.
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, 2020 to our President and Chief Executive Officer,
Lance A. Sellers, our former Chief Financial Officer, A. Joseph
Lampron, Jr., our current Chief Financial Officer, Jeffrey Hooper,
and William
17
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:
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, 2020.
18
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 2020, the Compensation Committee recommended, and
the Board of Directors approved, discretionary bonuses as follows:
$60,000 for Mr. Sellers; $40,000 for Mr. Hooper; and $40,000 for
Mr. Cable. Mr. Lampron did not receive a discretionary bonus in
2020. These discretionary bonuses were paid in January of 2021.
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. 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.
Long-Term Equity
Incentive Awards
. During part of the fiscal year ended
December 31, 2020, the Company maintained the 2020 Omnibus Stock
Ownership and Long Term Incentive Plan (“
2020 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 2020 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 would increase
in value based upon the market performance of the common stock
and/or the corporate achievement of financial and other performance
objectives. The 2020 Omnibus Plan was approved on May 7, 2020 and
expires on May 7, 2029.
In
making its decision to grant awards to the Company’s named
executive officers under the 2020 Omnibus Plan, the Compensation
Committee considered 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 considered each named executive
officer’s contribution to the Company’s
performance.
See
“Grants of Plan-Based Awards” on page 23
of this Proxy Statement,
“Outstanding Equity Awards at Fiscal Year-End” on page
23 of this Proxy Statement and “Option Exercises and Stock
Vested” on page 24 of this Proxy Statement for information on
grants and vesting of restricted stock units to the named executed
officers under the 2020 Omnibus Plan and the Company’s 2009
Omnibus Stock Ownership and Long Term Incentive Plan
(“
2009 Omnibus
Plan
”) which expired on May 7, 2019. See
“Omnibus Plan and Long Term Incentive Plan” starting on
page 27 of this Proxy Statement for additional information on the
2020 Omnibus Plan.
Supplemental
Executive Retirement Agreements
. The Bank provides a
non-qualified supplemental executive retirement benefit in the form
of Amended and Restated Executive Salary Continuation Agreements
with Messrs. Sellers, Lampron and Cable and an Executive Salary
Continuation Agreement with Mr. Hooper. 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 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, 2020. 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 2020
contribution to the 401(k) Plan pursuant to this formula was
approximately $692,000. 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
19
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 2020. 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, except for Mr. Hooper, 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 under the heading
“Employment Agreements” starting on page 25 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, 2020.
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 2019 Annual Meeting of Shareholders, 57.78% of the shareholders
who voted at the 2019 Annual Meeting of Shareholders elected to
review the executive compensation of the Company’s named
executive officers once every three years. As such, The Company
will submit a vote to the shareholders on the compensation of its
named executive officers at the 2022 Annual Meeting of
Shareholders. At the 2019 Annual Meeting of Shareholders, 85.40% of
the Shareholders who voted at the 2019 Annual Meeting of
Shareholders approved the executive compensation of the
Company’s named executive officers as presented in the 2019
proxy statement.
2020
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-
20
executive
employees. The Compensation Committee reviewed a comparison
of our Chief Executive Officer’s annual total compensation in
fiscal year 2020 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 22
of this Proxy
Statement.
The
calculation below includes all employees as of October 31,
2020.
The
2020 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)
|
$
44,061
|
|
|
|
|
Annual
Total Compensation of Lance A. Sellers,
|
|
|
Chief
Executive Officer
|
$
513,735
|
|
|
|
|
Ratio
of the Median Annual Total Compensation
|
|
|
of
All Employees to the Annual Total Compensation
|
|
|
of
Lance A. Sellers, Chief Executive Officer
|
11.66
|
21
Summary
Compensation Table
The
named executive officers of the Company are not paid any cash
compensation by the Company. However, the named executive officers
of the Company also are executive officers of the Bank and receive
compensation from the Bank. The below tables show, for the fiscal
years ended December 31, 2020, 2019 and 2018, 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($)
3
|
Change in
Pension Value and Nonqualified Deferred Compensation
Earnings($)
|
All Other
Compensation($)
4
|
Total($)
|
|
|
|
|
|
|
|
|
|
|
|
Lance A.
Sellers
|
|
2020
|
346,988
|
60,000
|
-
|
80,506
|
26,241
|
513,735
|
|
President and Chief
Executive
|
|
2019
|
336,980
|
115,000
|
-
|
74,098
|
26,179
|
552,257
|
|
Officer
|
|
2018
|
328,760
|
90,000
|
-
|
68,064
|
30,454
|
517,278
|
|
|
|
|
|
|
|
|
|
|
|
A. Joseph Lampron, Jr.
1
|
|
2020
|
132,327
|
-
|
-
|
-
|
18,506
|
150,833
|
|
Former Executive Vice
President,
|
|
2019
|
216,309
|
150,000
|
-
|
25,658
|
24,802
|
416,769
|
|
Chief Financial
Officer
|
|
2018
|
210,009
|
55,000
|
-
|
120,772
|
22,224
|
408,005
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Hooper
2
|
|
2020
|
152,712
|
74,000
2
|
-
|
7,439
|
8,801
|
242,953
|
|
Executive Vice President and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William D. Cable,
Sr.
|
|
2020
|
233,879
|
40,000
|
-
|
31,820
|
29,685
|
335,384
|
|
Executive Vice
President,
|
|
2019
|
228,174
|
55,000
|
40,086
|
29,227
|
25,081
|
377,568
|
|
Chief Operating
Officer
|
|
2018
|
216,125
|
50,000
|
-
|
26,837
|
24,365
|
317,327
|
_____________
1
Mr. Lampron retired from the Company
and the Bank on June 30, 2020. As such, his compensation reflects
amount received, paid or accrued from January 1, 2020 through June
30, 2020.
2
Mr. Hooper was hired by the Company
on March 2, 2020. As such, his compensation reflects amount
received, paid or accrued from March 2, 2020 through December 31,
2020. Includes a $34,000 signing bonus and a $40,000 year-end
annual discretionary bonus.
3
Amount represents the aggregate
grant date fair value computed in accordance with FASB ASC Topic
718. See Note 1 in the Notes to the Company’s Consolidated
Financial Statements included in the Company’s Annual Report,
which Annual Report is attached here to as Appendix A.
4
All other
compensation is comprised of the following:
|
Name and Principal
Position
|
|
Year
|
Employer
Match($)
|
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
|
|
2020
|
11,400
|
1,610
|
3,960
|
587
|
2,290
|
6,150
|
244
|
0
|
|
President and
Chief
|
|
2019
|
11,200
|
1,872
|
3,825
|
570
|
1,548
|
5,894
|
1,270
|
0
|
|
Executive
Officer
|
|
2018
|
11,000
|
2,888
|
3,730
|
539
|
2,899
|
5,628
|
1,270
|
2,500
(c)
|
|
A. Joseph Lampron, Jr.
(d)
|
|
2020
|
10,992
|
0
|
1,830
|
1,570
|
2,918
|
1,012
|
183
|
0
|
|
Former Executive
Vice
|
|
2019
|
11,200
|
0
|
3,660
|
1,464
|
5,626
|
1,900
|
952
|
0
|
|
President, Chief Financial
Officer
|
|
2018
|
10,610
|
0
|
3,630
|
1,359
|
3,688
|
1,984
|
953
|
0
|
|
Jeffrey Hooper
(e)
Executive Vice
President,
Chief Financial
Officer
|
|
2020
|
5,568
|
0
|
2,695
|
95
|
443
|
0
|
183
|
0
|
|
William D. Cable,
Sr.,
|
|
2020
|
11,327
|
0
|
3,780
|
527
|
1,122
|
8,207
|
973
|
3,750
(f)
|
|
Executive Vice
President
|
|
2019
|
11,118
|
0
|
3,780
|
496
|
1,047
|
7,688
|
952
|
0
|
|
Chief Operating
Officer
|
|
2018
|
10,795
|
0
|
3,730
|
463
|
2.050
|
6,375
|
952
|
0
|
22
__________
(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)
Mr. Lampron retired
from the Company and the Bank on June 30, 2020. As such, his
compensation reflects amount received, paid or accrued from January
1, 2020 through June 30, 2020.
(e)
Mr. Hooper was hired by the Company
on March 2, 2020. As such, his compensation reflects amount
received, paid or accrued from March 2, 2020 through December 31,
2020.
(f)
In 2020, Mr. Cable received 121 shares for 25 years of
service with the Bank and $750 in cash to pay taxes associated with
the award under the Bank’s Service Recognition
Program.
Grants
of Plan-Based AwardsGrants of Plan-Based Awards
The
Company did not grant any plan-based awards to Messrs. Sellers,
Lampron, and Cable during the fiscal year ended December 31,
2020. The following table shows certain information for those
grants of plan-based awards that we made to Mr. Hooper during the
fiscal year ended December 31, 2020.
GRANTS
OF PLAN-BASED AWARDS TABLE
|
Name
|
|
Grant
Date
|
Estimated Future
Payouts Under Equity Incentive Plan Awards
|
All Other Stock
Awards:Numberof Sharesof Stockor Units (#)
|
All Other Option
Awards: Number of Securities Under- lying Options (#)
|
Exercise or Base
Price of Option Awards ($/Sh)
|
Grant Date Fair
Value of Stock and Option
Awards
($)
|
|
|
|
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
|
|
|
|
|
Jeffrey N.
Hooper
|
|
May 7,
2020
|
--
|
--
|
1,760
(1)
|
--
|
--
|
17.08
(2)
|
____________________________________
(1)
Restricted stock
units vest in full on May 7, 2024
(2)
Represents fair
market value per share on May 7, 2024
Outstanding
Equity Awards at Fiscal Year End
Messrs.
Sellers and Lampron did not have any outstanding equity awards at
December 31, 2020. The following table shows certain information
for those outstanding equity awards at December 31, 2020 for
Messrs. Cable and Hooper.
OUTSTANDING EQUITY
AWARDS AT FISCAL YEAR-END TABLE
|
|
Stock
Awards
|
|||
|
Name
|
Number of Shares
or Units of Stock That Have Not Vested (#)
|
Market Value of
Shares or Units of Stock That Have
Not Vested
($)
|
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)
($)
|
|
William D. Cable,
Sr.
|
--
|
--
|
1,410
(1)
|
46,319
|
|
Jeffrey N.
Hooper
|
--
|
--
|
1,760
(2)
|
40,515
|
______________________________________
(1)
Represents 1,410
restricted stock units that were granted on February 21, 2019 (with
a grant date fair value for each restricted stock unit of $28.43 on
February 21, 2019) and will vest on February 21, 2023.
(2)
Represents 1,760
restricted stock units that were granted on May 7, 2020 (with a
grant date fair value for each restricted stock unit of $17.08 on
May 7, 2020) and vest on May 7, 2024.
(3)
Based on a stock
price of $23.02 per share on December 31, 2020.
23
Option
Exercises and Stock Vested
During
the fiscal year ended December 31, 2020, no options were exercised
by the named executive officers and no restricted stock units
granted to the named executive officers vested.
Pension
Benefits
The
following table shows, for the fiscal year ended December 31,
2020, the pension benefits paid or earned by Messrs. Sellers,
Lampron, Hooper, and Cable.
|
PENSION BENEFITS
TABLE
|
|||||
|
Name
|
|
Plan
Name
|
Number
of
Years
Credited
Service
|
Present
Value
of
Accumulated
Benefit($)
|
Payments
During
Last
Fiscal
Year($)
|
|
Lance A.
Sellers
|
|
Amended and
Restated Executive Salary Continuation Agreement
1
|
19
|
655,775
|
--
|
|
A. Joseph Lampron,
Jr.
|
|
Amended and
Restated Executive Salary Continuation Agreement
1,2
|
19
|
784,162
|
--
|
|
Jeffrey N.
Hooper
|
|
Executive Salary
Continuation Agreement
3
|
1
|
7,439
|
--
|
|
William D. Cable,
Sr.
|
|
Amended and
Restated Executive Salary Continuation Agreement
1
|
19
|
217,817
|
--
|
_______________________
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
Mr. Lampron retired on June 30, 2020 and beginning in
January of 2021 will begin drawing 100% of the annual benefit of
$76,554.
3
The Bank entered into an Executive Salary Continuation
Agreement with Mr. Hooper effective on July 1, 2020. Unless a
separation from service or a change in control (as defined in Mr.
Hooper’s Executive Salary Continuation Agreement) occurs
before the retirement age set forth in his Executive Salary
Continuation Agreement, the Executive Salary Continuation Agreement
provides for an annual supplemental retirement benefit to be paid
to Mr. Hooper in 12 equal monthly installments payable on the first
day of each month, beginning with the month immediately after the
month in which he attains the normal retirement age and for a
13-year term. Under the terms of the Executive Salary Continuation
Agreement, Mr. Hooper will receive an annual supplemental
retirement benefit of $45,000.
24
Nonqualified
Deferred Compensation
The
below table shows the compensation deferred by Messrs. Lampron and
Cable during the year ended December 31, 2020. Mr. Sellers and Mr.
Hooper elected not to defer any portion of their compensation
during the year ended December 31, 2020.
NONQUALIFIED
DEFERRED COMPENSATION TABLE
|
Name
|
Executive
Contributions
in the Last FY
($)
(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.
|
$
10,815
|
--
|
$
(79,662
)
|
0
|
$
229,748
|
|
William D. Cable,
Sr.
|
$
17,809
|
--
|
$
(105,677
)
|
0
|
$
572,924
|
___________________
(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 2020. 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
(27.40)% to 39.04
%
for the
year ended December 31, 2020.
(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 and (ii) 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
”).
Jeffrey N. Hooper, the Executive Vice President and Chief Financial
Officer of the Company and Executive Vice President, Chief
Financial Officer, Corporate Treasurer and Assistant Corporate
Secretary of the Bank does not have an employment agreement with
the Company or the Bank. On January 22, 2015, the Company and the
Bank also entered into an employment agreement with A. Joseph
Lampron, Jr., the former Executive Vice President and Chief
Financial Officer of the Bank and the former Executive Vice
President, Chief Financial Officer and Corporate Treasurer of the
Company (“
Mr.
Lampron’s Employment Agreement
”). Mr.
Lampron’s Employment Agreement ended upon his retirement from
the Company and the Bank on June 30, 2020.
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 and Mr. Cable a base salary at the rate of at
least $198,750 per year. 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 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.
25
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 event of
a “disability” (each as defined in the Employment
Agreements). In addition, each executive may voluntarily terminate
his employment upon 60 days prior written notice to the Company and
the Bank or for “good reason” (as defined in the
Employment Agreement). Under the Employment Agreements, if the
Company and the Bank terminate an executive’s employment
“without cause”, or an executive terminates his
employment for “good reason”, in each case, other than
in connection with a change of control, then in each case, the
executive would be entitled to receive certain severance payments
and access to welfare benefit plans as more particularly set forth
in the Employment Agreements. Under the Employment Agreements, in
the event that the Company and the Bank terminate an
executive’s employment “without cause”, or an
executive terminates his employment for “good reason”,
in any such case at the time of or within one year after a Change
of Control, then the executive will be entitled to receive certain
change in control payments as more particularly set forth in the
Employment Agreements.
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,
repurchase and 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 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, 2020,
“without cause” or for “good reason” at the
time of or within one year after a “change of control”,
Mr. Sellers and Mr. Cable would have been entitled to receive
compensation of approximately $1,220,963 and $821,636,
respectively, pursuant to their Employment Agreements. These
amounts are calculated based on each officer’s 2020
“Salary” and “Bonus” as shown in the
“Summary Compensation Table” on page 22 of this Proxy
Statement. In addition, if a “change in control” (as
defined in the 2009 Omnibus Plan, or in the case Mr. Hooper, the
2020 Omnibus Plan) had occurred on December 31, 2020, all unvested
restricted stock units previously granted to each of Mr. Cable and
Mr. Hooper would have vested immediately. On December 31, 2020,
these unvested restricted stock units had a fair market value of
$32,458 for Mr. Cable and $40,515 for Mr. Hooper. Neither Mr.
Sellers nor Mr. Lampron had outstanding restricted stock units at
December 31, 2020. Neither Mr. Lampron nor Mr. Hooper would have
been entitled to receive a severance payment on December 31,
2020.
26
Omnibus
Stock Option and Long Term Incentive Plan
General.
The purpose of the 2020
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.
The
2020 Omnibus Plan is administered by the Governance Committee of
the Board of Directors (the “Committee”). Subject
to the terms of the 2020 Omnibus Plan, the Committee and the Board
of Directors have authority to construe and interpret, for eligible
employees and eligible directors, respectively, the 2020 Omnibus
Plan, to determine the terms and provisions of Rights (as defined
below) to be granted under the 2020 Omnibus Plan, to define the
terms used in the 2020 Omnibus Plan and in the Rights granted
thereunder, to prescribe, amend and rescind rules and regulations
relating to the 2020 Omnibus Plan, to determine the individuals to
whom and the times at which Rights shall be granted and the number
of shares to be subject to, or to underlie, each Right awarded, and
to make all other determinations necessary or advisable for the
administration of the 2020 Omnibus Plan.
Rights Which May Be Granted.
Under the 2020 Omnibus Plan, the Committee may grant or award
eligible participants options, rights to receive restricted shares
of common stock, long term incentive units (each equivalent to one
share of common stock), and/or stock appreciation rights. These
grants and awards are referred to herein as the
“Rights.” If approved by the shareholders at the
Annual Meeting, all Rights must be granted or awarded by May 7,
2029, the tenth anniversary of the date the shareholders approve
the 2020 Omnibus Plan. The Board of Directors has provided
for 300,000 shares of the Company’s common stock be included
in the 2020 Omnibus Plan to underlie Rights which may be granted
thereunder. Any shares of common stock allocated to Rights granted
under the 2020 Omnibus Plan, which Rights are subsequently
cancelled or forfeited, will be available for further allocation
upon such cancellation or forfeiture.
Change in Control.
In the event of a
change in control (as such term is defined in the 2020 Omnibus
Plan), all Rights under the 2020 Omnibus Plan will fully vest and
be released from any restrictions on transfer. In addition, in the
event of a change in control, the Committee may, with 10
days’ advance notice to affected persons, cancel any Right
and pay to the holders thereof in cash or common stock or both, the
value of the Right based upon the price per share of common stock
received or to be received by the Company’s shareholders in
the change in control.
Clawback.
The Company may cancel any
Right, require reimbursement of any Right or previously paid
compensation under the Plan or an award agreement, or use any other
right of recoupment of equity or compensation in accordance with
any clawback policy adopted by the Company and as may be in effect
from time to time.
Grants.
On May 7, 2020, the Board of
Directors granted 7,635 non-transferable restricted stock units in
the aggregate to employees pursuant to the 2020 Omnibus Stock
Ownership and Long Term Incentive Plan. All grants were
compensatory in nature and were issued without cost to the
employees. Each restricted stock unit is subject to time-based
vesting restrictions and once vested will be convertible into one
share of the Company’s common stock.
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, 2020, each director received a fee of
$1,200 for each Bank Board of Directors meeting attended, an
additional fee of $750 for each committee meeting attended and a
retainer of $15,000. 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.
27
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 were eligible to participate in
the 2009 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, and upon vesting, each Restricted Stock
Unit had a market value of $28.07
for a total value of $11,593,
which was distributed to each director in a combination of stock or
cash, as chosen by each director. The number of Restricted Stock
Units described above 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, 2020.
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 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 2020.
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.
28
The
following table reports all forms of compensation paid to or
accrued for the benefit of each director during the 2020 fiscal
year.
|
Name
|
Fees Earned or
Paid in Cash ($)
|
Stock
Awards
1
($)
|
Option Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Change in
Pension Value and Nonqualified Deferred Compensation
Earnings
2
($)
|
All Other
Compensation ($)
3
|
Total
($)
|
|
James S.
Abernethy
|
38,900
|
--
|
--
|
--
|
9,535
|
--
|
48,435
|
|
Robert C.
Abernethy
|
42,450
|
--
|
--
|
--
|
5,642
|
--
|
48,092
|
|
Douglas S.
Howard
|
38,900
|
--
|
--
|
--
|
5,919
|
--
|
44,819
|
|
John W. Lineberger,
Jr.
|
30,900
|
--
|
--
|
--
|
6,625
|
--
|
37,525
|
|
Gary E.
Matthews
|
30,900
|
--
|
--
|
--
|
8,645
|
--
|
39,545
|
|
Billy L. Price,
Jr., M.D.
|
38,000
|
--
|
--
|
--
|
7,819
|
--
|
45,819
|
|
Larry E.
Robinson
|
30,900
|
--
|
--
|
--
|
6,625
|
--
|
37,525
|
|
William Gregory
Terry
|
33,150
|
--
|
--
|
--
|
2,897
|
--
|
36,047
|
|
Dan Ray Timmerman,
Sr.
|
39,200
|
--
|
--
|
--
|
6,625
|
3,750
|
49,575
|
|
Benjamin I.
Zachary
|
36,650
|
--
|
--
|
--
|
7,853
|
3,750
|
48,253
|
_________________________
1.
The Company did not
grant any plan-based awards to directors during the fiscal year
ended December 31, 2020. At December 31, 2020, no director had
restricted stock units 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 2020, Directors
Timmerman and Zachary received 121 shares of the Company’s
common stock and $750.00 in cash for their 25 years of service as a
director under the Bank’s Service Recognition
Program.
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 2020. All outstanding loans, extensions of credit
or overdrafts, endorsements and guarantees outstanding at any time
during 2020 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
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 14 of
this Proxy Statement.
29
The
Bank leased two of its facilities from Shortgrass Associates,
L.L.C. (“
Shortgrass
”) during 2020,
and in September of 2020, the Bank purchased both of these
properties from Shortgrass Associates, L.L.C. Director John W.
Lineberger, Jr. owns 25% of the membership interests in Shortgrass.
Each of the facilities was 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 2020 the Bank paid a
total of $173,194 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
$43,299 (or 25% x $173,194). The gross sales price for these
properties was $1 million. The properties were subject to a first
mortgage of $492,550, which was satisfied from the proceeds of the
sale. Director Lineberger’s interest in the net proceeds from
the sale of the properties was approximately $126,862 (or 25% x
($1,000,000 - $492,550)).
The
Board of Directors also evaluates the influence family
relationships may have on the independence of directors who are
related by blood or marriage. Directors Robert C. Abernethy
(Chairman of the Board) and James S. Abernethy (Vice Chairman of
the Board) are brothers and serve as co-executors of the Estate of
Christine S. Abernethy, a greater than ten percent (10%)
shareholder of the Company. As a result of serving as co-executors
of the Estate of Christine S. Abernethy, Directors R. Abernethy and
J. Abernethy are deemed to beneficially own more than 10% of the
issued and outstanding common stock of the Company. All of the
non-related directors have determined that neither the family
relationships among James S. Abernethy and Robert C. Abernethy nor
their beneficial ownership of greater than ten percent (10%) of the
Company’s common stock, affect the brothers’
independence as directors.
30
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, 2020. 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), (4) and (5)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(6)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation
plans approved by security holders
|
25,868
|
-
|
292,365
|
|
Equity compensation
plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
25,868
|
-
|
292,365
|
(1)
Includes 5,104 restricted stock units (adjusted for the 10% stock
dividend granted in December of 2017) granted on February 18, 2016
under the 2009 Omnibus Plan. These restricted stock grants vested
on February 18 2020.
(2)
Includes 4,114 restricted stock units (adjusted for the 10% stock
dividend granted in December of 2017) granted on March 1, 2017
under the 2009 Omnibus Plan. The restricted stock grants vest on
March 1, 2021.
(3)
Includes 3,725 restricted stock units granted on January 24, 2018
under the 2009 Omnibus Plan. These restricted stock units vest on
January 24, 2022.
(4)
Includes 5,290 restricted stock units granted on February 21, 2019
under the 2009 Omnibus Plan. These restricted stock units vest on
February 21, 2023.
(5)
Includes 7,635 restricted stock units granted on May 7, 2020 under
the 2020 Omnibus Plan. These restricted stock grants vest on May 7,
2024.
(6) The
restricted stock units granted by the Company under the 2009
Omnibus Plan and the 2020 Omnibus Plan do not have an exercise
price.
The
above table excludes shares to be awarded pursuant to the Service
Recognition Program. The Service Recognition Program is described
under the section captioned “Discretionary Bonus and Service
Awards” on page 19 of this Proxy Statement.
31
STOCK
PERFORMANCE GRAPH
32
PROPOSAL 2
AMENDMENT TO ARTICLES OF INCORPORATION TO IMPLEMENT A MAJORITY
VOTING
STANDARD IN UNCONTESTED ELECTIONS OF DIRECTORS
The
Board of Directors has adopted and recommends that the shareholders
approve an amendment (the “Amendment”) to the
Company’s Articles of Incorporation, as amended, to implement
a majority voting standard for the election of directors in
uncontested elections.
Appendix B
attached to this
Proxy Statement, shows the changes to the Articles of Incorporation
if the Amendment is approved. If approved by the shareholders, the
Amendment will be applicable to elections of directors occurring
subsequent to the 2021 Annual Meeting of Shareholders.
The
North Carolina Business Corporation Act (the “Act”)
Section 55-7-28(a) provides that, unless otherwise specified in a
corporation’s Articles of Incorporation or in a
shareholders’ agreement valid under Section 55-7-31 of the
Act, directors are elected by a plurality of the votes cast by the
shareholders entitled to vote at a meeting at which a quorum is
present. The Company’s Articles of Incorporation do not
currently specify the voting standard required in director
elections, but the Company’s Bylaws reflect that directors
are elected by a plurality vote, as set forth in the Act. Under the
plurality voting standard currently used by the Company, the
director nominees who receive the greatest number of votes
“for” election are elected.
In
recent years, shareholders of public corporations have expressed
concern that allowing plurality voting in uncontested elections of
directors can result in directors being elected when there are more
votes cast “against” their election than are cast
“for” their election. As a result, shareholders have
urged that companies amend their governing documents to provide
that a majority vote standard be used in uncontested director
elections, which are defined as elections when the number of
director nominees does not exceed the number of directors to be
elected. Use of a majority voting standard in uncontested elections
would mean that a director nominee would be elected only if the
votes cast “for” the nominee’s election exceed
the votes cast “against” the nominee’s election.
Shareholders would also be entitled to abstain with respect to the
election of a director, but abstentions would not affect the
determination of whether the required majority vote is
obtained.
After
careful consideration of the issues described above, the
Company’s Board of Directors has determined that it is in the
best interests of the Company and its shareholders to provide for
majority voting in uncontested director elections. The Board of
Directors believes that the existing plurality vote standard should
continue to apply in contested director elections, which are
defined as elections when there are more director nominees than the
number of directors to be elected. Using a majority vote standard
in a contested election could result in the election of fewer
nominees than the number of authorized board seats to be filled.
Therefore, the proposed Amendment provides for majority voting in
uncontested director elections and retains plurality voting in
contested director elections. If the Amendment is approved by the
shareholders, it will supersede conflicting provisions in the
Company’s Bylaws. However, if the Amendment is approved by
the Shareholders, the Board of Directors intends to amend the
Company’s Bylaws to eliminate the inconsistency that will
then exist between the Bylaws and the Amendment.
Pursuant to Section
55-8-05(a) of the Act and the Company’s Bylaws, an incumbent
director who is not re-elected remains in office and becomes a
“holdover director” until the director’s
successor is elected and qualifies or until there is a decrease in
the number of authorized directors on the Board. To address the
possibility that the Company could have such a holdover director,
if the Amendment is approved by the shareholders, the Board of
Directors intends to adopt a Director Resignation Policy. The
Director Resignation Policy provides that if any director nominee
in an uncontested election receives more “against”
votes than “for” votes, the director nominee is
required to submit his or her resignation to the Board of
Directors. The Governance Committee of the Board (excluding the
nominee in question) or, under circumstances described in the
Director Resignation Policy a special committee appointed by the
Board of Directors, will then consider the resignation offer and
make a recommendation to the Board of Directors as to whether to
accept or reject the tendered resignation. The Board of Directors
(excluding the nominee in question) must make a final determination
as to whether to accept the director’s resignation. The
Director Resignation Policy will continue in effect until amended
or terminated by the Board of Directors.
33
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
THE APPROVAL OF THE PROPOSED AMENDMENT TO THE COMPANY’S
ARTICLES OF INCORPORATION.
PROPOSAL 3
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
Elliott
Davis, our registered independent public accounting firm for the
fiscal year ended December 31, 2020, has been appointed by the
Audit Committee as our registered independent public accounting
firm for the fiscal year ending December 31, 2021, 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 AuditorsAudit 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,
2020 and 2019 and fees billed for audit-related services, tax
services and all other services rendered, for each of such
years.
|
|
Year Ended
December 31
|
|
|
|
2020
|
2019
|
|
|
||
|
Audit
Fees
1
|
$
182,383
|
$
202,445
|
|
|
||
|
Audit-Related
Fees
2
|
$
12,500
|
$
12,660
|
|
|
||
|
Tax
Fees
3
|
$
29,950
|
$
25,750
|
|
|
||
|
All Other
Fees
|
--
|
--
|
__________________________
1
For the fiscal year ending December 31,
2020, includes amounts for the testing of management’s
assertions regarding internal controls in accordance with the
Federal Deposit Insurance Corporation Improvement Act. For the
fiscal year ending December 31, 2019, audit fees include amounts
for the integrated audit of the consolidated financial statements
and internal control over financial reporting (Sarbanes-Oxley
Section 404) and for the testing of management's assertions
regarding internal controls in accordance with the Federal Deposit
Insurance Corporation Improvement Act.
2
Represents amounts
for the audit of the Company’s Profit Sharing and 401(k)
Plan.
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, 2021.
34
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
It is
presently anticipated that the 2022 Annual Meeting of Shareholders
of the Company will be held on May 5 2022. 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, 2021 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 2022
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 8, 2022, of his or her proposal. If the Secretary of
the Company is not notified of the shareholder’s proposal by
February 8, 2022, 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 2022 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, 2020,
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: JEFFREY
HOOPER.
|
|
By
Order of the Board of Directors,
Lance
A. Sellers
President
and Chief Executive Officer
|
Newton,
North Carolina
March
24, 2021
35
APPENDIX
A
ANNUAL
REPORT
OF
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
[See
Attached]
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
General
Description of Business
Peoples Bancorp of
North Carolina, Inc. (“Bancorp”), was formed in 1999 to
serve as the holding company for Peoples Bank (the
“Bank”). Bancorp is a bank holding company registered
with the Board of Governors of the Federal Reserve System (the
“Federal Reserve”) under the Bank Holding Company Act
of 1956, as amended (the “BHCA”). Bancorp’s
principal source of income is dividends declared and paid by the
Bank on its capital stock, if any. Bancorp has no operations and
conducts no business of its own other than owning the Bank.
Accordingly, the discussion of the business which follows concerns
the business conducted by the Bank, unless otherwise indicated.
Bancorp and its wholly owned subsidiary, the Bank, along with the
Bank’s wholly owned subsidiaries are collectively called the
“Company”, “we”, “our” or
“us” in this Annual Report. Our principal executive
offices are located at 518 West C Street, Newtown, North Carolina,
28658, and our telephone number is (828) 464-5620.
The Bank, founded
in 1912, is a state-chartered commercial bank serving the citizens
and business interests of the Catawba Valley and surrounding
communities through 18 banking offices, as of December 31, 2020,
located in Lincolnton, Newton, Denver, Catawba, Conover, Maiden,
Claremont, Hiddenite, Hickory, Charlotte, Cornelius, Mooresville,
Raleigh, and Cary North Carolina. The Bank also operates loan
production offices in Charlotte and Denver North Carolina. The
Company’s fiscal year ends December 31. At December 31, 2020,
the Company had total assets of $1.4 billion, net loans of $938.7
million, deposits of $1.2 billion, total securities of $249.4
million, and shareholders’ equity of $139.9
million.
The Bank operates
three banking offices focused on the Latino population that were
formerly operated as a division of the Bank under the name Banco de
la Gente (“Banco”). These offices are now branded as
Bank branches and considered a separate market territory of the
Bank as they offer normal and customary banking services as are
offered in the Bank’s other branches such as the taking of
deposits and the making of loans.
The Bank has a
diversified loan portfolio, with no foreign loans and few
agricultural loans. Real estate loans are predominately variable
rate and fixed rate commercial property loans, which include
residential development loans to commercial customers. Commercial
loans are spread throughout a variety of industries with no one
particular industry or group of related industries accounting for a
significant portion of the commercial loan portfolio. The majority
of the Bank’s deposit and loan customers are individuals and
small to medium-sized businesses located in the Bank’s market
area. The Bank’s loan portfolio also includes Individual
Taxpayer Identification Number (ITIN) mortgage loans generated
through the Bank’s Banco offices. Additional discussion of
the Bank’s loan portfolio and sources of funds for loans can
be found in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” on pages A-4
through A-25 of the Annual Report.
The operations of
the Bank and depository institutions in general are significantly
influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies,
including the Federal Reserve, the Federal Deposit Insurance
Corporation (the “FDIC”) and the North Carolina
Commissioner of Banks (the
“Commissioner”).
At December 31,
2020, the Company employed 290 full-time employees and 27 part-time
employees, which equated to 307 full-time equivalent
employees.
Subsidiaries
The Bank is a
subsidiary of the Company. At December 31, 2020, the Bank had four
subsidiaries, Peoples Investment Services, Inc., Real Estate
Advisory Services, Inc., Community Bank Real Estate Solutions, LLC
(“CBRES”) and PB Real Estate Holdings, LLC. Through a
relationship with Raymond James Financial Services, Inc., Peoples
Investment Services, Inc. provides the Bank’s customers
access to investment counseling and non-deposit investment products
such as stocks, bonds, mutual funds, tax deferred annuities, and
related brokerage services. Real Estate Advisory Services, Inc.
provides real estate appraisal and real estate brokerage services.
CBRES serves as a “clearing-house” for appraisal
services for community banks. Other banks are able to contract with
CBRES to find and engage appropriate appraisal companies in the
area where the property to be appraised is located. This type of
service ensures that the appraisal process remains independent from
the financing process within the Bank. PB Real Estate Holdings, LLC
acquires, manages and disposes of real property, other collateral
and other assets obtained in the ordinary course of collecting
debts previously contracted. In 2019, the Company launched PB
Insurance Agency, which is part of CBRES.
In June 2006, the Company formed a wholly owned Delaware statutory
trust, PEBK Capital Trust II (“PEBK Trust II”), which
issued $20.0 million of guaranteed preferred beneficial interests
in the Company’s junior subordinated deferrable interest
debentures. All of the common securities of PEBK Trust II are owned
by the Company. The proceeds from the issuance of the common
securities and the trust preferred securities were used by PEBK
Trust II to purchase $20.6 million of
A-1
junior subordinated
debentures of the Company, which pay a floating rateequal to
three-month LIBOR plus 163 basis points. The proceeds received by
the Company from the sale of the junior subordinated debentures
were used in December 2006 to repay the trust preferred securities
issued in December 2001 by PEBK Capital Trust, awholly owned
Delaware statutory trust of the Company, and for general purposes.
The debentures represent the sole asset of PEBK Trust II. PEBK
Trust II is not included in the consolidated financial statements.
The Company redeemed $5.0 million of outstanding trust preferred
securities in 2019.
The trust preferred
securities issued by PEBK Trust II accrue and pay quarterly at a
floating rate of three-month LIBOR plus 163 basis points. The
Company has guaranteed distributions and other payments due on the
trust preferred securities to the extent PEBK Trust II does not
have funds with which to make the distributions and other payments.
The net combined effect of the trust preferred securities
transaction is that the Company is obligated to make the
distributions and other payments required on the trust preferred
securities.
These trust
preferred securities are mandatorily redeemable upon maturity of
the debentures on June 28, 2036, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the
debentures purchased by PEBK Trust II, in whole or in part, which
became effective on June 28, 2011. As specified in the indenture,
if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount plus any accrued but unpaid
interest.
This report contains certain forward-looking statements with
respect to the financial condition, results of operations and
business of the Company. These forward-looking statements involve
risks and uncertainties and are based on the beliefs and
assumptions of management of the Company and on the information
available to management at the time that these disclosures were
prepared. These statements can be identified by the use of words
like “expect,” “anticipate,”
“estimate” and “believe,” variations of
these words and other similar expressions. Readers should not place
undue reliance on forward-looking statements as a number of
important factors could cause actual results to differ materially
from those in the forward-looking statements. Factors that could
cause actual results to differ materially include, but are not
limited to, (1) competition in the markets served by the Bank, (2)
changes in the interest rate environment, (3) general national,
regional or local economic conditions may be less favorable than
expected, resulting in, among other things, a deterioration in
credit quality and the possible impairment of collectibility of
loans, (4) legislative or regulatory changes, including changes in
accounting standards, (5) significant changes in the federal and
state legal and regulatory environment and tax laws, (6) the impact
of changes in monetary and fiscal policies, laws, rules and
regulations and (7) other risks and factors identified in the
Company’s other filings with the Securities and Exchange
Commission. The Company undertakes no obligation to update any
forward-looking statements.
A-2
SELECTED
FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|
Summary of Operations
|
|
|
|
|
|
|
Interest
income
|
$
47,958
|
49,601
|
45,350
|
41,949
|
39,809
|
|
Interest
expense
|
3,836
|
3,757
|
2,146
|
2,377
|
3,271
|
|
Net
interest income
|
44,122
|
45,844
|
43,204
|
39,572
|
36,538
|
|
Provision
for (reduction of) loan losses
|
4,259
|
863
|
790
|
(507
)
|
(1,206
)
|
|
Net
interest income after provision
|
|
|
|
|
|
|
for
loan losses
|
39,863
|
44,981
|
42,414
|
40,079
|
37,744
|
|
Non-interest
income (1)
|
22,914
|
17,739
|
16,166
|
15,364
|
16,236
|
|
Non-interest
expense (1)
|
48,931
|
45,517
|
42,574
|
41,228
|
42,242
|
|
Earnings
before income taxes
|
13,846
|
17,203
|
16,006
|
14,215
|
11,738
|
|
Income
tax expense
|
2,489
|
3,136
|
2,624
|
3,947
|
2,561
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
10,268
|
9,177
|
|
|
|
|
|
|
|
|
Selected Year-End Balances
|
|
|
|
|
|
|
Assets
|
$
1,414,855
|
1,154,882
|
1,093,251
|
1,092,166
|
1,087,991
|
|
Investment
securities available for sale
|
245,249
|
195,746
|
194,578
|
229,321
|
249,946
|
|
Net
loans
|
938,731
|
843,194
|
797,578
|
753,398
|
716,261
|
|
Mortgage
loans held for sale
|
9,139
|
4,417
|
680
|
857
|
5,709
|
|
Interest-earning
assets
|
1,326,489
|
1,058,937
|
1,007,078
|
996,509
|
999,201
|
|
Deposits
|
1,221,086
|
966,517
|
877,213
|
906,952
|
892,918
|
|
Interest-bearing
liabilities
|
805,771
|
668,353
|
657,110
|
679,922
|
698,120
|
|
Shareholders'
equity
|
$
139,899
|
134,120
|
123,617
|
115,975
|
107,428
|
|
Shares
outstanding
|
5,787,504
|
5,912,300
|
5,995,256
|
5,995,256
|
5,417,800
|
|
|
|
|
|
|
|
|
Selected Average Balances
|
|
|
|
|
|
|
Assets
|
$
1,365,642
|
1,143,338
|
1,094,707
|
1,098,992
|
1,076,604
|
|
Investment
securities available for sale
|
200,821
|
185,302
|
209,742
|
234,278
|
252,725
|
|
Loans
|
935,970
|
834,517
|
777,098
|
741,655
|
703,484
|
|
Interest-earning
assets
|
1,271,764
|
1,055,730
|
1,007,484
|
998,821
|
985,236
|
|
Deposits
|
1,115,019
|
932,647
|
903,120
|
895,129
|
856,313
|
|
Interest-bearing
liabilities
|
793,188
|
675,992
|
665,165
|
700,559
|
705,291
|
|
Shareholders'
equity
|
$
141,287
|
134,670
|
123,797
|
116,883
|
113,196
|
|
Shares
outstanding (2)
|
5,808,121
|
5,941,873
|
5,995,256
|
5,988,183
|
6,024,970
|
|
|
|
|
|
|
|
|
Profitability Ratios
|
|
|
|
|
|
|
Return
on average total assets
|
0.83
%
|
1.23
%
|
1.22
%
|
0.93
%
|
0.85
%
|
|
Return
on average shareholders' equity
|
8.04
%
|
10.45
%
|
10.81
%
|
8.78
%
|
8.11
%
|
|
Dividend
payout ratio
|
38.67
%
|
28.00
%
|
23.41
%
|
25.67
%
|
22.95
%
|
|
|
|
|
|
|
|
|
Liquidity and Capital Ratios (averages)
|
|
|
|
|
|
|
Loan
to deposit
|
83.94
%
|
89.48
%
|
86.05
%
|
82.85
%
|
82.15
%
|
|
Shareholders'
equity to total assets
|
10.35
%
|
11.78
%
|
11.31
%
|
10.64
%
|
10.51
%
|
|
|
|
|
|
|
|
|
Per share of Common Stock (2)
|
|
|
|
|
|
|
Basic
net earnings
|
$
1.95
|
2.37
|
2.23
|
1.71
|
1.53
|
|
Diluted
net earnings
|
$
1.95
|
2.36
|
2.22
|
1.69
|
1.50
|
|
Cash
dividends
|
$
0.75
|
0.66
|
0.52
|
0.44
|
0.35
|
|
Book
value
|
$
24.17
|
22.68
|
20.62
|
19.34
|
18.03
|
(1)
Appraisal management fee income and expense from the Bank’s
subsidiary, CBRES, was reported as a net amount prior to March 31,
2018, which was included in miscellaneous non-interest income. This
income and expense is now reported on separate line items under
non-interest income and non-interest expense. Prior periods have
been restated to reflect this change.
(2)
Average shares outstanding and per share computations have been
restated to reflect a 10% stock dividend paid during the fourth
quarter of 2017.
A-3
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The following is a discussion of our financial position and results
of operations and should be read in conjunction with the
information set forth under Item 1A Risk Factors in the
Company’s annual report on Form 10-K and the Company’s
consolidated financial statements and notes thereto on pages A-26
through A-71.
Introduction
Management’s
discussion and analysis of earnings and related data are presented
to assist in understanding the consolidated financial condition and
results of operations of Peoples Bancorp of North Carolina, Inc.
(“Bancorp”), for the years ended December 31, 2020,
2019 and 2018. Bancorp is a registered bank holding company
operating under the supervision of the Federal Reserve Board (the
“FRB”) and the parent company of Peoples Bank (the
“Bank”). The Bank is a North Carolina-chartered bank,
with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell
and Wake counties, operating under the banking laws of North
Carolina and the rules and regulations of the Federal Deposit
Insurance Corporation (the “FDIC”).
Overview
Our business
consists principally of attracting deposits from the general public
and investing these funds in commercial loans, real estate mortgage
loans, real estate construction loans and consumer loans. Our
profitability depends primarily on our net interest income, which
is the difference between the income we receive on our loan and
investment securities portfolios and our cost of funds, which
consists of interest paid on deposits and borrowed funds. Net
interest income also is affected by the relative amounts of our
interest-earning assets and interest-bearing liabilities. When
interest-earning assets approximate or exceed interest-bearing
liabilities, a positive interest rate spread will generate net
interest income. Our profitability is also affected by the level of
other income and operating expenses. Other income consists
primarily of miscellaneous fees related to our loans and deposits,
mortgage banking income and commissions from sales of annuities and
mutual funds. Operating expenses consist of compensation and
benefits, occupancy related expenses, federal deposit and other
insurance premiums, data processing, advertising and other
expenses.
Our operations are
influenced significantly by local economic conditions and by
policies of financial institution regulatory authorities. The
earnings on our assets are influenced by the effects of, and
changes in, trade, monetary and fiscal policies and laws, including
interest rate policies of the Board of Governors of the Federal
Reserve System (the “Federal Reserve”), inflation,
interest rates, market and monetary fluctuations. Lending
activities are affected by the demand for commercial and other
types of loans, which in turn is affected by the interest rates at
which such financing may be offered. Our cost of funds is
influenced by interest rates on competing investments and by rates
offered on similar investments by competing financial institutions
in our market area, as well as general market interest rates. These
factors can cause fluctuations in our net interest income and other
income. In addition, local economic conditions can impact the
credit risk of our loan portfolio, in that (1) local employers may
be required to eliminate employment positions of individual
borrowers, and (2) small businesses and commercial borrowers may
experience a downturn in their operating performance and become
unable to make timely payments on their loans. Management evaluates
these factors in estimating the allowance for loan losses and
changes in these economic factors could result in increases or
decreases to the provision for loan losses.
COVID-19 has
adversely affected, and may continue to adversely affect economic
activity globally, nationally and locally. Following the COVID-19
outbreak in December 2019 and January 2020, market interest rates
have declined significantly, with the 10-year Treasury bond falling
below 1.00% on March 3, 2020 for the first time. Such events also
may adversely affect business and consumer confidence, generally,
and the Company and its customers, and their respective suppliers,
vendors and processors may be adversely affected. On March 3, 2020,
the Federal Reserve Federal Open Market Committee
(“FOMC”) reduced the target federal funds rate by 50
basis points to a range of 1.00% to 1.25%. Subsequently on March
16, 2020, the FOMC further reduced the target federal funds rate by
an additional 100 basis points to a range of 0.00% to 0.25%. These
reductions in interest rates and other effects of the COVID-19
pandemic may adversely affect the Company’s financial
condition and results of operations. Prior to the occurrence of the
COVID-19 pandemic, economic conditions, while not as robust as the
economic conditions during the period from 2004 to 2007, had
stabilized such that businesses in our market area were growing and
investing again. The uncertainty expressed in the local, national
and international markets through the primary economic indicators
of activity were previously sufficiently stable to allow for
reasonable economic growth in our markets. See COVID-19 Impact
below for additional information regarding the impact of the
COVID-19 pandemic on the Company’s business.
Although we
are unable to control the external factors that influence our
business, by maintaining high levels
A-4
of balance sheet
liquidity, managing our interest rate exposures and by actively
monitoring asset quality, we seek to minimize the potentially
adverse risks of unforeseen and unfavorable economic
trends.
Our business
emphasis has been and continues to be to operate as a
well-capitalized, profitable and independent community-oriented
financial institution dedicated to providing quality customer
service. We are committed to meeting the financial needs of the
communities in which we operate. We expect growth to be achieved in
our local markets and through expansion opportunities in contiguous
or nearby markets. While we would be willing to consider growth by
acquisition in certain circumstances, we do not consider the
acquisition of another company to be necessary for our continued
ability to provide a reasonable return to our shareholders. We
believe that we can be more effective in serving our customers than
many of our non-local competitors because of our ability to quickly
and effectively provide senior management responses to customer
needs and inquiries. Our ability to provide these services is
enhanced by the stability and experience of our Bank officers and
managers.
The Company does
not have specific plans for additional offices in 2021 but will
continue to look for growth opportunities in nearby markets and may
expand if considered a worthwhile opportunity.
COVID 19 Impact
Overview.
The COVID-19 pandemic has caused and continues to cause
significant, unprecedented disruption that affects daily living and
negatively impacts the global economy, the banking industry and the
Company. While we are unable to estimate the magnitude, we expect
the COVID-19 pandemic and related global economic crisis will
adversely affect our future operating results. As such, the impact
of the COVID-19 pandemic on future fiscal periods is subject to a
high degree of uncertainty.
Effects on Our Market
Areas.
Our commercial and
consumer banking products and services are offered primarily in
North Carolina where individual and governmental responses to the
COVID-19 pandemic led to a broad curtailment of economic activity
beginning in March 2020. In North Carolina, schools closed for the
remainder of the 2019-2020 academic year, businesses were ordered
to temporarily close or reduce their business operations to
accommodate social distancing and shelter in place requirements,
non-critical healthcare services were significantly curtailed and
unemployment levels rose. Since the initial shut down in March
2020, phased reopening plans began in mid-May subject to public
health reopening guidelines and limitations on
capacity
and limitations
continue to remain in place.
Policy and Regulatory
Developments
. Federal, state
and local governments and regulatory authorities have enacted and
issued a range of policy responses to the COVID-19 pandemic,
including the following:
●
The
Federal Reserve decreased the range for the federal funds target
rate by 0.5 percent on March 3, 2020, and by another 1.0 percent on
March 16, 2020, reaching a current range of 0.0 - 0.25
percent.
●
On March 27, 2020,
President Trump signed the CARES Act, which established a $2
trillion economic stimulus package, including cash payments to
individuals, supplemental unemployment insurance benefits and a
$349 billion loan program administered through the Small Business
Administration (“SBA”), referred to as the Paycheck
Protection Program (“PPP”). Under the PPP, small
businesses, sole proprietorships, independent contractors and
self-employed individuals may apply for loans from existing SBA
lenders and other approved regulated lenders that enroll in the
program, subject to numerous limitations and eligibility criteria.
After the initial $349 billion in funds for the PPP was exhausted,
an additional $310 billion in funding for PPP loans was authorized.
The Bank is participating as a lender in the PPP. In addition, the
CARES Act provides financial institutions the option to temporarily
suspend certain requirements under GAAP related to troubled debt
restructured (“TDR”) loans for a limited period of time
to account for the effects of COVID-19. See Note 3 of the financial
statements for additional disclosure of loan modifications as of
December 31, 2020.
●
On
April 7, 2020, federal banking regulators issued a revised
Interagency Statement on Loan Modifications and Reporting for
Financial Institutions, which, among other things, encouraged
financial institutions to work prudently with borrowers who are or
may be unable to meet their contractual payment obligations because
of the effects of COVID-19, and stated that institutions generally
do not need to categorize COVID-19-related modifications as TDRs
and that the agencies will not direct supervised institutions to
automatically categorize all COVID-19 related loan modifications as
TDRs. See Note 3 of the financial statements for additional
disclosure of loan modifications as of December 31,
2020.
●
On April 9, 2020, the Federal Reserve announced
additional measures aimed at supporting small and mid-sized
businesses, as well as state and local governments impacted by
COVID-19. The Federal Reserve announced the Main Street Business
Lending Program, which established two new loan facilities
intended
A-5
to facilitate lending to small and mid-sized
businesses: (1) the Main Street New Loan Facility, or MSNLF, and
(2) the Main Street Expanded Loan Facility, or MSELF.
MSNLF loans are unsecured term loans
originated on or after April 8, 2020, while MSELF loans are
provided as upsized tranches of existing loans originated before
April 8, 2020. The combined size of the program will be up to $600
billion. The program is designed for businesses with up to 10,000
employees or $2.5 billion in 2019 revenues. To obtain a loan,
borrowers must confirm that they are seeking financial support
because of COVID-19 and that they will not use proceeds from the
loan to pay off debt. The Federal Reserve also stated that it would
provide additional funding to banks offering PPP loans to
struggling small businesses. Lenders participating in the PPP will
be able to exclude loans financed by the facility from their
leverage ratio. In addition, the Federal Reserve created a
Municipal Liquidity Facility to support state and local governments
with up to $500 billion in lending, with the Treasury Department
backing $35 billion for the facility using funds appropriated by
the CARES Act. The facility will make short-term financing
available to cities with a population of more than one million or
counties with a population of greater than two million. The Federal
Reserve expanded both the size and scope of its Primary and
Secondary Market Corporate Credit Facilities to support up to $750
billion in credit to corporate debt issuers. This will allow
companies that were investment grade before the onset of COVID-19
but then subsequently downgraded after March 22, 2020 to gain
access to the facility. Finally, the Federal Reserve announced that
its Term Asset-Backed Securities Loan Facility will be scaled up in
scope to include the triple A-rated tranche of commercial
mortgage-backed securities and newly issued collateralized loan
obligations. The size of the facility is $100 billion. The Bank did
not participate in the MSELF or MSNLF.
●
On
December 27, 2020, the Economic Aid to Hard-Hit Small Businesses,
Nonprofits and Venues Act (the “Economic Aid Act”)
became law. The Economic Aid Act reopens and expands the PPP loan
program through March 31, 2021. The changes to the PPP program
allow new borrowers to apply for a loan under the original PPP loan
program and the creation of an additional PPP loan for eligible
borrowers. The Economic Aid Act also revises certain PPP
requirements, including aspects of loan forgiveness on existing PPP
loans.
●
In
addition to the policy responses described above, the federal bank
regulatory agencies, along with their state counterparts, have
issued a stream of guidance in response to the COVID-19 pandemic
and have taken a number of unprecedented steps to help banks
navigate the pandemic and mitigate its impact. These include,
without limitation: requiring banks to focus on business continuity
and pandemic planning; adding pandemic scenarios to stress testing;
encouraging bank use of capital buffers and reserves in lending
programs; permitting certain regulatory reporting extensions;
reducing margin requirements on swaps; permitting certain otherwise
prohibited investments in investment funds; issuing guidance to
encourage banks to work with customers affected by the pandemic and
encourage loan workouts; and providing credit under the Community
Reinvestment Act (“CRA”) for certain pandemic related
loans, investments and public service. Moreover, because of the
need for social distancing measures, the agencies revamped the
manner in which they conducted periodic examinations of their
regular institutions, including making greater use of off-site
reviews. The Federal Reserve also issued guidance encouraging
banking institutions to utilize its discount window for loans and
intraday credit extended by its Reserve Banks to help households
and businesses impacted by the pandemic and announced numerous
funding facilities. The FDIC has also acted to mitigate the deposit
insurance assessment effects of participating in the PPP and the
Federal Reserve's PPP Liquidity Facility and Money Market Mutual
Fund Liquidity Facility.
Effects on Our
Business.
The COVID-19
pandemic and the specific developments referred to above have had
and will continue to have a significant impact on our business. In
particular, we anticipate that a significant portion of the
Bank’s borrowers in the hotel, restaurant and retail
industries will continue to endure significant economic distress,
which has caused, and may continue to cause, them to draw on their
existing lines of credit and adversely affect their ability to
repay existing indebtedness, and is expected to adversely impact
the value of collateral. These developments, together with economic
conditions generally, are also expected to impact our commercial
real estate portfolio, particularly with respect to real estate
with exposure to these industries, and the value of certain
collateral securing our loans. As a result, we anticipate that our
financial condition, capital levels and results of operations could
be adversely affected, as described in further detail
below.
Our
Response
. We have taken
numerous steps in response to the COVID-19 pandemic, including the
following:
●
On
March 13, 2020 we enacted our Pandemic Plan. We used available
physical resources to achieve appropriate social distancing
protocols in all facilities; in addition, we established mandatory
remote work to isolate certain personnel essential to critical
business continuity operations. We also expanded and tested remote
access for the core banking system, funds transfer and loan
operations.
●
We
are actively working with loan customers to evaluate prudent loan
modification terms.
A-6
●
We
continue to promote our digital banking options through our
website. Customers are encouraged to utilize online and mobile
banking tools, and our customer service and retail departments are
fully staffed and available to assist customers
remotely.
●
We
are a participating lender in the PPP. We believe it is our
responsibility as a community bank to assist the SBA in the
distribution of funds authorized under the CARES Act to our
customers and communities.
●
On
March 19, 2020, we restricted branch customer activity to drive-up
and appointment only services. Branch lobbies were reopened on May
20, 2020. One small branch located in an assisted living facility
was permanently closed effective December 31, 2020 due to limited
lobby space and COVID-19 restrictions. All business functions
continue to be operational. We continue to pay all employees
according to their normal work schedule, even if their work has
been reduced. No employees have been furloughed. Employees whose
job responsibilities can be effectively carried out remotely are
working from home. Employees whose critical duties require their
continued presence on-site are observing social distancing and
cleaning protocols.
Summary
of Significant and Critical Accounting Policies
The consolidated
financial statements include the financial statements of Bancorp
and its wholly owned subsidiary, the Bank, along with the
Bank’s wholly owned subsidiaries, Peoples Investment
Services, Inc., Real Estate Advisory Services, Inc.
(“REAS”), Community Bank Real Estate Solutions, LLC
(“CBRES”) and PB Real Estate Holdings, LLC
(collectively called the “Company”). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The Company’s
accounting policies are fundamental to understanding
management’s discussion and analysis of results of operations
and financial condition. Many of the Company’s accounting
policies require significant judgment regarding valuation of assets
and liabilities and/or significant interpretation of specific
accounting guidance. The following is a summary of some of the more
subjective and complex accounting policies of the Company. A more
complete description of the Company’s significant accounting
policies can be found in Note 1 of the Notes to Consolidated
Financial Statements in the Company’s 2020 Annual Report to
Shareholders which is Appendix A to the Proxy Statement for the May
6, 2021 Annual Meeting of Shareholders.
The allowance for
loan losses reflects management’s assessment and estimate of
the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. The Bank periodically analyzes
the loan portfolio in an effort to review asset quality and to
establish an allowance for loan losses that management believes
will be adequate in light of anticipated risks and loan
losses.
Many of the
Company’s assets and liabilities are recorded using various
techniques that require significant judgment as to recoverability.
The collectability of loans is reflected through the
Company’s estimate of the allowance for loan losses. The
Company performs periodic and systematic detailed reviews of its
lending portfolio to assess overall collectability. In addition,
certain assets and liabilities are reflected at their estimated
fair value in the consolidated financial statements. Such amounts
are based on either quoted market prices or estimated values
derived from dealer quotes used by the Company, market comparisons
or internally generated modeling techniques. The Company’s
internal models generally involve present value of cash flow
techniques. The various techniques are discussed in greater detail
elsewhere in this management’s discussion and analysis and
the Notes to Consolidated Financial Statements.
There are other
complex accounting standards that require the Company to employ
significant judgment in interpreting and applying certain of the
principles prescribed by those standards. These judgments include,
but are not limited to, the determination of whether a financial
instrument or other contract meets the definition of a derivative
in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”).
The
disclosure requirements for derivatives and hedging activities are
intended to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged
items are accounted for and (c) how derivative instruments and
related hedged items affect an entity’s financial position,
financial performance, and cash flows. The disclosure requirements
include qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about the fair value
of, and gains and losses, on derivative instruments, and
disclosures about credit-risk-related contingent features in
derivative instruments.
The Company has an
overall interest rate risk management strategy that has, in prior
years, incorporated the use of derivative instruments to minimize
significant unplanned fluctuations in earnings that are caused by
interest rate volatility. When using derivative instruments, the
Company is exposed to credit and market risk. If the
A-7
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, 2020 or 2019.
Management of the
Company has made a number of estimates and assumptions relating to
reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the accompanying
consolidated financial statements in conformity with GAAP. Actual
results could differ from those estimates.
Results
of Operations
Summary.
The Company reported earnings
of $11.4 million or $1.95 basic and diluted net earnings per share
for the year ended December 31, 2020, as compared to $14.1 million
or $2.37 basic net earnings per share and $2.36 diluted net
earnings per share for the same period one year ago. The decrease
in year-to-date net earnings is primarily attributable to a
decrease in net interest income, an increase in the provision for
loan losses and an increase in non-interest expense, which were
partially offset by an increase in non-interest income, as
discussed below.
The Company
reported earnings of $14.1 million or $2.37 basic net earnings per
share and $2.36 diluted net earnings per share for the year ended
December 31, 2019, as compared to $13.4 million or $2.23 basic net
earnings per share and $2.22 diluted net earnings per share for the
same period one year ago. The increase in year-to-date net earnings
is primarily attributable to an increase in net interest income and
an increase in non-interest income, which were partially offset by
an increase in the provision for loan losses and an increase in
non-interest expense.
The return on
average assets in 2020 was 0.83%, as compared to 1.23% in 2019 and
1.22% in 2018. The return on average shareholders’ equity was
8.04% in 2020, as compared to 10.45% in 2019 and 10.81% in
2018.
Net Interest Income.
Net interest
income, the major component of the Company’s net income, is
the amount by which interest and fees generated by interest-earning
assets exceed the total cost of funds used to carry them. Net
interest income is affected by changes in the volume and mix of
interest-earning assets and interest-bearing liabilities, as well
as changes in the yields earned and rates paid. Net interest margin
is calculated by dividing tax-equivalent net interest income by
average interest-earning assets, and represents the Company’s
net yield on its interest-earning assets.
Net interest income
for 2020 was $44.1 million, as compared to $45.8 million in 2019.
The decrease in net interest income was primarily due to a $1.6
million decrease in interest income and a $79,000 increase in
interest expense. The decrease in interest income was primarily due
to a $987,000 decrease in interest income on loans resulting from
the 1.50% reduction in the Prime Rate in March 2020. The increase
in interest expense was primarily due to an increase in average
outstanding balances of interest-bearing liabilities, which was
partially offset by a decrease in rates paid on interest-bearing
liabilities. Net interest income increased to $45.8 million in 2019
from $43.2 million in 2018.
Table 1 sets forth
for each category of interest-earning assets and interest-bearing
liabilities, the average amounts outstanding, the interest incurred
on such amounts and the average rate earned or incurred for
the years ended December 31, 2020, 2019 and 2018. The table also
sets forth the average rate earned on total interest-earning
assets, the average rate paid on total interest-bearing
liabilities, and the net yield on total average interest-earning
assets for the same periods. Yield information does not give effect
to changes in fair value that are reflected as a component of
shareholders’ equity. Yields and interest income on
tax-exempt investments have been adjusted to a tax equivalent basis
using an effective tax rate of 22.98% for securities that are both
federal and state tax exempt and an effective tax rate of 20.48%
for federal tax-exempt securities. Non-accrual loans and the
interest income that was recorded on non-accrual loans, if any, are
included in the yield calculations for loans in all periods
reported. The Company believes the presentation of net
interest income on a tax-equivalent basis provides comparability of
net interest income from both taxable and tax-exempt sources and
facilitates comparability within the industry. Although the Company
believes these non-GAAP financial measures enhance investors’
understanding of its business and performance, these non-GAAP
financial measures should not be considered an alternative to GAAP.
The reconciliations of these non-GAAP financial measures to their
most directly comparable GAAP financial measures are presented
below.
A-8
Table 1- Average Balance Table
|
|
December
31, 2020
|
December
31, 2019
|
December
31, 2018
|
||||||
|
(Dollars
in thousands)
|
Average
Balance
|
Interest
|
Yield
/ Rate
|
Average
Balance
|
Interest
|
Yield
/ Rate
|
Average
Balance
|
Interest
|
Yield
/ Rate
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
935,970
|
42,314
|
4.52
%
|
834,517
|
43,301
|
5.19
%
|
777,098
|
38,654
|
4.97
%
|
|
Investments -
taxable
|
132,468
|
2,299
|
1.74
%
|
77,945
|
2,254
|
2.89
%
|
71,093
|
1,936
|
2.72
%
|
|
Investments -
nontaxable*
|
75,609
|
3,634
|
4.81
%
|
113,117
|
4,293
|
3.80
%
|
142,832
|
5,508
|
3.86
%
|
|
Federal funds
sold
|
91,166
|
204
|
0.22
%
|
19,078
|
331
|
1.73
%
|
-
|
-
|
0.00
%
|
|
Other
|
36,551
|
127
|
0.35
%
|
11,073
|
213
|
1.92
%
|
16,461
|
304
|
1.85
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-earning assets
|
1,271,764
|
48,578
|
3.82
%
|
1,055,730
|
50,392
|
4.77
%
|
1,007,484
|
46,402
|
4.61
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
34,569
|
|
|
36,227
|
|
|
41,840
|
|
|
|
Other
assets
|
67,742
|
|
|
57,880
|
|
|
51,704
|
|
|
|
Allowance for loan
losses
|
(8,433
)
|
|
|
(6,499
)
|
|
|
(6,321
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
1,365,642
|
|
|
1,143,338
|
|
|
1,094,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW, MMDA &
savings deposits
|
$
584,177
|
1,962
|
0.34
%
|
495,509
|
1,596
|
0.32
%
|
484,180
|
769
|
0.16
%
|
|
Time
deposits
|
103,694
|
947
|
0.91
%
|
105,458
|
909
|
0.86
%
|
112,398
|
472
|
0.42
%
|
|
FHLB
borrowings
|
60,820
|
357
|
0.59
%
|
19,625
|
205
|
1.04
%
|
-
|
-
|
0.00
%
|
|
Trust preferred
securities
|
15,478
|
370
|
2.39
%
|
20,619
|
844
|
4.09
%
|
20,619
|
790
|
3.83
%
|
|
Other
|
29,019
|
200
|
0.69
%
|
34,781
|
203
|
0.58
%
|
47,968
|
115
|
0.24
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing liabilities
|
793,188
|
3,836
|
0.48
%
|
675,992
|
3,757
|
0.56
%
|
665,165
|
2,146
|
0.32
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
427,148
|
|
|
331,680
|
|
|
306,544
|
|
|
|
Other
liabilities
|
4,019
|
|
|
996
|
|
|
(799
)
|
|
|
|
Shareholders'
equity
|
141,287
|
|
|
134,670
|
|
|
123,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholder's equity
|
$
1,365,642
|
|
|
1,143,338
|
|
|
1,094,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest spread
|
|
$
44,742
|
3.34
%
|
|
$
46,635
|
4.21
%
|
|
$
44,256
|
4.29
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
yield on interest-earning assets
|
|
|
3.52
%
|
|
|
4.42
%
|
|
|
4.39
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
equivalent adjustment
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
$
620
|
|
|
$
791
|
|
|
$
1,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
44,122
|
|
|
$
45,844
|
|
|
$
43,204
|
|
*Includes U.S. Government agency securities that are non-taxable
for state income tax purposes of $19.2 million in 2020, $32.0
million in 2019 and $38.0 million in 2018. A tax rate of 2.50% was
used to calculate the tax equivalent yields on these securities in
2020, 2019 and 2018.
Changes in interest
income and interest expense can result from variances in both
volume and rates. Table 2 describes the impact on the
Company’s tax equivalent net interest income resulting from
changes in average balances and average rates for the periods
indicated. The changes in net interest income due to both volume
and rate changes have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amounts of
the changes in each.
A-9
Table 2 - Rate/Volume Variance Analysis-Tax Equivalent
Basis
|
|
December
31, 2020
|
December
31, 2019
|
||||
|
(Dollars
in thousands)
|
Changes
in average volume
|
Changes
in average rates
|
Total
Increase (Decrease)
|
Changes
in average volume
|
Changes
in average rates
|
Total
Increase (Decrease)
|
|
Interest income:
|
|
|
|
|
|
|
|
Loans:
Net of unearned income
|
$
4,925
|
(5,912
)
|
(987
)
|
$
2,918
|
1,729
|
4,647
|
|
|
|
|
|
|
|
|
|
Investments
- taxable
|
1,261
|
(1,216
)
|
45
|
192
|
126
|
318
|
|
Investments
- nontaxable
|
(1,613
)
|
954
|
(659
)
|
(1,137
)
|
(78
)
|
(1,215
)
|
|
Federal
funds sold
|
706
|
(833
)
|
(127
)
|
166
|
165
|
331
|
|
Other
|
290
|
(376
)
|
(86
)
|
(102
)
|
12
|
(90
)
|
|
Total interest income
|
5,569
|
(7,383
)
|
(1,814
)
|
2,037
|
1,954
|
3,991
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
NOW,
MMDA & savings deposits
|
292
|
74
|
366
|
27
|
800
|
827
|
|
Time
deposits
|
(16
)
|
54
|
38
|
(44
)
|
481
|
437
|
|
FHLB
borrowings
|
336
|
(184
)
|
152
|
103
|
102
|
205
|
|
Trust
preferred securities
|
(167
)
|
(307
)
|
(474
)
|
-
|
54
|
54
|
|
Other
|
(37
)
|
34
|
(3
)
|
(54
)
|
142
|
88
|
|
Total interest expense
|
408
|
(329
)
|
79
|
32
|
1,579
|
1,611
|
|
Net interest income
|
$
5,161
|
(7,054
)
|
(1,893
)
|
$
2,005
|
375
|
2,380
|
Net interest income
on a tax equivalent basis totaled $44.7 million in 2020, as
compared to $46.6 million in 2019. The net interest rate spread,
which represents the rate earned on interest-earning assets less
the rate paid on interest-bearing liabilities, was 3.34% in 2020,
as compared to a net interest rate spread of 4.21% in 2019. The net
yield on interest-earning assets was 3.52% in 2020 and 4.42% in
2019.
Tax equivalent
interest income decreased $1.8 million in 2020 primarily due
to a decrease in rates on interest earning assets. The yield
on interest-earning assets was 3.82% in 2020, as compared to 4.77%
in 2019.
Interest expense
increased $79,000 in 2020, as compared to 2019. The increase in
interest expense was primarily due to an increase in average
outstanding balances of interest-bearing liabilities, which was
partially offset by a decrease in rates paid on interest-bearing
liabilities. Average interest-bearing liabilities increased by
$117.2 million to $793.2 million in 2020, as compared to $676.0
million in 2019. The cost of funds decreased to 0.48% in 2020 from
0.56% in 2019.
In 2019, net
interest income on a tax equivalent basis was $46.6 million, as
compared to $44.3 million in 2018. The net interest spread was
4.21% in 2019, as compared to 4.29% in 2018. The net yield on
interest-earning assets was 4.42% in 2019, as compared to 4.39% in
2018.
Provision for Loan Losses.
Provisions
for loan losses are charged to income in order to bring the total
allowance for loan losses to a level deemed appropriate by
management of the Company based on factors such as
management’s judgment as to losses within the Bank’s
loan portfolio, including the valuation of impaired loans, loan
growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies and management’s assessment of the
quality of the loan portfolio and general economic
climate.
The provision for
loan losses for the year ended December 31, 2020 was $4.3 million,
compared to $863,000 for the year ended December 31, 2019. The
increase in the provision for loan losses is primarily attributable
to increases in the qualitative factors applied in the
Company’s Allowance for Loan and Lease Losses
(“ALLL”) model due to the impact to the economy from
the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk,
A-10
and a higher
reserve rate has been applied to that pool. Of all loans modified
as a result of COVID-19, $101.3 million of these loans have
returned to their original terms; however, the effects of stimulus
in the current environment are still unknown, and additional losses
may be currently present in loans that are currently modified and
that were once modified.
Table 3 presents a
summary of net charge off activity for the years ended December 31,
2020, 2019, 2018, 2017 and 2016.
Table 3 - Net Charge-off Analysis
|
|
Net
charge-offs/(recoveries)
|
Net
charge-offs/(recoveries) as a percent of average loans
outstanding
|
||||||||
|
|
Years
ended December 31,
|
Years
ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
2020
|
2019
|
2018
|
2017
|
2016
|
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development
|
$
(31
)
|
(24
)
|
43
|
(14
)
|
(3
)
|
-0.03
%
|
-0.03
%
|
0.05
%
|
-0.02
%
|
-0.01
%
|
|
Single-family
residential
|
(5
)
|
(24
)
|
10
|
164
|
220
|
0.00
%
|
-0.01
%
|
0.00
%
|
0.07
%
|
0.09
%
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Commercial
|
(63
)
|
(48
)
|
348
|
(21
)
|
299
|
-0.02
%
|
-0.02
%
|
0.13
%
|
-0.01
%
|
0.12
%
|
|
Multifamily and
farmland
|
-
|
-
|
4
|
66
|
-
|
0.00
%
|
0.00
%
|
0.01
%
|
0.23
%
|
0.00
%
|
|
Total real estate
loans
|
(99
)
|
(96
)
|
405
|
195
|
516
|
-0.01
%
|
-0.01
%
|
0.06
%
|
0.03
%
|
0.09
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
869
|
306
|
22
|
163
|
(25
)
|
0.54
%
|
0.31
%
|
0.02
%
|
0.19
%
|
-0.03
%
|
|
Farm
loans
|
-
|
-
|
-
|
-
|
-
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Consumer loans
(1)
|
254
|
418
|
284
|
319
|
342
|
3.57
%
|
4.95
%
|
3.11
%
|
3.10
%
|
3.38
%
|
|
All other
loans
|
7
|
-
|
-
|
-
|
-
|
0.20
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
Total
loans
|
$
1,031
|
628
|
711
|
677
|
833
|
0.11
%
|
0.07
%
|
0.09
%
|
0.09
%
|
0.12
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
(reduction of) loan losses
|
|
|
|
|
|
|
|
|
|
|
|
for the
period
|
$
4,259
|
863
|
790
|
(507
)
|
(1,206
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses at end of period
|
$
9,908
|
6,680
|
6,445
|
6,366
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of
period
|
$
948,639
|
849,874
|
804,023
|
759,764
|
723,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans at
end of period
|
$
3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses as a percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans outstanding
at end of period
|
1.04
%
|
0.79
%
|
0.80
%
|
0.84
%
|
1.04
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans as a
percent of
|
|
|
|
|
|
|
|
|
|
|
|
total loans outstanding
at end of period
|
0.40
%
|
0.42
%
|
0.41
%
|
0.49
%
|
0.53
%
|
|
|
|
|
|
(1)
The loss ratio for consumer loans is elevated because overdraft
charge-offs related to DDA and NOW accounts are reported in
consumer loan charge-offs and recoveries. The net overdraft
charge-offs are not considered material and are therefore not shown
separately.
Please see the
section below entitled “Allowance for Loan Losses” for
a more complete discussion of the Bank’s policy for
addressing potential loan losses.
Non-Interest Income.
Non-interest
income was $22.9 million for the year ended December 31, 2020,
compared to $17.7 million for the year ended December 31, 2019. The
increase in non-interest income is primarily attributable to a $2.4
million increase in gains on sale of securities, a $2.3 million
increase in appraisal management fee income due to an increase in
the volume of appraisals and a $1.2 million increase in mortgage
banking income due to increased mortgage loan volume, which were
partially offset by a $1.0 million decrease in service charges and
fees primarily due to service charge and fee concessions associated
with the COVID-19 pandemic.
Non-interest income
was $17.7 million for the year ended December 31, 2019, as compared
to $16.2 million for the year ended December 31, 2018. The increase
in non-interest income is primarily attributable to a $1.3 million
increase in appraisal management fee income due to an increase in
the volume of appraisals and a $413,000 increase in mortgage
banking income due to an increase in mortgage loan
volume.
The Company
periodically evaluates its investments for any impairment which
would be deemed other-than-temporary. No investment
impairments were deemed other-than-temporary in 2020, 2019 or
2018.
Table
4 presents a summary of non-interest income for the years ended
December 31, 2020, 2019 and 2018.
A-11
Table 4 - Non-Interest Income
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
Service
charges
|
$
3,528
|
4,576
|
4,355
|
|
Other
service charges and fees
|
742
|
714
|
705
|
|
Gain
on sale of securities
|
2,639
|
226
|
15
|
|
Mortgage
banking income
|
2,469
|
1,264
|
851
|
|
Insurance
and brokerage commissions
|
897
|
877
|
824
|
|
Gain/(loss)
on sale and write-down of other real estate
|
(47
)
|
(11
)
|
17
|
|
Visa
debit card income
|
4,237
|
4,145
|
3,911
|
|
Appraisal
management fee income
|
6,754
|
4,484
|
3,206
|
|
Miscellaneous
|
1,695
|
1,464
|
2,282
|
|
Total non-interest income
|
$
22,914
|
17,739
|
16,166
|
Non-Interest Expense.
Non-interest
expense was $48.9 million for the year ended December 31, 2020,
compared to $45.5 million for the year ended December 31, 2019. The
increase in non-interest expense was primarily attributable to a
$1.9 million increase in appraisal management fee expense due to an
increase in the volume of appraisals and a $570,000 increase in
other non-interest expense. The increase in other non-interest
expense is primarily due to a $1.1 million FHLB borrowings
prepayment penalty in December 2020.
Non-interest
expense was $45.5 million for the year ended December 31, 2019, as
compared to $42.6 million for the year ended December 31, 2018. The
increase in non-interest expense was primarily due to a $1.7
million increase in salaries and benefits expense and a $961,000
increase in appraisal management fee expense. The increase in
salaries and benefits expense was primarily attributable to an
increase in salary expense primarily due to annual salary
increases, an increase in incentive compensation expense, an
increase in insurance costs and an increase in commission expense
primarily due to an increase in mortgage loan production. The
increase in appraisal management fee expense was primarily due to
an increase in the volume of appraisals.
Table 5 presents a
summary of non-interest expense for the years ended December 31,
2020, 2019 and 2018.
Table 5 - Non-Interest Expense
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
Salaries
and employee benefits
|
$
23,538
|
23,238
|
21,530
|
|
Occupancy
expense
|
7,933
|
7,364
|
7,170
|
|
Office
supplies
|
528
|
467
|
503
|
|
FDIC
deposit insurance
|
263
|
119
|
328
|
|
Visa
debit card expense
|
1,012
|
890
|
994
|
|
Professional
services
|
502
|
517
|
513
|
|
Postage
|
190
|
294
|
249
|
|
Telephone
|
794
|
802
|
678
|
|
Director
fees and expense
|
360
|
394
|
312
|
|
Advertising
|
787
|
1,021
|
922
|
|
Consulting
fees
|
1,078
|
972
|
1,012
|
|
Taxes
and licenses
|
295
|
287
|
288
|
|
Foreclosure/OREO
expense
|
20
|
28
|
58
|
|
Internet
banking expense
|
729
|
681
|
603
|
|
FHLB
advance prepayment penalty
|
1,100
|
-
|
-
|
|
Appraisal
management fee expense
|
5,274
|
3,421
|
2,460
|
|
Other
operating expense
|
4,528
|
5,022
|
4,954
|
|
Total non-interest expense
|
$
48,931
|
45,517
|
42,574
|
Income Taxes.
The Company reported
income tax expense of $2.5 million, $3.1 million and $2.6 million
for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company’s effective tax rates were 17.98%, 18.23% and
16.39% in 2020, 2019 and 2018, respectively.
Liquidity.
The objectives of the
Company’s liquidity policy are to provide for the
availability of adequate funds to meet the needs of loan demand,
deposit withdrawals, maturing liabilities and to satisfy regulatory
requirements. Both deposit and loan customer cash needs can
fluctuate significantly depending upon business cycles,
A-12
economic conditions
and yields and returns available from alternative investment
opportunities. In addition, the Company’s liquidity is
affected by off-balance sheet commitments to lend in the form of
unfunded commitments to extend credit and standby letters of
credit. As of December 31, 2020, such unfunded commitments to
extend credit were $299.0 million, while commitments in the form of
standby letters of credit totaled $4.7 million.
The
Company uses several funding sources to meet its liquidity
requirements. The primary funding source is core deposits, which
includes demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000. The
Company considers these to be a stable portion of the
Company’s liability mix and the result of on-going consumer
and commercial banking relationships. As of December 31, 2020, the
Company’s core deposits totaled $1.2 billion, or 98% of total
deposits.
The Bank’s
five largest deposit relationships, including securities sold under
agreements to repurchase, amounted to $122.0 million and $121.9
million at December 31, 2020 and 2019, respectively. These balances
represent 9.78% of total deposits and securities sold under
agreements to repurchase combined at December 31, 2020, as compared
to 12.30% of total deposits and securities sold under agreements to
repurchase combined at December 31, 2019. Total deposits for the
five largest relationships referenced above amounted to $108.9
million, or 8.92% of total deposits at December 31, 2020, as
compared to $107.7 million, or 11.14% of total deposits at December
31, 2019. Total securities sold under agreements to repurchase for
the five largest relationships referenced above amounted to $13.1
million, or 49.86% of total securities sold under agreements to
repurchase at December 31, 2020, as compared to $14.2 million, or
58.76% of total securities sold under agreements to repurchase at
December 31, 2019.
The other sources
of funding for the Company are through large denomination
certificates of deposit, including brokered deposits, federal funds
purchased, securities under agreement to repurchase and FHLB
borrowings. The Bank is also able to borrow from the FRB on a
short-term basis. The Bank’s policies include the ability to
access wholesale funding up to 40% of total assets. The
Bank’s wholesale funding includes FHLB borrowings, FRB
borrowings, brokered deposits and internet certificates of deposit.
The Company’s ratio of wholesale funding to total assets was
0.88% as of December 31, 2020.
The Bank has a line
of credit with the FHLB equal to 20% of the Bank’s total
assets, with no balances outstanding at December 31, 2020. At
December 31, 2020, the carrying value of loans pledged as
collateral totaled approximately $165.1 million. The remaining
availability under the line of credit with the FHLB was $111.4
million at December 31, 2020. The Bank had no borrowings from the
FRB at December 31, 2020. The FRB borrowings are collateralized by
a blanket assignment on all qualifying loans that the Bank owns
which are not pledged to the FHLB. At December 31, 2020, the
carrying value of loans pledged as collateral to the FRB totaled
approximately $469.5 million. Availability under the line of credit
with the FRB was $340.0 million at December 31, 2020.
The Bank also had
the ability to borrow up to $100.5 million for the purchase of
overnight federal funds from five correspondent financial
institutions as of December 31, 2020.
The liquidity ratio
for the Bank, which is defined as net cash, interest-bearing
deposits with banks, federal funds sold and certain investment
securities, as a percentage of net deposits and short-term
liabilities was 28.12%, 18.20% and 16.09% at December 31, 2020,
2019 and 2018, respectively. The minimum required liquidity ratio
as defined in the Bank’s Asset/Liability and Interest Rate
Risk Management Policy for on balance sheet liquidity was 10% at
December 31, 2020, 2019 and 2018.
As disclosed in the
Company’s Consolidated Statements of Cash Flows included
elsewhere herein, net cash provided by operating activities was
approximately $9.2 million during 2020. Net cash used in investing
activities was $149.0 million during 2020 and net cash provided by
financing activities was $249.0 million during 2020.
Asset Liability and Interest Rate Risk
Management.
The objective of the Company’s Asset
Liability and Interest Rate Risk strategies is to identify and
manage the sensitivity of net interest income to changing interest
rates and to minimize the interest rate risk between
interest-earning assets and interest-bearing liabilities at various
maturities. This is done in conjunction with the need to maintain
adequate liquidity and the overall goal of maximizing net interest
income. Table 6 presents an interest rate sensitivity analysis for
the interest-earning assets and interest-bearing liabilities for
the year ended December 31, 2020.
A-13
Table 6 - Interest Sensitivity Analysis
|
(Dollars
in thousands)
|
Immediate
|
1-3
months
|
4-12
months
|
Total
Within One Year
|
Over
One Year & Non-sensitive
|
Total
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
Loans
|
$
255,956
|
8,929
|
19
|
264,904
|
683,735
|
948,639
|
|
Mortgage loans held
for sale
|
9,139
|
-
|
-
|
9,139
|
-
|
9,139
|
|
Investment
securities available for sale
|
-
|
3,302
|
7,403
|
10,705
|
234,544
|
245,249
|
|
Interest-bearing
deposit accounts
|
118,843
|
-
|
-
|
118,843
|
-
|
118,843
|
|
Other
interest-earning assets
|
-
|
-
|
-
|
-
|
4,619
|
4,619
|
|
Total
interest-earning assets
|
383,938
|
12,231
|
7,422
|
403,591
|
922,898
|
1,326,489
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
NOW, savings, and
money market deposits
|
657,834
|
-
|
-
|
657,834
|
-
|
657,834
|
|
Time
deposits
|
9,805
|
10,104
|
37,565
|
57,474
|
48,798
|
106,272
|
|
Securities sold
under
|
|
|
|
|
|
|
|
agreement to
repurchase
|
26,201
|
-
|
-
|
26,201
|
-
|
26,201
|
|
Trust preferred
securities
|
-
|
15,464
|
-
|
15,464
|
-
|
15,464
|
|
Total
interest-bearing liabilities
|
693,840
|
25,568
|
37,565
|
756,973
|
48,798
|
805,771
|
|
|
|
|
|
|
|
|
|
Interest-sensitive
gap
|
$
(309,902
)
|
(13,337
)
|
(30,143
)
|
(353,382
)
|
874,100
|
520,718
|
|
|
|
|
|
|
|
|
|
Cumulative
interest-sensitive gap
|
$
(309,902
)
|
(323,239
)
|
(353,382
)
|
(353,382
)
|
520,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.34
%
|
47.84
%
|
19.76
%
|
53.32
%
|
1891.26
%
|
|
The Company manages
its exposure to fluctuations in interest rates through policies
established by the Asset/Liability Committee (“ALCO”)
of the Bank. The ALCO meets quarterly and has the responsibility
for approving asset/liability management policies, formulating and
implementing strategies to improve balance sheet positioning and/or
earnings and reviewing the interest rate sensitivity of the
Company. ALCO tries to minimize interest rate risk between
interest-earning assets and interest-bearing liabilities by
attempting to minimize wide fluctuations in net interest income due
to interest rate movements. The ability to control these
fluctuations has a direct impact on the profitability of the
Company. Management monitors this activity on a regular basis
through analysis of its portfolios to determine the difference
between rate sensitive assets and rate sensitive
liabilities.
The Company’s
rate sensitive assets are those earning interest at variable rates
and those with contractual maturities within one year. Rate
sensitive assets therefore include both loans and available for
sale (“AFS”) securities. Rate sensitive liabilities
include interest-bearing checking accounts, money market deposit
accounts, savings accounts, time deposits and borrowed funds. At
December 31, 2020, rate sensitive assets and rate sensitive
liabilities totaled $1.3 billion and $793.2 million,
respectively.
Included in the
rate sensitive assets are $232.7 million in variable rate loans
indexed to prime rate subject to immediate repricing upon changes
by the Federal Open Market Committee (“FOMC”). The Bank
utilizes interest rate floors on certain variable rate loans to
protect against further downward movements in the prime rate. At
December 31, 2020, the Bank had $144.0 million in loans with
interest rate floors. The floors were in effect on $117.4 million
of these loans pursuant to the terms of the promissory notes on
these loans. The weighted average rate on these loans is 0.83%
higher than the indexed rate on the promissory notes without
interest rate floors.
An analysis of the
Company’s financial condition and growth can be made by
examining the changes and trends in interest-earning assets and
interest-bearing liabilities. A discussion of these changes and
trends follows.
Analysis
of Financial Condition
Investment Securities.
The composition
of the investment securities portfolio reflects the Company’s
investment strategy of maintaining an appropriate level of
liquidity while providing a relatively stable source of income. The
investment portfolio also provides a balance to interest rate risk
and credit risk in other categories of the balance sheet while
providing a vehicle for the investment of available funds,
furnishing liquidity, and supplying securities to pledge as
required collateral for certain deposits.
All of the
Company’s investment securities are held in the AFS
category
.
At December 31,
2020 the market value of AFS securities totaled $245.2 million, as
compared to $195.7 million and $194.6 million at December 31, 2019
and 2018, respectively. Table 7 presents the fair value of the AFS
securities held at December 31, 2020, 2019 and 2018.
A-14
Table 7 - Summary of Investment Portfolio
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
|
U.
S. Government sponsored enterprises
|
$
7,507
|
28,397
|
34,634
|
|
State
and political subdivisions
|
92,428
|
88,143
|
107,591
|
|
Mortgage-backed
securities
|
145,314
|
78,956
|
52,103
|
|
Trust
preferred securities
|
-
|
250
|
250
|
|
Total securities
|
$
245,249
|
195,746
|
194,578
|
The Company’s
investment portfolio consists of U.S. Government sponsored
enterprise securities, municipal securities, U.S. Government
sponsored enterprise mortgage-backed securities, corporate bonds,
trust preferred securities and equity securities. AFS securities
averaged $200.8 million in 2020, $185.3 million in 2019 and $209.7
million in 2018. Table 8 presents the book value of AFS securities
held by the Company by maturity category at December 31, 2020.
Yield information does not give effect to changes in fair value
that are reflected as a component of shareholders’ equity.
Yields are calculated on a tax equivalent basis. Yields and
interest income on tax-exempt investments have been adjusted to a
tax equivalent basis using an effective tax rate of 22.98% for
securities that are both federal and state tax exempt and an
effective tax rate of 20.48% for federal tax-exempt
securities.
Table 8 - Maturity Distribution and Weighted Average Yield on
Investments
|
|
|
|
After
One Year
|
After
5 Years
|
|
|
|
|
||
|
|
One
Year or Less
|
Through
5 Years
|
Through
10 Years
|
After
10 Years
|
Totals
|
|||||
|
(Dollars
in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|
Book
value:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
enterprises
|
$
-
|
-
|
3,314
|
3.02
%
|
1,110
|
0.89
%
|
3,083
|
1.99
%
|
7,507
|
2.50
%
|
|
State and political
subdivisions
|
10,704
|
3.38
%
|
12,684
|
2.40
%
|
64,716
|
2.46
%
|
4,324
|
3.52
%
|
92,428
|
2.56
%
|
|
Mortgage-backed
securities
|
-
|
-
|
-
|
-
|
14,442
|
1.77
%
|
130,872
|
2.05
%
|
145,314
|
2.01
%
|
|
Total
securities
|
$
10,704
|
3.38
%
|
15,998
|
2.95
%
|
80,268
|
1.87
%
|
138,279
|
2.44
%
|
245,249
|
2.06
%
|
Loans.
The loan portfolio is the
largest category of the Company’s earning assets and is
comprised of commercial loans, real estate mortgage loans, real
estate construction loans and consumer loans. The Bank grants loans
and extensions of credit primarily within the Catawba Valley region
of North Carolina, which encompasses Catawba, Alexander, Iredell
and Lincoln counties and also in Mecklenburg, Wake and Durham
counties in North Carolina.
Although the
Company has a diversified loan portfolio, a substantial portion of
the loan portfolio is collateralized by real estate, which is
dependent upon the real estate market. Real estate mortgage loans
include both commercial and residential mortgage loans. At December
31, 2020, the Company had $104.2 million in residential mortgage
loans, $96.6 million in home equity loans and $476.7 million in
commercial mortgage loans, which include $375.0 million secured by
commercial property and $101.7 million secured by residential
property. Residential mortgage loans include $26.9 million in
non-traditional mortgage loans from the former Banco division of
the Bank. All residential mortgage loans are originated as fully
amortizing loans, with no negative amortization.
At December 31,
2020, the Bank had $94.1 million in construction and land
development loans. Table 9 presents a breakout of these
loans.
Table 9 - Construction and Land Development Loans
|
(Dollars in thousands)
|
Number
of Loans
|
Balance
Outstanding
|
Non-accrual
Balance
|
|
Land
acquisition and development - commercial purposes
|
36
|
$
7,509
|
-
|
|
Land
acquisition and development - residential purposes
|
161
|
20,444
|
-
|
|
1
to 4 family residential construction
|
93
|
18,897
|
-
|
|
Commercial
construction
|
32
|
47,274
|
-
|
|
Total
acquisition, development and construction
|
322
|
$
94,124
|
-
|
The mortgage loans
originated in the traditional banking offices are generally 15 to
30-year fixed rate loans with attributes that prevent the loans
from being sellable in the secondary market. These factors may
include higher loan-to-value ratio, limited documentation on
income, non-conforming appraisal or non-conforming property
type.
A-15
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|||||
|
(Dollars
in thousands)
|
Amount
|
% of
Loans
|
Amount
|
% of
Loans
|
Amount
|
% of
Loans
|
Amount
|
% of
Loans
|
Amount
|
% of
Loans
|
|
Real estate
loans
|
|
|
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
94,124
|
9.92
%
|
92,596
|
10.90
%
|
94,178
|
11.71
%
|
84,987
|
11.19
%
|
61,749
|
8.53
%
|
|
Single-family
residential
|
272,325
|
28.71
%
|
269,475
|
31.71
%
|
252,983
|
31.47
%
|
246,703
|
32.47
%
|
240,700
|
33.25
%
|
|
Single-family
residential- Banco de la
|
|
|
|
|
|
|
|
|
|
|
|
Gente
non-traditional
|
26,883
|
2.83
%
|
30,793
|
3.62
%
|
34,261
|
4.26
%
|
37,249
|
4.90
%
|
40,189
|
5.55
%
|
|
Commercial
|
332,971
|
35.10
%
|
291,255
|
34.27
%
|
270,055
|
33.59
%
|
248,637
|
32.73
%
|
247,521
|
34.20
%
|
|
Multifamily and
farmland
|
48,880
|
5.15
%
|
48,090
|
5.66
%
|
33,163
|
4.12
%
|
28,937
|
3.81
%
|
21,047
|
2.91
%
|
|
Total real estate
loans
|
775,183
|
81.72
%
|
732,209
|
86.16
%
|
684,640
|
85.15
%
|
646,513
|
85.10
%
|
611,206
|
84.44
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
161,740
|
17.05
%
|
100,263
|
11.80
%
|
97,465
|
12.12
%
|
89,022
|
11.71
%
|
87,596
|
12.11
%
|
|
Farm
loans
|
855
|
0.09
%
|
1,033
|
0.12
%
|
926
|
0.12
%
|
1,204
|
0.16
%
|
-
|
0.00
%
|
|
Consumer
loans
|
7,113
|
0.75
%
|
8,432
|
0.99
%
|
9,165
|
1.14
%
|
9,888
|
1.30
%
|
9,832
|
1.36
%
|
|
All other
loans
|
3,748
|
0.40
%
|
7,937
|
0.93
%
|
11,827
|
1.47
%
|
13,137
|
1.73
%
|
15,177
|
2.10
%
|
|
Total
loans
|
948,639
|
100.00
%
|
849,874
|
100.00
%
|
804,023
|
100.00
%
|
759,764
|
100.00
%
|
723,811
|
100.00
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for
loan losses
|
9,908
|
|
6,680
|
|
6,445
|
|
6,366
|
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
$
938,731
|
|
843,194
|
|
797,578
|
|
753,398
|
|
716,261
|
|
As of December 31,
2020, gross loans outstanding were $948.6 million, as compared to
$849.9 million at December 31, 2019. Average loans represented 74%
and 79% of average total earning assets for the years ended
December 31, 2020 and 2019, respectively. The Bank had $9.1 million
and $4.4 million in mortgage loans held for sale as of December 31,
2020 and 2019, respectively.
TDR loans modified
in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8
million and $4.3 million at December 31, 2020 and December 31,
2019, respectively. The terms of these loans have been renegotiated
to provide a concession to original terms, including a reduction in
principal or interest as a result of the deteriorating financial
position of the borrower. There were no performing loans classified
as TDR loans at December 31, 2020 and December 31,
2019.
On March 27, 2020,
President Trump signed the CARES Act, which established a $2
trillion economic stimulus package, including cash payments to
individuals, supplemental unemployment insurance benefits and a
$349 billion loan program administered through the PPP. Under the
PPP, small businesses, sole proprietorships, independent
contractors and self-employed individuals may apply for loans from
existing SBA lenders and other approved regulated lenders that
enroll in the program, subject to numerous limitations and
eligibility criteria. The Bank is participating as a lender in the
PPP. The Bank originated $64.5 million in PPP loans during the
initial round of PPP funding. A second round of PPP funding, signed
into law by President Trump on April 24, 2020, provided $320
billion additional funding for the PPP. As of December 31, 2020,
the Bank had originated $34.5 million in PPP loans during the
second round of PPP funding. Total PPP loans originated as of
December 31, 2020 amounted to $99.0 million. PPP loans outstanding
amounted to $75.8 million at December 31, 2020. PPP loans are
reported in Commercial loans not secured by real estate in Table 10
above. The Bank has received $4.0 million in fees from the SBA for
PPP loans originated as of December 31, 2020. The Bank has
recognized $1.4 million PPP loan fee income as of December 31,
2020. PPP loan fee income is reported in interest and fees on loans
in the Consolidated Statements of Earnings on page
A-31.
The Bank has
continued to modify payments on loans due to the COVID-19 pandemic.
At September 30, 2020, loans totaling $119.7 million had payment
modifications due to the COVID-19 pandemic. At December 31, 2020,
the balance of loans with existing modifications as a result of
COVID-19 was $18.3 million: the balance of loans under the terms of
a first modification was $12.6 million, and the balance of
outstanding loans under the terms of a second modification was $5.7
million. The Company continues to track all loans that are
currently modified or have been modified under COVID-19. At
December 31, 2020, the balance for all loans that are currently
modified or were modified during 2020 but have returned to their
original terms was $119.6 million. Payment modifications are
primarily interest only payments for three to nine months. Loan
payment modifications associated with the COVID-19 pandemic are not
classified as TDR due to Section 4013 of the CARES Act, which
provides that a qualified loan modification is exempt by law from
classification as a TDR pursuant to GAAP.
Table 11 identifies
the maturities of all loans as of December 31, 2020 and addresses
the sensitivity of these loans to changes in interest
rates.
A-16
Table 11 - Maturity and Repricing Data for Loans
|
(Dollars in thousands)
|
Within
one year or less
|
After
one year through five years
|
After
five years
|
Total
loans
|
|
Real estate loans
|
|
|
|
|
|
Construction
and land development
|
$
34,977
|
23,058
|
36,089
|
94,124
|
|
Single-family
residential
|
120,291
|
78,787
|
73,247
|
272,325
|
|
Single-family
residential- Banco de la Gente
|
|
|
|
|
|
stated
income
|
12,497
|
-
|
14,386
|
26,883
|
|
Commercial
|
70,231
|
158,119
|
104,621
|
332,971
|
|
Multifamily
and farmland
|
10,289
|
22,011
|
16,580
|
48,880
|
|
Total
real estate loans
|
248,285
|
281,975
|
244,923
|
775,183
|
|
|
|
|
|
|
|
Loans
not secured by real estate
|
|
|
|
|
|
Commercial
loans
|
36,055
|
105,289
|
20,396
|
161,740
|
|
Farm
loans
|
776
|
79
|
-
|
855
|
|
Consumer
loans
|
3,776
|
2,638
|
699
|
7,113
|
|
All
other loans
|
1,947
|
1,369
|
432
|
3,748
|
|
Total loans
|
$
290,839
|
391,350
|
266,450
|
948,639
|
|
|
|
|
|
|
|
Total
fixed rate loans
|
$
25,935
|
357,413
|
266,450
|
649,798
|
|
Total
floating rate loans
|
264,904
|
33,937
|
-
|
298,841
|
|
|
|
|
|
|
|
Total loans
|
$
290,839
|
391,350
|
266,450
|
948,639
|
In the normal
course of business, there are various commitments outstanding to
extend credit that are not reflected in the financial statements.
At December 31, 2020, outstanding loan commitments totaled $299.0
million. Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the commitment contract. Commitments generally have
fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Additional information
regarding commitments is provided below in the section entitled
“Commitments and Contingencies” and in Note 11 to the
Consolidated Financial Statements.
Allowance for Loan Losses.
The
allowance for loan losses reflects management’s assessment
and estimate of the risks associated with extending credit and its
evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review
asset quality and to establish an allowance for loan losses that
management believes will be adequate in light of anticipated risks
and loan losses. In assessing the adequacy of the allowance, size,
quality and risk of loans in the portfolio are reviewed. Other
factors considered are:
● the
Bank’s loan loss experience;
● the
amount of past due and non-performing loans;
● specific
known risks;
● the
status and amount of other past due and non-performing
assets;
● underlying
estimated values of collateral securing loans;
●
current and
anticipated economic conditions (including those arising out of the
COVID-19 pandemic); and
● other
factors which management believes affect the allowance for
potential credit losses.
Management uses
several measures to assess and monitor the credit risks in the loan
portfolio, including a loan grading system that begins upon loan
origination and continues until the loan is collected or
collectability becomes doubtful. Upon loan origination, the
Bank’s originating loan officer evaluates the quality of the
loan and assigns one of eight risk grades. The loan officer
monitors the loan’s performance and credit quality and makes
changes to the credit grade as conditions warrant. When originated
or renewed, all loans over a certain dollar amount receive in-depth
reviews and risk assessments by the Bank’s Credit
Administration. Before making any changes in these risk grades,
management considers assessments as determined by the third-party
credit review firm (as described below), regulatory examiners and
the Bank’s Credit Administration. Any issues regarding the
risk assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
A-17
As an additional
measure, the Bank engages an independent third party to review the
underwriting, documentation and risk grading analyses. This
independent third-party reviews and evaluates loan relationships
greater than $1.0 million as well as a sample of commercial
relationships with exposures below $1.0 million, excluding loans in
default, and loans in process of litigation or liquidation. The
third party’s evaluation and report is shared with management
and the Bank’s Board of Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses the
information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The allowance for
loan losses is comprised of three components: specific reserves,
general reserves and unallocated reserves. After a loan has been
identified as impaired, management measures impairment. When the
measure of the impaired loan is less than the recorded investment
in the loan, the amount of the impairment is recorded as a specific
reserve. These specific reserves are determined on an individual
loan basis based on management’s current evaluation of the
Bank’s loss exposure for each credit, given the appraised
value of any underlying collateral. Loans for which specific
reserves are provided are excluded from the general allowance
calculations as described below.
The general
allowance reflects reserves established under GAAP for collective
loan impairment. These reserves are based upon historical net
charge-offs using the greater of the last two, three, four, or five
years’ loss experience. This charge-off experience may be
adjusted to reflect the effects of current conditions. The Bank
considers information derived from its loan risk ratings and
external data related to industry and general economic trends in
establishing reserves. Qualitative factors applied in the
Company’s Allowance for Loan and Lease Losses
(“ALLL”) model include the impact to the economy from
the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk, and a higher reserve rate has been applied to
that pool. Of all loans modified as a result of COVID-19, $101.3
million of these loans have returned to their original terms;
however, the effects of stimulus in the current environment are
still unknown, and additional losses may be currently present in
loans that are currently modified and that were once
modified.
The unallocated
allowance is determined through management’s assessment of
probable losses that are in the portfolio but are not adequately
captured by the other two components of the allowance, including
consideration of current economic and business conditions and
regulatory requirements. The unallocated allowance also reflects
management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
There were no
significant changes in the estimation methods or fundamental
assumptions used in the evaluation of the allowance for loan losses
for the year ended December 31, 2020, as compared to the year ended
December 31, 2019. Revisions, estimates and assumptions may be made
in any period in which the supporting factors indicate that loss
levels may vary from the previous estimates.
Effective December
31, 2012, certain mortgage loans from the former Banco division of
the Bank were analyzed separately from other single-family
residential loans in the Bank’s loan portfolio. These loans
are first mortgage loans made to the Latino market, primarily in
Mecklenburg, North Carolina and surrounding counties. These loans
are non-traditional mortgages in that the customer normally did not
have a credit history, so all credit information was accumulated by
the loan officers.
A-18
Various regulatory
agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses.
Such agencies may require adjustments to the allowance based on
their judgments of information available to them at the time of
their examinations. Management believes it has established the
allowance for credit losses pursuant to GAAP, and has taken into
account the views of its regulators and the current economic
environment. Management considers the allowance for loan losses
adequate to cover the estimated losses inherent in the Bank’s
loan portfolio as of the date of the financial statements. Although
management uses the best information available to make evaluations,
significant future additions to the allowance may be necessary
based on changes in economic and other conditions, thus adversely
affecting the operating results of the Company.
Net charge-offs for
2020, 2019 and 2018 were $1.0 million, $628,000 and $711,000,
respectively. The ratio of net charge-offs to average total loans
was 0.11%
in 2020,
0.07% in 2018 and 0.09% in 2018. The years ended December 31, 2018
and 2019 saw net charge-offs at historically low levels. The
current level of past due and non-accrual loans currently indicate
that net charge-offs may not remain near these historical lows. The
allowance for loan losses was $9.9 million or 1.04% of total loans
outstanding at December 31, 2020. For December 31, 2019 and 2018,
the allowance for loan losses amounted to $6.7 million or 0.79% of
total loans outstanding and $6.4 million, or 0.80% of total loans
outstanding, respectively.
Table 12 presents
the percentage of loans assigned to each risk grade at December 31,
2020 and 2019.
|
Table 12 - Loan Risk Grade Analysis
|
|
|
|
|
Percentage
of Loans
|
|
|
|
By
Risk Grade
|
|
|
Risk Grade
|
2020
|
2019
|
|
Risk
Grade 1 (Excellent Quality)
|
1.18
%
|
1.16
%
|
|
Risk
Grade 2 (High Quality)
|
20.45
%
|
24.46
%
|
|
Risk
Grade 3 (Good Quality)
|
65.70
%
|
62.15
%
|
|
Risk
Grade 4 (Management Attention)
|
9.75
%
|
10.02
%
|
|
Risk
Grade 5 (Watch)
|
2.20
%
|
1.45
%
|
|
Risk
Grade 6 (Substandard)
|
0.72
%
|
0.76
%
|
|
Risk
Grade 7 (Doubtful)
|
0.00
%
|
0.00
%
|
|
Risk
Grade 8 (Loss)
|
0.00
%
|
0.00
%
|
Table 13 presents
an analysis of the allowance for loan losses, including charge-off
activity.
Table 13 - Analysis of Allowance for Loan Losses
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
|
Allowance
for loan losses at beginning
|
$
6,680
|
6,445
|
6,366
|
7,550
|
9,589
|
|
|
|
|
|
|
|
|
Loans
charged off:
|
|
|
|
|
|
|
Commercial
|
903
|
389
|
54
|
194
|
146
|
|
Real
estate - mortgage
|
72
|
43
|
574
|
315
|
593
|
|
Real
estate - construction
|
5
|
21
|
53
|
-
|
7
|
|
Consumer
|
434
|
623
|
452
|
473
|
492
|
|
Total loans charged off
|
1,414
|
1,076
|
1,133
|
982
|
1,238
|
|
|
|
|
|
|
|
|
Recoveries
of losses previously charged off:
|
|
|
|
|
|
|
Commercial
|
34
|
83
|
32
|
31
|
170
|
|
Real
estate - mortgage
|
141
|
115
|
212
|
106
|
74
|
|
Real
estate - construction
|
36
|
45
|
10
|
14
|
10
|
|
Consumer
|
172
|
205
|
168
|
154
|
151
|
|
Total recoveries
|
383
|
448
|
422
|
305
|
405
|
|
Net loans charged off
|
1,031
|
628
|
711
|
677
|
833
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
4,259
|
863
|
790
|
(507
)
|
(1,206
)
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year
|
$
9,908
|
6,680
|
6,445
|
6,366
|
7,550
|
|
|
|
|
|
|
|
|
Loans
charged off net of recoveries, as
|
|
|
|
|
|
|
a
percent of average loans outstanding
|
0.11
%
|
0.07
%
|
0.09
%
|
0.09
%
|
0.12
%
|
|
|
|
|
|
|
|
|
Allowance
for loan losses as a percent
|
|
|
|
|
|
|
of
total loans outstanding at end of year
|
1.04
%
|
0.79
%
|
0.80
%
|
0.84
%
|
1.04
%
|
A-19
Non-performing Assets.
Non-performing
assets were $3.9 million or 0.27% of total assets at December 31,
2020, compared to $3.6 million or 0.31% of total assets at December
31, 2019. Non-performing assets include $3.5 million in commercial
and residential mortgage loans, $226,000 in other loans and
$128,000 in other real estate owned at December 31, 2020, compared
to $3.4 million in commercial and residential mortgage loans and
$154,000 in other loans at December 31, 2019. Other real estate
owned totaled $128,000 at December 31, 2020. The Bank had no other
real estate owned at December 31, 2019. The Bank had no repossessed
assets as of December 31, 2020 and 2019.
At December 31,
2020, the Bank had non-performing loans, defined as non-accrual and
accruing loans past due more than 90 days, of $3.8 million or 0.40%
of total loans. Non-performing loans at December 31, 2019 were $3.6
million or 0.42% of total loans.
Management
continually monitors the loan portfolio to ensure that all loans
potentially having a material adverse impact on future operating
results, liquidity or capital resources have been classified as
non-performing. Should economic conditions deteriorate, the
inability of distressed customers to service their existing debt
could cause higher levels of non-performing loans. Management
expects the level of non-accrual loans to continue to be in-line
with the level of non-accrual loans at December 31, 2020 and
2019.
It is the general
policy of the Bank to stop accruing interest income when a loan is
placed on non-accrual status and any interest previously accrued
but not collected is reversed against current income. Generally, a
loan is placed on non-accrual status when it is over 90 days past
due and there is reasonable doubt that all principal will be
collected.
A summary of
non-performing assets at December 31 for each of the years
presented is shown in Table 14.
|
Table 14 - Non-performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2020
|
2019
|
2018
|
2017
|
2016
|
|
Non-accrual
loans
|
$
3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
|
Loans
90 days or more past due and still accruing
|
-
|
-
|
-
|
-
|
-
|
|
Total non-performing loans
|
3,758
|
3,553
|
3,314
|
3,711
|
3,825
|
|
All
other real estate owned
|
128
|
-
|
27
|
118
|
283
|
|
Repossessed
assets
|
-
|
-
|
-
|
-
|
-
|
|
Total non-performing assets
|
$
3,886
|
3,553
|
3,341
|
3,829
|
4,108
|
|
|
|
|
|
|
|
|
TDR
loans not included in above,
|
|
|
|
|
|
|
(not
90 days past due or on nonaccrual)
|
$
1,610
|
2,533
|
3,173
|
2,543
|
3,337
|
|
|
|
|
|
|
|
|
As a percent of total loans at year end
|
|
|
|
|
|
|
Non-accrual
loans
|
0.40
%
|
0.42
%
|
0.41
%
|
0.49
%
|
0.53
%
|
|
Loans
90 days or more past due and still accruing
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
|
|
|
|
|
as a percent of total assets at year end
|
0.27
%
|
0.31
%
|
0.31
%
|
0.35
%
|
0.38
%
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
as a percent of total loans at year-end
|
0.40
%
|
0.42
%
|
0.41
%
|
0.49
%
|
0.53
%
|
Deposits.
The Company primarily uses
deposits to fund its loan and investment portfolios. The Company
offers a variety of deposit accounts to individuals and businesses.
Deposit accounts include checking, savings, money market and time
deposits. As of December 31, 2020, total deposits were $1.2
billion, as compared to $966.5 million at December 31, 2019.
Core deposits, which
include demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000,
amounted to $1.2 billion at December 31, 2020, as compared to
$932.2 million at December 31, 2019.
Time deposits in
amounts of $250,000 or more totaled $25.8 million and $34.3 million
at December 31, 2020 and 2019, respectively. At December 31, 2020,
brokered deposits amounted to $12.4 million, as compared to $22.3
million at December 31, 2019. Certificates of deposit participated
through the Certificate of Deposit Account Registry Service
(“CDARS”) included in brokered deposits amounted to
$4.3 million and $3.1 million as of December 31, 2020 and 2019,
respectively. Brokered deposits are generally considered to be more
susceptible to withdrawal as a result of interest rate changes and
to be a less stable source of funds, as compared to deposits from
the local market. Brokered deposits outstanding as of December 31,
2020 have a weighted average rate of 1.43% with a weighted average
original term of 32 months.
A-20
Table 15 is a
summary of the maturity distribution of time deposits in amounts of
$250,000 or more as of December 31, 2020.
Table 15 - Maturities of Time Deposits of $250,000 or
greater
|
(Dollars in thousands)
|
2020
|
|
Three
months or less
|
$
3,658
|
|
Over
three months through six months
|
3,297
|
|
Over
six months through twelve months
|
3,871
|
|
Over
twelve months
|
14,945
|
|
Total
|
$
25,771
|
Borrowed Funds.
The Company has access
to various short-term borrowings, including the purchase of federal
funds and borrowing arrangements from the FHLB and other financial
institutions. There were no FHLB borrowings outstanding at December
31, 2020 and 2019. Average FHLB borrowings for 2020 and 2019 were
$60.8 million and $19.6 million, respectively. The maximum amount
of outstanding FHLB borrowings was $70.0 million in
2020.
Additional
information regarding FHLB borrowings is provided in Note 7 to the
Consolidated Financial Statements.
The Bank had no
borrowings from the FRB at December 31, 2020 and 2019. FRB
borrowings are collateralized by a blanket assignment on all
qualifying loans that the Bank owns which are not pledged to the
FHLB. At December 31, 2020, the carrying value of loans pledged as
collateral totaled approximately $469.5 million.
Securities sold
under agreements to repurchase were $26.2 million at December 31,
2020, as compared to $24.2 million at December 31,
2019.
Junior subordinated
debentures were $15.5 million and $15.6 million as of December 31,
2020 and 2019, respectively.
Contractual Obligations and Off-Balance Sheet
Arrangements.
The Company’s contractual obligations
and other commitments as of December 31, 2020 are summarized in
Table 16 below. The Company’s contractual obligations include
junior subordinated debentures, as well as certain payments under
current lease agreements. Other commitments include commitments to
extend credit. Because not all of these commitments to extend
credit will be drawn upon, the actual cash requirements are likely
to be significantly less than the amounts reported for other
commitments below.
Table 16 - Contractual Obligations and Other
Commitments
|
(Dollars in thousands)
|
Within
One Year
|
One
to Three Years
|
Three
to Five Years
|
Five
Years or More
|
Total
|
|
Contractual Cash Obligations
|
|
|
|
|
|
|
Junior
subordinated debentures
|
$
-
|
-
|
-
|
15,464
|
15,464
|
|
Operating
lease obligations
|
601
|
842
|
629
|
1,011
|
3,083
|
|
Total
|
$
601
|
842
|
629
|
16,475
|
18,547
|
|
|
|
|
|
|
|
|
Other Commitments
|
|
|
|
|
|
|
Commitments
to extend credit
|
$
117,428
|
31,300
|
15,293
|
135,018
|
299,039
|
|
Standby
letters of credit
|
|
|
|
|
|
|
and
financial guarantees written
|
4,745
|
-
|
-
|
-
|
4,745
|
|
Income
tax credits
|
54
|
74
|
12
|
44
|
184
|
|
Total
|
$
122,227
|
31,374
|
15,305
|
135,062
|
303,968
|
The Company enters
into derivative contracts to manage various financial risks. A
derivative is a financial instrument that derives its cash flows,
and therefore its value, by reference to an underlying instrument,
index or referenced interest rate. Derivative contracts are carried
at fair value on the consolidated balance sheet with the fair value
representing the net present value of expected future cash receipts
or payments based on market interest rates as of the balance sheet
date. Derivative contracts are written in amounts referred to as
notional amounts, which only provide the basis for calculating
payments between counterparties and are not a measure of financial
risk. Therefore, the derivative amounts recorded on the balance
sheet do not represent the amounts that may ultimately be paid
under
A-21
these
contracts. Further discussions of derivative instruments are
included above in the section entitled “Asset Liability and
Interest Rate Risk Management” beginning on page A-11 and in
Notes 1, 11 and 16 to the Consolidated Financial Statements. There
were no derivatives at December 31, 2020 or 2019.
Capital Resources
. Shareholders’
equity was $139.9 million, or 9.89% of total assets, as of December
31, 2020, as compared to $134.1 million, or 11.61% of total assets,
as of December 31, 2019.
Average
shareholders’ equity as a percentage of total average assets
is one measure used to determine capital strength. Average
shareholders’ equity as a percentage of total average assets
was 9.89%, 11.61% and 11.31% for 2020, 2019 and 2018, respectively.
The return on average shareholders’ equity was 8.04% at
December 31, 2020, as compared to 10.45% and 10.81% at December 31,
2019 and December 31, 2018, respectively. Total cash dividends paid
on common stock were $4.4 million, $3.9 million and $3.1 million
during 2020, 2019 and 2018, respectively.
The Board of
Directors, at its discretion, can issue shares of preferred stock
up to a maximum of 5,000,000 shares. The Board is authorized to
determine the number of shares, voting powers, designations,
preferences, limitations and relative rights.
In 2019, the
Company’s Board of Directors authorized a stock repurchase
program, whereby up to $5 million will be allocated to repurchase
the Company’s common stock. Any purchases under the
Company’s stock repurchase program may be made periodically
as permitted by securities laws and other legal requirements in the
open market or in privately-negotiated transactions. The timing and
amount of any repurchase of shares will be determined by the
Company’s management, based on its evaluation of market
conditions and other factors. The stock repurchase program may be
suspended at any time or from time-to-time without prior
notice. The Company has repurchased approximately $2.5
million, or 90,354 shares of its common stock, under this stock
repurchase program as of December 31, 2019.
In 2020, the
Company’s Board of Directors authorized a stock repurchase
program, whereby up to $3 million will be allocated to repurchase
the Company’s common stock. Any purchases under the
Company’s stock repurchase program may be made periodically
as permitted by securities laws and other legal requirements in the
open market or in privately-negotiated transactions. The timing and
amount of any repurchase of shares will be determined by the
Company’s management, based on its evaluation of market
conditions and other factors. The stock repurchase program may be
suspended at any time or from time-to-time without prior notice.
The Company has repurchased approximately $3.0 million, or 126,800
shares of its common stock, under this stock repurchase program as
of December 31, 2020.
In 2013, the FRB
approved its final rule on the Basel III capital standards, which
implement changes to the regulatory capital framework for banking
organizations. The Basel III capital standards, which became
effective January 1, 2015, include new risk-based capital and
leverage ratios, which were phased in from 2015 to 2019. The new
minimum capital level requirements applicable to the Company and
the Bank under the final rules are as follows: (i) a new common
equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of
6% (increased from 4%); (iii) a total risk-based capital ratio of
8% (unchanged from previous rules); and (iv) a Tier 1 leverage
ratio of 4% (unchanged from previous rules). An additional capital
conservation buffer was added to the minimum requirements for
capital adequacy purposes beginning on January 1, 2016 and was
phased in through 2019 (increasing by 0.625% on January 1, 2016 and
each subsequent January 1, until it reached 2.5% on January 1,
2019). This resulted in the following minimum ratios beginning in
2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier
1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%.
Under the final rules, institutions would be subject to limitations
on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the buffer
amount. These limitations establish a maximum percentage of
eligible retained earnings that could be utilized for such
actions.
Under the
regulatory capital guidelines, financial institutions are currently
required to maintain a total risk-based capital ratio of 8.0% or
greater, with a Tier 1 risk-based capital ratio of 6.0% or greater
and a common equity Tier 1 capital ratio of 4.5% or greater, as
required by the Basel III capital standards referenced above. Tier
1 capital is generally defined as shareholders’ equity and
trust preferred securities less all intangible assets and goodwill.
Tier 1 capital includes $15.0 million in trust preferred securities
at December 31, 2020 and 2019. The Company’s Tier 1 capital
ratio was 15.07% and 15.37% at December 31, 2020 and December 31,
2019, respectively. Total risk-based capital is defined as Tier 1
capital plus supplementary capital. Supplementary capital, or Tier
2 capital, consists of the Company’s allowance for loan
losses, not exceeding 1.25% of the Company’s risk-weighted
assets. Total risk-based capital ratio is therefore defined as the
ratio of total capital (Tier 1 capital and Tier 2 capital) to
risk-weighted assets. The Company’s total risk-based capital
ratio was 16.07% and 16.08% at December 31, 2020 and December 31,
2019, respectively. The Company’s common equity Tier 1
capital consists of common stock and retained earnings. The
Company’s common equity Tier 1 capital ratio was 13.56% and
13.79% at December 31, 2020 and December 31, 2019, respectively.
Financial institutions are also required to maintain a leverage
ratio of Tier 1 capital to total
A-22
average assets of
4.0% or greater. The Company’s Tier 1 leverage capital ratio
was 10.24% and 11.91% at December 31, 2020 and December 31, 2019,
respectively.
The Company’s key
equity ratios as of December 31, 2020, 2019 and 2018 are presented
in Table 17.
The Bank’s
Tier 1 risk-based capital ratio was 14.85% and 15.09% at December
31, 2020 and December 31, 2019, respectively. The total risk-based
capital ratio for the Bank was 15.85% and 15.79% at December 31,
2020 and December 31, 2019, respectively. The Bank’s common
equity Tier 1 capital ratio was 14.85% and 15.09% at December 31,
2020 and December 31, 2019, respectively. The Bank’s Tier 1
leverage capital ratio was 10.04% and 11.61% at December 31, 2020
and December 31, 2019, respectively.
A bank is
considered to be “well capitalized” if it has a total
risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based
capital ratio of 8.0% or greater, a common equity Tier 1 capital
ratio of 6.5% or greater and a leverage ratio of 5.0% or greater.
Based upon these guidelines, the Bank was considered to be
“well capitalized” at December 31, 2020.
Table 17 - Equity Ratios
|
|
2020
|
2019
|
2018
|
|
Return
on average assets
|
0.83
%
|
1.23
%
|
1.22
%
|
|
Return
on average equity
|
8.04
%
|
10.45
%
|
10.81
%
|
|
Dividend
payout ratio
|
38.67
%
|
28.00
%
|
23.41
%
|
|
Average
equity to average assets
|
10.35
%
|
11.78
%
|
11.31
%
|
Quarterly Financial Data.
The
Company’s consolidated quarterly operating results for the
years ended December 31, 2020 and 2019 are presented in Table
18.
Table 18
|
(Dollars
in thousands, except per share amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
|
Total interest
income
|
$
12,250
|
11,638
|
11,868
|
12,202
|
$
12,183
|
12,375
|
12,430
|
12,613
|
|
Total interest
expense
|
1,041
|
912
|
942
|
941
|
757
|
781
|
994
|
1,225
|
|
Net
interest income
|
11,209
|
10,726
|
10,926
|
11,261
|
11,426
|
11,594
|
11,436
|
11,388
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan
losses
|
1,521
|
1,417
|
522
|
799
|
178
|
77
|
422
|
186
|
|
Other
income
|
4,595
|
5,239
|
7,132
|
5,948
|
4,120
|
4,385
|
4,708
|
4,526
|
|
Other
expense
|
11,449
|
11,452
|
11,914
|
14,116
|
10,916
|
11,244
|
11,267
|
12,090
|
|
Income
before income taxes
|
2,834
|
3,096
|
5,622
|
2,294
|
4,452
|
4,658
|
4,455
|
3,638
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
467
|
535
|
1,113
|
374
|
785
|
845
|
834
|
672
|
|
Net
earnings
|
2,367
|
2,561
|
4,509
|
1,920
|
3,667
|
3,813
|
3,621
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
$
0.40
|
0.44
|
0.78
|
0.33
|
$
0.61
|
0.64
|
0.62
|
0.50
|
|
Diluted
net earnings per share
|
$
0.40
|
0.44
|
0.78
|
0.33
|
$
0.61
|
0.64
|
0.61
|
0.50
|
A-23
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk
reflects the risk of economic loss resulting from adverse changes
in market prices and interest rates. This risk of loss can be
reflected in either diminished current market values or reduced
potential net interest income in future periods.
The Company’s
market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. The structure of the
Company’s loan and deposit portfolios is such that a
significant decline (increase) in interest rates may adversely
(positively)
impact net
market values and interest income. Management seeks to manage the
risk through the utilization of its investment securities and
off-balance sheet derivative instruments. During the years ended
December 31, 2020, 2019 and 2018, the Company used interest rate
contracts to manage market risk as discussed above in the section
entitled “Asset Liability and Interest Rate Risk
Management.”
Table 19 presents
in tabular form the contractual balances and the estimated fair
value of the Company’s on-balance sheet financial instruments
at their expected maturity dates for the period ended December 31,
2020. The expected maturity categories take into consideration
historical prepayment experience as well as management’s
expectations based on the interest rate environment at December 31,
2020. For core deposits without contractual maturity (i.e.
interest-bearing checking, savings, and money market accounts), the
table presents principal cash flows based on management’s
judgment concerning their most likely runoff or repricing
behaviors.
Table 19 - Market Risk Table
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Loans
Receivable
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total
|
Fair
Value
|
|
Fixed
rate
|
$
38,515
|
125,843
|
62,042
|
81,749
|
87,779
|
273,142
|
669,070
|
655,184
|
|
Average interest
rate
|
4.69
%
|
2.53
%
|
5.18
%
|
4.93
%
|
4.37
%
|
4.29
%
|
|
|
|
Variable
rate
|
$
57,892
|
20,336
|
22,247
|
14,608
|
15,784
|
157,841
|
288,708
|
288,708
|
|
Average interest
rate
|
3.92
%
|
4.34
%
|
4.13
%
|
4.04
%
|
4.00
%
|
4.26
%
|
|
|
|
Total
|
|
|
|
|
|
|
957,778
|
943,892
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
Interest bearing
deposits
|
$
118,843
|
-
|
-
|
-
|
-
|
-
|
118,843
|
118,843
|
|
Average interest
rate
|
0.11
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Securities available
for sale
|
$
9,977
|
7,391
|
3,347
|
632
|
1,062
|
222,840
|
245,249
|
245,249
|
|
Average interest
rate
|
4.42
%
|
4.35
%
|
4.08
%
|
2.63
%
|
3.03
%
|
3.24
%
|
|
|
|
Nonmarketable equity
securities
|
$
-
|
-
|
-
|
-
|
-
|
4,155
|
4,155
|
4,155
|
|
Average interest
rate
|
-
|
-
|
-
|
-
|
-
|
3.42
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Obligations
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
57,902
|
19,395
|
14,815
|
10,926
|
3,821
|
1,114,227
|
1,221,086
|
1,216,503
|
|
Average interest
rate
|
0.29
%
|
0.60
%
|
0.76
%
|
1.15
%
|
0.93
%
|
0.05
%
|
|
|
|
Securities sold
under agreement
|
|
|
|
|
|
|
|
|
|
to
repurchase
|
$
26,201
|
-
|
-
|
-
|
-
|
-
|
26,201
|
26,201
|
|
Average interest
rate
|
0.39
%
|
-
|
-
|
-
|
-
|
-
|
|
|
|
Junior subordinated
debentures
|
$
-
|
-
|
-
|
-
|
-
|
15,464
|
15,464
|
15,464
|
|
Average interest
rate
|
-
|
-
|
-
|
-
|
-
|
1.85
%
|
|
|
A-24
Table 20 presents
the simulated impact to net interest income under varying interest
rate scenarios and the theoretical impact of rate changes over a
twelve-month period referred to as “rate ramps.” The
table shows the estimated theoretical impact on the Company’s
tax equivalent net interest income from hypothetical rate changes
of plus and minus 1%, 2% and 3%, as compared to the estimated
theoretical impact of rates remaining unchanged. The table also
shows the simulated impact to market value of equity under varying
interest rate scenarios and the theoretical impact of immediate and
sustained rate changes referred to as “rate shocks” of
plus and minus 1%, 2% and 3%, as compared to the theoretical impact
of rates remaining unchanged. The prospective effects of the
hypothetical interest rate changes are based upon various
assumptions, including relative and estimated levels of key
interest rates. This type of modeling has limited usefulness
because it does not allow for the strategies management would
utilize in response to sudden and sustained rate changes. Also,
management does not believe that rate changes of the magnitude
presented are likely in the forecast period presented.
Table
20 - Interest Rate Risk
|
(Dollars in
thousands)
|
|
|
|
|
Estimated
Resulting Theoretical Net
Interest
Income
|
|
|
Hypothetical rate
change (ramp over 12 months)
|
Amount
|
%
Change
|
|
+3%
|
$
44,228
|
4.08
%
|
|
+2%
|
$
43,925
|
3.37
%
|
|
+1%
|
$
43,302
|
1.90
%
|
|
0%
|
$
42,494
|
0.00
%
|
|
-1%
|
$
42,159
|
-0.79
%
|
|
-2%
|
$
42,107
|
-0.91
%
|
|
-3%
|
$
42,105
|
-0.92
%
|
|
|
Estimated
Resulting Theoretical Market
Value
of Equity
|
|
|
Hypothetical rate
change (immediate shock)
|
Amount
|
%
Change
|
|
+3%
|
$
179,805
|
37.72
%
|
|
+2%
|
$
176,642
|
35.30
%
|
|
+1%
|
$
160,149
|
22.67
%
|
|
0%
|
$
130,555
|
0.00
%
|
|
-1%
|
$
88,296
|
-32.37
%
|
|
-2%
|
$
83,689
|
-35.90
%
|
|
-3%
|
$
86,198
|
-33.98
%
|
A-25
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2020, 2019 and 2018
INDEX
|
|
PAGE(S)
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm on the
Consolidated Financial Statements
|
A-27-
A-28
|
|
|
|
|
Financial
Statements
|
|
|
Consolidated
Balance Sheets at December 31, 2020 and 2019
|
A-29
|
|
|
|
|
Consolidated
Statements of Earnings for the years ended December 31, 2020, 2019
and 2018
|
A-30
|
|
|
|
|
Consolidated
Statements of Comprehensive Income for the years ended December 31,
2020, 2019 and 2018
|
A-31
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2020, 2019 and 2018
|
A-32
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2020,
2019 and 2018
|
A-33
- A-34
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
A-35
- A-71
|
A-26
Report
of Independent Registered Public Accounting Firm
To the Shareholders
and the Board of Directors of Peoples Bancorp of North Carolina,
Inc.
Opinion on the Financial Statements
We
have audited the accompanying consolidated balance sheets of
Peoples Bancorp of North Carolina, Inc. and its subsidiaries (the
Company) as of December 31, 2020 and 2019, the related consolidated
statements of earnings, comprehensive income, changes in
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2020, and the related notes
to the consolidated financial statements (collectively, the
financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The
critical audit matter communicated below is a matter arising from
the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of
the critical audit matter does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or
disclosures to which it relates.
elliottdavis.com
A-27
Allowance for Loan Losses - Qualitative Factors
As
discussed in Note 3 to the Company’s financial statements,
the Company had a gross loan portfolio of approximately $948.6
million and associated allowance for loan losses of approximately
$9.9 million as of December 31, 2020. As described by the Company
in Note 1, the allowance for loan losses is evaluated on a regular
basis by management and is based on management’s periodic
review of the collectability of the loans in light of the
Company’s historical loan loss experience, the amount of past
due and non-performing loans, specific known risks, underlying
estimated values of collateral securing loans, current and
anticipated economic conditions, and other factors which management
believes represents the best estimate of the allowance for loan
losses.
We
identified the Company’s estimate of qualitative factors
applied to adjust the historical loss experience of the allowance
for loan losses as a critical audit matter. The principal
considerations for our determination of the allowance for loan
losses as a critical audit matter related to the high degree of
subjectivity in the Company’s judgments in determining the
qualitative factors. Auditing these complex judgments and
assumptions by the Company involves especially challenging auditor
judgment due to the nature and extent of audit evidence and effort
required to address these matters, including the extent of
specialized skill or knowledge needed.
The
primary procedures we performed to address this critical audit
matter included the following:
●
We
evaluated the relevance and the reasonableness of assumptions
related to evaluation of the loan portfolio, current economic
conditions, and other risk factors used in development of the
qualitative factors for collectively evaluated loans.
●
We
evaluated the reasonableness of assumptions and data used by the
Company in developing the qualitative factors by comparing these
data points to internally developed and third-party sources, and
other audit evidence gathered.
●
Analytical
procedures were performed to evaluate changes that occurred in the
allowance for loan losses for loans collectively evaluated for
impairment.
/s/
Elliott Davis, PLLC
W
e have served as the Company's auditor
since 2015.
Charlotte, North
Carolina
March 19,
2021
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 2020 and December 31, 2019
(Dollars in thousands)
|
|
December
31,
|
December
31,
|
|
Assets
|
2020
|
2019
|
|
|
(Audited)
|
(Audited)
|
|
|
|
|
|
Cash
and due from banks, including reserve requirements
|
|
|
|
of
$0 at 12/31/20 and $13,210 at 12/31/19
|
$
42,737
|
48,337
|
|
Interest-bearing
deposits
|
118,843
|
720
|
|
Federal
funds sold
|
-
|
3,330
|
|
Cash
and cash equivalents
|
161,580
|
52,387
|
|
|
|
|
|
Investment
securities available for sale
|
245,249
|
195,746
|
|
Other
investments
|
4,155
|
4,231
|
|
Total
securities
|
249,404
|
199,977
|
|
|
|
|
|
Mortgage
loans held for sale
|
9,139
|
4,417
|
|
|
|
|
|
Loans
|
948,639
|
849,874
|
|
Less
allowance for loan losses
|
(9,908
)
|
(6,680
)
|
|
Net
loans
|
938,731
|
843,194
|
|
|
|
|
|
Premises
and equipment, net
|
18,600
|
18,604
|
|
Cash
surrender value of life insurance
|
16,968
|
16,319
|
|
Other
real estate
|
128
|
-
|
|
Right
of use lease asset
|
3,423
|
3,622
|
|
Accrued
interest receivable and other assets
|
16,882
|
16,362
|
|
Total
assets
|
$
1,414,855
|
1,154,882
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
Noninterest-bearing
demand
|
$
456,980
|
338,004
|
|
NOW,
MMDA & savings
|
657,834
|
516,757
|
|
Time,
$250,000 or more
|
25,771
|
34,269
|
|
Other
time
|
80,501
|
77,487
|
|
Total
deposits
|
1,221,086
|
966,517
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
26,201
|
24,221
|
|
Junior
subordinated debentures
|
15,464
|
15,619
|
|
Lease
liability
|
3,471
|
3,647
|
|
Accrued
interest payable and other liabilities
|
8,734
|
10,758
|
|
Total
liabilities
|
1,274,956
|
1,020,762
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
Preferred
stock, no par value; authorized
|
|
|
|
5,000,000
shares; no shares issued and outstanding
|
-
|
-
|
|
Common
stock, no par value; authorized
|
|
|
|
20,000,000
shares; issued and outstanding 5,787,504 shares
|
|
|
|
at
December 31, 2020 and 5,912,300 shares at December 31,
2019
|
56,871
|
59,813
|
|
Retained
earnings
|
77,628
|
70,663
|
|
Accumulated
other comprehensive income
|
5,400
|
3,644
|
|
Total
shareholders' equity
|
139,899
|
134,120
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
1,414,855
|
1,154,882
|
See accompanying Notes to
Consolidated Financial Statements
.
A-29
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands, except per share amounts)
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Interest
income:
|
|
|
|
|
Interest
and fees on loans
|
$
42,314
|
43,301
|
38,654
|
|
Interest
on due from banks
|
127
|
213
|
304
|
|
Interest
on federal funds sold
|
204
|
331
|
-
|
|
Interest
on investment securities:
|
|
|
|
|
U.S.
Government sponsored enterprises
|
2,361
|
2,670
|
2,333
|
|
States
and political subdivisions
|
2,691
|
2,915
|
3,877
|
|
Other
|
261
|
171
|
182
|
|
Total
interest income
|
47,958
|
49,601
|
45,350
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
NOW,
MMDA & savings deposits
|
1,962
|
1,596
|
769
|
|
Time
deposits
|
947
|
909
|
472
|
|
FHLB
borrowings
|
357
|
205
|
-
|
|
Junior
subordinated debentures
|
370
|
844
|
790
|
|
Other
|
200
|
203
|
115
|
|
Total
interest expense
|
3,836
|
3,757
|
2,146
|
|
|
|
|
|
|
Net
interest income
|
44,122
|
45,844
|
43,204
|
|
|
|
|
|
|
Provision
for loan losses
|
4,259
|
863
|
790
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
39,863
|
44,981
|
42,414
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
Service
charges
|
3,528
|
4,576
|
4,355
|
|
Other
service charges and fees
|
742
|
714
|
705
|
|
Gain
on sale of securities
|
2,639
|
226
|
15
|
|
Mortgage
banking income
|
2,469
|
1,264
|
851
|
|
Insurance
and brokerage commissions
|
897
|
877
|
824
|
|
Appraisal
management fee income
|
6,754
|
4,484
|
3,206
|
|
Gain
(loss) on sales and write-downs of
|
|
|
|
|
other
real estate, net
|
(47
)
|
(11
)
|
17
|
|
Miscellaneous
|
5,932
|
5,609
|
6,193
|
|
Total
non-interest income
|
22,914
|
17,739
|
16,166
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
Salaries
and employee benefits
|
23,538
|
23,238
|
21,530
|
|
Occupancy
|
7,933
|
7,364
|
7,170
|
|
Professional
fees
|
1,580
|
1,490
|
1,525
|
|
Advertising
|
787
|
1,021
|
922
|
|
Debit
card expense
|
1,012
|
890
|
994
|
|
FDIC
insurance
|
263
|
119
|
328
|
|
Appraisal
management fee expense
|
5,274
|
3,421
|
2,460
|
|
Other
|
8,544
|
7,974
|
7,645
|
|
Total
non-interest expense
|
48,931
|
45,517
|
42,574
|
|
|
|
|
|
|
Earnings
before income taxes
|
13,846
|
17,203
|
16,006
|
|
|
|
|
|
|
Income
tax expense
|
2,489
|
3,136
|
2,624
|
|
|
|
|
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
|
|
|
|
|
|
Basic
net earnings per share
|
$
1.95
|
2.37
|
2.23
|
|
Diluted
net earnings per share
|
$
1.95
|
2.36
|
2.22
|
|
Cash
dividends declared per share
|
$
0.75
|
0.66
|
0.52
|
See
accompanying Notes to Consolidated Financial
Statements.
A-30
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
Unrealized
holding gains (losses) on securities
|
|
|
|
|
available
for sale
|
4,919
|
3,677
|
(3,370
)
|
|
Reclassification
adjustment for gains on
|
|
|
|
|
securities
available for sale
|
|
|
|
|
included
in net earnings
|
(2,639
)
|
(226
)
|
(15
)
|
|
|
|
|
|
|
Total
other comprehensive gain (loss),
|
|
|
|
|
before
income taxes
|
2,280
|
3,451
|
(3,385
)
|
|
|
|
|
|
|
Income
tax expense (benefit) related to other
|
|
|
|
|
comprehensive
gain (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized
holding gain (losses) on securities
|
|
|
|
|
available
for sale
|
1,130
|
845
|
(774
)
|
|
Reclassification
adjustment for gains on
|
|
|
|
|
securities
available for sale
|
|
|
|
|
included
in net earnings
|
(606
)
|
(52
)
|
(4
)
|
|
|
|
|
|
|
Total
income tax expense (benefit) related to
|
|
|
|
|
other
comprehensive gain (loss)
|
524
|
793
|
(778
)
|
|
|
|
|
|
|
Total
other comprehensive gain (loss),
|
|
|
|
|
net
of tax
|
1,756
|
2,658
|
(2,607
)
|
|
|
|
|
|
|
Total
comprehensive income
|
$
13,113
|
16,725
|
10,775
|
See
accompanying Notes to Consolidated Financial
Statements.
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders'
Equity
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
Common
|
|
Other
|
|
|
|
Stock
|
Stock
|
Retained
|
Comprehensive
|
|
|
|
Shares
|
Amount
|
Earnings
|
Income
|
Total
|
|
Balance,
December 31, 2017
|
5,995,256
|
$
62,096
|
50,286
|
3,593
|
115,975
|
|
|
|
|
|
|
|
|
Cash
dividends declared on
|
|
|
|
|
|
|
common
stock
|
-
|
-
|
(3,133
)
|
-
|
(3,133
)
|
|
Net
earnings
|
|
|
13,382
|
|
13,382
|
|
Change
in accumulated other
|
-
|
-
|
-
|
(2,607
)
|
(2,607
)
|
|
comprehensive
income due to
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
5,995,256
|
$
62,096
|
60,535
|
986
|
123,617
|
|
|
|
|
|
|
|
|
Common
stock repurchase
|
(90,354
)
|
(2,490
)
|
-
|
-
|
(2,490
)
|
|
Cash
dividends declared on
|
|
|
|
|
|
|
common
stock
|
-
|
-
|
(3,939
)
|
-
|
(3,939
)
|
|
Restricted
stock units exercised
|
7,398
|
207
|
|
|
207
|
|
Net
earnings
|
-
|
-
|
14,067
|
-
|
14,067
|
|
Change
in accumulated other
|
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
|
net
of tax
|
-
|
-
|
-
|
2,658
|
2,658
|
|
Balance,
December 31, 2019
|
5,912,300
|
$
59,813
|
70,663
|
3,644
|
134,120
|
|
|
|
|
|
|
|
|
Common
stock repurchase
|
(126,800
)
|
(2,999
)
|
-
|
-
|
(2,999
)
|
|
Cash
dividends declared on
|
|
|
|
|
|
|
common
stock
|
-
|
-
|
(4,392
)
|
-
|
(4,392
)
|
|
Restricted
stock units exercised
|
2,004
|
57
|
|
|
57
|
|
Net
earnings
|
-
|
-
|
11,357
|
-
|
11,357
|
|
Change
in accumulated other
|
|
|
|
|
|
|
comprehensive
income,
|
|
|
|
|
|
|
net
of tax
|
-
|
-
|
-
|
1,756
|
1,756
|
|
Balance,
December 31, 2020
|
5,787,504
|
$
56,871
|
77,628
|
5,400
|
139,899
|
See
accompanying Notes to Consolidated Financial
Statements.
A-32
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
|
Adjustments
to reconcile net earnings to
|
|
|
|
|
net
cash provided by operating activities:
|
|
|
|
|
Depreciation,
amortization and accretion
|
4,183
|
3,964
|
4,571
|
|
Provision
for loan losses
|
4,259
|
863
|
790
|
|
Deferred
income taxes
|
(560
)
|
164
|
78
|
|
Gain
on sale of investment securities
|
(2,639
)
|
(226
)
|
(15
)
|
|
Gain
on sale of other real estate
|
-
|
(6
)
|
(17
)
|
|
Write-down
of other real estate
|
47
|
17
|
-
|
|
(Gain)
loss on sale and writedowns of premises and equipment
|
-
|
239
|
(544
)
|
|
Restricted
stock expense
|
27
|
270
|
85
|
|
Proceeds
from sales of loans held for sale
|
112,426
|
56,364
|
35,922
|
|
Origination
of loans held for sale
|
(117,148
)
|
(60,101
)
|
(35,745
)
|
|
Change
in:
|
|
|
|
|
Cash
surrender value of life insurance
|
(380
)
|
(383
)
|
(384
)
|
|
Right
of use lease asset
|
199
|
787
|
-
|
|
Other
assets
|
(382
)
|
952
|
(3,695
)
|
|
Lease
liability
|
(176
)
|
(762
)
|
-
|
|
Other
liabilities
|
(2,051
)
|
(3,012
)
|
2,759
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
9,162
|
13,197
|
17,187
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
Purchases
of investment securities available for sale
|
(127,893
)
|
(54,212
)
|
(34,692
)
|
|
Proceeds
from sales, calls and maturities of investment
securities
|
|
|
|
|
available
for sale
|
62,408
|
40,561
|
48,241
|
|
Proceeds
from paydowns of investment securities available for
sale
|
19,169
|
14,489
|
15,556
|
|
Purchases
of other investments
|
(45
)
|
(45
)
|
(2,611
)
|
|
Proceeds
from paydowns of other investment securities
|
176
|
176
|
117
|
|
Net
change in FHLB stock
|
(55
)
|
(1
)
|
(4
)
|
|
Net
change in loans
|
(99,971
)
|
(46,505
)
|
(45,094
)
|
|
Purchases
of premises and equipment
|
(2,492
)
|
(2,835
)
|
(1,742
)
|
|
Purchases
of bank owned life insurance
|
(269
)
|
-
|
-
|
|
Proceeds
from sale of premises and equipment
|
-
|
149
|
1,410
|
|
Proceeds
from sale of other real estate and repossessions
|
-
|
42
|
232
|
|
|
|
|
|
|
Net
cash used by investing activities
|
(148,972
)
|
(48,181
)
|
(18,587
)
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
Net
change in deposits
|
254,569
|
89,304
|
(29,739
)
|
|
Net
change in securities sold under agreement to
repurchase
|
1,980
|
(33,874
)
|
20,338
|
|
Proceeds
from FHLB borrowings
|
70,000
|
184,500
|
-
|
|
Repayments
of FHLB borrowings
|
(70,000
)
|
(184,500
)
|
-
|
|
Proceeds
from FRB borrowings
|
1
|
1
|
1
|
|
Repayments
of FRB borrowings
|
(1
)
|
(1
)
|
(1
)
|
|
Proceeds
from Fed Funds Purchased
|
7,011
|
100,252
|
4,277
|
|
Repayments
of Fed Funds Purchased
|
(7,011
)
|
(100,252
)
|
(4,277
)
|
|
Repayments
of Junior Subordinated Debentures
|
(155
)
|
(5,000
)
|
-
|
|
Common
stock repurchased
|
(2,999
)
|
(2,490
)
|
-
|
|
Cash
dividends paid on common stock
|
(4,392
)
|
(3,939
)
|
(3,133
)
|
|
|
|
|
|
|
Net
cash (used) provided by financing activities
|
249,003
|
44,001
|
(12,534
)
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
109,193
|
9,017
|
(13,934
)
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
52,387
|
43,370
|
57,304
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
161,580
|
52,387
|
43,370
|
A-33
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
Interest
|
$
3,856
|
3,750
|
2,128
|
|
Income
taxes
|
$
2,781
|
3,206
|
1,163
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
Change
in unrealized gain on investment securities
|
|
|
|
|
available
for sale, net
|
$
1,756
|
2,658
|
(2,607
)
|
|
Transfer
of loans to other real estate
|
$
175
|
26
|
124
|
|
Issuance
of accrued restricted stock units
|
$
57
|
207
|
-
|
|
Recognition
of lease right of use asset and lease liability
|
$
942
|
4,401
|
-
|
See
accompanying Notes to Consolidated Financial
Statements.
A-34
PEOPLES
BANCORP OF NORTH CAROLINA, INC.
Notes
to Consolidated Financial Statements
(1)
Summary
of Significant Accounting Policies
Organization
Peoples Bancorp of
North Carolina, Inc. (“Bancorp”) received regulatory
approval to operate as a bank holding company on July 22, 1999, and
became effective August 31, 1999. Bancorp is primarily regulated by
the Board of Governors of the Federal Reserve System, and serves as
the one-bank holding company for Peoples Bank (the
“Bank”).
The Bank commenced
business in 1912 upon receipt of its banking charter from the North
Carolina Commissioner of Banks (the “Commissioner”).
The Bank is primarily regulated by the Commissioner and the Federal
Deposit Insurance Corporation (the “FDIC”) and
undergoes periodic examinations by these regulatory agencies. The
Bank, whose main office is in Newton, North Carolina, provides a
full range of commercial and consumer banking services primarily in
Catawba, Alexander, Lincoln, Mecklenburg, Iredell and Wake counties
in North Carolina.
Peoples Investment
Services, Inc. (“PIS”) is a wholly owned subsidiary of
the Bank and began operations in 1996 to provide investment and
trust services through agreements with an outside
party.
Real Estate
Advisory Services, Inc. (“REAS”) is a wholly owned
subsidiary of the Bank and began operations in 1997 to provide real
estate appraisal and property management services to individuals
and commercial customers of the Bank.
Community Bank Real
Estate Solutions, LLC (“CBRES”) is a wholly owned
subsidiary of the Bank and began operations in 2009 as a
“clearing house” for appraisal services for community
banks. Other banks are able to contract with CBRES to find and
engage appropriate appraisal companies in the area where the
property is located. In 2019, the Company launched PB Insurance
Agency, which is part of CBRES.
PB Real Estate
Holdings, LLC (“PBREH”) is a wholly owned subsidiary of
the Bank and began operation in 2015. PBREH acquires, manages and
disposes of real property, other collateral and other assets
obtained in the ordinary course of collecting debts previously
contracted.
The Bank operates
three banking offices focused on the Latino population that were
formerly operated as a division of the Bank under the name Banco de
la Gente (“Banco”). These offices are now branded as
Bank branches and considered a separate market territory of the
Bank as they offer normal and customary banking services as are
offered in the Bank’s other branches such as the taking of
deposits and the making of loans.
Principles of Consolidation
The consolidated
financial statements include the financial statements of Bancorp
and its wholly owned subsidiary, the Bank, along with the
Bank’s wholly owned subsidiaries, PIS, REAS, CBRES and PBREH
(collectively called the “Company”). All significant
intercompany balances and transactions have been eliminated in
consolidation.
Basis of Presentation
The accounting
principles followed by the Company, and the methods of applying
these principles, conform with accounting principles generally
accepted in the United States of America (“GAAP”) and
with general practices in the banking industry. In preparing the
financial statements in conformity with GAAP, management is
required to make estimates and assumptions that affect the reported
amounts in the financial statements. Actual results could differ
significantly from these estimates. Material estimates common to
the banking industry that are particularly susceptible to
significant change in the near term include, but are not limited
to, the determination of the allowance for loan losses and
valuation of real estate acquired in connection with or in lieu of
foreclosure on loans.
Cash and Cash Equivalents
Cash, due from
banks, interest-bearing deposits and federal funds sold are
considered cash and cash equivalents for cash flow reporting
purposes.
A-35
Investment Securities
There are three
classifications the Company is able to classify its investment
securities: trading, available for sale, or held to maturity.
Trading securities are bought and held principally for sale in the
near term. Held to maturity securities are those securities for
which the Company has the ability and intent to hold until
maturity. All other securities not included in trading or held to
maturity are classified as available for sale. At December 31, 2020
and 2019, the Company classified all of its investment securities
as available for sale.
Available for sale
securities are recorded at fair value. Unrealized holding gains and
losses, net of the related tax effect, are excluded from earnings
and are reported as a separate component of shareholders’
equity until realized.
Management
evaluates investment securities for other-than-temporary impairment
on a quarterly basis. A decline in the market value of any
investment below cost that is deemed other-than-temporary is
charged to earnings for the decline in value deemed to be credit
related and a new cost basis in the security is established. The
decline in value attributed to non-credit related factors is
recognized in comprehensive income.
Premiums and
discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale are included in
earnings and are derived using the specific identification method
for determining the cost of securities sold.
Other Investments
Other investments
include equity securities with no readily determinable fair value.
These investments are carried at cost.
Loans
Loans that
management has the intent and ability to hold for the foreseeable
future or until maturity are reported at the principal amount
outstanding, net of the allowance for loan losses. Interest on
loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. The recognition of
certain loan origination fee income and certain loan origination
costs is deferred when such loans are originated and amortized over
the life of the loan.
A loan is impaired
when, based on current information and events, it is probable that
all amounts due according to the contractual terms of the loan will
not be collected. Impaired loans are measured based on the present
value of expected future cash flows, discounted at the loan’s
effective interest rate, or at the loan’s observable market
price, or the fair value of the collateral if the loan is
collateral dependent.
Accrual of interest
is discontinued on a loan when management believes, after
considering economic conditions and collection efforts, that the
borrower’s financial condition is such that collection of
interest is doubtful. Interest previously accrued but not collected
is reversed against current period earnings.
Allowance for Loan Losses
The allowance for
loan losses reflects management’s assessment and estimate of
the risks associated with extending credit and its evaluation of
the quality of the loan portfolio. The Bank periodically analyzes
the loan portfolio in an effort to review asset quality and to
establish an allowance for loan losses that management believes
will be adequate in light of anticipated risks and loan losses. In
assessing the adequacy of the allowance, size, quality and risk of
loans in the portfolio are reviewed. Other factors considered
are:
●
the Bank’s
loan loss experience;
●
the amount of past
due and non-performing loans;
●
specific known
risks;
●
the status and
amount of other past due and non-performing assets;
●
underlying
estimated values of collateral securing loans;
●
current and
anticipated economic conditions; and
●
other factors which
management believes affect the allowance for potential credit
losses.
Management uses
several measures to assess and monitor the credit risks in the loan
portfolio, including a loan grading system that begins upon loan
origination and continues until the loan is collected or
collectability becomes doubtful. Upon loan origination, the
Bank’s originating loan officer evaluates the quality of the
loan and assigns one of eight risk grades. The loan officer
monitors the loan’s performance and credit quality and makes
changes to the credit grade as conditions warrant. When originated
or renewed, all loans over a certain dollar amount receive in-depth
reviews and risk assessments by the Bank’s Credit
Administration. Before making any changes in these risk grades,
management considers assessments as determined by the third party
credit review firm (as described below), regulatory examiners and
the Bank’s Credit Administration. Any
issues
A-36
regarding the risk
assessments are addressed by the Bank’s senior credit
administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors
reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the
Bank’s Credit Administration.
As an additional
measure, the Bank engages an independent third party to review the
underwriting, documentation and risk grading analyses. This
independent third party reviews and evaluates loan relationships
greater than or equal to $1.0 million as well as a sample of
commercial relationships with exposures below $1.0 million,
excluding loans in default, and loans in process of litigation or
liquidation. The third party’s evaluation and report is
shared with management and the Bank’s Board of
Directors.
Management
considers certain commercial loans with weak credit risk grades to
be individually impaired and measures such impairment based upon
available cash flows and the value of the collateral. Allowance or
reserve levels are estimated for all other graded loans in the
portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses the
information developed from the procedures described above in
evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan
losses. The provision for loan losses charged or credited to
earnings is based upon management’s judgment of the amount
necessary to maintain the allowance at a level appropriate to
absorb probable incurred losses in the loan portfolio at the
balance sheet date. The amount each quarter is dependent upon many
factors, including growth and changes in the composition of the
loan portfolio, net charge-offs, delinquencies, management’s
assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these
factors is performed quarterly by management through an analysis of
the appropriateness of the allowance for loan losses.
The allowance for
loan losses is comprised of three components: specific reserves,
general reserves and unallocated reserves. After a loan has been
identified as impaired, management measures impairment. When the
measure of the impaired loan is less than the recorded investment
in the loan, the amount of the impairment is recorded as a specific
reserve. These specific reserves are determined on an individual
loan basis based on management’s current evaluation of the
Bank’s loss exposure for each credit, given the appraised
value of any underlying collateral. Loans for which specific
reserves are provided are excluded from the general allowance
calculations as described below.
The general
allowance reflects reserves established under GAAP for collective
loan impairment. These reserves are based upon historical net
charge-offs using the greater of the last two, three, four, or five
years’ loss experience. This charge-off experience may be
adjusted to reflect the effects of current conditions. The Bank
considers information derived from its loan risk ratings and
external data related to industry and general economic trends in
establishing reserves. Qualitative factors applied in the
Company’s Allowance for Loan and Lease Losses
(“ALLL”) model include the impact to the economy from
the COVID-19 pandemic and reserves on loans with payment
modifications made in 2020 as a result of the COVID-19 pandemic. At
December 31, 2020, the balance of loans with existing modifications
as a result of COVID-19 was $18.3 million: the balance of loans
under the terms of a first modification was $12.6 million, and the
balance of outstanding loans under the terms of a second
modification was $5.7 million. The Company continues to track all
loans that are currently modified or have been modified under
COVID-19. At December 31, 2020, the balance for all loans that are
currently modified or were modified during 2020 but have returned
to their original terms was $119.6 million. These loan balances
associated with COVID-19 related modifications have been grouped
into their own pool within the ALLL model as they have a higher
likelihood of risk, and a higher reserve rate has been applied to
that pool. Of all loans modified as a result of COVID-19, $101.3
million of these loans have returned to their original terms;
however, the effects of stimulus in the current environment are
still unknown, and additional losses may be currently present in
loans that are currently modified and that were once
modified.
The unallocated
allowance is determined through management’s assessment of
probable losses that are in the portfolio but are not adequately
captured by the other two components of the allowance, including
consideration of current economic and business conditions and
regulatory requirements. The unallocated allowance also reflects
management’s acknowledgement of the imprecision and
subjectivity that underlie the modeling of credit risk. Due to the
subjectivity involved in determining the overall allowance,
including the unallocated portion, the unallocated portion may
fluctuate from period to period based on management’s
evaluation of the factors affecting the assumptions used in
calculating the allowance.
There were no
significant changes in the estimation methods or fundamental
assumptions used in the evaluation of the allowance for loan losses
for the year ended December 31, 2020 as compared to the year
ended
A-37
December 31, 2019. Revisions, estimates and assumptions may be
made in any period in which the supporting factors indicate that
loss levels may vary from the previous
estimates.
Effective December
31, 2012, certain mortgage loans from the former Banco division of
the Bank were analyzed separately from other single family
residential loans in the Bank’s loan portfolio. These loans
are first mortgage loans made to the Latino market, primarily in
Mecklenburg, North Carolina and surrounding counties. These loans
are non-traditional mortgages in that the customer normally did not
have a credit history, so all credit information was accumulated by
the loan officers.
PPP loans are
excluded from the allowance for loan losses as PPP loans are 100
percent guaranteed by the SBA.
Various regulatory
agencies, as an integral part of their examination process,
periodically review the Bank’s allowance for loan losses.
Such agencies may require adjustments to the allowance based on
their judgments of information available to them at the time of
their examinations. Management believes it has established the
allowance for credit losses pursuant to GAAP, and has taken into
account the views of its regulators and the current economic
environment. Management considers the allowance for loan
losses adequate to cover the estimated losses inherent in the
Bank’s loan portfolio as of the date of the financial
statements. Although management uses the best information available
to make evaluations, significant future additions to the allowance
may be necessary based on changes in economic and other conditions,
thus adversely affecting the operating results of the
Company.
Mortgage Banking Activities
Mortgage banking
income represents income from the sale of mortgage loans and fees
received from borrowers and loan investors related to the
Bank’s origination of single-family residential mortgage
loans.
Mortgage loans
serviced for others are not included in the accompanying balance
sheets. The unpaid principal balances of mortgage loans serviced
for others was approximately $578,000, $729,000 and $866,000 at
December 31, 2020, 2019 and 2018, respectively.
The Bank originates
certain fixed rate mortgage loans and commits these loans for sale.
The commitments to originate fixed rate mortgage loans and the
commitments to sell these loans to a third party are both
derivative contracts. The fair value of these derivative contracts
is immaterial and has no effect on the recorded amounts in the
financial statements.
Mortgage loans held
for sale are carried at lower of aggregate cost or market value.
The cost of mortgage loans held for sale approximates the market
value.
Premises and Equipment
Premises and
equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily using the straight-line method
over the estimated useful lives of the assets. When assets are
retired or otherwise disposed, the cost and related accumulated
depreciation are removed from the accounts, and any gain or loss is
reflected in earnings for that period. The cost of maintenance and
repairs that do not improve or extend the useful life of the
respective asset is charged to earnings as incurred, whereas
significant renewals and improvements are capitalized. The range of
estimated useful lives for premises and equipment are generally as
follows:
|
Buildings
and improvements
|
10
- 50 years
|
|
Furniture
and equipment
|
3 -
10 years
|
Other Real Estate
Foreclosed assets
include all assets received in full or partial satisfaction of a
loan. Foreclosed assets are reported at fair value less estimated
selling costs. Any write-downs at the time of foreclosure are
charged to the allowance for loan losses. Subsequent to
foreclosure, valuations are periodically performed by management,
and a valuation allowance is established if fair value less
estimated selling costs declines below carrying value. Costs
relating to the development and improvement of the property are
capitalized. Revenues and expenses from operations are included in
other expenses. Changes in the valuation allowance are included in
loss on sale and write-down of other real estate.
Income Taxes
Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Additionally, the recognition of future tax
benefits, such as net operating loss carryforwards, is required to
the
A-38
extent that the
realization of such benefits is more likely than not to occur.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which the
assets and liabilities are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income tax expense in the period that
includes the enactment date.
In the event the
future tax consequences of differences between the financial
reporting bases and the tax bases of the Company’s assets and
liabilities results in a deferred tax asset, an evaluation of the
probability of being able to realize the future benefits indicated
by such asset is required. A valuation allowance is provided for
the portion of the deferred tax asset when it is more likely than
not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of a deferred tax asset,
management considers the scheduled reversals of deferred tax
liabilities, projected future taxable income, and tax planning
strategies.
Tax effects from an
uncertain tax position can be recognized in the financial
statements only when it is more likely than not that the tax
position will be sustained upon examination by the appropriate
taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more likely than not
recognition threshold is measured at the largest amount of benefit
that is greater than fifty percent likely of being realized upon
ultimate settlement. Previously recognized tax positions that no
longer meet the more likely than not recognition threshold should
be derecognized in the first subsequent financial reporting period
in which that threshold is no longer met. The Company assessed the
impact of this guidance and determined that it did not have a
material impact on the Company’s financial position, results
of operations or disclosures.
Derivative Financial Instruments and Hedging
Activities
In the normal
course of business, the Company enters into derivative contracts to
manage interest rate risk by modifying the characteristics of the
related balance sheet instruments in order to reduce the adverse
effect of changes in interest rates. All material derivative
financial instruments are recorded at fair value in the financial
statements. The fair value of derivative contracts related to the
origination of fixed rate mortgage loans and the commitments to
sell these loans to a third party is immaterial and has no effect
on the recorded amounts in the financial statements.
The
disclosure requirements for derivatives and hedging activities have
the intent to provide users of financial statements with an
enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related
hedged items are accounted for and (c) how derivative instruments
and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The disclosure
requirements include qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about
the fair value of, and gains and losses on, derivative instruments,
and disclosures about credit-risk-related contingent features in
derivative instruments.
On the date a
derivative contract is entered into, the Company designates the
derivative as a fair value hedge, a cash flow hedge, or a trading
instrument. Changes in the fair value of instruments used as fair
value hedges are accounted for in the earnings of the period
simultaneous with accounting for the fair value change of the item
being hedged. Changes in the fair value of the effective portion of
cash flow hedges are accounted for in other comprehensive income
rather than earnings. Changes in the fair value of instruments that
are not intended as a hedge are accounted for in the earnings of
the period of the change.
If a derivative
instrument designated as a fair value hedge is terminated or the
hedge designation removed, the difference between a hedged
item’s then carrying amount and its face amount is recognized
into income over the original hedge period. Likewise, if a
derivative instrument designated as a cash flow hedge is terminated
or the hedge designation removed, related amounts accumulated in
other accumulated comprehensive income are reclassified into
earnings over the original hedge period during which the hedged
item affects income.
The accounting for
changes in the fair value of derivatives depends on the intended
use of the derivative, whether the Company has elected to designate
a derivative in a hedging relationship and apply hedge accounting
and whether the hedging relationship has satisfied the criteria
necessary to apply hedge accounting. Derivatives designated and
qualifying as a hedge of the exposure to changes in the fair value
of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair
value hedges. Derivatives designated and qualifying as a hedge of
the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges.
Hedge accounting generally provides for the matching of the timing
of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value
hedge or the earnings effect of the hedged forecasted transactions
in a cash flow hedge. The Company may enter into derivative
contracts that are intended to economically hedge certain of its
risks, even though hedge accounting does not apply or the Company
elects not to apply hedge accounting.
A-39
The Company
formally documents all hedging relationships, including an
assessment that the derivative instruments are expected to be
highly effective in offsetting the changes in fair values or cash
flows of the hedged items.
Advertising Costs
Advertising costs
are expensed as incurred.
Stock-Based Compensation
The Company has an
Omnibus Stock Ownership and Long Term Incentive Plan that was
approved by shareholders on May 7, 2009 (the “2009
Plan”) whereby certain stock-based rights, such as stock
options, restricted stock, restricted stock units, performance
units, stock appreciation rights or book value shares, may be
granted to eligible directors and employees. The 2009 Plan expired
on May 7, 2019 but still governs the rights and obligations of the
parties for grants made thereunder. As of December 31, 2020, there
were no outstanding shares under the 2009 Plan.
The Company granted
16,583 restricted stock units under the 2009 Plan at a grant date
fair value of $16.34 per share during the first quarter of 2015.
The Company granted 5,544 restricted stock units under the 2009
Plan at a grant date fair value of $16.91 per share during the
first quarter of 2016. The Company granted 4,114 restricted stock
units under the 2009 Plan at a grant date fair value of $25.00 per
share during the first quarter of 2017. The Company granted 3,725
restricted stock units under the 2009 Plan at a grant date fair
value of $31.43 per share during the first quarter of 2018. The
Company granted 5,290 restricted stock units under the 2009 Plan at
a grant date fair value of $28.43 per share during the first
quarter of 2019. The number of restricted stock units granted and
grant date fair values for the restricted stock units granted in
2015 through 2017 have been restated to reflect the 10% stock
dividend that was paid in the fourth quarter of 2017. The Company
recognizes compensation expense on the restricted stock units over
the period of time the restrictions are in place (four years from
the grant date for the 2015, 2016, 2017, 2018 and 2019 grants). The
amount of expense recorded each period reflects the changes in the
Company’s stock price during such period. As of December 31,
2020, the total unrecognized compensation expense related to the
restricted stock unit grants under the 2009 Plan was
$89,000.
The Company also
has an Omnibus Stock Ownership and Long Term Incentive Plan that
was approved by shareholders on May 7, 2020 (the “2020
Plan”) whereby certain stock-based rights, such as stock
options, restricted stock, restricted stock units, performance
units, stock appreciation rights or book value shares, may be
granted to eligible directors and employees. A total of 292,365
shares are currently reserved for possible issuance under the 2020
Plan. All stock-based rights under the 2020 Plan must be granted or
awarded by May 7, 2030 (or ten years from the 2020 Plan effective
date).
The Company granted
7,635 restricted stock units under the 2020 Plan at a grant date
fair value of $17.08 per share during the second quarter of 2020.
The Company recognizes compensation expense on the restricted stock
units over the period of time the restrictions are in place (four
years from the grant date for 2020 grants). As of December 31,
2020, the total unrecognized compensation expense related to the
restricted stock unit grants under the 2020 Plan was
$146,000.
The Company
recognized compensation expense for restricted stock units granted
under the 2009 Plan and 2020 Plan of $27,000 for the year ended
December 31, 2020. The Company recognized compensation expense for
restricted stock units granted under the 2009 Plan of $270,000 and
$85,000 for the years ended December 31, 2019 and 2018,
respectively.
Net Earnings Per Share
Net earnings per
common share is based on the weighted average number of common
shares outstanding during the period while the effects of potential
common shares outstanding during the period are included in diluted
earnings per common share. The average market price during the year
is used to compute equivalent shares.
The reconciliations
of the amounts used in the computation of both “basic
earnings per common share” and “diluted earnings per
common share” for the years ended December 31, 2020, 2019 and
2018 are as follows:
A-40
For the year ended December 31, 2020
|
|
Net
Earnings (Dollars in thousands)
|
Weighted
Average Number of Shares
|
Per
Share Amount
|
|
Basic
earnings per share
|
$
11,357
|
5,808,121
|
$
1.95
|
|
Effect
of dilutive securities:
|
|
|
|
|
Restricted
stock units
|
-
|
14,203
|
|
|
Diluted
earnings per share
|
$
11,357
|
5,822,324
|
$
1.95
|
For the year ended December 31, 2019
|
|
Net
Earnings (Dollars in thousands)
|
Weighted
Average Number of Shares
|
Per
Share Amount
|
|
Basic
earnings per share
|
$
14,067
|
5,941,873
|
$
2.37
|
|
Effect
of dilutive securities:
|
|
|
|
|
Restricted
stock units
|
-
|
25,438
|
|
|
Diluted
earnings per share
|
$
14,067
|
5,967,311
|
$
2.36
|
For the year ended December 31, 2018
|
|
Net
Earnings (Dollars in thousands)
|
Weighted
Average Number of Shares
|
Per
Share Amount
|
|
Basic
earnings per share
|
$
13,382
|
5,995,256
|
$
2.23
|
|
Effect
of dilutive securities:
|
|
|
|
|
Restricted
stock units
|
-
|
20,240
|
|
|
Diluted
earnings per share
|
$
13,382
|
6,015,496
|
$
2.22
|
Revenue
Recognition
The Company has
applied ASU 2014-09 using a modified retrospective approach. The
Company’s revenue is comprised of net interest income and
noninterest income. The scope of ASU 2014-09 explicitly excludes
net interest income as well as many other revenues for financial
assets and liabilities including loans, leases, securities, and
derivatives. Accordingly, the majority of the Company’s
revenues are not affected. Appraisal management fee income and
expense from the Bank’s subsidiary, CBRES, was reported as a
net amount prior to March 31, 2018, which was included in
miscellaneous non-interest income. This income and expense is now
reported on separate line items under non-interest income and
non-interest expense. See below for additional information
related to revenue generated from contracts with
customers.
Revenue and Method of Adoption
The majority of the
Company’s revenue is derived primarily from interest income
from receivables (loans) and securities. Other revenues are derived
from fees received in connection with deposit accounts, investment
advisory, and appraisal services. On January 1, 2018, the Company
adopted the requirements of ASU 2014-09. The core principle of the
new standard is that a company should recognize revenue to depict
the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or
services.
The Company adopted
ASU 2014-09 using the modified retrospective transition approach
which does not require restatement of prior periods. The method was
selected as there were no material changes in the timing of revenue
recognition resulting in no comparability issues with prior
periods. This adoption method is considered a change in accounting
principle requiring additional disclosure of the nature of, and
reason for, the change, which is solely a result of the adoption of
the required standard. When applying the modified retrospective
approach under ASU 2014-09, the Company has elected, as a practical
expedient, to apply this approach only to contracts that were not
completed as of January 1, 2018. A completed contract is considered
to be a contract for which all (or substantially all) of the
revenue was recognized in accordance with revenue guidance that was
in effect before January 1, 2018. There were no uncompleted
contracts as of January 1, 2018 for which application of the new
standard required an adjustment to retained earnings.
A-41
The following
disclosures involve the Company’s material income streams
derived from contracts with customers which are within the scope of
ASU 2014-09. Through the Company’s wholly-owned subsidiary,
PIS, the Company contracts with a registered investment advisor to
perform investment advisory services on behalf of the
Company’s customers. The Company receives commissions from
this third party investment advisor based on the volume of business
that the Company’s customers do with such investment advisor.
Total revenue recognized from these contracts was $896,000,
$876,000 and $823,000 for the years ended December 31, 2020, 2019
and 2018, respectively. The Company utilizes third parties to
contract with the Company’s customers to perform debit and
credit card clearing services. These third parties pay the Company
commissions based on the volume of transactions that they process
on behalf of the Company’s customers. Total revenue
recognized from these contracts with these third parties was
$4.2 million, $4.1 million and $3.9 million for the years ended
December 31, 2020, 2019 and 2018, respectively. Through the
Company’s wholly-owned subsidiary, REAS, the Company provides
property appraisal services for negotiated fee amounts on a per
appraisal basis. Total revenue recognized from these contracts with
customers was $828,000, $692,000 and $597,000 for the years ended
December 31, 2020, 2019 and 2018, respectively. Through the
Company’s wholly-owned subsidiary, CBRES, the Company
provides appraisal management services. Total revenue recognized
from these contracts with customers was $6.8 million, $4.5 million
and $3.2 million for the years ended December 31, 2020, 2019
and 2018, respectively. Due to the nature of the Company’s
relationship with the customers that the Company provides services,
the Company does not incur costs to obtain contracts and there are
no material incremental costs to fulfill these contracts that
should be capitalized.
Disaggregation of Revenue
. The
Company’s portfolio of services provided to the
Company’s customers consists of over 50,000 active contracts.
The Company has disaggregated revenue according to timing of the
transfer of service. Total revenue for the year ended December 31,
2020 derived from contracts in which services are transferred at a
point in time was approximately $8.1 million. None of the
Company’s revenue is derived from contracts in which services
are transferred over time. Revenue is recognized as the services
are provided to the customers. Economic factors, such as the
financial stress impacting businesses and individuals as a result
of the novel coronavirus (“COVID-19”) pandemic, could
affect the nature, amount, and timing of these cash flows, as
unfavorable economic conditions could impair a customers’
ability to provide payment for services. For the Company’s
deposit contracts, this risk is mitigated as the Company generally
deducts payments from customers’ accounts as services are
rendered. For the Company’s appraisal services, the risk is
mitigated in that the appraisal is not released until payment is
received.
Contract Balances
. The timing of
revenue recognition, billings, and cash collections results in
billed accounts receivable on the balance sheet. Most contracts
call for payment by a charge or deduction to the respective
customer account but there are some that require a receipt of
payment from the customer. For fee per transaction contracts, the
customers are billed as the transactions are processed. The Company
has no contracts in which customers are billed in advance for
services to be performed. These types of contracts would create
contract liabilities or deferred revenue, as the customers pay in
advance for services. There are no contract liabilities or accounts
receivables balances that are material to the Company’s
balance sheet.
Performance Obligations
. A performance
obligation is a promise in a contract to transfer a distinct good
or service to the customer, and is the unit of account in ASU
2014-09. A contract’s transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or
as, the performance obligation is satisfied. Performance
obligations are satisfied as the service is provided to the
customer at a point in time. There are no significant financing
components in the Company’s contracts. Excluding deposit and
appraisal service revenues which are primarily billed at a point in
time as a fee for services incurred, all other contracts within the
scope of ASU 2014-09 contain variable consideration in that fees
earned are derived from market values of accounts which determine
the amount of consideration to which the Company is entitled. The
variability is resolved when the services are provided. The
contracts do not include obligations for returns, refunds, or
warranties. The contracts are specific to the amounts owed to the
Company for services performed during a period should the contracts
be terminated.
Significant Judgements
. All of the
Company’s contracts create performance obligations that are
satisfied at a point in time excluding some immaterial deposit
revenues. Revenue is recognized as services are billed to the
customers. Variable consideration does exist for contracts related
to the Company’s contract with its registered investment
advisor as some revenues earned pursuant to that contract are based
on market values of accounts at the end of the period.
A-42
Recent Accounting Pronouncements
The following
tables provide a summary of Accounting Standards Updates
(“ASU”) issued by the Financial Accounting Standards
Board (“FASB”) that the Company has recently
adopted.
Recently Adopted Accounting Guidance
|
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
|
ASU
2016-02: Leases
|
Increases
transparency and comparability among organizations by recognizing
lease assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements.
|
January
1, 2019
|
See
section titled "ASU 2016-02" below for a description of the effect
on the Company’s results of operations, financial position
and disclosures.
|
|
ASU
2017-08: Premium Amortization on Purchased Callable Debt
Securities
|
Amended
the requirements related to the amortization period for certain
purchased callable debt securities held at a premium.
|
January
1, 2019
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU
2018-11: Leases (Topic 842): Targeted Improvements
|
Intended
to reduce costs and ease implementation of ASU
2016-02.
|
January
1, 2019
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU
2018-20: Narrow- Scope Improvements for Lessors
|
Provides
narrow-scope improvements for lessors, that provide relief in the
accounting for sales, use and similar taxes, the accounting for
other costs paid by a lessee that may benefit a lessor, and
variable payments when contracts have lease and non-lease
components.
|
January
1, 2019
|
See
comments for ASU 2016-02 below.
|
|
ASU
2019-07: Codification Updates to SEC Sections
|
Guidance
updated for various Topics of the ASC to align the guidance in
various SEC sections of the ASC with the requirements of certain
SEC final rules.
|
Effective
upon issuance
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
|
ASU
2018-13: Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement (Topic 820)
|
Updates
the disclosure requirements on fair value measurements in ASC 820,
Fair Value Measurement.
|
January
1, 2020
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU
2018-18: Clarifying the Interaction between Topic 808 and Topic
606
|
Clarifies
the interaction between the guidance for certain collaborative
arrangements and the new revenue recognition financial accounting
and reporting standard.
|
January
1, 2020 Early adoption permitted
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
|
ASU
2018-19: Leases (Topic 842): Codification Improvements
|
Provides
guidance to address concerns companies had raised about an
accounting exception they would lose when assessing the fair value
of underlying assets under the leases standard and clarify that
lessees and lessors are exempt from a certain interim disclosure
requirement associated with adopting the new standard.
|
January
1, 2020
|
The
adoption of this guidance did not have a material impact on the
Company’s results of operations, financial position or
disclosures.
|
ASU 2016-02
On January 1, 2019,
the Company adopted the requirements of ASU 2016-02, Leases (Topic
842). Topic 842 was subsequently amended by ASU 2018-01, Land
Easement Practical Expedient for Transition to Topic 842; ASU
2018-10, Codification Improvements to Topic 842, Leases; and ASU
2018-11, Targeted Improvements. The purpose of Topic 842 is to
increase transparency and comparability between organizations that
enter into lease agreements. The key difference of Topic 842 from
the previous guidance (Topic 840) is the recognition of a
right-of-use (“ROU”) asset and lease liability on the
statement of financial position for those leases previously
classified as operating leases under the previous guidance. Topic
842 states that a contract is or contains a lease if the contract
conveys the right to control the use of identified property, plant,
or equipment (an identified asset) for a period of time in exchange
for consideration. The Company reviewed its material non-real
estate contracts to determine if they included a lease and did not
note any that would need to be considered under Topic 842. The
Company’s lease agreements in which Topic 842 has been
applied are primarily for retail branch real estate properties.
These real estate leases have lease terms from less than 12 months
to leases with options up to 15 years, and payment terms vary with
some being fixed payments or based on a fixed annual increase while
others are variable and the annual increases are based on market
rates or other indexes.
A-43
Initially
transition from Topic 840 to Topic 842 required a modified
retrospective approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented
in the financial statements. ASU 2018-11, which, among other
things, provided an additional transition method that would allow
entities to not apply the initial guidance of ASU 2016-02 to the
comparative periods presented in the financial statements and
instead recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company
chose the transition method of adoption provided by ASU 2018-11,
therefore, the Company has applied this standard to all existing
leases as of the adoption date of January 1, 2019, recording a ROU
asset and a lease liability and a cumulative-effect adjustment to
the opening balance of retained earnings (if applicable) in the
period of adoption. With this transition method, comparative prior
period disclosures will be under the previous accounting guidance
for leases (Topic 840). This adoption method is considered a change
in accounting principle requiring additional disclosure of the
nature of and reason for the change, which is solely a result of
the adoption of the required standard.
Topic 842 provides
a package of practical expedients in applying the lease standard to
be chosen at the date of adoption. The Company has chosen to elect
the package of practical expedients provided under ASU 2016-02
whereby it will not reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the lease classification for
any expired or existing leases and (iii) initial direct costs for
any existing leases. The Company has also chosen not to apply the
recognition requirements of ASU 2016-02 to any short-term leases
(as defined by related accounting guidance). The Company will
account for lease and non-lease components separately because such
amounts are readily determinable under its lease contracts.
Additionally, the Company has chosen to elect the use of hindsight,
when applicable, in determining the lease term, in assessing the
likelihood that a lessee purchase option will be exercised; and in
assessing the impairment of ROU assets.
ROU assets
represent the Company’s right to use an underlying asset for
the lease term and lease liabilities represent the Company’s
obligation to make lease payments arising from the lease. The
Company determined that all of its leases are classified as
operating leases under Topic 842. For operating and finance leases,
lease liabilities are initially measured at commencement date based
on the present value of lease payments not yet paid, discounted
using the discount rate for the lease at the lease commencement
date over the lease term. For operating and finance leases, ROU
assets are measured at the commencement date as the amount of the
initial liability, adjusted for lease payments made to the lessor
at or before commencement date, minus incentives; and for any
initial direct costs incurred by the lessee. Based on the
transition method that the Company has chosen to follow, the
initial application date of the lease term for all existing leases
is January 1, 2019.
For operating
leases, after lease commencement, the lease liability is recorded
at the present value of the unpaid lease payments discounted at the
discount rate for the lease established at the commencement date.
Lease expense is determined by the sum of the lease payments to be
recognized on a straight-line basis over the lease term. The ROU
asset is subsequently amortized as the difference between the
straight line lease cost for the period and the periodic accretion
of the lease liability. The lease term used for the calculation of
the initial operating ROU asset and lease liability will include
the initial lease term in addition to one renewal option the
Company thinks it is reasonably certain to exercise or incur.
Regarding the discount rate, Topic 842 requires that the implicit
rate within the lease agreement be used if available. If not
available, the Company should use its incremental borrowing rate in
effect at the time of the lease commencement date. The Company
utilized Federal Home Loan Bank (“FHLB”)
Atlanta’s Fixed Rate Credit rates for terms consistent with
the Company’s lease terms.
The Company
recorded operating ROU assets and operating lease liabilities of
$4.4 million and $4.4 million, respectively at the
commencement date of January 1, 2019. The Company did not have a
cumulative-effect adjustment to the opening balance of retained
earnings. The adoption of ASU 2016-02 did not have a material
impact on the Company’s results of operations, financial
position or disclosures.
A director of the
Company has a membership interest in a company that previously
leased two branch facilities to the Bank. The Bank purchased these
branch facilities in September 2020.The Bank’s lease payments
for these facilities totaled $173,000 and $231,000 for the years
ended December 31, 2020 and 2019, respectively.
The following
tables provide a summary of ASU’s issued by the FASB that the
Company has not adopted as of December 31, 2020, which may impact
the Company’s financial statements.
A-44
Recently Issued Accounting Guidance Not Yet Adopted
|
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
|
ASU
2016-13: Measurement of Credit Losses on Financial
Instruments
|
Provides
guidance to change the accounting for credit losses and modify the
impairment model for certain debt securities.
|
See
ASU 2019-10 below.
|
The
Company will apply this guidance through a cumulative-effect
adjustment to retained earnings as of the beginning of the year of
adoption. The Company is still evaluating the impact of this
guidance on its consolidated financial statements. The Company has
formed a Current Expected Credit Losses (“CECL”)
committee and implemented a model from a third-party vendor for
running CECL calculations. The Company is currently developing CECL
model assumptions and comparing results to current allowance for
loan loss calculations. The Company plans to run parallel
calculations leading up to the effective date of this guidance to
ensure it is prepared for implementation by the effective date. In
addition to the Company’s allowance for loan losses, it will
also record an allowance for credit losses on debt securities
instead of applying the impairment model currently utilized. The
amount of the adjustments will be impacted by each
portfolio’s composition and credit quality at the adoption
date as well as economic conditions and forecasts at that
time.
|
|
|
|
|
|
|
ASU
2018-14: Disclosure Framework—Changes to the Disclosure
Requirements for Defined Benefit Plans (Subtopic
715-20)
|
Updates
disclosure requirements for employers that sponsor defined benefit
pension or other postretirement plans.
|
January
1, 2021
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
|
ASU
2018-19: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses
|
Aligns
the implementation date of the topic for annual financial
statements of nonpublic companies with the implementation date for
their interim financial statements. The guidance also clarifies
that receivables arising from operating leases are not within the
scope of the topic, but rather, should be accounted for in
accordance with the leases topic.
|
See
ASU 2019-10 below.
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures. See ASU 2016-13 above.
|
|
ASU
2019-04: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses, Topic 815, Derivatives and
Hedging, and Topic 825, Financial Instruments
|
Addresses
unintended issues accountants flagged when implementing ASU
2016-01, Recognition and Measurement of Financial Assets and
Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on
Financial Instruments, and ASU 2017-12, Targeted Improvements to
Accounting for Hedging Activities.
|
See
ASU 2019-10 below.
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures. See ASU 2016-13 above.
|
|
ASU
2019-05: Financial Instruments—Credit Losses (Topic 326):
Targeted Transition Relief
|
Guidance
to provide entities with an option to irrevocably elect the fair
value option, applied on an instrument-by-instrument basis for
eligible instruments, upon adoption of ASU 2016-13, Measurement of
Credit Losses on Financial Instruments.
|
See
ASU 2019-10 below.
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures. See ASU 2016-13 above.
|
|
ASU
2019-10: Financial Instruments—Credit Losses (Topic 326),
Derivatives and Hedging (Topic 815), and Leases (Topic 842):
Effective Dates
|
Guidance
to defer the effective dates for private companies, not-for-profit
organizations, and certain smaller reporting companies applying
standards on current expected credit losses (CECL), leases,
hedging.
|
January
1, 2023
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
2019-11: Codification Improvements to Topic 326, Financial
Instruments—Credit Losses
|
Guidance
that addresses issues raised by stakeholders during the
implementation of ASU 2016-13, Financial Instruments—Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The amendments affect a variety of Topics in the
ASC.
|
January
1, 2023
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
|
|
|
|
|
|
|
|
|
A-45
|
ASU
2019-12: Income Taxes (Topic 740): Simplifying the Accounting for
Income Taxes
|
Guidance
to simplify accounting for income taxes by removing specific
technical exceptions that often produce information investors have
a hard time understanding. The amendments also improve consistent
application of and simplify GAAP for other areas of Topic 740 by
clarifying and amending existing guidance.
|
January
1, 2021
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
2020-01: Investments—Equity Securities (Topic 321),
Investments—Equity Method and Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic 815)—Clarifying the
Interactions between Topic 321, Topic 323, and Topic 815 (a
consensus of the FASB Emerging Issues Task Force)
|
Guidance
to clarify the interaction of the accounting for equity securities
under Topic 321 and investments accounted for under the equity
method of accounting in Topic 323 and the accounting for certain
forward contracts and purchased options accounted for under Topic
815.
|
January
1, 2021
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
|
Description
|
Effective
Date
|
Effect
on Financial Statements or Other Significant Matters
|
|
ASU
2020-02: Financial Instruments—Credit Losses (Topic 326) and
Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to
SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on
Effective Date Related to Accounting Standards Update No. 2016-02,
Leases (Topic 842) (SEC Update)
|
Guidance
to add and amend SEC paragraphs in the Accounting Standards
Codification to reflect the issuance of SEC Staff Accounting
Bulletin No. 119 related to the new credit losses standard and
comments by the SEC staff related to the revised effective date of
the new leases standard.
|
Effective
upon issuance
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
2020-03: Codification Improvements to Financial
Instruments
|
Guidance
to clarify that the contractual term of a net investment in a
lease, determined in accordance with the leases standard, should be
the contractual term used to measure expected credit losses under
ASC 326.
|
January
1, 2023
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
2020-04: Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial
Reporting
|
Guidance
that provides optional expedients and exceptions for applying GAAP
to contract modifications and hedging relationships, subject to
meeting certain criteria, that reference LIBOR or another reference
rate expected to be discontinued. The ASU is intended to help
stakeholders during the global market-wide reference rate
transition period. Therefore, it will be in effect for a limited
time through December 31, 2022.
|
March
12, 2020 through December 31, 2022
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
|
ASU
2020-06: Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity
|
Guidance
to improve financial reporting associated with accounting for
convertible instruments and contracts in an entity’s own
equity.
|
January
1, 2022
|
The
adoption of this guidance is not expected to have a material impact
on the Company’s results of operations, financial position or
disclosures.
|
A-46
Other accounting
standards that have been issued or proposed by FASB or other
standards-setting bodies are not expected to have a material impact
on the Company’s results of operations, financial
position or disclosures.
Reclassification
Certain amounts in
the 2019 and 2018 consolidated financial statements have been
reclassified to conform to the 2020 presentation.
(2)
Investment
Securities
Investment
securities available for sale at December 31, 2020 and 2019 are as
follows:
(Dollars
in thousands)
|
|
December
31, 2020
|
|||
|
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|
Mortgage-backed
securities
|
$
143,095
|
2,812
|
593
|
145,314
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
7,384
|
331
|
208
|
7,507
|
|
State
and political subdivisions
|
87,757
|
4,758
|
87
|
92,428
|
|
Total
|
$
238,236
|
7,901
|
888
|
245,249
|
(Dollars
in thousands)
|
|
December
31, 2019
|
|||
|
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Estimated
Fair Value
|
|
Mortgage-backed
securities
|
$
77,812
|
1,371
|
227
|
78,956
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
28,265
|
443
|
311
|
28,397
|
|
State
and political subdivisions
|
84,686
|
3,657
|
200
|
88,143
|
|
Trust
preferred securities
|
250
|
-
|
-
|
250
|
|
Total
|
$
191,013
|
5,471
|
738
|
195,746
|
The current fair
value and associated unrealized losses on investments in debt
securities with unrealized losses at December 31, 2020 and 2019 are
summarized in the tables below, with the length of time the
individual securities have been in a continuous loss
position.
(Dollars
in thousands)
|
|
December
31, 2020
|
|||||
|
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||
|
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|
Mortgage-backed
securities
|
$
80,827
|
565
|
4,762
|
28
|
85,589
|
593
|
|
U.S.
Government
|
|
|
|
|
|
|
|
sponsored
enterprises
|
-
|
-
|
4,193
|
208
|
4,193
|
208
|
|
State
and political subdivisions
|
7,126
|
87
|
-
|
-
|
7,126
|
87
|
|
Total
|
$
87,953
|
652
|
8,955
|
236
|
96,908
|
888
|
A-47
(Dollars
in thousands)
|
|
December
31, 2019
|
|||||
|
|
Less
than 12 Months
|
12
Months or More
|
Total
|
|||
|
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|
Mortgage-backed
securities
|
$
28,395
|
177
|
6,351
|
50
|
34,746
|
227
|
|
U.S.
Government
|
|
|
|
|
|
|
|
sponsored
enterprises
|
2,899
|
10
|
6,151
|
301
|
9,050
|
311
|
|
State
and political subdivisions
|
7,367
|
200
|
-
|
-
|
7,367
|
200
|
|
Total
|
$
38,661
|
387
|
12,502
|
351
|
51,163
|
738
|
At December 31,
2020, unrealized losses in the investment securities portfolio
relating to debt securities totaled $888,000. The unrealized losses
on these debt securities arose due to changing interest rates and
are considered to be temporary. From the December 31, 2020 tables
above, six out of 86 securities issued by state and political
subdivisions contained unrealized losses and 29 out of 68
securities issued by U.S. Government sponsored enterprises,
including mortgage-backed securities, contained unrealized losses.
These unrealized losses are considered temporary because of
acceptable financial condition and results of operations on each
security and the repayment sources of principal and interest on
U.S. Government sponsored enterprises, including mortgage-backed
securities, are government backed.
The Company
periodically evaluates its investments for any impairment which
would be deemed other-than-temporary. No investment
impairments were deemed other-than-temporary in 2020, 2019 or
2018.
The amortized cost
and estimated fair value of investment securities available for
sale at December 31, 2020, by contractual maturity, are shown
below. Expected maturities of mortgage-backed securities will
differ from contractual maturities because borrowers have the right
to call or prepay obligations with or without call or prepayment
penalties.
|
December
31, 2020
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
Amortized
Cost
|
Estimated
Fair Value
|
|
Due
within one year
|
$
10,576
|
10,705
|
|
Due
from one to five years
|
15,236
|
15,997
|
|
Due
from five to ten years
|
62,014
|
65,826
|
|
Due
after ten years
|
7,315
|
7,407
|
|
Mortgage-backed
securities
|
143,095
|
145,314
|
|
Total
|
$
238,236
|
245,249
|
During 2020,
proceeds from sales of securities available for sale were $56.3
million and resulted in net gains of $2.6 million. During 2019,
proceeds from sales of securities available for sale were $20.7
million and resulted in net gains of $226,000. During 2018,
proceeds from sales of securities available for sale were $36.0
million and resulted in gross gains of $15,000.
Securities with a
fair value of approximately $77.3 million and $66.0 million at
December 31, 2020 and 2019, respectively, were pledged to secure
public deposits, FHLB borrowings and for other purposes as required
by law.
GAAP establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. There is
a
three-level fair value hierarchy for fair value measurements. Level
1 inputs are quoted prices in active markets for identical assets
or liabilities that a company has the ability to access at the
measurement date. Level 2 inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 3 inputs are
unobservable inputs for the asset or liability. The table below
presents the balance of securities available for sale, which are
measured at fair value on a recurring basis by level within the
fair value hierarchy as of December 31, 2020 and
2019.
A-48
(Dollars
in thousands)
|
|
December
31, 2020
|
|||
|
|
Fair
Value Measurements
|
Level
1 Valuation
|
Level
2 Valuation
|
Level
3 Valuation
|
|
Mortgage-backed
securities
|
$
145,314
|
-
|
145,314
|
-
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
$
7,507
|
-
|
7,507
|
-
|
|
State
and political subdivisions
|
$
92,428
|
-
|
92,428
|
-
|
(Dollars
in thousands)
|
|
December
31, 2019
|
|||
|
|
Fair
Value Measurements
|
Level
1 Valuation
|
Level
2 Valuation
|
Level
3 Valuation
|
|
Mortgage-backed
securities
|
$
78,956
|
-
|
78,956
|
-
|
|
U.S.
Government
|
|
|
|
|
|
sponsored
enterprises
|
$
28,397
|
-
|
28,397
|
-
|
|
State
and political subdivisions
|
$
88,143
|
-
|
88,143
|
-
|
|
Trust
preferred securities
|
$
250
|
-
|
-
|
250
|
Fair
values of investment securities available for sale are determined
by obtaining quoted prices on nationally recognized securities
exchanges when available. If quoted prices are not available, fair
value is determined using matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities
without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’
relationship to other benchmark quoted securities.
The following is an
analysis of fair value measurements of investment securities
available for sale using Level 3, significant unobservable inputs,
for the year ended December 31, 2020.
(Dollars
in thousands)
|
|
Investment
Securities Available for Sale
|
|
|
Level
3 Valuation
|
|
Balance,
beginning of period
|
$
250
|
|
Change
in book value
|
-
|
|
Change
in gain/(loss) realized and unrealized
|
-
|
|
Purchases/(sales
and calls)
|
(250
)
|
|
Transfers
in and/or (out) of Level 3
|
-
|
|
Balance,
end of period
|
$
-
|
|
|
|
|
Change
in unrealized gain/(loss) for assets still held in Level
3
|
$
-
|
A-49
(3)
Loans
Major
classifications of loans at December 31, 2020 and 2019 are
summarized as follows:
(Dollars
in thousands)
|
|
December
31,
2020
|
December
31,
2019
|
|
Real
estate loans:
|
|
|
|
Construction
and land development
|
$
94,124
|
92,596
|
|
Single-family
residential
|
272,325
|
269,475
|
|
Single-family
residential -
|
|
|
|
Banco
de la Gente non-traditional
|
26,883
|
30,793
|
|
Commercial
|
332,971
|
291,255
|
|
Multifamily
and farmland
|
48,880
|
48,090
|
|
Total
real estate loans
|
775,183
|
732,209
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
Commercial
loans
|
161,740
|
100,263
|
|
Farm
loans
|
855
|
1,033
|
|
Consumer
loans
|
7,113
|
8,432
|
|
All
other loans
|
3,748
|
7,937
|
|
|
|
|
|
Total
loans
|
948,639
|
849,874
|
|
|
|
|
|
Less
allowance for loan losses
|
9,908
|
6,680
|
|
|
|
|
|
Total
net loans
|
$
938,731
|
843,194
|
The above table
includes deferred fees, net of deferred costs, totaling $1.4
million at December 31, 2020 including $2.6 million in deferred PPP
loan fees. The above table includes deferred costs, net of deferred
fees, totaling $1.5 million at December 31, 2019.
The Bank grants
loans and extensions of credit primarily within the Catawba Valley
region of North Carolina, which encompasses Catawba, Alexander,
Iredell and Lincoln counties and also in Mecklenburg and Wake
counties of North Carolina. Although the Bank has a diversified
loan portfolio, a substantial portion of the loan portfolio is
collateralized by improved and unimproved real estate, the value of
which is dependent upon the real estate market. Risk
characteristics of the major components of the Bank’s loan
portfolio are discussed below:
●
Construction and
land development loans – The risk of loss is largely
dependent on the initial estimate of whether the property’s
value at completion equals or exceeds the cost of property
construction and the availability of take-out financing. During the
construction phase, a number of factors can result in delays or
cost overruns. If the estimate is inaccurate or if actual
construction costs exceed estimates, the value of the property
securing the loan may be insufficient to ensure full repayment when
completed through a permanent loan, sale of the property, or by
seizure of collateral. As of December 31, 2020, construction and
land development loans comprised approximately 10% of the
Bank’s total loan portfolio.
●
Single-family
residential loans – Declining home sales volumes, decreased
real estate values and higher than normal levels of unemployment
could contribute to losses on these loans. As of December 31, 2020,
single-family residential loans comprised approximately 32% of the
Bank’s total loan portfolio, including Banco single-family
residential non-traditional loans which were approximately 3% of
the Bank’s total loan portfolio.
●
Commercial real
estate loans – Repayment is dependent on income being
generated in amounts sufficient to cover operating expenses and
debt service. These loans also involve greater risk because they
are generally not fully amortizing over a loan period, but rather
have a balloon payment due at maturity. A borrower’s ability
to make a balloon payment typically will depend on being able to
either refinance the loan or timely sell the underlying property.
As of December 31, 2020, commercial real estate loans comprised
approximately 35% of the Bank’s total loan
portfolio.
A-50
●
Commercial loans
– Repayment is generally dependent upon the successful
operation of the borrower’s business. In addition, the
collateral securing the loans may depreciate over time, be
difficult to appraise, be illiquid, or fluctuate in value based on
the success of the business. As of December 31, 2020, commercial
loans comprised approximately 17% of the Bank’s total loan
portfolio, including $75.8 million in PPP loans.
Loans are
considered past due if the required principal and interest payments
have not been received as of the date such payments were due. Loans
are placed on non-accrual status when, in management’s
opinion, the borrower may be unable to meet payment obligations as
they become due, as well as when required by regulatory provisions.
Loans may be placed on non-accrual status regardless of whether or
not such loans are considered past due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments
are received in excess of principal due. Loans are returned to
accrual status when all the principal and interest amounts
contractually due are brought current and future payments are
reasonably assured.
On March 27, 2020,
President Trump signed the CARES Act, which established a $2
trillion economic stimulus package, including cash payments to
individuals, supplemental unemployment insurance benefits and a
$349 billion loan program administered through the PPP. Under the
PPP, small businesses, sole proprietorships, independent
contractors and self-employed individuals may apply for loans from
existing SBA lenders and other approved regulated lenders that
enroll in the program, subject to numerous limitations and
eligibility criteria. The Bank is participating as a lender in the
PPP. The Bank originated $64.5 million in PPP loans during the
initial round of PPP funding. A second round of PPP funding, signed
into law by President Trump on April 24, 2020, provided $320
billion additional funding for the PPP. As of December 31, 2020,
the Bank had originated $34.5 million in PPP loans during the
second round of PPP funding. Total PPP loans originated as of
December 31, 2020 amounted to $99.0 million. PPP loans outstanding
amounted to $75.8 million at December 31, 2021. The Bank has
received $4.0 million in fees from the SBA for PPP loans originated
as of December 31, 2020. The Bank has recognized $1.4 million PPP
loan fee income as of December 31, 2020.
The following
tables present an age analysis of past due loans, by loan type, as
of December 31, 2020 and 2019:
December
31, 2020
(Dollars
in thousands)
|
|
Loans
30-89 Days Past Due
|
Loans
90 or More Days Past Due
|
Total
Past Due Loans
|
Total
Current Loans
|
Total
Loans
|
Accruing
Loans 90 or More Days Past Due
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$
298
|
-
|
298
|
93,826
|
94,124
|
-
|
|
Single-family
residential
|
3,660
|
270
|
3,930
|
268,395
|
272,325
|
-
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco
de la Gente non-traditional
|
3,566
|
105
|
3,671
|
23,212
|
26,883
|
-
|
|
Commercial
|
36
|
-
|
36
|
332,935
|
332,971
|
-
|
|
Multifamily
and farmland
|
-
|
-
|
-
|
48,880
|
48,880
|
-
|
|
Total
real estate loans
|
7,560
|
375
|
7,935
|
767,248
|
775,183
|
-
|
|
|
|
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
-
|
-
|
-
|
161,740
|
161,740
|
-
|
|
Farm
loans
|
-
|
-
|
-
|
855
|
855
|
-
|
|
Consumer
loans
|
45
|
2
|
47
|
7,066
|
7,113
|
-
|
|
All
other loans
|
-
|
-
|
-
|
3,748
|
3,748
|
-
|
|
Total
loans
|
$
7,605
|
377
|
7,982
|
940,657
|
948,639
|
-
|
A-51
December
31, 2019
(Dollars
in thousands)
|
|
Loans
30-89 Days Past Due
|
Loans
90 or More Days Past Due
|
Total
Past Due Loans
|
Total
Current Loans
|
Total
Loans
|
Accruing
Loans 90 or More Days Past Due
|
|
Real
estate loans:
|
|
|
|
|
|
|
|
Construction
and land development
|
$
803
|
-
|
803
|
91,793
|
92,596
|
-
|
|
Single-family
residential
|
3,000
|
126
|
3,126
|
266,349
|
269,475
|
-
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
Banco
de la Gente non-traditional
|
4,834
|
413
|
5,247
|
25,546
|
30,793
|
-
|
|
Commercial
|
504
|
176
|
680
|
290,575
|
291,255
|
-
|
|
Multifamily
and farmland
|
-
|
-
|
-
|
48,090
|
48,090
|
-
|
|
Total
real estate loans
|
9,141
|
715
|
9,856
|
722,353
|
732,209
|
-
|
|
|
|
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
|
|
|
|
Commercial
loans
|
432
|
-
|
432
|
99,831
|
100,263
|
-
|
|
Farm
loans
|
-
|
-
|
-
|
1,033
|
1,033
|
-
|
|
Consumer
loans
|
170
|
22
|
192
|
8,240
|
8,432
|
-
|
|
All
other loans
|
-
|
-
|
-
|
7,937
|
7,937
|
-
|
|
Total
loans
|
$
9,743
|
737
|
10,480
|
839,394
|
849,874
|
-
|
The following table
presents the Bank’s non-accrual loans as of December 31, 2020
and 2019:
(Dollars
in thousands)
|
|
December
31,
2020
|
December
31,
2019
|
|
Real
estate loans:
|
|
|
|
Construction
and land development
|
$
-
|
-
|
|
Single-family
residential
|
1,266
|
1,378
|
|
Single-family
residential -
|
|
|
|
Banco
de la Gente non-traditional
|
1,709
|
1,764
|
|
Commercial
|
440
|
256
|
|
Multifamily
and farmland
|
117
|
-
|
|
Total
real estate loans
|
3,532
|
3,398
|
|
|
|
|
|
Loans
not secured by real estate:
|
|
|
|
Commercial
loans
|
212
|
122
|
|
Consumer
loans
|
14
|
33
|
|
Total
|
$
3,758
|
3,553
|
At each reporting
period, the Bank determines which loans are impaired. Accordingly,
the Bank’s impaired loans are reported at their estimated
fair value on a non-recurring basis. An allowance for each impaired
loan that is collateral-dependent is calculated based on the fair
value of its collateral. The fair value of the collateral is based
on appraisals performed by REAS, a subsidiary of the Bank. REAS is
staffed by certified appraisers that also perform appraisals for
other companies. Factors, including the assumptions and techniques
utilized by the appraiser, are considered by management. If the
recorded investment in the impaired loan exceeds the measure of
fair value of the collateral, a valuation allowance is recorded as
a component of the allowance for loan losses. An allowance for each
impaired loan that is not collateral dependent is calculated based
on the present value of projected cash flows. If the recorded
investment in the impaired loan exceeds the present value of
projected cash flows, a valuation allowance is recorded as a
component of the allowance for loan losses. Impaired loans under
$250,000 are not individually evaluated for impairment with the
exception of the Bank’s TDR loans in the residential mortgage
loan portfolio, which are individually evaluated for impairment.
Impaired loans collectively evaluated for impairment totaled $5.8
million and $5.3 million at December 31, 2020 and 2019,
respectively. Accruing impaired loans were $21.3 million at
December 31, 2020 and December 31, 2019. Interest income recognized
on accruing impaired loans was $1.2 million and $1.3 million for
the years ended December 31, 2020 and 2019, respectively. No
interest income is recognized on non-accrual impaired loans
subsequent to their classification as non-accrual.
A-52
The following
tables present the Bank’s impaired loans as of December 31,
2020, 2019 and 2018:
December
31, 2020
(Dollars
in thousands)
|
|
Unpaid
Contractual Principal Balance
|
Recorded
Investment With No Allowance
|
Recorded
Investment With Allowance
|
Recorded
Investment in Impaired Loans
|
Related
Allowance
|
Average
Outstanding Impaired Loans
|
YTD
Interest Income Recognized
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
108
|
-
|
108
|
108
|
4
|
134
|
8
|
|
Single-family
residential
|
5,302
|
379
|
4,466
|
4,845
|
33
|
4,741
|
262
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
13,417
|
-
|
12,753
|
12,753
|
862
|
13,380
|
798
|
|
Commercial
|
2,999
|
1,082
|
1,891
|
2,973
|
14
|
2,940
|
139
|
|
Multifamily and
farmland
|
119
|
-
|
117
|
117
|
-
|
29
|
6
|
|
Total impaired real
estate loans
|
21,945
|
1,461
|
19,335
|
20,796
|
913
|
21,224
|
1,213
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate:
|
|
|
|
|
|
|
|
|
Commercial
loans
|
515
|
211
|
244
|
455
|
5
|
564
|
32
|
|
Consumer
loans
|
41
|
-
|
37
|
37
|
1
|
60
|
5
|
|
Total impaired
loans
|
$
22,501
|
1,672
|
19,616
|
21,288
|
919
|
21,848
|
1,250
|
December
31, 2019
(Dollars
in thousands)
|
|
Unpaid
Contractual Principal Balance
|
Recorded
Investment With No Allowance
|
Recorded
Investment With Allowance
|
Recorded
Investment in Impaired Loans
|
Related
Allowance
|
Average
Outstanding Impaired Loans
|
YTD
Interest Income Recognized
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
183
|
-
|
183
|
183
|
7
|
231
|
12
|
|
Single-family
residential
|
5,152
|
403
|
4,243
|
4,646
|
36
|
4,678
|
269
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
15,165
|
-
|
14,371
|
14,371
|
944
|
14,925
|
956
|
|
Commercial
|
1,879
|
-
|
1,871
|
1,871
|
7
|
1,822
|
91
|
|
Total impaired real
estate loans
|
22,379
|
403
|
20,668
|
21,071
|
994
|
21,656
|
1,328
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate:
|
|
|
|
|
|
|
|
|
Commercial
loans
|
180
|
92
|
84
|
176
|
-
|
134
|
9
|
|
Consumer
loans
|
100
|
-
|
96
|
96
|
2
|
105
|
7
|
|
Total impaired
loans
|
$
22,659
|
495
|
20,848
|
21,343
|
996
|
21,895
|
1,344
|
December
31, 2018
(Dollars
in thousands)
|
|
Unpaid
Contractual Principal Balance
|
Recorded
Investment With No Allowance
|
Recorded
Investment With Allowance
|
Recorded
Investment in Impaired Loans
|
Related
Allowance
|
Average
Outstanding Impaired Loans
|
YTD
Interest Income Recognized
|
|
Real estate
loans:
|
|
|
|
|
|
|
|
|
Construction and
land development
|
$
281
|
-
|
279
|
279
|
5
|
327
|
19
|
|
Single-family
residential
|
5,059
|
422
|
4,188
|
4,610
|
32
|
6,271
|
261
|
|
Single-family
residential -
|
|
|
|
|
|
|
|
|
Banco de la Gente
non-traditional
|
16,424
|
-
|
15,776
|
15,776
|
1,042
|
14,619
|
944
|
|
Commercial
|
1,995
|
-
|
1,925
|
1,925
|
17
|
2,171
|
111
|
|
Total impaired real
estate loans
|
23,759
|
422
|
22,168
|
22,590
|
1,096
|
23,388
|
1,335
|
|
|
|
|
|
|
|
|
|
|
Loans not secured by
real estate:
|
|
|
|
|
|
|
|
|
Commercial
loans
|
251
|
89
|
1
|
90
|
-
|
96
|
-
|
|
Consumer
loans
|
116
|
-
|
113
|
113
|
2
|
137
|
7
|
|
Total impaired
loans
|
$
24,126
|
511
|
22,282
|
22,793
|
1,098
|
23,621
|
1,342
|
The fair value
measurements for mortgage loans held for sale, impaired loans and
other real estate on a non-recurring basis at December 31, 2020 and
2019 are presented below. The Company’s valuation methodology
is discussed in Note 16.
A-53
(Dollars
in thousands)
|
|
Fair
Value Measurements December 31, 2020
|
Level
1 Valuation
|
Level
2 Valuation
|
Level
3 Valuation
|
|
Mortgage
loans held for sale
|
$
9,139
|
-
|
-
|
9,139
|
|
Impaired
loans
|
$
20,369
|
-
|
-
|
20,369
|
|
Other
real estate
|
$
128
|
-
|
-
|
128
|
(Dollars
in thousands)
|
|
Fair
Value Measurements December 31, 2019
|
Level
1 Valuation
|
Level
2 Valuation
|
Level
3 Valuation
|
|
Mortgage
loans held for sale
|
$
4,417
|
-
|
-
|
4,417
|
|
Impaired
loans
|
$
20,347
|
-
|
-
|
20,347
|
|
Other
real estate
|
$
-
|
-
|
-
|
-
|
(Dollars
in thousands)
|
|
Fair
Value December 31, 2020
|
Fair
Value December 31, 2019
|
Valuation
Technique
|
Significant
Unobservable Inputs
|
General
Range of Significant Unobservable Input Values
|
|
Mortgage
loans held for sale
|
$
9,139
|
4,417
|
Rate
lock commitment
|
N/A
|
N/A
|
|
Impaired
loans
|
$
20,369
|
20,347
|
Appraised
value and discounted cash flows
|
Discounts
to reflect current market conditions and ultimate
collectability
|
0 - 25
%
|
|
Other
real estate
|
$
128
|
-
|
Appraised
value
|
Discounts
to reflect current market conditions and estimated costs to
sell
|
0 - 25
%
|
The following table
presents changes in the allowance for loan losses for the year
ended December 31, 2020. PPP loans are excluded from the allowance
for loan losses as PPP loans are 100 percent guaranteed by the
SBA.
A-54
(Dollars
in thousands)
|
|
Real
Estate Loans
|
|
|
|
|
|
||||
|
|
Construction
and Land Development
|
Single-Family
Residential
|
Single-Family
Residential - Banco de la Gente Non-traditional
|
Commercial
|
Multifamily
and Farmland
|
Commercial
|
Farm
|
Consumer
and All Other
|
Unallocated
|
Total
|
|
Allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
|
Charge-offs
|
(5
)
|
(65
)
|
-
|
(7
)
|
-
|
(903
)
|
-
|
(434
)
|
-
|
(1,414
)
|
|
Recoveries
|
36
|
70
|
-
|
70
|
-
|
34
|
-
|
173
|
-
|
383
|
|
Provision
|
471
|
564
|
(21
)
|
844
|
2
|
1,526
|
-
|
251
|
622
|
4,259
|
|
Ending
balance
|
$
1,196
|
1,843
|
1,052
|
2,212
|
122
|
1,345
|
-
|
128
|
2,010
|
9,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
1
|
4
|
844
|
8
|
-
|
-
|
-
|
-
|
-
|
857
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
1,195
|
1,839
|
208
|
2,204
|
122
|
1,345
|
-
|
128
|
2,010
|
9,051
|
|
Ending
balance
|
$
1,196
|
1,843
|
1,052
|
2,212
|
122
|
1,345
|
-
|
128
|
2,010
|
9,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
94,124
|
272,325
|
26,883
|
332,971
|
48,880
|
161,740
|
855
|
10,861
|
-
|
948,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
7
|
1,558
|
11,353
|
2,118
|
-
|
212
|
-
|
-
|
-
|
15,248
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
94,117
|
270,767
|
15,530
|
330,853
|
48,880
|
161,528
|
855
|
10,861
|
-
|
933,391
|
Changes in the
allowance for loan losses for the year ended December 31, 2019 were
as follows:
(Dollars
in thousands)
|
|
Real
Estate Loans
|
|
|
|
|
|
||||
|
|
Construction
and Land Development
|
Single-Family
Residential
|
Single-Family
Residential - Banco de la Gente Non-traditional
|
Commercial
|
Multifamily
and Farmland
|
Commercial
|
Farm
|
Consumer
and All Other
|
Unallocated
|
Total
|
|
Allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
|
Charge-offs
|
(21
)
|
(42
)
|
-
|
(1
)
|
-
|
(389
)
|
-
|
(623
)
|
-
|
(1,076
)
|
|
Recoveries
|
45
|
66
|
-
|
49
|
-
|
83
|
-
|
205
|
-
|
448
|
|
Provision
|
(143
)
|
(75
)
|
(104
)
|
(21
)
|
37
|
368
|
-
|
395
|
406
|
863
|
|
Ending
balance
|
$
694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
2
|
6
|
925
|
4
|
-
|
-
|
-
|
-
|
-
|
937
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
692
|
1,268
|
148
|
1,301
|
120
|
688
|
-
|
138
|
1,388
|
5,743
|
|
Ending
balance
|
$
694
|
1,274
|
1,073
|
1,305
|
120
|
688
|
-
|
138
|
1,388
|
6,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
92,596
|
269,475
|
30,793
|
291,255
|
48,090
|
100,263
|
1,033
|
16,369
|
-
|
849,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
10
|
1,697
|
12,899
|
1,365
|
-
|
92
|
-
|
-
|
-
|
16,063
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
92,586
|
267,778
|
17,894
|
289,890
|
48,090
|
100,171
|
1,033
|
16,369
|
-
|
833,811
|
Changes in the
allowance for loan losses for the year ended December 31, 2018 were
as follows:
A-55
(Dollars
in thousands)
|
|
Real
Estate Loans
|
|
|
|
|
|
||||
|
|
Construction
and Land Development
|
Single-Family
Residential
|
Single-Family
Residential - Banco de la Gente Non-traditional
|
Commercial
|
Multifamily
and Farmland
|
Commercial
|
Farm
|
Consumer
and All Other
|
Unallocated
|
Total
|
|
Allowance for loan
losses:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
$
804
|
1,812
|
1,280
|
1,193
|
72
|
574
|
-
|
155
|
476
|
6,366
|
|
Charge-offs
|
(53
)
|
(116
)
|
-
|
(453
)
|
(5
)
|
(54
)
|
-
|
(452
)
|
-
|
(1,133
)
|
|
Recoveries
|
10
|
106
|
-
|
105
|
1
|
32
|
-
|
168
|
-
|
422
|
|
Provision
|
52
|
(477
)
|
(103
)
|
433
|
15
|
74
|
-
|
290
|
506
|
790
|
|
Ending
balance
|
$
813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
-
|
-
|
1,023
|
15
|
-
|
-
|
-
|
-
|
-
|
1,038
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
813
|
1,325
|
154
|
1,263
|
83
|
626
|
-
|
161
|
982
|
5,407
|
|
Ending
balance
|
$
813
|
1,325
|
1,177
|
1,278
|
83
|
626
|
-
|
161
|
982
|
6,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
$
94,178
|
252,983
|
34,261
|
270,055
|
33,163
|
97,465
|
926
|
20,992
|
-
|
804,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance:
individually
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
96
|
1,779
|
14,310
|
1,673
|
-
|
89
|
-
|
-
|
-
|
17,947
|
|
Ending balance:
collectively
|
|
|
|
|
|
|
|
|
|
|
|
evaluated for
impairment
|
$
94,082
|
251,204
|
19,951
|
268,382
|
33,163
|
97,376
|
926
|
20,992
|
-
|
786,076
|
The Bank utilizes
an internal risk grading matrix to assign a risk grade to each of
its loans. Loans are graded on a scale of 1 to 8. These risk grades
are evaluated on an ongoing basis. A description of the general
characteristics of the eight risk grades is as
follows:
●
Risk Grade 1
– Excellent Quality: Loans are well above average quality and
a minimal amount of credit risk exists. CD or cash secured loans or
properly margined actively traded stock or bond secured loans would
fall in this grade.
●
Risk Grade 2
– High Quality: Loans are of good quality with risk levels
well within the Company’s range of acceptability. The
organization or individual is established with a history of
successful performance though somewhat susceptible to economic
changes.
●
Risk Grade 3
– Good Quality: Loans of average quality with risk levels
within the Company’s range of acceptability but higher than
normal. This may be a new organization or an existing organization
in a transitional phase (e.g. expansion, acquisition, market
change).
●
Risk Grade 4
– Management Attention: These loans have higher risk and
servicing needs but still are acceptable. Evidence of marginal
performance or deteriorating trends is observed. These are not
problem credits presently, but may be in the future if the borrower
is unable to change its present course.
●
Risk Grade 5
– Watch: These loans are currently performing satisfactorily,
but there has been some recent past due history on repayment and
there are potential weaknesses that may, if not corrected, weaken
the asset or inadequately protect the Company’s position at
some future date.
●
Risk Grade 6
– Substandard: A Substandard loan is inadequately protected
by the current sound net worth and paying capacity of the obligor
or the collateral pledged (if there is any). There is a
well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. There is a distinct possibility that the Company will
sustain some loss if the deficiencies are not
corrected.
●
Risk Grade 7
– Doubtful: Loans classified as Doubtful have all the
weaknesses inherent in loans classified Substandard, plus the added
characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions, and
values highly questionable and improbable. Doubtful is a temporary
grade where a loss is expected but is presently not quantified with
any degree of accuracy. Once the loss position is determined, the
amount is charged off.
●
Risk Grade 8
– Loss:
Loans classified as Loss
are considered uncollectable and of such little value that their
continuance as bankable assets is not warranted. This
classification does not mean that the asset has absolutely no
recovery or salvage value, but rather that it is not practical or
desirable to defer writing off this worthless loan even though
partial recovery may be realized in the future. Loss is a temporary
grade until the appropriate authority is obtained to charge the
loan off.
A-56
The following
tables present the credit risk profile of each loan type based on
internally assigned risk grades as of December 31, 2020 and
2019.
|
December
31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
||||
|
|
Construction
and Land Development
|
Single-Family
Residential
|
Single-Family
Residential - Banco de la Gente non-traditional
|
Commercial
|
Multifamily
and Farmland
|
Commercial
|
Farm
|
Consumer
|
All
Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent
Quality
|
$
228
|
9,867
|
-
|
-
|
-
|
406
|
-
|
678
|
-
|
11,179
|
|
2- High
Quality
|
9,092
|
121,331
|
-
|
40,569
|
22
|
19,187
|
-
|
2,237
|
1,563
|
194,001
|
|
3- Good
Quality
|
76,897
|
115,109
|
10,170
|
241,273
|
44,890
|
128,727
|
832
|
3,826
|
1,477
|
623,201
|
|
4- Management
Attention
|
4,917
|
20,012
|
12,312
|
39,370
|
3,274
|
11,571
|
23
|
336
|
708
|
92,523
|
|
5-
Watch
|
2,906
|
2,947
|
1,901
|
10,871
|
694
|
1,583
|
-
|
6
|
-
|
20,908
|
|
6-
Substandard
|
84
|
3,059
|
2,500
|
888
|
-
|
266
|
-
|
30
|
-
|
6,827
|
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$
94,124
|
272,325
|
26,883
|
332,971
|
48,880
|
161,740
|
855
|
7,113
|
3,748
|
948,639
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate Loans
|
|
|
|
|
|
||||
|
|
Construction
and Land Development
|
Single-Family
Residential
|
Single-Family
Residential - Banco de la Gente non-traditional
|
Commercial
|
Multifamily
and Farmland
|
Commercial
|
Farm
|
Consumer
|
All
Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1- Excellent
Quality
|
$
-
|
8,819
|
-
|
-
|
-
|
330
|
-
|
693
|
-
|
9,842
|
|
2- High
Quality
|
32,029
|
128,757
|
-
|
21,829
|
256
|
20,480
|
-
|
2,708
|
1,860
|
207,919
|
|
3- Good
Quality
|
52,009
|
107,246
|
12,103
|
231,003
|
42,527
|
72,417
|
948
|
4,517
|
5,352
|
528,122
|
|
4- Management
Attention
|
5,487
|
18,409
|
13,737
|
35,095
|
4,764
|
6,420
|
85
|
458
|
725
|
85,180
|
|
5-
Watch
|
3,007
|
3,196
|
2,027
|
3,072
|
543
|
492
|
-
|
8
|
-
|
12,345
|
|
6-
Substandard
|
64
|
3,048
|
2,926
|
256
|
-
|
124
|
-
|
48
|
-
|
6,466
|
|
7-
Doubtful
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
8-
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$
92,596
|
269,475
|
30,793
|
291,255
|
48,090
|
100,263
|
1,033
|
8,432
|
7,937
|
849,874
|
TDR loans modified
in 2020, past due TDR loans and non-accrual TDR loans totaled $3.8
million and $4.3 million at December 31, 2020 and December 31,
2019, respectively. The terms of these loans have been renegotiated
to provide a concession to original terms, including a reduction in
principal or interest as a result of the deteriorating financial
position of the borrower. There were no performing loans classified
as TDR loans at December 31, 2020 and December 31,
2019.
There were no new
TDR modifications during the years ended December 31, 2020 and
2019.
There were no TDR
loans with a payment default occurring within 12 months of the
restructure date, and the payment default occurring during the
years ended December 31, 2020 and 2019. TDR loans are deemed to be
in default if they become past due by 90 days or more.
At December 31,
2020, the balance of loans with existing modifications as a result
of COVID-19 was $18.3 million, the balance of loans under the terms
of a first modification was $12.6 million, and the balance of
outstanding loans under the terms of a second modification was $5.7
million. The Company continues to track all loans that are
currently modified or have been modified under COVID-19. At
December 31, 2020, the balance for all loans that are currently
modified or were modified during 2020 but have returned to their
original terms was $119.6 million. Of all loans modified as a
result of COVID-19, $101.3 million of these loans have returned to
their original terms; however, the effects of stimulus in the
current environment are still unknown, and additional losses may be
currently present in loans that are currently modified and that
were once modified. These payment modifications are primarily
interest only payments for three to nine months. Loan payment
modifications associated with the COVID-19 pandemic are not
classified as TDR due to Section 4013 of the CARES Act, which
provides that a qualified loan modification is exempt by law from
classification as a TDR pursuant to GAAP.
A-57
(4)
Premises
and Equipment
Major
classifications of premises and equipment at December 31, 2020 and
2019 are summarized as follows:
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Land
|
$
3,970
|
3,690
|
|
Buildings
and improvements
|
18,804
|
18,034
|
|
Furniture
and equipment
|
26,565
|
24,743
|
|
Construction
in process
|
10
|
395
|
|
|
|
|
|
Total
premises and equipment
|
49,349
|
46,862
|
|
|
|
|
|
Less
accumulated depreciation
|
30,749
|
28,258
|
|
|
|
|
|
Total
net premises and equipment
|
$
18,600
|
18,604
|
The Company
recognized depreciation expense totaling $2.5 million for the year
ended December 31, 2020 and $2.3 million for the years ended
December 31, 2019 and 2018.
The Company had no
gains or losses on the sale of or write-downs on premises and
equipment for the year ended December 31, 2020. The Company has
$239,000 net losses on the sale of and write-downs on premises and
equipment for the year ended December 31, 2019.
(5)
Leases
The Company leases
various office spaces for banking and operational facilities and
equipment under operating lease arrangements.
Total rent expense
was approximately $880,000, $949,000 and $785,000 for the years
ended December 31, 2020, 2019 and 2018, respectively.
As of December 31,
2020, the Company had operating ROU assets of $3.4 million and
operating lease liabilities of $3.5 million. The Company maintains
operating leases on land and buildings for some of the Bank’s
branch facilities and loan production offices. Most leases include
one option to renew, with renewal terms extending up to 15 years.
The exercise of renewal options is based on the judgment of
management as to whether or not the renewal option is reasonably
certain to be exercised. Factors in determining whether an option
is reasonably certain of exercise include, but are not limited to,
the value of leasehold improvements, the value of renewal rates
compared to market rates, and the presence of factors that would
cause a significant economic penalty to the Company if the option
is not exercised. As allowed by the standard, leases with a term of
12 months or less are not recorded on the balance sheet and instead
are recognized in lease expense on a straight-line basis over the
lease term.
The following table
presents lease cost and other lease information as of December 31,
2020.
|
(Dollars
in thousands)
|
|
|
|
December
31,
2020
|
|
|
|
|
Operating
lease cost $
|
855
|
|
|
|
|
Other
information:
|
|
|
Cash
paid for amounts included in the measurement of lease
liabilities
|
833
|
|
Operating
cash flows from operating leases
|
-
|
|
Right-of-use
assets obtained in exchange for new lease liabilities - operating
leases
|
942
|
|
Weighted-average
remaining lease term - operating leases
|
6.95
|
|
Weighted-average
discount rate - operating leases
|
2.69
%
|
A-58
The following table
presents lease maturities as of December 31, 2020.
|
(Dollars
in thousands)
|
|
|
|
|
|
Maturity
Analysis of Operating Lease Liabilities:
|
December
31,
2020
|
|
|
|
|
2021
|
$
754
|
|
2022
|
588
|
|
2023
|
567
|
|
2024
|
489
|
|
2025
|
433
|
|
Thereafter
|
1,041
|
|
Total
|
3,872
|
|
Less:
Imputed Interest
|
(401
)
|
|
Operating
Lease Liability
|
$
3,471
|
(6)
Time
Deposits
At December 31,
2020, the scheduled maturities of time deposits are as
follows:
|
(Dollars
in thousands)
|
|
|
|
|
|
2021
|
$
57,475
|
|
2022
|
19,235
|
|
2023
|
14,815
|
|
2024
|
10,926
|
|
2025
and thereafter
|
3,821
|
|
|
|
|
Total
|
$
106,272
|
At December 31,
2020 and 2019, the Bank had approximately $12.4 million and $22.3
million, respectively, in time deposits purchased through third
party brokers, including certificates of deposit participated
through the Certificate of Deposit Account Registry Service
(“CDARS”) on behalf of local customers. CDARS balances
totaled $4.3 million and $3.1 million as of December 31, 2020 and
2019, respectively. The weighted average rate of brokered deposits
as of December 31, 2020 and 2019 was 1.43% and 1.96%,
respectively.
(7)
Federal
Home Loan Bank and Federal Reserve Bank Borrowings
The Bank had no
borrowings from the FHLB at December 31, 2020 and 2019. FHLB
borrowings are collateralized by a blanket assignment on all
residential first mortgage loans, home equity lines of credit and
loans secured by multi-family real estate that the Bank owns. At
December 31, 2020, the carrying value of loans pledged as
collateral totaled approximately $165.1 million. The remaining
availability under the line of credit with the FHLB was $111.4
million at December 31, 2020. The Bank incurred a $1.1 million
prepayment penalty on the prepayment of a $70.0 million FHLB
advance in 2020.
The Bank is
required to purchase and hold certain amounts of FHLB stock in
order to obtain FHLB borrowings. No ready market exists for the
FHLB stock, and it has no quoted market value. The stock is
redeemable at $100 per share subject to certain limitations set by
the FHLB. The Bank owned $1.0 million and $983,000 of FHLB stock,
included in other investments, at December 31, 2020 and 2019,
respectively.
As of December 31,
2020 and 2019, the Bank had no borrowings from the Federal Reserve
Bank (“FRB”). FRB borrowings are collateralized by a
blanket assignment on all qualifying loans that the Bank owns which
are not pledged to the FHLB. At December 31, 2020, the carrying
value of loans pledged as collateral totaled approximately $469.5
million. Availability under the line of credit with the FRB was
$340.0 million at December 31, 2020.
A-59
(8)
Junior
Subordinated Debentures
In June 2006, the
Company formed a second wholly owned Delaware statutory trust, PEBK
Capital Trust II (“PEBK Trust II”), which issued $20.0
million of guaranteed preferred beneficial interests in the
Company’s junior subordinated deferrable interest debentures.
All of the common securities of PEBK Trust II are owned by the
Company. The proceeds from the issuance of the common securities
and the trust preferred securities were used by PEBK Trust II to
purchase $20.6 million of junior subordinated debentures of the
Company. The proceeds received by the Company from the sale of the
junior subordinated debentures were used to repay in December 2006
the trust preferred securities issued in December 2001 by PEBK
Capital Trust, a wholly owned Delaware statutory trust of the
Company, and for general purposes. The debentures represent the
sole assets of PEBK Trust II. PEBK Trust II is not included in the
consolidated financial statements.
The trust preferred
securities issued by PEBK Trust II accrue and pay interest
quarterly at a floating rate of three-month LIBOR plus 163 basis
points. The Company has guaranteed distributions and other payments
due on the trust preferred securities to the extent PEBK Trust II
does not have funds with which to make the distributions and other
payments. The net combined effect of all the documents entered into
in connection with the trust preferred securities is that the
Company is liable to make the distributions and other payments
required on the trust preferred securities.
These trust
preferred securities are mandatorily redeemable upon maturity of
the debentures on June 28, 2036, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the
debentures purchased by PEBK Trust II, in whole or in part, which
became effective on June 28, 2011. As specified in the indenture,
if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount plus any accrued but unpaid
interest.
The Company
redeemed $5.0 million of outstanding trust preferred securities in
December 2019.
(9)
Income
Taxes
The provision for
income taxes is summarized as follows:
|
(Dollars
in thousands)
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
Current
expense
|
$
3,049
|
2,972
|
2,546
|
|
Deferred
income tax expense
|
(560
)
|
164
|
78
|
|
Total
income tax
|
$
2,489
|
3,136
|
2,624
|
The differences
between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to earnings before
income taxes are as follows:
|
(Dollars
in thousands)
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
Tax
expense at statutory rate
|
$
2,908
|
3,613
|
3,361
|
|
State
income tax, net of federal income tax effect
|
261
|
351
|
358
|
|
Tax-exempt
interest income
|
(649
)
|
(802
)
|
(990
)
|
|
Increase
in cash surrender value of life insurance
|
(80
)
|
(81
)
|
(81
)
|
|
Nondeductible
interest and other expense
|
46
|
40
|
23
|
|
Other
|
3
|
15
|
(47
)
|
|
Total
|
$
2,489
|
3,136
|
2,624
|
The following
summarizes the tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities. The net deferred tax asset is included as a
component of other assets at December 31, 2020 and
2019.
A-60
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
Deferred
tax assets:
|
|
|
|
Allowance
for loan losses
|
$
2,276
|
1,535
|
|
Accrued
retirement expense
|
1,190
|
1,150
|
|
Restricted
stock
|
190
|
217
|
|
Accrued
bonuses
|
-
|
265
|
|
Interest
income on nonaccrual loans
|
1
|
2
|
|
Lease
liability
|
798
|
838
|
|
Total
gross deferred tax assets
|
4,455
|
4,007
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Deferred
loan fees
|
284
|
343
|
|
Accumulated
depreciation
|
873
|
873
|
|
Prepaid
expenses
|
5
|
7
|
|
ROU
Asset
|
787
|
832
|
|
Other
|
41
|
47
|
|
Unrealized
gain on available for sale securities
|
1,611
|
1,087
|
|
Total
gross deferred tax liabilities
|
3,601
|
3,189
|
|
|
|
|
|
Net
deferred tax asset
|
$
854
|
818
|
The Company has
analyzed the tax positions taken or expected to be taken in its tax
returns and has concluded that it has no liability related to
uncertain tax positions.
The Company’s
Federal income tax filings for years 2017 through 2020 were at year
end 2020 open to audit under statutes of limitations by the
Internal Revenue Service. The Company’s North Carolina income
tax returns are currently under audit for tax year 2014-2016, tax
years 2017, 2018 and 2019 are open to audit under the statutes of
limitations by the North Carolina Department of
Revenue.
(10)
Related
Party Transactions
The Company
conducts transactions with its directors and executive officers,
including companies in which they have beneficial interests, in the
normal course of business. It is the policy of the Company that
loan transactions with directors and officers are made on
substantially the same terms as those prevailing at the time made
for comparable loans to other persons. The following is a summary
of activity for related party loans for 2020 and 2019:
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
Beginning
balance
|
$
3,472
|
3,192
|
|
New
loans
|
4,189
|
5,716
|
|
Repayments
|
(5,809
)
|
(5,436
)
|
|
Ending
balance
|
$
1,852
|
3,472
|
At December 31,
2020 and 2019, the Company had deposit relationships with related
parties of approximately $44.5 million and $30.4 million,
respectively.
A director of the
Company has a membership interest in a company that previously
leased two branch facilities to the Bank. The Bank purchased these
branch facilities in September 2020.The Bank’s lease payments
for these facilities totaled $173,000 and $231,000 for the years
ended December 31, 2020 and 2019, respectively.
(11)
Commitments
and Contingencies
The Bank is party
to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit,
standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial
instruments.
A-61
The exposure to
credit loss in the event of nonperformance by the other party to
the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is
represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
In most cases, the
Bank requires collateral or other security to support financial
instruments with credit risk.
|
(Dollars
in thousands)
|
|
|
|
|
Contractual
Amount
|
|
|
|
2020
|
2019
|
|
Financial
instruments whose contract amount represent credit
risk:
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
$
299,039
|
276,338
|
|
|
|
|
|
Standby
letters of credit and financial guarantees written
|
$
4,745
|
3,558
|
Commitments to
extend credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates and because they
may expire without being drawn upon, the total commitment amount of
$303.8 million does not necessarily represent future cash
requirements.
Standby letters of
credit and financial guarantees written are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to businesses in
the Bank’s delineated market area. The credit risk involved
in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds
real estate, equipment, automobiles and customer deposits as
collateral supporting those commitments for which collateral is
deemed necessary.
In the normal
course of business, the Company is a party (both as plaintiff and
defendant) to a number of lawsuits. In the opinion of management
and counsel, none of these cases should have a material adverse
effect on the financial position of the Company.
Bancorp and the
Bank have employment agreements with certain key employees. The
agreements, among other things, include salary, bonus, incentive
compensation, and change in control provisions.
The Company has
$110.5 million available for the purchase of overnight federal
funds from five correspondent financial institutions as of December
31, 2020.
At December 31,
2017, the Bank committed to invest $3.0 million in an income tax
credit partnership owning and developing two multifamily housing
developments in Charlotte, North Carolina, with $1.5 million
allocated to each property. The Bank has funded $2.8 million of
this commitment at December 31, 2020.
(12)
Employee
and Director Benefit Programs
The Company has a
profit sharing and 401(k) plan for the benefit of substantially all
employees subject to certain minimum age and service requirements.
Under the 401(k) plan, the Company matched employee contributions
to a maximum of 4.00% of annual compensation in 2018, 2019 and
2020. The Company’s contribution pursuant to this formula was
approximately $692,000, $691,000 and $670,000 for the years ended
December 31, 2020, 2019 and 2018, respectively. Investments of the
401(k) plan are determined by a committee comprised of senior
management. No investments in Company stock have been made by the
401(k) plan. Contributions to the 401(k) plan are vested
immediately.
In December 2001,
the Company initiated a postretirement benefit plan to provide
retirement benefits to key officers and its Board of Directors and
to provide death benefits for their designated beneficiaries. Under
the postretirement benefit plan, the Company purchased life
insurance contracts on the lives of the key officers and each
director. The increase in cash surrender value of the contracts
constitutes the Company’s contribution to the postretirement
benefit plan each year. Postretirement benefit plan participants
are to be paid annual benefits for a specified number of years
commencing upon retirement. Expenses incurred for benefits relating
to the postretirement benefit plan were approximately $388,000,
$361,000 and $423,000 for the years ended December 31, 2020, 2019
and 2018, respectively.
The Company is
currently paying medical benefits for certain retired employees.
The Company did not incur any postretirement medical benefits
expense in 2020, 2019 and 2018 due to an excess accrual
balance.
A-62
The following table
sets forth the change in the accumulated benefit obligation for the
Company’s two postretirement benefit plans described
above:
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Benefit
obligation at beginning of period
|
$
4,700
|
4,566
|
|
Service
cost
|
323
|
299
|
|
Interest
cost
|
63
|
58
|
|
Benefits
paid
|
(216
)
|
(223
)
|
|
|
|
|
|
Benefit
obligation at end of period
|
$
4,870
|
4,700
|
The amounts
recognized in the Company’s Consolidated Balance Sheet as of
December 31, 2020 and 2019 are shown in the following two
tables:
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Benefit
obligation $
|
4,870
|
4,700
|
|
Fair
value of plan assets
|
-
|
-
|
|
(Dollars
in thousands)
|
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Funded
status
|
$
(4,870
)
|
(4,700
)
|
|
Unrecognized
prior service cost/benefit
|
-
|
-
|
|
Unrecognized
net actuarial loss
|
-
|
-
|
|
|
|
|
|
Net
amount recognized
|
$
(4,870
)
|
(4,700
)
|
|
|
|
|
|
Unfunded
accrued liability
|
$
(4,870
)
|
(4,700
)
|
|
Intangible
assets
|
-
|
-
|
|
|
|
|
|
Net
amount recognized
|
$
(4,870
)
|
(4,700
)
|
Net periodic
benefit cost of the Company’s postretirement benefit plans
for the years ended December 31, 2020, 2019 and 2018 consisted of
the following:
|
(Dollars
in thousands)
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Service
cost
|
$
323
|
299
|
362
|
|
Interest
cost
|
63
|
58
|
70
|
|
|
|
|
|
|
Net
periodic cost
|
$
386
|
357
|
432
|
|
|
|
|
|
|
Weighted
average discount rate assumption
|
|
|
|
|
used
to determine benefit obligation
|
5.49
%
|
5.49
%
|
5.49
%
|
The Company paid
benefits under the two postretirement plans totaling $216,000 and
$223,000 during the years ended December 31, 2020 and 2019,
respectively. Information about the expected benefit payments for
the Company’s two postretirement benefit plans is as
follows:
A-63
|
(Dollars
in thousands)
|
|
|
|
|
|
Year ending December 31,
|
|
|
2021
|
$
353
|
|
2022
|
$
342
|
|
2023
|
$
342
|
|
2024
|
$
354
|
|
2025
|
$
370
|
|
Thereafter
|
$
8,345
|
(13)
Regulatory
Matters
The Company is
subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company’s financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of
the assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
Quantitative
measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of
capital in relation to both on- and off-balance sheet items at
various risk weights. Total capital consists of two tiers of
capital. Tier 1 capital includes common shareholders’ equity
and trust preferred securities less adjustments for intangible
assets. Tier 2 capital consists of the allowance for loan losses,
up to 1.25% of risk-weighted assets and other adjustments.
Management believes, as of December 31, 2020, that the Company and
the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31,
2020, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the table below. There have been
no conditions or events since that notification that management
believes have changed the Bank’s category.
In 2013, the FRB
approved its final rule on the Basel III capital standards, which
implement changes to the regulatory capital framework for banking
organizations. The Basel III capital standards, which became
effective January 1, 2015, include new risk-based capital and
leverage ratios, which were phased in from 2015 to 2019. The new
minimum capital level requirements applicable to the Company and
the Bank under the final rules are as follows: (i) a new common
equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of
6% (increased from 4%); (iii) a total risk based capital ratio of
8% (unchanged from previous rules); and (iv) a Tier 1 leverage
ratio of 4% (unchanged from previous rules). An additional capital
conservation buffer was added to the minimum requirements for
capital adequacy purposes beginning on January 1, 2016 and was
phased in through 2019 (increasing by 0.625% on January 1, 2016 and
each subsequent January 1, until it reached 2.5% on January 1,
2019). This resulted in the following minimum ratios beginning in
2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier
1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%.
Under the final rules, institutions would be subject to limitations
on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the buffer
amount. These limitations establish a maximum percentage of
eligible retained earnings that could be utilized for such
actions.
The Company’s
and the Bank’s actual capital amounts and ratios are
presented below:
A-64
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Actual
|
Minimum
Regulatory Capital Ratio
|
Minimum
Ratio plus Capital Conservation Buffer
|
|||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
159,407
|
16.07
%
|
79,372
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
157,106
|
15.85
%
|
79,283
|
8.00
%
|
104,059
|
10.50
%
|
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
149,499
|
15.07
%
|
59,529
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
147,198
|
14.85
%
|
59,462
|
6.00
%
|
84,238
|
8.50
%
|
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
149,499
|
10.24
%
|
58,378
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
147,198
|
10.04
%
|
58,662
|
4.00
%
|
58,662
|
4.00
%
|
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
134,499
|
13.56
%
|
44,647
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
147,198
|
14.85
%
|
44,597
|
4.50
%
|
69,373
|
7.00
%
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Actual
|
Minimum
Regulatory Capital Ratio
|
Minimum
Ratio plus Capital Conservation Buffer
|
|||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
152,156
|
16.08
%
|
75,710
|
8.00
%
|
N/A
|
N/A
|
|
Bank
|
$
149,266
|
15.79
%
|
75,602
|
8.00
%
|
99,228
|
10.50
%
|
|
Tier
1 Capital (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
145,476
|
15.37
%
|
56,783
|
6.00
%
|
N/A
|
N/A
|
|
Bank
|
$
142,586
|
15.09
%
|
56,702
|
6.00
%
|
80,328
|
8.50
%
|
|
Tier
1 Capital (to Average Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
145,476
|
11.91
%
|
48,872
|
4.00
%
|
N/A
|
N/A
|
|
Bank
|
$
142,586
|
11.61
%
|
49,106
|
4.00
%
|
49,106
|
4.00
%
|
|
Common
Equity Tier 1 (to Risk-Weighted Assets)
|
|
|
|
|
|
|
|
Consolidated
|
$
130,476
|
13.79
%
|
42,587
|
4.50
%
|
N/A
|
N/A
|
|
Bank
|
$
142,586
|
15.09
%
|
42,526
|
4.50
%
|
66,152
|
7.00
%
|
(14)
Shareholders’
Equity
Shareholders’
equity was $139.9 million, or 9.89% of total assets, at December
31, 2020, compared to 134.1 million, or 11.61% of total assets, at
December 31, 2019. The increase in shareholders’ equity is
primarily due to an increase in retained earnings due to net
income.
Annualized return
on average equity for the year ended December 31, 2020 was 8.01%
compared to 10.45% for the year ended December 31, 2019. Total cash
dividends paid on common stock were $4.4 million and $3.9 million
for the years ended December 31, 2020 and 2019,
respectively.
The Board of
Directors, at its discretion, can issue shares of preferred stock
up to a maximum of 5,000,000 shares. The Board is authorized to
determine the number of shares, voting powers, designations,
preferences, limitations and relative rights. The Board of
Directors does not currently anticipate issuing shares of preferred
stock.
In 2019, the
Company’s Board of Directors authorized a stock repurchase
program, whereby up to $5 million will be allocated to repurchase
the Company’s common stock. Any purchases under the
Company’s stock repurchase program may be made periodically
as permitted by securities laws and other legal requirements in the
open market or in privately-negotiated transactions. The timing and
amount of any repurchase of shares will be determined by the
Company’s management, based on its evaluation of market
conditions and other factors. The stock repurchase program may be
suspended at any time or from time-to-time without prior
notice.
A-65
The Company has
repurchased approximately $2.5 million, or 90,354 shares of its
common stock, under this stock repurchase program as of December
31, 2019.
In 2020, the
Company’s Board of Directors authorized a stock repurchase
program, whereby up to $3 million will be allocated to repurchase
the Company’s common stock. Any purchases under the
Company’s stock repurchase program may be made periodically
as permitted by securities laws and other legal requirements in the
open market or in privately-negotiated transactions. The timing and
amount of any repurchase of shares will be determined by the
Company’s management, based on its evaluation of market
conditions and other factors. The stock repurchase program may be
suspended at any time or from time-to-time without prior notice.
The Company has repurchased approximately $3.0 million, or 126,800
shares of its common stock, under this stock repurchase program as
of December 31, 2020.
(15)
Other
Operating Income and Expense
Miscellaneous
non-interest income for the years ended December 31, 2020, 2019 and
2018 included the following items:
|
(Dollars
in thousands)
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
Visa
debit card income
|
$
4,237
|
4,145
|
3,911
|
|
Bank
owned life insurance income
|
380
|
383
|
384
|
|
Gain
(loss) on sale of premises and equipment
|
-
|
(239
)
|
544
|
|
Other
|
1,315
|
1,320
|
1,354
|
|
|
$
5,932
|
5,609
|
6,193
|
Other non-interest
expense for the years ended December 31, 2020, 2019 and 2018
included the following items:
|
(Dollars
in thousands)
|
|
|
|
|
|
2020
|
2019
|
2018
|
|
ATM
expense
|
$
567
|
579
|
542
|
|
Consulting
|
1,078
|
972
|
1,012
|
|
Data
processing
|
635
|
616
|
466
|
|
Deposit
program expense
|
426
|
515
|
586
|
|
Dues
and subscriptions
|
538
|
421
|
421
|
|
FHLB
advance prepayment penalty
|
1,100
|
-
|
-
|
|
Internet
banking expense
|
729
|
681
|
603
|
|
Office
supplies
|
538
|
467
|
503
|
|
Telephone
|
794
|
802
|
678
|
|
Other
|
2,139
|
2,921
|
2,834
|
|
|
$
8,544
|
7,974
|
7,645
|
(16)
Fair
Value of Financial Instruments
The Company is
required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance
sheet, for which it is practicable to estimate that value. The
assumptions used in the estimation of the fair value of the
Company’s financial instruments are detailed below. Where
quoted prices are not available, fair values are based on estimates
using discounted cash flows and other valuation techniques. The use
of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of
future cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the Company, but
rather a good faith estimate of the increase or decrease in the
value of financial instruments held by the Company since purchase,
origination, or issuance.
The Company groups
assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These
levels are:
●
Level 1 –
Valuation is based upon quoted prices for identical instruments
traded in active markets.
●
Level 2 –
Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments
in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in
the market.
A-66
●
Level 3 –
Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing
models, discounted cash flow models and similar
techniques.
Cash and Cash Equivalents
For cash, due from
banks and interest-bearing deposits, the carrying amount is a
reasonable estimate of fair value. Cash and cash equivalents are
reported in the Level 1 fair value category.
Investment Securities Available for Sale
Fair values of
investment securities available for sale are determined by
obtaining quoted prices on nationally recognized securities
exchanges when available. If quoted prices are not available, fair
value is determined using matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities
without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’
relationship to other benchmark quoted securities. Fair values for
investment securities with quoted market prices are reported in the
Level 1 fair value category. Fair value measurements obtained from
independent pricing services are reported in the Level 2 fair value
category. All other fair value measurements are reported in the
Level 3 fair value category.
Other Investments
For other
investments, the carrying value is a reasonable estimate of fair
value. Other investments are reported in the Level 3 fair value
category.
Mortgage Loans Held for Sale
Mortgage loans held
for sale are carried at lower of aggregate cost or market value.
The cost of mortgage loans held for sale approximates the market
value. Mortgage loans held for sale are reported in the Level 3
fair value category.
Loans
The fair value of
fixed rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value. Loans are
reported in the Level 3 fair value category, as the pricing of
loans is more subjective than the pricing of other financial
instruments.
Cash Surrender Value of Life Insurance
For cash surrender
value of life insurance, the carrying value is a reasonable
estimate of fair value. Cash surrender value of life insurance is
reported in the Level 2 fair value category.
Other Real Estate
The fair value of
other real estate is based upon independent market prices,
appraised values of the collateral or management’s estimation
of the value of the collateral. Other real estate is reported in
the Level 3 fair value category.
Deposits
The fair value of
demand deposits, interest-bearing demand deposits and savings is
the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of
similar remaining maturities. Deposits are reported in the Level 2
fair value category.
Securities Sold Under Agreements to Repurchase
For securities sold
under agreements to repurchase, the carrying value is a reasonable
estimate of fair value. Securities sold under agreements to
repurchase are reported in the Level 2 fair value
category.
FHLB Borrowings
The fair value of
FHLB borrowings is estimated based upon discounted future cash
flows using a discount rate comparable to the current market rate
for such borrowings. FHLB borrowings are reported in the Level 2
fair value category.
Junior Subordinated Debentures
Because the
Company’s junior subordinated debentures were issued at a
floating rate, the carrying amount is a reasonable estimate of fair
value. Junior subordinated debentures are reported in the Level 2
fair value category.
A-67
Commitments
to Extend Credit and Standby Letters of Credit
Commitments to
extend credit and standby letters of credit are generally
short-term and at variable interest rates. Therefore, both the
carrying value and estimated fair value associated with these
instruments are immaterial.
Limitations
Fair value
estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company’s
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company’s
financial instruments, fair value estimates are based on many
judgments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value
estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are
not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include
deferred income taxes and premises and equipment. In addition, the
tax ramifications related to the realization of unrealized gains
and losses can have a significant effect on fair value estimates
and have not been considered in the estimates.
The fair value
presentation for recurring assets is presented in Note 2. There
were no recurring liabilities at December 31, 2020 and 2019. The
fair value presentation for non-recurring assets is presented in
Note 3. There were no non-recurring liabilities at December 31,
2020 and 2019. The carrying amount and estimated fair value of the
Company’s financial instruments at December 31, 2020 and 2019
are as follows:
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2020
|
|||
|
|
Carrying
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
161,580
|
161,580
|
-
|
-
|
161,580
|
|
Investment
securities available for sale
|
$
245,249
|
-
|
245,249
|
-
|
245,249
|
|
Other
investments
|
$
4,155
|
-
|
-
|
4,155
|
4,155
|
|
Mortgage
loans held for sale
|
$
9,139
|
-
|
-
|
9,139
|
9,139
|
|
Loans,
net
|
$
938,731
|
-
|
-
|
924,845
|
924,845
|
|
Cash
surrender value of life insurance
|
$
16,968
|
-
|
16,968
|
-
|
16,968
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
1,221,086
|
-
|
-
|
1,216,503
|
1,216,503
|
|
Securities
sold under agreements
|
|
|
|
|
|
|
to
repurchase
|
$
26,201
|
-
|
26,201
|
-
|
26,201
|
|
Junior
subordinated debentures
|
$
15,464
|
-
|
15,464
|
-
|
15,464
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2019
|
|||
|
|
Carrying
Amount
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
52,387
|
52,387
|
-
|
-
|
52,387
|
|
Investment
securities available for sale
|
$
195,746
|
-
|
195,496
|
250
|
195,746
|
|
Other
investments
|
$
4,231
|
-
|
-
|
4,231
|
4,231
|
|
Mortgage
loans held for sale
|
$
4,417
|
-
|
-
|
4,417
|
4,417
|
|
Loans,
net
|
$
843,194
|
-
|
-
|
819,397
|
819,397
|
|
Cash
surrender value of life insurance
|
$
16,319
|
-
|
16,319
|
-
|
16,319
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
966,517
|
-
|
-
|
955,766
|
955,766
|
|
Securities
sold under agreements
|
|
|
|
|
|
|
to
repurchase
|
$
24,221
|
-
|
24,221
|
-
|
24,221
|
|
Junior
subordinated debentures
|
$
15,619
|
-
|
15,619
|
-
|
15,619
|
A-68
(17)
Peoples
Bancorp of North Carolina, Inc. (Parent Company Only) Condensed
Financial Statements
Balance Sheets
December 31, 2020 and 2019
(Dollars in thousands)
|
Assets
|
2020
|
2019
|
|
|
|
|
|
Cash
|
$
664
|
1,187
|
|
Interest-bearing
time deposit
|
1,000
|
1,000
|
|
Investment
in subsidiaries
|
152,598
|
146,230
|
|
Investment
in PEBK Capital Trust II
|
464
|
619
|
|
Investment
securities available for sale
|
-
|
250
|
|
Other
assets
|
650
|
476
|
|
|
|
|
|
Total
assets
|
$
155,376
|
149,762
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Junior
subordinated debentures
|
$
15,464
|
15,619
|
|
Liabilities
|
13
|
23
|
|
Shareholders'
equity
|
139,899
|
134,120
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
155,376
|
149,762
|
Statements of Earnings
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
Revenues:
|
2020
|
2019
|
2018
|
|
|
|
|
|
|
Interest
and dividend income
|
$
7,539
|
12,850
|
4,544
|
|
|
|
|
|
|
Total
revenues
|
7,539
|
12,850
|
4,544
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
370
|
844
|
790
|
|
Other
operating expenses
|
625
|
629
|
678
|
|
|
|
|
|
|
Total
expenses
|
995
|
1,473
|
1,468
|
|
|
|
|
|
|
Income
before income tax benefit and equity in
|
|
|
|
|
undistributed
earnings of subsidiaries
|
6,544
|
11,377
|
3,076
|
|
|
|
|
|
|
Income
tax benefit
|
201
|
299
|
299
|
|
|
|
|
|
|
Income
before equity in undistributed
|
|
|
|
|
earnings
of subsidiaries
|
6,745
|
11,676
|
3,375
|
|
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
4,612
|
2,391
|
10,007
|
|
|
|
|
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
A-69
Statements of Cash Flows
For the Years Ended December 31, 2020, 2019 and 2018
(Dollars in thousands)
|
|
2020
|
2019
|
2018
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
$
11,357
|
14,067
|
13,382
|
|
Adjustments
to reconcile net earnings to net
|
|
|
|
|
cash
provided by operating activities:
|
|
|
|
|
Equity
in undistributed earnings of subsidiaries
|
(4,612
)
|
(2,391
)
|
(10,007
)
|
|
Change
in:
|
|
|
|
|
Other
assets
|
(19
)
|
57
|
13
|
|
Other
liabilities
|
(10
)
|
(13
)
|
6
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
6,716
|
11,720
|
3,394
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from calls and maturities of investment securities
|
|
|
|
|
available
for sale
|
250
|
-
|
-
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
250
|
-
|
-
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayment
of junior subordinated debentures
|
(155
)
|
(5,000
)
|
-
|
|
Cash
dividends paid on common stock
|
(4,392
)
|
(3,939
)
|
(3,133
)
|
|
Stock
repurchase
|
(2,999
)
|
(2,490
)
|
-
|
|
Proceeds
from exercise of restricted stock units
|
57
|
207
|
-
|
|
|
|
|
|
|
Net
cash used by financing activities
|
(7,489
)
|
(11,222
)
|
(3,133
)
|
|
|
|
|
|
|
Net
change in cash
|
(523
)
|
498
|
261
|
|
|
|
|
|
|
Cash
at beginning of year
|
1,187
|
689
|
428
|
|
|
|
|
|
|
Cash
at end of year
|
$
664
|
1,187
|
689
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
Change
in unrealized gain on investment securities
|
|
|
|
|
available
for sale, net
|
$
1,756
|
2,658
|
(2,607
)
|
(18)
Quarterly
Data
|
|
2020
|
2019
|
||||||
|
(Dollars
in thousands, except per share amounts)
|
First
|
Second
|
Third
|
Fourth
|
First
|
Second
|
Third
|
Fourth
|
|
Total interest
income
|
$
12,250
|
11,638
|
11,868
|
12,202
|
$
12,183
|
12,375
|
12,430
|
12,613
|
|
Total interest
expense
|
1,041
|
912
|
942
|
941
|
757
|
781
|
994
|
1,225
|
|
Net
interest income
|
11,209
|
10,726
|
10,926
|
11,261
|
11,426
|
11,594
|
11,436
|
11,388
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan
losses
|
1,521
|
1,417
|
522
|
799
|
178
|
77
|
422
|
186
|
|
Other
income
|
4,595
|
5,239
|
7,132
|
5,948
|
4,120
|
4,385
|
4,708
|
4,526
|
|
Other
expense
|
11,449
|
11,452
|
11,914
|
14,116
|
10,916
|
11,244
|
11,267
|
12,090
|
|
Income
before income taxes
|
2,834
|
3,096
|
5,622
|
2,294
|
4,452
|
4,658
|
4,455
|
3,638
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense
|
467
|
535
|
1,113
|
374
|
785
|
845
|
834
|
672
|
|
Net
earnings
|
2,367
|
2,561
|
4,509
|
1,920
|
3,667
|
3,813
|
3,621
|
2,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
$
0.40
|
0.44
|
0.78
|
0.33
|
$
0.61
|
0.64
|
0.62
|
0.50
|
|
Diluted
net earnings per share
|
$
0.40
|
0.44
|
0.78
|
0.33
|
$
0.61
|
0.64
|
0.61
|
0.50
|
A-70
(19)
Subsequent
Events
The Company has
reviewed and evaluated subsequent events and transactions for
material subsequent events through the date the financial
statements are issued.
On December 27,
2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and
Venues Act (the “Economic Aid Act”) became law. The
Economic Aid Act reopened and expanded the PPP loan program through
March 31, 2021. The changes to the PPP program allow new borrowers
to apply for a loan under the original PPP loan program and the
creation of an additional PPP loan for eligible borrowers. The
Economic Aid Act also revises certain PPP requirements, including
aspects of loan forgiveness on existing PPP loans. As of
March 12, 2021, the Bank had originated $17.9 million in PPP loans
under the expanded PPP loan program. The Bank expects to
receive approximately $967,000 in fees from the SBA for PPP loans
originated under the expanded PPP loan program as of March 12,
2021.
The outstanding
balance of PPP loans originated in 2020 was $55.7 million at March
12, 2021, as compared to $75.8 million at December 31, 2020.
The decrease from December 31, 2020 to March 12, 2021 was primarily
due to PPP loans being forgiven by the SBA.
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DIRECTORS
AND OFFICERS OF THE COMPANY
DIRECTORS
Robert C. Abernethy – Chairman
Chairman of the
Board, Peoples Bancorp of North Carolina, Inc. and Peoples
Bank;
President,
Secretary and Treasurer, Carolina Glove Company, Inc. (glove
manufacturer)
Secretary and
Assistant Treasurer, Midstate Contractors, Inc. (paving
company)
James S. Abernethy
Vice President,
Carolina Glove Company, Inc. (glove manufacturer)
President and
Assistant Secretary, Midstate Contractors, Inc. (paving
company)
Vice President,
Secretary and Chairman of the Board of Directors, Alexander
Railroad Company
Douglas S. Howard
Vice President and
Treasurer, Denver Equipment Company of Charlotte, Inc.
John W. Lineberger, Jr.
President, Lincoln
Bonded Warehouse Company (commercial warehousing
facility)
Gary E. Matthews
President and
Director, Matthews Construction Company, Inc. (general
contractor)
Billy L. Price, Jr. MD
Practitioner of
Internal Medicine, BL Price Jr. Medical Consultants,
PLLC
Larry E. Robinson
Shareholder,
Director, Chairman of the Board and Chief Executive Officer, The
Blue Ridge Distributing Co., Inc. (beer and wine
distributor)
Director and member
of the Board of Directors, United Beverages of North Carolina, LLC
(beer distributor)
William Gregory (Greg) Terry
President,
Hole-In-One Advantage, LLC
Director/Consultant,
Drum & Willis-Reynolds Funeral Homes and Crematory
Dan Ray Timmerman, Sr.
Chairman of the
Board and Chief Executive Officer, Timmerman Manufacturing, Inc.
(wrought iron furniture, railings and gates
manufacturer)
Benjamin I. Zachary
President,
Treasurer, General Manager and Director, Alexander Railroad
Company
OFFICERS
Lance A. Sellers
President and Chief
Executive Officer
Jeffrey N. Hooper
Executive Vice
President, Chief Financial Officer, Corporate Treasurer and
Assistant Corporate Secretary
William D. Cable, Sr.
Executive Vice
President, Corporate Secretary and Assistant Corporate
Treasurer
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APPENDIX
B
PROPOSED AMENDMENT TO ARTICLES OF INCORPORATION,
AS AMENDED, OF PEOPLES BANCORP OF NORTH CAROLINA, INC.
The
proposed amendment to the Articles of Incorporation would, if
approved, add the following new Article IX immediately after the
end of existing Article VIII:
ARTICLE IX
Each
director shall be elected by a majority of the votes cast with
respect to the director by the shares represented in person or by
proxy and entitled to vote at any meeting for the election of
directors at which a quorum is present; provided, however, that, in
the event of a contested election of directors, directors shall be
elected by the vote of a plurality of the votes represented in
person or by proxy at any such meeting and entitled to vote in the
election of directors. For purposes of this Article IX, (a) a
majority of the votes cast means that the number of shares voted
“for” a director must exceed the number of votes cast
“against” that director; provided that neither
abstentions nor broker non-votes will be deemed to be votes
“for” or “against” a director’s
election; and (b) a contested election shall mean any election of
directors in which the number of candidates for election as
directors exceeds the number of directors to be elected and the
excess number is the result of a timely nomination by a shareholder
or shareholders in accordance with the Corporation’s Bylaws,
as determined by the Secretary of the Corporation. The filling of
any vacancy occurring in the Board of Directors shall be in
accordance with the Bylaws.
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