Notice of 2017 Annual Meeting,
Proxy Statement and
Annual Report
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PROXY STATEMENT
Table of Contents
Page
Notice of 2017 Annual Meeting of Shareholders ........................................................................................................ iii
Proxy Statement ............................................................................................................................................................. 1
Information About The Annual Meeting ....................................................................................................................... 1
Security Ownership Of Certain Beneficial Owners and Management ........................................................................... 5
Section 16(a) Beneficial Ownership Reporting Compliance ......................................................................................... 7
Proposal 1 - Election of Directors ................................................................................................................................. 7
Director Nominees ......................................................................................................................................................... 8
Executive Officers of the Company ............................................................................................................................. 10
How often did our Board of Directors meet during 2016? .......................................................................................... 10
What is our policy for director attendance at Annual Meetings? ................................................................................. 10
How can you communicate with the Board or its members? ....................................................................................... 10
Board Leadership Structure and Risk Oversight .......................................................................................................... 11
Code of Business Conduct and Ethics ......................................................................................................................... 11
Diversity of the Board of Directors ............................................................................................................................. 11
How can a shareholder nominate someone for election to the Board of Directors? .................................................... 12
Who serves on the Board of Directors of the Bank? .................................................................................................... 12
Board Committees ....................................................................................................................................................... 12
Executive Committee ................................................................................................................................................... 12
Governance Committee ............................................................................................................................................... 12
Audit and Enterprise Risk Committee ......................................................................................................................... 13
Compensation Discussion and Analysis....................................................................................................................... 14
Summary Compensation Table .................................................................................................................................... 17
Grants of Plan-Based Awards ...................................................................................................................................... 19
Outstanding Equity Awards at Fiscal Year End ........................................................................................................... 19
Option Exercises and Stock Vested ............................................................................................................................. 20
Pension Benefits .......................................................................................................................................................... 20
Nonqualified Deferred Compensation ......................................................................................................................... 21
Employment Agreements ............................................................................................................................................. 21
Potential Payments upon Termination or Change in Control ....................................................................................... 22
Omnibus Stock Option and Long Term Incentive Plan ............................................................................................... 22
Director Compensation ................................................................................................................................................ 25
Indebtedness of and Transactions with Management and Directors ............................................................................ 26
Equity Compensation Plan Information ....................................................................................................................... 28
Stock Performance Graph ............................................................................................................................................ 29
Proposal 2 - Ratification of Selection of Independent Registered Public Accounting Firm ........................................ 30
i
Audit Fees Paid to Independent Auditors .................................................................................................................... 30
Date for Receipt of Shareholder Proposals .................................................................................................................. 31
Other Matters ............................................................................................................................................................... 31
Miscellaneous .............................................................................................................................................................. 31
Appendix A – Annual Report ...................................................................................................................................... 32
ii
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Post Office Box 467
518 West C Street
Newton, North Carolina 28658-0467
(828) 464-5620
NOTICE OF 2017 ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 4, 2017
NOTICE IS HEREBY GIVEN that the 2017 Annual Meeting of Shareholders of Peoples Bancorp of North
Carolina, Inc. (the “Company”) will be held as follows:
Place:
Date:
Time:
Catawba Country Club
1154 Country Club Road
Newton, North Carolina
May 4, 2017
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 2018 Annual
Meeting of Shareholders or until their successors are duly elected and qualified;
To ratify the appointment of Elliott Davis Decosimo PLLC (“Elliott Davis”) as the Company’s
independent registered public accounting firm for the fiscal year ending December 31, 2017; and
To consider and act on any other matters that may properly come before the Annual Meeting or any
adjournment.
The Board of Directors has established March 9, 2017, 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 shares may be voted in accordance
with your wishes. You may vote by executing and returning your proxy card in the accompanying envelope, or by
voting electronically over the Internet or by telephone. Please refer to the proxy card enclosed for information on
voting electronically. If you attend the Annual Meeting, you may vote in person and the proxy will not be used.
By Order of the Board of Directors,
Lance A. Sellers
President and Chief Executive Officer
Newton, North Carolina
March 24, 2017
iii
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PEOPLES BANCORP OF NORTH CAROLINA, INC.
______________________________________
PROXY STATEMENT
______________________________________
Annual Meeting of Shareholders
To Be Held On May 4, 2017
_____________________________________
This Proxy Statement is being mailed to our shareholders on or about March 24, 2017, 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 4, 2017. The Notice, Proxy Statement and the Annual Report to Shareholders for the year ended
December 31, 2016 are also available at
https://www.snl.com/IRWebLinkX/GenPage.aspx?IID=4050385&GKP=202713
You may also access the above off-site website by going to www.peoplesbanknc.com and click on the link.
INFORMATION ABOUT THE ANNUAL MEETING
Your vote is very important. For this reason, our Board of Directors is requesting that you allow your common
stock to be represented at the 2017 Annual Meeting of Shareholders by the proxies named on the enclosed proxy card.
When is the Annual Meeting?
May 4, 2017, at 11 a.m., Eastern Time.
Where will the Annual Meeting be held?
At the Catawba Country Club, 1154 Country Club Road,
Newton, North Carolina.
What items will be voted on at the
Annual Meeting?
1.
2.
3.
1
ELECTION OF DIRECTORS. To elect ten directors
to serve until the 2018 Annual Meeting of Shareholders.
SELECTION
OF
REGISTERED
OF
RATIFICATION
INDEPENDENT
PUBLIC
ACCOUNTING FIRM. To ratify the appointment of
Elliott Davis Decosimo, PLLC (“Elliott Davis”) as the
Company’s independent registered public accounting
firm for fiscal year 2017.
OTHER BUSINESS. To consider any other business
as may properly come before the Annual Meeting or
any adjournment.
Who can vote?
How do I vote by proxy?
Only holders of record of our common stock at the close of
business on March 9, 2017 (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 5,426,188 shares of our common stock outstanding and
entitled to vote and 672 shareholders of record.
You may vote your shares by marking, signing and dating the
enclosed proxy card and returning it in the enclosed postage-paid
envelope or by voting electronically over the Internet or by
telephone using the information on the proxy card. If you return
your signed proxy card before the Annual Meeting, the proxies
will vote your shares as you direct. The Board of Directors has
appointed proxies to represent shareholders who cannot attend
the Annual Meeting in person.
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.
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.
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.
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.
2
How do I change or revoke my proxy?
How many votes can I cast?
How many votes are required to approve
the proposals?
You can change or revoke your proxy at any time before it is
voted at the Annual Meeting in any of three ways: (1) by
delivering a written notice of revocation to the Secretary of the
Company; (2) by delivering another properly signed proxy card
to the Secretary of the Company with a more recent date than
your first proxy card or by changing your vote by telephone or
the Internet; or (3) by attending the Annual Meeting and voting
in person. You should deliver your written notice or superseding
proxy to the Secretary of the Company at our principal executive
offices listed above.
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.
If a quorum is present at the Annual Meeting, each director
nominee will be elected by a plurality of the votes cast in person
or by proxy. If you withhold your vote on a nominee, your
shares will not be counted as having voted for that nominee. The
proposal to ratify the appointment of the Company’s independent
registered public accounting firm for 2017 will be approved if
the votes cast in favor exceed the votes cast in opposition.
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.
Abstentions and broker non-votes are not treated as votes cast on
any proposal. As a result, neither will have an effect on the vote
for the election of any director or the ratification of our
independent registered public accounting firm. A broker non-
vote occurs when a broker does not vote on a particular matter
because the broker does not have discretionary authority on that
matter and has not received instructions from the owner of the
shares.
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.
3
What constitutes a “quorum” for
the Annual Meeting?
Who pays for the solicitation of proxies?
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.
We will pay the cost of preparing, printing and mailing materials
in connection with this solicitation of proxies. In addition to
solicitation by mail, our officers, directors and regular
employees, as well as those of the Bank, may make solicitations
personally, by telephone or otherwise without additional
compensation for doing so. We reserve the right to engage a
proxy solicitation firm to assist in the solicitation of proxies for
the Annual Meeting. We will, upon request, reimburse
brokerage firms, banks and others for their reasonable out-of-
pocket expenses in forwarding proxy materials to beneficial
owners of stock or otherwise in connection with this solicitation
of proxies.
4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Exchange Act requires that any person who acquires the beneficial ownership of more than five percent
(5%) of the Company’s common stock notify the Securities and Exchange Commission (the “SEC”) and the Company.
Following is certain information, as of the Record Date, regarding those persons or groups who held of record, or who
are known to the Company to own beneficially, more than five percent (5%) of the Company’s outstanding common
stock.
Name and Address of
Beneficial Owner
Amount and Nature of
Beneficial Ownership1
Christine S. Abernethy
P.O. Box 386
Newton, NC 28658
Tontine Financial Partners, LP
55 Railroad Avenue, 3rd Floor
Greenwich, CT 06830-6378
Tontine Management, LLC
55 Railroad Avenue
Greenwich, CT 06830
Tontine Asset Associates, LLC
55 Railroad Avenue
Greenwich, CT 06830
Jeffrey L. Gendell
55 Railroad Avenue
Greenwich, CT 06830
660,4953
376,7044
376,7044
141,3614
518,0654
Percent
of Class2
12.17%
6.94%
6.94%
2.61%
9.55%
________________________________
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 5,426,188 shares of common stock outstanding as of the Record Date.
3 Carolina Glove Company, Inc. owns 107,604 shares of common stock. These shares are included in the calculation of Ms.
Abernethy’s total beneficial ownership interest. Ms. Abernethy owns approximately 50% of the stock of Carolina Glove
Company, Inc. The business is operated by a family committee. Ms. Abernethy has no active day-to-day participation in the
business affairs of Carolina Glove Company, Inc.
4 Based on a Schedule 13G/A (Amendment No. 8) filed by Tontine Financial Partners, LP, Tontine Management, LLC, Tontine
Overseas Associates, LLC, Tontine Asset Associates, LLC and Jeffrey L. Gendell with the SEC on February 10, 2017 and
represents the total number of shares controlled by Jeffrey Gendell and the related Tontine entities.
5
Set forth below is certain information, as of the Record Date (unless otherwise indicated), regarding those shares
of common stock owned beneficially by each of the persons who currently serves as a member of the Board of Directors,
is a nominee for election to the Board of Directors at the Annual Meeting, or is a named executive officer of the
Company. Also shown is the number of shares of common stock owned by the directors and executive officers of the
Company as a group.
Name and Address
James S. Abernethy
Post Office Box 327
Newton, NC 28658
Robert C. Abernethy
Post Office Box 366
Newton, NC 28658
William D. Cable, Sr.
Post Office Box 467
Newton, NC 28658
Douglas S. Howard
Post Office Box 587
Denver, NC 28037
A. Joseph Lampron, Jr.
Post Office Box 467
Newton, NC 28658
John W. Lineberger, Jr.
Post Office Box 481
Lincolnton, NC 28092
Gary E. Matthews
210 First Avenue South
Conover, NC 28613
Billy L. Price, Jr., M.D.
540 11th Ave. Place NW
Hickory, NC 28601
Larry E. Robinson
Post Office Box 723
Newton, NC 28658
Lance A. Sellers
Post Office Box 467
Newton, NC 28658
William Gregory Terry
Post Office Box 395
Conover, NC 28613
Dan Ray Timmerman, Sr.
Post Office Box 1148
Conover, NC 28613
Benjamin I. Zachary
Post Office Box 277
Taylorsville, NC 28681
Percentage
of
Class2
2.81%
2.89%
*
*
*
*
*
*
*
*
*
1.65%
1.75%
Amount and Nature
of Beneficial
Ownership1
152,2623
156,8454
20,915
15,2355
9,383
2,773
22,164
6,285
50,7556
14,052
19,258
89,3807
95,1108
6
All current directors and nominees and
executive officers as a group (13 people)
590,3799
10.88%
*Does not exceed one percent of the common stock outstanding.
______________________________________________
1 Unless otherwise noted, all shares are owned directly of record by the named individuals, by their spouses and minor children, or by
other entities controlled by the named individuals. Voting and investment power is not shared unless otherwise indicated.
2 Based upon a total of 5,426,188 shares of common stock outstanding as of the Record Date.
3 Includes 64,038 shares of common stock owned by Alexander Railroad Company. Mr. J. Abernethy is Vice President, Secretary
and Chairman of the Board of Directors of Alexander Railroad Company.
4 Includes 6,130 shares of common stock owned by Mr. R. Abernethy’s spouse, for which Mr. R. Abernethy disclaims beneficial
ownership.
5 Includes 450 shares of common stock owned by Mr. Howard’s spouse, for which Mr. Howard disclaims beneficial ownership.
6 Includes 8,835 shares of common stock owned by Mr. Robinson’s spouse, for which Mr. Robinson disclaims beneficial ownership.
7 Includes 2,722 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 64,038 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 64,038 shares owned by Alexander Railroad Company and attributed to Mr. J. Abernethy and Mr. Zachary are only included
once in calculating this total.
Directors James S. Abernethy and Robert C. Abernethy are brothers and are sons of Christine S. Abernethy, who owns in
excess of ten percent (10%) of the common stock of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company’s executive officers and directors, and persons who
own more than ten percent (10%) of the common stock, to file reports of ownership and changes in ownership with the
SEC. Executive officers, directors and greater than ten percent (10%) beneficial owners are required by SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the Company and written representations from
the Company’s executive officers and directors, the Company believes that during the fiscal year ended December 31,
2016, its executive officers and directors and greater than ten percent (10%) beneficial owners complied with all
applicable Section 16(a) filing requirements.
PROPOSAL 1
ELECTION OF DIRECTORS
Our Board of Directors has set its number at ten members. Our current Bylaws provide that in order to be
eligible for consideration at the Annual Meeting of Shareholders, all nominations of directors, other than those made by
the Governance Committee or the Board of Directors, must be in writing and must be delivered to the Secretary of the
Company not less than 50 days nor more than 90 days prior to the meeting at which such nominations will be made;
provided, however, that if less than 60 days’ notice of the meeting is given to the shareholders, such nominations must be
delivered to the Secretary of the Company not later than the close of business on the tenth day following the day on which
the notice of meeting was mailed.
7
Information about the nominees for election to the Board of Directors for a one-year term until the 2018 Annual
Meeting of Shareholders appears below. All of the nominees are currently serving on the Board of Directors.
Director Nominees
James S. Abernethy, age 62 (as of February 1, 2017), 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 24 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 24 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 66 (as of February 1, 2017), 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 40 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 58 (as of February 1, 2017), is employed by Denver Equipment of Charlotte, Inc. as
Vice President, Secretary and Treasurer. Mr. Howard is currently serving as the Chairman of the Catawba Valley Medical
Group. He has served as a director of the Company since 2004. Mr. Howard has a total of 18 years of banking
experience and is a graduate of the North Carolina Bank Directors’ College and attended the initial Advanced Directors’
Training session offered by the NC Bank Directors’ College in association with the College of Management at North
Carolina State University. Mr. Howard also serves on the Board of Trustees of Catawba Valley Medical Center and as
Chairman of the Finance Committee at Catawba Valley Medical Center.
John W. Lineberger, Jr., age 66 (as of February 1, 2017), 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 12 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 61 (as of February 1, 2017), 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 15
years of banking experience, is a graduate of the North Carolina Bank Directors’ College, and attended the initial
Advanced Directors’ Training session offered by the NC Bank Directors’ College in association with the College of
Management at North Carolina State University. Mr. Matthews is also a director of Conover Metal Products, a privately
held company. Mr. Matthews earned a B.S. degree in civil engineering/construction from North Carolina State
University.
8
Billy L. Price, Jr., M.D., age 60 (as of February 1, 2017), is a Practitioner of Internal Medicine at BL Price
Medical Consultants, PLLC. Dr. Price also serves on the Board of Trustees of Catawba Valley Medical Center. He has
served as a director of the Company since 2004. Dr. Price has a total of 12 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 71 (as of February 1, 2017), is a shareholder, director, Chairman of the Board of
Directors 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 23 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 49 (as of February 1, 2017), is President of DFH Holdings and Operator/General
Manager of Drum & Willis-Reynolds Funeral Homes and Crematory. He has served as a director of the Company since
2004. Mr. Terry has a total of 12 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 69 (as of February 1, 2017), 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 21 years of
banking experience and is a graduate of the North Carolina Bank Directors’ College and attended the initial Advanced
Directors’ Training session offered by the NC Bank Directors’ College in association with the College of Management at
North Carolina State University. Mr. Timmerman earned a B.S. degree in business administration with a concentration in
accounting from Lenoir-Rhyne University in North Carolina. Mr. Timmerman serves as Chairman of the Board of the
Catawba County Economic Development Commission.
Benjamin I. Zachary, age 60 (as of February 1, 2017), 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 21 years of banking experience and is a graduate of the North Carolina Bank Directors’ College.
Mr. Zachary earned a B.S. degree in business administration with a concentration in accounting from the University of
North Carolina at Chapel Hill. He worked as a CPA for a national accounting firm for eight years following graduation
where his assignments included financial statement audits of several banks. Mr. Zachary is a member of the Taylorsville
Rotary Club and has served as Treasurer for the Taylorsville Rotary Club and its Foundation.
We have no reason to believe that any of the nominees for election will be unable or will decline to serve if
elected. In the event of death or disqualification of any nominee or the refusal or inability of any nominee to serve as a
director, however, the proxies will vote for the election of another person as they determine in their discretion or may
allow the vacancy to remain open until filled by the Board of Directors. In no circumstance will any proxy be voted for
more than two nominees who are not named in this Proxy Statement. Properly executed and returned proxies, unless
revoked, will be voted as directed by you or, in the absence of direction, will be voted in favor of the election of the
recommended nominees. An affirmative vote of a plurality of votes cast at the Annual Meeting is necessary to elect a
nominee as a director.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE “FOR” ALL OF THE NOMINEES NAMED
ABOVE AS DIRECTORS
9
Executive Officers of the Company
During 2016, our executive officers were:
Lance A. Sellers, age 54 (as of February 1, 2017), 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 32 years of banking experience. He is a graduate of the University of North Carolina at Chapel Hill
and upon graduation served as a senior credit officer at a regional bank headquartered in North Carolina.
William D. Cable, Sr., age 48 (as of February 1, 2017), 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 25 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 62 (as of February 1, 2017), serves as Executive Vice President, Chief Financial
Officer, Corporate Treasurer and Assistant Corporate Secretary of the Company and Executive Vice President and Chief
Financial Officer of the Bank. He has been employed by the Company and the Bank since 2001. Mr. Lampron is a
graduate of the University of North Carolina at Chapel Hill and upon graduation worked as a certified public accountant
with a national accounting firm. His work with the firm included audits of banks and thrift institutions. Mr. Lampron has
also served as Chief Financial Officer of a thrift institution and as a senior change manager in the finance group of a large
North Carolina bank. Mr. Lampron has a total of 37 years of banking experience.
How often did our Board of Directors meet during 2016?
Our Board of Directors held 15 meetings during 2016. All incumbent directors attended more than 75% of the
total number of meetings of the Board of Directors and its committees on which they served during the year.
What is our policy for director attendance at Annual Meetings?
Although it is customary for all of our directors to attend Annual Meetings of Shareholders, we have no formal
policy in place requiring attendance. All members of the Board of Directors attended our 2016 Annual Meeting of
Shareholders held on May 5, 2016.
How can you communicate with the Board or its members?
We do not have formal procedures for shareholder communication with our Board of Directors. In general, our
directors and officers are easily accessible by telephone, postal mail or e-mail. Any matter intended for your Board of
Directors, or any individual director, can be directed to Lance Sellers, our President and Chief Executive Officer, or Joe
Lampron, our Chief Financial Officer, at our principal executive offices at 518 West C Street, Newton, North Carolina
28658. You also may direct correspondence to our Board of Directors, or any of its members, in care of the Company at
the foregoing address. Your communication will be forwarded to the intended recipient unopened.
10
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 Director Lineberger, 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 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 and the
qualifications of the independent directors have been described above. Each of the Company’s and the Bank’s
committees considers risk within its area of responsibility. The Audit Committee and the full Board of Directors focus on
the Company’s most significant risks in the areas of liquidity, credit, interest rate and general risk management strategy.
The Board of Directors sets policy guidelines in the areas of loans and asset/liability management which are reviewed on
an on-going basis. While the Board of Directors oversees the Company’s risk management, the Company’s and the
Bank’s management are responsible for day-to-day risk management following the dictates of the policy decisions set by
the Board of Directors.
The Governance Committee, as part of its annual review, evaluates the Board of Directors leadership structure
and performance and reports its findings to the whole Board of Directors. The Board of Directors believes that having
separate persons serving as Chief Executive Officer and Chairman and all independent directors provides the optimal
board leadership structure for the Company and its shareholders.
Code of Business Conduct and Ethics
The Company and the Bank have a Code of Business Conduct and Ethics for its directors, officers and
employees. The Code of Business Conduct and Ethics requires that individuals avoid conflicts of interest, comply with
all laws and other legal requirements, conduct business in an honest and ethical manner and otherwise act with integrity
and in the best interests of the Company and the Bank. The Code of Business Conduct and Ethics is a guide to help
ensure that all employees live up to the highest ethical standards of behavior.
A copy of
the Code of Business Conduct and Ethics
is available on
the Bank’s website
(www.peoplesbanknc.com) under Investor Relations.
As is permitted by SEC rules, the Company intends to post on its website any amendment to or waiver from any
provision in the Code of Business Conduct and Ethics that applies to the Chief Executive Officer, the Chief Financial
Officer, the Controller, or persons performing similar functions, and that relates to any element of the standards
enumerated in the rules of the SEC.
Diversity of the Board of Directors
The Governance Committee has no written diversity policy; however, the Governance Committee defines
diversity broadly to include, in addition to race, gender, ethnicity and age, differences in professional experience,
educational background, geographic mix within the Company’s market area, skills and other individual qualities and
attributes that foster board heterogeneity in order to encourage and maintain board effectiveness. While there are
currently no women or minorities serving on the Board of Directors, any qualified candidate receives consideration
regardless of race, gender or national origin.
11
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 2016, 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. 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 met once during 2016.
Governance Committee. The Governance Committee is responsible for developing and maintaining the
corporate governance policy, as well as acting as the nominating committee for the Board of Directors. The following
persons currently serve on the Governance Committee: Directors R. Abernethy, J. Abernethy, Howard, Terry, and
Timmerman. All of the members of the Governance Committee are independent as defined in the applicable NASDAQ
listing standards. The Board of Directors determines on an annual basis each director’s independence.
The Governance Committee, serving as the nominating committee of the Board of Directors, interviews
candidates for membership to the Board of Directors, recommends candidates to the full Board of Directors, slates
candidates for shareholder votes, and fills any vacancies on the Board of Directors which occur between shareholder
meetings. The Governance Committee’s identification of candidates for director typically results from the business
interactions of the members of the Governance Committee or from recommendations received from other directors or
from the Company’s management.
If a shareholder recommends a director candidate to the Governance Committee in accordance with the
Company’s Bylaws, the Governance Committee will consider the candidate and apply the same considerations that it
would to its own candidates. The recommendation of a candidate by a shareholder should be made in writing, addressed
to the attention of the Governance Committee at the Company’s corporate headquarters. The recommendation should
include a description of the candidate’s background, his or her contact information, and any other information the
shareholder considers useful and appropriate for the Governance Committee’s consideration of the candidate. The
criteria which have been established by the Governance Committee as bearing on the consideration of a candidate’s
qualification to serve as a director include the following: the candidate’s ethics, integrity, involvement in the community,
12
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, 2016.
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. The Board of Directors has determined that these members are 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.
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, 2016.
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, 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, 2016.
Robert C. Abernethy
Benjamin I. Zachary
Douglas S. Howard
Dan R. Timmerman, Sr.
James S. Abernethy
Billy L Price, Jr. MD, Committee Chair
Compensation Committee. The Company’s Compensation Committee is responsible for developing, reviewing,
implementing and maintaining the Bank’s salary, bonus, and incentive award programs and for making recommendations
to the Company’s and the Bank’s Board of Directors regarding compensation of the executive officers. Upon
recommendation from the Compensation Committee, the Company’s Board of Directors ultimately determines such
compensation.
All of the members of the Compensation Committee are independent as defined in the applicable NASDAQ’s
listing standards. The Board of Directors determines on an annual basis each director’s independence. The following
persons currently serve on the Compensation Committee: Directors R. Abernethy, J. Abernethy, Howard, Terry and
Timmerman. The Compensation Committee met twice during the year ended December 31, 2016.
13
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 NEOs 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.
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, 2016.
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, 2016 to our President and Chief Executive Officer, Lance A. Sellers, our Chief
Financial Officer, A. Joseph Lampron, Jr. and William D. Cable, Sr. (together, our “named executive officers”).
Compensation Committee Processes and Procedures. The Compensation Committee assists the Board of
Directors in determining appropriate compensation levels for the members of the Board of Directors and our named
executive officers. It also has strategic and administrative responsibility for a broad range of compensation issues. It
seeks to ensure that we compensate key management employees effectively and in a manner consistent with the
Compensation Committee’s stated compensation strategy and relevant requirements of various regulatory entities. A part
of these responsibilities is overseeing the administration of executive compensation and employee benefit plans,
including the design, selection of participants, establishment of performance measures, and evaluation of awards pursuant
to our annual and long-term incentive programs.
Compensation Philosophy. The overall objective of our executive compensation program is to align total
compensation so that the individual executive believes it is fair and equitable and provides the highest perceived value to
our shareholders and to that individual. In order to accomplish this overall objective, our executive compensation
program is designed to: (i) attract qualified executives necessary to meet our needs as defined by the Company’s strategic
plans, and (ii) retain and motivate executives whose performance supports the achievement of our long-term plans and
short-term goals. The executive compensation program is founded upon the idea that a strong, performance-oriented
compensation program, which is generally consistent with the practices of our peers, is a key ingredient in becoming a
leading performer among financial institutions of similar size, and is, therefore, in the best interests of our shareholders.
The Compensation Committee considers a number of factors specific to each executive’s role when determining
the amount and mix of compensation to be paid. These factors are:
compensation of the comparable executives at comparable financial institutions;
financial performance of the Company (especially on a “net operating” basis, which excludes
the effect of one-time gains and expenses) over the most recent fiscal year and the prior three
years;
composition of earnings;
asset quality relative to the banking industry;
responsiveness to the economic environment;
14
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, 2016.
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 2016, the Compensation Committee recommended, and the Board of Directors approved,
discretionary bonuses as follows: $50,000 for Mr. Sellers; $40,000 for Mr. Lampron; and $40,000 for Mr. Cable. These
discretionary bonuses were paid in January of 2017. 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. On December 20, 2016, Mr. Lampron was awarded 42 shares of the Company’s common stock plus
$288 in cash under the Service Recognition Program.
Long-Term Equity Incentive Awards. The Company maintains the 2009 Omnibus Stock Ownership
and Long Term Incentive Plan (“Omnibus Plan”), under which it is permitted to grant incentive stock options, restricted
stock, restricted stock units, stock appreciation rights, book value shares, and performance units. The purpose of the
Omnibus Plan is to promote the interests of the Company by attracting and retaining directors and employees of
outstanding ability and to provide executives of the Company greater incentive to make material contributions to the
success of the Company by providing them with stock-based compensation which will increase in value based upon the
market performance of the common stock and/or the corporate achievement of financial and other performance
objectives.
In making its decision to grant awards to the Company’s named executive officers under the Omnibus
Plan, the Compensation Committee considers all elements of such named executive officer’s compensation. In
considering the number of awards to grant to the Company’s named executive officers, the Compensation Committee
considers each named executive officer’s contribution to the Company’s performance.
The Company did not grant any plan-based awards to its named executive officers during the fiscal
year ended December 31, 2016. See “Outstanding Equity Awards at Fiscal Year-End” on page 19 of this Proxy
Statement for information on grants of restricted stock units to the named executive officers during the fiscal years
ended December 31, 2012, 2013, 2014 and 2015. See “Omnibus Plan and Long Term Incentive Plan” starting on
page 22 of this Proxy Statement for additional information on the Omnibus Plan.
15
Supplemental Executive Retirement Agreements. The Bank provides non-qualified supplemental
executive retirement benefit in the form of Executive Salary Continuation Agreements with Messrs. Sellers, Lampron and
Cable. The Committee’s goal is to provide competitive retirement benefits given the restrictions on executives within
tax-qualified plans. In prior years, the Compensation Committee worked with a compensation consultant in analyzing the
possible benefits of using supplemental retirement benefits to address the issues of internal and external equity in terms of
retirement benefits offered to all employees at the Company as a percentage of 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, 2016.
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 2016 contribution to the 401(k) Plan
pursuant to this formula was approximately $565,300. All contributions to the 401(k) Plan are tax deferred. The Profit
Sharing Plan and 401(k) Plan permit participants to choose from investment funds which are selected by a committee
comprised of senior management. Employees are eligible to participate in both the 401(k) Plan and Profit Sharing Plan
beginning in the second month of employment. Both plans are now “safe harbor” plans, and all participants are
immediately 100% vested in all employer contributions.
Deferred Compensation Plan. The Bank maintains a non-qualified deferred compensation plan for
directors and certain officers. Eligible officers selected by the Bank’s Board of Directors may elect to contribute a
percentage of their compensation to the plan. Participating officers may elect to invest their deferred compensation in a
restricted list of investment funds. The Bank may make matching or other contributions to the plan as well, in amounts
determined at the discretion of the Bank. Participants are fully vested in all amounts contributed to the plan by them or
on their behalf. The Bank has established a Rabbi Trust to hold the accrued benefits of the participants under the plan.
There are no “above-market” returns provided for in this plan. The Bank made no contributions to the plan in 2016.
Benefits under the plan are payable in the event of the participant’s retirement, death, termination, or as a result of
hardship. Benefit payments may be made in a lump sum or in installments, as selected by the participant.
Employment Agreements. The Company has employment agreements with each named executive
officer, which the Board of Directors believes serve a number of functions, including (i) retention of the executive team;
(ii) mitigation of any uncertainty about future employment and continuity of management in the event of a change in
control; and (iii) protection of the Company and customers through non-compete and non-solicitation covenants.
Additional information regarding the employment agreements, including a description of key terms may be found starting
on page 21 of this Proxy Statement.
Other Benefits. Executive officers are entitled to participate in fringe benefit plans offered to
employees including health and dental insurance plans and life, accidental death and dismemberment and long-term
disability plans. In addition, the Bank has paid country club dues for each named executive officer.
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,
2016. 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.
16
The Compensation Committee also considers the results of the shareholders’ non-binding vote on executive
compensation. At the 2013 Annual Meeting of Shareholders, 52% of the shareholders who voted at the 2013 Annual
Meeting of Shareholders elected to review the executive compensation of the Company’s named executive officers once
every three years. As a result, the Company submitted, in a non-binding advisory proposal, the executive compensation
of the Company’s named executive officers at the 2016 Annual Meeting of Shareholders. At the 2016 Annual Meeting of
Shareholders, 94% of the shareholders who voted at the 2016 Annual Meeting of Shareholders approved the executive
compensation of the Company’s named executive officers as presented to the shareholders in the 2016 proxy statement.
The Company will submit a vote to the shareholders on the compensation of its named executive officers at its 2019
Annual Meeting of Shareholders.
Summary Compensation Table
The executive officers of the Company are not paid any cash compensation by the Company. However, the
executive officers of the Company also are executive officers of the Bank and receive compensation from the Bank. The
table on the following page show, for the fiscal years ended December 31, 2016, 2015 and 2014, the cash compensation
received by, as well as certain other compensation paid or accrued for those years, to each named executive officer.
17
SUMMARY COMPENSATION TABLE
Name and Principal Position
Year
Salary($)
Bonus($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings($)
Stock
Awards($)1
Lance A. Sellers
President and Chief Executive
Officer
A. Joseph Lampron, Jr.
Executive Vice President,
Chief Financial Officer
2016
2015
2014
2016
2015
2014
319,185
311,400
311,400
197,653
193,125
187,500
50,000
30,000
30,000
40,000
30,000
30,000
-
39,893
61,230
-
29,920
42,830
57,312
52,507
54,638
102,893
93,827
57,767
All Other
Compensation($)2 Total($)
31,775
31,861
26,990
24,307
23,105
18,468
458,271
465,661
484,258
365,153
369,977
336,565
William D. Cable, Sr.
Executive Vice President,
Chief Operating Officer
________________
1 Amount represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. See Note 1 in the Notes to the Company’s Consolidated
Financial Statements included in the Company’s Annual Report, which Annual Report is attached here to as Appendix A.
2 All other compensation is comprised of the following:
203,179
198,750
187,500
291,759
306,692
300,706
40,000
30,000
30,000
25,500
27,403
19,777
22,540
20,619
20,599
29,920
42,830
2016
2015
2014
-
Name and Principal Position
Year
Employer
Match($)
Car
Allowance($)
Lance A. Sellers
President and Chief Executive
Officer
2016
2015
2014
10,600
10,600
10,400
A. Joseph Lampron, Jr.
Executive Vice President,
Chief Financial Officer
2016
2015
2014
9,096
8,628
8,279
4,113
4,113
4,113
0
0
0
Country
Club
Dues($)
3,576
3,506
3,455
3,380
3,300
3,280
Split
Dollar
Death
Benefit($)
480
454
418
1,139
1,056
978
Group
Term
Life($)(a)
Disability
and LTC
Premiums($)(b)
2,376
4,104
1,242
3,863
5,506
2,555
5,628
5,398
5,392
1,984
1,984
1,984
Dividends
Accrued
on
Restricted
Stock
Units($)
5,002
3,686
1,970
3,570
2,631
1,392
2016
2015
2014
8,699
9,150
8,279
William D. Cable, Sr.
Executive Vice President,
Chief Operating Officer
_________
(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 NEO.
(c)In 2015, Mr. Cable received 106 shares for 20 years of service with the Bank and $513 in cash to pay the taxes associated with the award under the Bank’s Service
Recognition Program.
(d)In 2016, Mr. Lampron received 42 shares for 15 years of service with the Bank and $288 in cash to pay the taxes associated with the award under the Bank’s Service
Recognition Program.
1,775
3,477
581
6,375
5,816
5,816
4,676
3,452
3,360
3,570
2,631
1,392
405
377
349
0
0
0
Other($)
0
0
0
1,275(d)
0
0
0
2,500(c)
0
18
Grants of Plan-Based Awards
The Company did not grant any plan-based awards to the named executive officers during the fiscal year ended
December 31, 2016.
Outstanding Equity Awards at Fiscal Year End
The following table shows certain information for those outstanding equity awards at December 31, 2016.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Stock Awards
Number of
Shares or Units
of Stock That
Have Not
Vested (#)
Market Value of
Shares or Units of
Stock That Have
Not Vested ($)
Equity Incentive Plan
Awards: Number of
Unearned Shares, Units
or Other Rights That
Have Not Vested (#)
19,669(1)
Equity Incentive Plan
Awards: Market or Payout
Value of Unearned Shares,
Units or Other Rights
That Have Not Vested(3) ($)
14,173(2)
14,173(2)
493,102
355,317
355,317
Name
Lance A. Sellers
A. Joseph Lampron, Jr.
William D. Cable, Sr.
______________________________________
--
--
--
--
--
--
(1) Includes 6,505 restricted stock units that were granted on March 22, 2012 (with a grant date fair value for each restricted stock unit of $7.90 on March
22, 2012) and vest on March 22, 2017; 2,169 restricted stock units that were granted on July 26, 2012 (with a grant date fair value for each restricted
stock unit of $8.25 on July 26, 2012) and vest on July 26, 2017; 4,875 restricted stock units that were granted on May 23, 2013 (with a grant date fair
value for each restricted stock unit of $11.90 on May 23, 2013) and vest on May 23, 2017; 3,900 restricted stock units that were granted on February
20, 2014 (with a grant date fair value for each restricted stock unit of $15.70 on February 20, 2014) and vest on February 20, 2017; and 2,200
restricted stock units that were granted on February 19, 2015 (with a grant date fair value for each restricted stock unit of $17.97 on February 19,
2015) and vest on February 19, 2019.
(2) Includes 4,777 restricted stock units that were granted on March 22, 2012 (with a grant date fair value for each restricted stock unit of $7.90 on March
22, 2012) and vest on March 22, 2017; 1,593 restricted stock units that were granted on July 26, 2012 (with a grant date fair value for each restricted
stock unit of $8.25 on July 26, 2012) and vest on July 26, 2017; 3,410 restricted stock units that were granted on May 23, 2013 (with a grant date fair
value for each restricted stock unit of $11.90 on May 23, 2013) and vest on May 23, 2017; 2,728 restricted stock units that were granted on February
20, 2014 (with a grant date fair value for each restricted stock unit of $15.70 on February 20, 2014) and vest on February 20, 2017; and 1,665
restricted stock units that were granted on February 19, 2015 (with a grant date fair value for each restricted stock unit of $17.97 on February 19,
2015) and vest on February 19, 2019.
(3) Based on a stock price of $25.07 per share on December 31, 2016.
19
Option Exercises and Stock Vested
During the fiscal year ended December 31, 2016, no options were exercised by the named executive officers and
no restricted stock units granted to the named executive officers vested.
Pension Benefits
The following table shows, for the fiscal year ended December 31, 2016, the pension benefits paid or earned by
Messrs. Sellers, Lampron and Cable.
PENSION BENEFITS TABLE
Name
Plan Name
Number of
Years
Credited
Service
Present
Value of
Accumulated
Benefit($)
Payments
During Last
Fiscal Year($)
Lance A. Sellers
Executive Salary Continuation Agreement1
A. Joseph Lampron, Jr.
Executive Salary Continuation Agreement1,2
15
15
370,614
525,074
--
--
Executive Salary Continuation Agreement1
William D. Cable, Sr.
_______________________
1 The Bank entered into an Executive Salary Continuation Agreement with Messrs. Sellers, Lampron and Cable effective on January 1, 2002. Each
Executive Salary Continuation Agreement was amended on December 31, 2003 and December 18, 2008. The Executive Salary Continuation
Agreements for Messrs. Sellers, Lampron and Cable were further amended on December 10, 2014. Unless a separation from service or a change in
control (as defined in the Executive Salary Continuation Agreements) occurs before the retirement age set forth in each Executive Salary Continuation
Agreement, the 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 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.
137,145
15
--
2 As of December 31, 2016, Mr. Lampron was the only named executive officer eligible to withdraw funds from the plan. Mr. Lampron, if he elected,
could withdrawal 80% of the annual benefit of $76,554 (or $61,243 per year).
20
Nonqualified Deferred Compensation
The below table shows the compensation deferred by Messrs. Lampron and Cable during the year ended
December 31, 2016. Mr. Sellers elected not to defer any portion of his compensation during the year ended December 31,
2016.
NONQUALIFIED DEFERRED COMPENSATION
Name
Executive
Contributions
in the Last FY ($)(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.
William D. Cable, Sr.
5,922
16,252
--
--
43,664
76,767
0
0
182,353
414,653
___________________
(1) The above contributions were based on the named executive officer’s deferral elections and the salaries shown in the Summary Compensation Table. The
(2)
(3)
salaries in the Summary Compensation Table include these contributions.
This column reflects earnings or losses on plan balances in 2016. 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
-2.30% to 31.59% for the year ended December 31, 2016.
This column represents the year-end balances of the named executive officer’s nonqualified deferred compensation accounts. These balances include
contributions that were included in the Summary Compensation Tables in previous years. Amounts in this column include earnings that were not previously
reported in the Summary Compensation Table because they were not “above-market” earnings.
Employment Agreements
On January 22, 2015, the Company, the Bank and each of (i) Lance A. Sellers, the President and Chief
Executive Officer of the Company and the Bank, (ii) A. Joseph Lampron, Jr., Executive Vice President and Chief
Financial Officer of the Bank and Executive Vice President, Chief Financial Officer and Corporate Treasurer of the
Company and (iii) William D. Cable, Sr., Executive Vice President and Chief Operating Officer of the Bank and
Executive Vice President, Assistant Corporate Treasurer and Assistant Corporate Secretary of the Company executed an
Employment Agreement which replaced and superseded such executive’s prior employment agreement (collectively, the
“Employment Agreements”).
Each Employment Agreement provides for an initial term of 36 months beginning on January 22, 2015 (the
“Effective Date”). On the first anniversary of the Effective Date and on each anniversary thereafter (the “Renewal Date”),
each Employment Agreement shall be extended automatically for one additional year unless the Board of Directors of the
Company (or the executive determines, and prior to the Renewal Date sends to the other party written notice, that the
term shall not be extended. If the Board of Directors of the Company decides not to extend the term, the Employment
Agreement shall nevertheless remain in force until its existing term expires. Under the Employment Agreements, the
Bank will pay Mr. Sellers a base salary at the rate of at least $311,400 per year, Mr. Lampron a base salary at the rate of
at least $193,125 per year and Mr. Cable a base salary at the rate of at least $198,750 per year (“Base Salary”). The
Bank will review each executive’s total compensation at least annually and in its sole discretion may adjust an executive’s
total compensation from year to year, but during the term of the Employment Agreement, Mr. Sellers’s Base Salary may
not decrease below $319,185, Mr. Lampron’s Base Salary may not decrease below $193,125 and Mr. Cable’s Base
Salary may not decrease below $198,750; provided, however, that periodic increases in Base Salary, once granted, may
not be subject to revocation. In addition, the Employment Agreements provide for discretionary bonuses and
participation in other management incentive, pension, profit-sharing, medical and retirement plans maintained by the
Bank, as well as fringe benefits normally associated with such executive’s office.
Under the Employment Agreements, each executive’s employment will terminate automatically upon death.
Otherwise, the Company and the Bank may terminate each executive’s employment for “cause”, “without cause” or in the
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
21
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 and repurchase an forfeiture rights, either as a result of the change of
control or otherwise, shall immediately vest and be released from such restrictions as of the change of control termination
date; and (3) all options previously granted to the officer that are unvested as of the change of control termination date
will be deemed vested, fully exercisable and non-forfeitable as of the change of control termination date (other than
transfer restrictions applicable to incentive stock options) and all previously granted options that are vested, but
unexercised, on the change of control termination date will remain exercisable, in each case for the period during which
they would have been exercisable absent the termination of his or her employment, except as otherwise specifically
provided by the Internal Revenue Code; and (4) his benefits under all benefit plans that are non-qualified plans will be
100% vested, regardless of his age or years of service, as of the change of control termination date.
If the named executive officers were terminated on December 31, 2016, “without cause” or for “good reason” at
the time of or within one year after a “change of control”, Mr. Sellers, Mr. Lampron and Mr. Cable would have been
entitled to receive compensation of approximately $1,084,000, $713,000 and $730,000, respectively, pursuant to their
Employment Agreements. These amounts are calculated based on each officer’s 2016 base salary and bonus as shown in
the Summary Compensation Table. In addition, if a “change in control” (as defined in the Omnibus Plan) had occurred on
December 31, 2016, all unvested restricted stock units previously granted to each of Mr. Sellers, Mr. Lampron and Mr.
Cable would have vest immediately. On December 31, 2016, these unvested restricted stock units had a fair market value
of $493,102, $355,317 and $355,317, respectively.
Omnibus Stock Option and Long Term Incentive Plan
The purpose of the Omnibus Plan is to promote the interests of the Company by attracting and retaining
directors and employees of outstanding ability and to provide executive and other key employees of the Company and its
subsidiaries greater incentive to make material contributions to the success of the Company by providing them with
stock-based compensation which will increase in value based upon the market performance of the common stock and/or
the corporate achievement of financial and other performance objectives.
Rights Which May Be Granted. Under the Omnibus Plan, the Committee may grant or award eligible
participants stock options, rights to receive restricted shares of common stock, restricted stock units, performance units
(each equivalent to one share of common stock), SARs, and/or book value shares. These grants and awards are referred
22
to herein as “Rights.” All Rights must be granted or awarded by February 19, 2019, the tenth anniversary of the date the
Board of Directors adopted the Omnibus Plan. The Board of Directors has provided for 360,000 shares of the
Company’s common stock to be included in the Omnibus Plan to underlie Rights which may be granted thereunder.
Options. Options granted under the Omnibus Plan to eligible directors and employees may be either
incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). The exercise price of an ISO or NSO may not
be less than 100% of the last-transaction price for the common stock quoted by the NASDAQ Stock Market on the date
of grant.
Restricted Stock and Restricted Stock Units. The Committee may award Rights to acquire shares of
common stock or restricted stock units, subject to certain transfer restrictions (“Restricted Stock” or “Restricted Stock
Unit”) to eligible participants under the Omnibus Plan for such purchase price per share, if any, as the Committee, in its
discretion, may determine appropriate. The Committee will determine the expiration date for each Restricted Stock or
Restricted Stock Unit award, up to a maximum of ten years from the date of grant. In the Committee’s discretion, it may
specify the period or periods of time within which each Restricted Stock or Restricted Stock Unit award will first become
exercisable, which period or periods may be accelerated or shortened by the Committee. Under the terms of the Omnibus
Plan, the Committee also has the discretion to pay out awards of Restricted Stock or Restricted Stock Units in the
Company’s common stock, cash or a combination of stock and cash.
Performance Units. Under the Omnibus Plan, the Committee may grant to eligible directors and
employees awards of long term incentive performance units, each equivalent in value to one share of common stock
(“Units”). Except as otherwise provided, Units awarded may be distributed only after the end of a performance period of
two or more years, as determined by the Committee, beginning with the year in which the awards are granted.
The percentage of the Units awarded that are to be distributed will depend on the level of financial and other
performance goals achieved by the Company during the performance period. The Committee may adopt one or more
performance categories in addition to, or in substitution for, a performance category or may eliminate all performance
categories other than financial performance.
As soon as practicable after each performance period, the percentage of Units awarded that are to be distributed,
based on the levels of performance achieved, will be determined and distributed to the recipients of such awards in the
form of a combination of shares of common stock and cash or cash only. Units awarded, but which the recipients are not
entitled to receive, will be cancelled.
In the event of the death or disability of a Unit recipient prior to the end of any performance period, the number
of Units awarded for such performance period will be reduced in proportion to the number of months remaining in the
performance period after the date of death or disability. The remaining portion of the award, if any, may, in the discretion
of the Committee, be adjusted based upon the levels of performance achieved prior to the date of death or disability, and
distributed within a reasonable time after death or disability. In the event a recipient of Units ceases to be an eligible
director or employee for any reason other than death or disability, all Units awarded, but not yet distributed, will be
cancelled.
In the event of a change in control (as that term is defined in the Omnibus Plan), any outstanding Units will
immediately and automatically be reduced as appropriate to reflect a shorter performance period.
An amount equal to the dividend payable on one share of common stock (a “dividend equivalent credit”) will be
determined and credited on the payment date to each Unit recipient’s account for each Unit awarded and not yet
distributed or cancelled. Such amount will be converted within the account to an additional number of Units equal to the
number of shares of common stock which could be purchased at the last-transaction price of the common stock on the
NASDAQ Market on the dividend payment date.
No dividend equivalent credits or distribution of Units may be credited or made if, at the time of crediting or
distribution, (i) the regular quarterly dividend on the common stock has been omitted and not subsequently paid or there
exists any default in payment of dividends on any such outstanding shares of common stock; (ii) the rate of dividends on
the common stock is lower than at the time the Units to which the dividend equivalent credit relates were awarded,
23
adjusted for certain changes; (iii) estimated consolidated net income of the Company for the twelve-month period
preceding the month the dividend equivalent credit or distribution would otherwise have been made is less than the sum
of the amount of the dividend equivalent credits and Units eligible for distribution under the Omnibus Plan in that month
plus all dividends applicable to such period on an accrual basis, either paid, declared or accrued at the most recently paid
rate, on all outstanding shares of common stock; or (iv) the dividend equivalent credit or distribution would result in a
default in any agreement by which the Company is bound.
If an extraordinary event occurs during a performance period which significantly alters the basis upon which the
performance levels were established, the Committee may make adjustments which it deems appropriate in the
performance levels. Such events may include changes in accounting practices, tax, financial institution laws or
regulations or other laws or regulations, economic changes not in the ordinary course of business cycles, or compliance
with judicial decrees or other legal requirements.
Stock Appreciation Rights. The Omnibus Plan provides that the Committee may award to eligible
directors and employees Rights to receive cash based upon increases in the market price of common stock over the last
transaction price of the common stock on the NASDAQ Stock Market (the “Base Price”) on the date of the award. The
Committee may adjust the Base Price of a stock appreciation right (“SAR”) based upon the market value performance of
the common stock in comparison with the aggregate market value performance of a selected index or at a stated annual
percentage rate. The expiration date of a SAR may be no more than ten years from the date of award.
Each SAR awarded by the Committee may be exercisable immediately or may become vested over such period
or periods as the Committee may establish, which periods may be accelerated or shortened in the Committee’s discretion.
Each SAR awarded will terminate upon the expiration date established by the Committee, termination of the employment
or directorship of the SAR recipient, or in the event of a change in control, as described above in connection with the
termination of Options.
Book Value Shares. The Omnibus Plan provides that the Committee may award to eligible directors
and eligible employees long term incentive units, each equivalent in value to the book value of one share of common
stock on the date of award (“Book Value Shares”). The Committee will specify the period or periods of time within
which each Book Value Share will vest, which period or periods may be accelerated or shortened by the Committee.
Upon redemption, the holder of a Book Value Share will receive an amount equal to the difference between the book
value of the common stock at the time the Book Value Share is awarded and the book value of the common stock at the
time the Book Value Share is redeemed, adjusted for the effects of dividends, new share issuances, and mark-to-market
valuations of the Company’s investment securities portfolio in accordance with generally accepted accounting principles.
The expiration date of each Book Value Share awarded will be established by the Committee, up to a maximum
of ten years from the date of award. However, awards of Book Value Shares will terminate earlier in the same manner as
described above in connection with the termination of Options.
Adjustments. In the event the outstanding shares of the common stock are increased, decreased, changed into or
exchanged for a different number or kind of securities as a result of a stock split, reverse stock split, stock dividend,
recapitalization, merger, share exchange acquisition, or reclassification, appropriate proportionate adjustments will be
made in (i) the aggregate number or kind of shares which may be issued pursuant to exercise of, or which underlie,
Rights; (ii) the exercise or other purchase price, or Base Price, and the number and/or kind of shares acquirable under, or
underlying, Rights; and (iii) rights and matters determined on a per share basis under the Omnibus Plan. Any such
adjustment will be made by the Committee, subject to ratification by the Board of Directors. As described above, the
Base Price of a SAR may also be adjusted by the Committee to reflect changes in a selected index. Except with regard to
Units and Book Value Shares awarded under the Omnibus Plan, no adjustment in the Rights will be required by reason of
the issuance of common stock, or securities convertible into common stock, by the Company for cash or the issuance of
shares of common stock by the Company in exchange for shares of the capital stock of any corporation, financial
institution or other organization acquired by the Company or a subsidiary thereof in connection therewith.
Any shares of common stock allocated to Rights granted under the Omnibus Plan which are subsequently
cancelled or forfeited will be available for further allocation upon such cancellation or forfeiture.
24
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, 2016, each director received a fee of $1,000 for each Bank Board of
Directors meeting attended, an additional fee of $500 for each committee meeting attended and a retainer of $12,000. In
addition, the Chairman of the Bank’s Board of Directors received an additional $250 per meeting attended and the
chairpersons of each committee received an additional $150 per meeting attended. Directors receive $375 for special
meetings held via conference call in lieu of the Board of Director and committee meeting fees set forth above.
Directors who are members of the Board of Directors of Real Estate Advisory Services, Inc., Peoples Investment
Services, Inc. and PB Real Estate Holdings, LLC, and Community Bank Real Estate Solutions, LLC, subsidiaries of the
Bank, receive $500 per meeting.
The Bank maintains a Service Recognition Program, under which directors, officers and employees are eligible
for awards. Under the Service Recognition Program, directors, officers and employees are awarded a combination of
common stock of the Company and cash in the amount necessary to pay taxes on the award, with the amount of the award
based upon the length of service to the Bank. Any common stock awarded under the Service Recognition Program is
purchased by the Bank on the open market, and no new shares are issued by the Company under the Service Recognition
Program.
Directors’ Stock Benefits Plan. Members of the Board of Directors are eligible to participate in the Company’s
Omnibus Plan. On March 22, 2012, the Company granted 810 restricted stock units to each director, with each unit being
comprised of the right to receive one share of the Company’s common stock and having a grant date fair value of $7.90.
The restricted stock units awarded to directors on March 22, 2012 vested in full on March 22, 2017. On May 23, 2013,
the Company granted 810 restricted stock units to each director, with each unit being comprised of the right to receive
one share of the Company’s common stock and having a grant date fair value of $11.90. The restricted stock units
awarded to directors on May 23, 2013 will vest in full on May 23, 2017. On February 20, 2014, the Company granted
650 restricted stock units to each director, with each unit being comprised of the right to receive one share of the
Company’s common stock and having a grant date fair value of $15.70. The restricted stock units awarded to directors
on February 20, 2014 vested in full on February 20, 2017. On February 19, 2015, the Company granted 375 restricted
stock units to each director, with each unit being comprised of the right to receive one share of the Company’s common
stock and having a grant date fair value of $17.97. The restricted stock units awarded to directors on February 19, 2015
will vest in full on February 19, 2019. The Company did not grant any plan-based awards to directors during the fiscal
year ended December 31, 2016.
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 2016.
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
25
cash surrender value of the contracts constitutes the Company’s contribution to the supplemental retirement benefits plan
each year. The Bank will pay annual benefits to each director for 15 years beginning upon retirement from the Board of
Directors. The Bank is the sole owner of all of the insurance contracts.
The following table reports all forms of compensation paid to or accrued for the benefit of each director
during the 2016 fiscal year.
DIRECTOR COMPENSATION
Fees
Earned or
Paid in
Cash ($)
Stock
Awards1 ($)
Option
Awards ($)
Non-Equity
Incentive Plan
Compensation ($)
Name
James S. Abernethy
28,950
Robert C. Abernethy
45,200
Douglas S. Howard
37,800
John W. Lineberger, Jr.
27,300
Gary E. Matthews
27,300
Billy L. Price, Jr., M.D.
37,650
Larry E. Robinson
27,800
William Gregory Terry
28,300
Dan Ray Timmerman, Sr.
34,300
Benjamin I. Zachary
31,300
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings2 ($)
6,869
10,400
4,264
10,129
6,228
5,632
6,625
2,087
14,655
5,657
All Other
Compensation ($)
Total ($)
0
5,0003
0
0
1,2753
0
0
0
0
0
35,819
60,600
42,064
37,429
34,803
43,282
34,425
30,387
48,955
36,957
_________________________
1 The Company did not grant any plan-based awards to directors during the fiscal year ended December 31, 2016. At December 31, 2016, each director
had an aggregate of 2,645 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 2016, Director R. Abernethy received 171 shares of the Company’s stock and $981.50 in cash for his 40 years of service as a director under the
Bank’s Service Recognition Program, and Director Matthews received 42 shares of the Company’s stock and $288.00 in cash for his 15 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 2016. All outstanding loans, extensions
of credit or overdrafts, endorsements and guarantees outstanding at any time during 2016 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.
26
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.
Transactions are reviewed as to 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.
The Bank leases two of its facilities from Shortgrass Associates, L.L.C. (“Shortgrass”). Director John W.
Lineberger, Jr. owns 25% of the membership interests in Shortgrass. Pursuant to the terms of the leases for the two
facilities leased by the Bank, during 2016 the Bank paid a total of $229,310 to Shortgrass in lease payments for these
facilities. Each of the facilities is subject to a 20-year lease between the Bank and Shortgrass.
The Bank engaged Matthews Construction Company, Inc. (“Matthews Construction”) to renovate the Bank’s
Corporate Center located at 518 West C Street, Newton, North Carolina 28658. Director Gary E. Matthews owns
18.43% of the issued and outstanding capital stock in Matthews Construction. During 2016 the Bank paid a total of
$208,770 to Matthews Construction for such renovation work.
The Board of Directors also evaluates the influence family relationships may have on the independence of
directors who are related by blood or marriage. Christine S. Abernethy, a greater than ten percent (10%) shareholder of
the Company, has two sons, Robert C. Abernethy and James S. Abernethy, who serve on the Board of Directors. All of
the non-related directors have determined that the family relationships among Christine S. Abernethy, James S.
Abernethy and Robert C. Abernethy do not affect the brothers’ independence as directors.
27
Equity Compensation Plan Information
The following table sets forth certain information regarding outstanding options and shares for future issuance
under the Equity Compensation Plans as of December 31, 2016. 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.
Number of
securities to be
issued upon
exercise of
outstanding option,
warrants and rights
(1), (2), (3), (4), (5)
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights (6)
(b)
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a)) (7)
(c)
97,480
-
97,480
$25.07
-
$25.07
262,520
-
262,520
Plan Category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(1) Includes 24,159 restricted stock units granted on March 22, 2012 and 5,355 restricted stock units granted on July
26, 2012 under the February 19, 2009 Omnibus Stock Ownership and Long Term Incentive Plan (the "Omnibus
Plan"). These restricted stock grants vest five years after issuance.
(2) Includes 26,795 restricted stock units granted on May 23, 2013 under the Omnibus Plan. These restricted stock
grants vest on May 23, 2017.
(3) Includes 21,056 restricted stock units granted on February 20, 2014 under the Omnibus Plan. These restricted
stock grants vest on February 20, 2017.
(4) Includes 15,075 restricted stock units granted on February 19, 2015 under the Omnibus Plan. These restricted
stock grants vest on February 19, 2019.
(5) Includes 5,040 restricted stock units granted on February 18, 2016 under the Omnibus Plan. These restricted
stock grants vest on February 20, 2020.
(6) The exercise price used for the grants of restricted stock units under the Omnibus Plan is $25.07, the closing price
for the Company’s stock on December 31, 2016.
(7) Reflects shares currently reserved for possible issuance under the Omnibus Plan.
28
STOCK PERFORMANCE GRAPH
The following graph compares the Company’s cumulative shareholder return on its common stock with a
NASDAQ index and with a southeastern bank index. The graph was prepared by SNL Securities, L.C., Charlottesville,
Virginia, using data as of December 31, 2016.
COMPARISON OF SIX-YEAR CUMULATIVE TOTAL RETURNS
Performance Report for
Peoples Bancorp of North Carolina, Inc.
Peoples Bancorp of North Carolina, Inc.
Peoples Bancorp of North Carolina, Inc.
Total Return Performance
Peoples Bancorp of North Carolina, Inc.
NASDAQ Composite
SNL Southeast Bank
500
450
400
350
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
Index
Peoples Bancorp of North Carolina, Inc.
NASDAQ Composite
SNL Southeast Bank
Period Ending
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
492.69
219.89
331.30
373.07
201.98
249.57
341.90
188.84
253.52
169.48
117.45
166.11
100.00
100.00
100.00
266.65
164.57
225.10
29
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
Elliott Davis Decosimo, PLLC (“Elliott Davis”), our registered independent public accounting firm for the fiscal
year ended December 31, 2016, has been appointed by the Audit Committee as our registered independent public
accounting firm for the fiscal year ending December 31, 2017, 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.
On June 19, 2015, we advised Porter Keadle Moore, LLC (“PKM”), our registered independent accounting firm
for the fiscal year ended December 31, 2014, that it was dismissed as our registered independent public accounting firm.
PKM’s reports on our financial statements for the fiscal years ended December 31, 2013 and 2014, did not contain an
adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was recommended and approved by the Audit Committee.
During fiscal years ended December 31, 2013 and December 31, 2014 and through the period ended June 19, 2015, there
were no disagreements with PKM on any matter of accounting principles or practices, financial statement disclosures, or
auditing scope or procedures which disagreements, if not resolved to PKM’s satisfaction, would have caused PKM to
make reference thereto in their reports on the financial statements for such periods.
In addition, on June 19, 2015, we appointed Elliott Davis as our independent registered public accounting firm
for the fiscal year ended December 31, 2015. We did not consult with Elliott Davis during the fiscal years ended
December 31, 2013 and 2014, nor during any subsequent interim period preceding such appointment, on the application
of accounting principles to a specific contemplated or completed transaction, the type of audit opinion that might be
rendered on our consolidated financial statements, or any matter that was the subject of a “disagreement” or a “reportable
event” as such terms are described in Item 304(a)(1)(iv) and (v) of Regulation S-K.
Audit Fees Paid to Independent Auditors
The following table represents the approximate fees for professional services rendered by Elliott Davis and
PKM 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, 2016 and 2015 and fees billed for audit-related services, tax services and all
other services rendered, for each of such years.
Audit Fees1
Audit-Related Fees2
Tax Fees3
All Other Fees
Year Ended December 31
2016
$178,500
$ 10,000
$ 25,100
--
2015
$193,000
$ 19,000
$ 45,000
--
__________________________
1 Of the 2015 amount, $163,000 was for Elliott Davis and $30,000 was for PKM. The $163,000 for Elliot Davis includes amounts for the testing of
management’s assertions regarding internal controls in accordance with the Federal Deposit Insurance Corporation Improvement Act. Audit Fees for
Elliot Davis and PKM include amounts for the integrated audit of the consolidated financial statements and internal control over financial reporting
(Sarbanes-Oxley Section 404).
2 Represents amounts for the audit of the Company’s Profit Sharing and 401(k) Plan and the testing of management’s assertions regarding internal
controls in accordance with the Federal Deposit Insurance Corporation Improvement Act. Of the 2015 amount, all was for PKM.
3 Represents amounts for assistance in the preparation of our various federal, state and local tax returns. Of the 2015 amount, $20,000 was for Elliott
Davis and $25,000 was for PKM.
30
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, 2016.
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
It is presently anticipated that the 2018 Annual Meeting of Shareholders of the Company will be held on May 3,
2018. 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 27, 2017 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 2018 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 9, 2018, of his or
her proposal. If the Secretary of the Company is not notified of the shareholder’s proposal by February 9, 2018, 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 2018 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, 2016, which includes financial statements
audited and reported upon by the Company’s registered independent public accounting firm, is being mailed as Appendix
A to this Proxy Statement; however, it is not intended that the Annual Report be deemed a part of this Proxy Statement or
a solicitation of proxies.
THE FORM 10-K FILED BY THE COMPANY WITH THE SEC, INCLUDING THE FINANCIAL
STATEMENTS AND SCHEDULES THERETO, WILL BE PROVIDED FREE OF CHARGE UPON WRITTEN
REQUEST DIRECTED TO: PEOPLES BANCORP OF NORTH CAROLINA, INC., POST OFFICE BOX 467,
518 WEST C STREET, NEWTON, NORTH CAROLINA 28658-0467, ATTENTION: A. JOSEPH LAMPRON,
JR.
By Order of the Board of Directors,
Lance A. Sellers
President and Chief Executive Officer
Newton, North Carolina
March 24, 2017
31
APPENDIX A
ANNUAL REPORT
OF
PEOPLES BANCORP OF NORTH CAROLINA, INC.
PEOPLES BANCORP OF NORTH CAROLINA, INC.
General Description of Business
Peoples Bancorp of North Carolina, Inc. (“Bancorp”), was formed in 1999 to serve as the holding company for
Peoples Bank (the “Bank”). Bancorp is a bank holding company registered with the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
Bancorp’s principal source of income is dividends declared and paid by the Bank on its capital stock, if any. Bancorp has no
operations and conducts no business of its own other than owning the Bank. Accordingly, the discussion of the business
which follows concerns the business conducted by the Bank, unless otherwise indicated. Bancorp and its wholly owned
subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries are collectively called the “Company”.
The Bank, founded in 1912, is a state-chartered commercial bank serving the citizens and business interests of the
Catawba Valley and surrounding communities through 20 banking offices, as of December 31, 2016, located in Lincolnton,
Newton, Denver, Catawba, Conover, Maiden, Claremont, Hiddenite, Hickory, Charlotte, Monroe, Cornelius, Mooresville and
Raleigh, North Carolina. The Bank also operates loan production offices in Denver, Durham and Winston-Salem, North
Carolina. At December 31, 2016, the Company had total assets of $1.1 billion, net loans of $716.3 million, deposits of
$892.9 million, total securities of $252.6 million, and shareholders’ equity of $107.4 million.
The Bank operates four banking offices focused on the Latino population under the name Banco de la Gente
(“Banco”). These offices are operated as a division of the Bank. Banco offers 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 and therefore is not considered a
reportable segment of the Company. The Bank operates one Banco loan production office in Durham County, North
Carolina and one Banco loan production office in Forsyth County, North Carolina specifically designed to serve the growing
Latino market.
The Bank has a diversified loan portfolio, with no foreign loans and few agricultural loans. Real estate loans are
predominately variable rate and fixed rate commercial property loans, which include residential development loans to
commercial customers. Commercial loans are spread throughout a variety of industries with no one particular industry or
group of related industries accounting for a significant portion of the commercial loan portfolio. The majority of the Bank’s
deposit and loan customers are individuals and small to medium-sized businesses located in the Bank’s market area. The
Bank’s loan portfolio also includes Individual Taxpayer Identification Number (ITIN) mortgage loans generated thorough the
Bank’s Banco offices. Additional discussion of the Bank’s loan portfolio and sources of funds for loans can be found in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages A-4 through A-23 of the
Annual Report, which is included in this Form 10-K as Exhibit (13).
The operations of the Bank and depository institutions in general are significantly influenced by general economic
conditions and by related monetary and fiscal policies of depository institution regulatory agencies, including the Federal
Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Commissioner of Banks (the
“Commissioner”).
The Company’s fiscal year ends December 31. This Form 10-K is also being used as the Bank’s Annual Disclosure
Statement under FDIC Regulations. This Form 10-K has not been reviewed, or confirmed for accuracy or relevance by the
FDIC.
At December 31, 2016, the Company employed 294 full-time employees and 37 part-time employees, which equated
to 318 full-time equivalent employees.
Subsidiaries
The Bank is a subsidiary of the Company. At December 31, 2016, the Bank had four subsidiaries, Peoples
Investment Services, Inc., Real Estate Advisory Services, Inc., Community Bank Real Estate Solutions, LLC (“CBRES”) and
PB Real Estate Holdings, LLC. Through a relationship with Raymond James Financial Services, Inc., Peoples Investment
Services, Inc. provides the Bank’s customers access to investment counseling and non-deposit investment products such as
stocks, bonds, mutual funds, tax deferred annuities, and related brokerage services. Real Estate Advisory Services, Inc.
provides real estate appraisal and real estate brokerage services. CBRES serves as a “clearing-house” for appraisal services
for community banks. Other banks are able to contract with CBRES to find and engage appropriate appraisal companies in
the area where the property to be appraised is located. This type of service ensures that the appraisal process remains
independent from the financing process within the Bank. PB Real Estate Holdings, LLC acquires, manages and disposes of
real property, other collateral and other assets obtained in the ordinary course of collecting debts previously contracted.
A-1
In June 2006, the Company formed a wholly owned Delaware statutory trust, PEBK Capital Trust II (“PEBK Trust
II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable
interest debentures. All of the common securities of PEBK Trust II are owned by the Company. The proceeds from the
issuance of the common securities and the trust preferred securities were used by PEBK Trust II to purchase $20.6 million of
junior subordinated debentures of the Company, which pay a floating rate equal to three-month LIBOR plus 163 basis points.
The proceeds received by the Company from the sale of the junior subordinated debentures were used in December 2006 to
repay the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned Delaware statutory trust
of the Company, and for general purposes. The debentures represent the sole asset of PEBK Trust II. PEBK Trust II is not
included in the consolidated financial statements.
The trust preferred securities issued by PEBK Trust II accrue and pay quarterly at a floating rate of three-month
LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the trust preferred
securities to the extent PEBK Trust II does not have funds with which to make the distributions and other payments. The net
combined effect of the trust preferred securities transaction is that the Company is obligated to make the distributions and
other payments required on the trust preferred securities.
These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036, or
upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by
PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the indenture, if the debentures
are redeemed prior to maturity, the redemption price will be the principal amount plus any accrued but unpaid interest.
This report contains certain forward-looking statements with respect to the financial condition, results of
operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based
on the beliefs and assumptions of management of the Company and on the information available to management at the
time that these disclosures were prepared. These statements can be identified by the use of words like “expect,”
“anticipate,” “estimate” and “believe,” variations of these words and other similar expressions. Readers should not place
undue reliance on forward-looking statements as a number of important factors could cause actual results to differ
materially from those in the forward-looking statements. Factors that could cause actual results to differ materially
include, but are not limited to, (1) competition in the markets served by the Bank, (2) changes in the interest rate
environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting
in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4)
legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and
state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules
and regulations and (7) other risks and factors identified in the Company’s other filings with the Securities and Exchange
Commission. The Company undertakes no obligation to update any forward-looking statements.
A-2
SELECTED FINANCIAL DATA
Dollars in Thousands Except Per Share Amounts
Summary of Operations
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Non-interest income
Non-interest expense
Earnings before income taxes
Income tax expense
Net earnings
Dividends and accretion of preferred stock
Net earnings available to common
shareholders
Selected Year-End Balances
Assets
Investment securities available for sale
Net loans
Mortgage loans held for sale
Interest-earning assets
Deposits
Interest-bearing liabilities
Shareholders' equity
Shares outstanding
Selected Average Balances
Assets
Investment securities available for sale
Net loans
Interest-earning assets
Deposits
Interest-bearing liabilities
Shareholders' equity
Shares outstanding
Profitability Ratios
Return on average total assets
Return on average shareholders' equity
Dividend payout ratio*
$
$
$
$
$
$
2016
2015
2014
2013
2012
39,809
3,271
36,538
(1,206)
37,744
13,976
39,982
11,738
2,561
9,177
-
38,666
3,484
35,182
(17)
35,199
13,312
35,778
12,733
3,100
9,633
-
38,420
4,287
34,133
(699)
34,832
12,164
35,671
11,325
1,937
9,388
-
36,696
5,353
31,343
2,584
28,759
12,652
32,841
8,570
1,879
6,691
656
39,245
7,696
31,549
4,924
26,625
12,537
31,782
7,380
1,587
5,793
1,010
9,177
9,633
9,388
6,035
4,783
1,087,991
249,946
716,261
5,709
1,019,661
892,918
698,120
107,428
5,417,800
1,076,604
252,725
703,484
985,236
856,313
705,291
113,196
5,477,245
1,038,481
268,530
679,502
4,149
977,079
832,175
679,937
104,864
5,510,538
1,038,594
266,830
669,628
952,251
816,628
707,611
106,644
5,559,235
1,040,494
281,099
640,809
1,375
956,900
814,700
722,991
98,665
5,612,588
1,036,486
287,371
631,025
949,537
808,399
731,786
96,877
5,615,666
1,034,684
297,890
607,459
497
925,736
799,361
735,111
83,719
5,613,495
1,023,609
293,770
614,532
950,451
787,640
741,228
100,241
5,613,495
1,013,516
297,823
605,551
6,922
931,738
781,525
745,140
97,747
5,613,495
1,029,612
289,010
648,595
965,994
786,976
770,546
103,805
5,559,401
0.85%
8.11%
22.95%
0.93%
9.03%
16.34%
0.91%
9.69%
10.89%
0.65%
6.67%
11.17%
0.56%
5.58%
20.96%
Liquidity and Capital Ratios (averages)
Loan to deposit
Shareholders' equity to total assets
82.15%
10.51%
82.00%
10.27%
78.06%
9.35%
78.02%
9.79%
82.42%
10.08%
Per share of Common Stock
Basic net earnings
Diluted net earnings
Cash dividends
Book value
$
$
$
$
1.68
1.65
0.38
19.83
1.73
1.72
0.28
19.03
1.67
1.66
0.18
17.58
1.08
1.07
0.12
14.91
0.86
0.86
0.18
15.18
*As a percentage of net earnings available to common shareholders.
A-3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of our financial position and results of operations and should be read in
conjunction with the information set forth under Item 1A Risk Factors in the Company’s annual report on Form
10-K and the Company’s consolidated financial statements and notes thereto on pages A-24 through A-67.
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, 2016, 2015 and 2014. 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, Union, Wake, Durham and Forsyth 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.
Current economic conditions, while not as robust as those experienced in the pre-crisis period from 2004 to
2007, have stabilized such that businesses in our market area are growing and investing again. The uncertainty
expressed in the local, national and in international markets through the primary economic indicators of activity,
however, continues to limit the level of activity in our markets.
Although we are unable to control the external factors that influence our business, by maintaining high
levels 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.
A-4
The Federal Reserve maintained the Federal Funds rate at 0.25% from December 2008 to December 2015
before increasing the Fed Funds rate to 0.50% on December 16, 2015 and to 0.75% on December 14, 2016. This
continued period of very low interest rates has presented a challenge to the Company to maintain its net interest
margin as loan rates fell and remained low, primarily because of competition for credit worthy customers. The cost
of deposits has also fallen but has reached the point where there is little room left to reduce this cost. While the
0.25% Fed Funds rate increases in December 2015 and December 2016 will be helpful, the negative impact of such
low interest rates will remain until the Fed Funds rate increases to levels approaching historical norms.
The Company does not have specific plans for additional offices in 2017 but will continue to look for
growth opportunities in nearby markets and may expand if considered a worthwhile opportunity.
On August 31, 2015, the FDIC and the North Carolina Office of the Commissioner of Banks
(“Commissioner”) issued a Consent Order (the “Order”) in connection with compliance by the Bank with the Bank
Secrecy Act and its implementing regulations (collectively, the “BSA”). The Order was issued pursuant to the
consent of the Bank. In consenting to the issuance of the Order, the Bank did not admit or deny any unsafe or
unsound banking practices or violations of law or regulation.
The Order requires the Bank to take certain affirmative actions to comply with its obligations under the
BSA, including, without limitation, strengthening its Board of Directors’ oversight of BSA activities; reviewing,
enhancing, adopting and implementing a revised BSA compliance program; completing a BSA risk assessment;
developing a revised system of internal controls designed to ensure full compliance with the BSA; reviewing and
revising customer due diligence and risk assessment processes, policies and procedures; developing, adopting and
implementing effective BSA training programs; assessing BSA staffing needs and resources and appointing a
qualified BSA officer; establishing an independent BSA testing program; ensuring that all reports required by the
BSA are accurately and properly filed and engaging an independent firm to review past account activity to
determine whether suspicious activity was properly identified and reported.
Prior to implementation, certain of the actions described above are subject to review by and approval or
non-objection from the FDIC and the Commissioner. The Order will remain in effect and be enforceable until it is
modified, terminated, suspended or set aside by the FDIC and the Commissioner.
The Bank continues to make progress in addressing the issues identified in the Order and expects that it
will be able to undertake and implement all required actions within the time period specified in the Order. The Bank
has incurred and will continue to incur additional non-interest expenses associated with the implementation of
corrective actions; however, these expenses are not expected to have a significant impact on the results of operations
or financial position of the Bank or Bancorp. Operating under the Order will limit the Bank’s and Bancorp’s ability
to participate in acquisitions, to open new branches, and to allocate funds to Bancorp’s stock repurchase plan until
such time as the Order has been modified, terminated, suspended or set aside by the FDIC and the Commissioner.
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. CBRES was moved from a wholly owned subsidiary of Bancorp to a wholly
owned subsidiary of the Bank effective August 31, 2016.
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 2016 Annual Report to Shareholders
which is Appendix A to the Proxy Statement for the May 4, 2017 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.
A-5
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
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, 2016 or 2015.
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 $9.2 million or $1.68 basic net earnings per share and $1.65
diluted net earnings per share, as compared to $9.6 million or $1.73 basic net earnings per share and $1.72 diluted
net earnings per share for the same period one year ago. The decrease in year-to-date net earnings is primarily
attributable to an increase in non-interest expense, which was partially offset by an increase in net interest income,
an increase in the credit to the provision for loan losses and an increase in non-interest income, as discussed below.
The Company reported earnings of $9.6 million, or $1.73 basic net earnings per share and $1.72 diluted net
earnings per share for the year ended December 31, 2015, as compared to $9.4 million, or $1.67 basic net earnings
per share and $1.66 diluted net earnings per share for the year ended December 31, 2014. The increase in year-to-
date earnings is primarily attributable to an increase in net interest income and an increase in non-interest income,
which were partially offset by a decrease in the credit to the provision for loan losses and an increase in non-interest
expense, as discussed below.
The return on average assets in 2016 was 0.85%, compared to 0.93% in 2015 and 0.91% in 2014. The
return on average shareholders’ equity was 8.11% in 2016 compared to 9.03% in 2015 and 9.69% in 2014.
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.
A-6
Net interest income for 2016 was $36.5 million compared to $35.2 million in 2015. The increase in net
interest income was primarily due to a $1.1 million increase in interest income, which was primarily attributable to
an increase in the average outstanding balance of loans and a 0.25% increase in the prime rate in December 2015,
combined with a $213,000 decrease in interest expense, which was primarily attributable to a decrease in the
average outstanding balance of time deposits and Federal Home Loan Bank (“FHLB”) borrowings during the year
ended December 31, 2016, as compared to the year ended December 31, 2015. Net interest income increased to
$35.2 million in 2015 from $34.8 million in 2014.
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, 2016, 2015 and 2014. 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 36.64% for securities that are both federal and state tax exempt and
an effective tax rate of 32.64% 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.
Table 1- Average Balance Table
(Dollars in thousands)
Interest-earning assets:
Interest and fees on loans
Investments - taxable
Investments - nontaxable*
Other
December 31, 2016
December 31, 2015
December 31, 2014
Average
Balance
Interest
Yield /
Rate
Average
Balance
Interest
Yield /
Rate
Average
Balance
Interest
Yield /
Rate
$
703,484
78,575
178,379
24,798
32,452
1,925
7,577
123
4.61%
2.45%
4.25%
0.50%
669,628
89,998
181,382
11,243
31,098
2,240
7,634
26
4.64%
2.49%
4.21%
0.23%
631,025
120,038
172,662
25,812
30,305
2,840
7,561
65
4.80%
2.37%
4.38%
0.25%
Total interest-earning assets
985,236
42,077
4.27%
952,251
40,998
4.31%
949,537
40,771
4.29%
Cash and due from banks
Other assets
Allowance for loan losses
Total assets
44,732
59,537
(8,884)
$
1,080,621
42,483
59,222
(10,678)
1,043,278
47,614
56,571
(12,905)
1,040,817
Interest-bearing liabilities:
NOW, MMDA & savings deposits
Time deposits
FHLB borrowings
Trust preferred securities
Other
$
447,582
150,641
42,903
20,619
43,546
495
586
1,661
485
44
0.11%
0.39%
3.87%
2.35%
0.10%
418,358
173,622
49,840
20,619
45,172
432
870
1,735
402
45
0.10%
0.50%
3.48%
1.95%
0.10%
392,822
208,194
63,712
20,619
46,439
499
1,188
2,166
389
45
0.13%
0.57%
3.40%
1.89%
0.10%
Total interest-bearing liabilities
705,291
3,271
0.46%
707,611
3,484
0.49%
731,786
4,287
0.59%
Demand deposits
Other liabilities
Shareholders' equity
258,091
4,043
113,196
Total liabilities and shareholder's equity
$
1,080,621
224,648
4,375
106,644
1,043,278
207,383
4,771
96,877
1,040,817
Net interest spread
$
38,806
3.81%
$
37,514
3.82%
36,484
3.70%
Net yield on interest-earning assets
3.94%
3.94%
3.84%
Taxable equivalent adjustment
Investment securities
Net interest income
$
2,268
$
36,538
$
2,332
$
35,182
2,351
34,133
*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $38.7 million in 2016, $37.3 million in 2015 and $26.0
million in 2014. The tax rates of 4.00%, 5.00% and 6.00% were used to calculate the tax equivalent yields on these securities in 2016, 2015 and 2014,
respectively.
Changes in interest income and interest expense can result from variances in both volume and rates. Table
2 describes the impact on the Company’s tax equivalent net interest income resulting from changes in average
balances and average rates for the periods indicated. The changes in interest due to both volume and rate have been
allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the changes
in each.
A-7
Table 2 - Rate/Volume Variance Analysis-Tax Equivalent Basis
(Dollars in thousands)
Interest income:
Loans: Net of unearned income
Investments - taxable
Investments - nontaxable
Other
Total interest income
Interest expense:
NOW, MMDA & savings deposits
Time deposits
FHLB / FRB Borrowings
Trust Preferred Securities
Other
Total interest expense
Net interest income
December 31, 2016
December 31, 2015
Changes
in average
volume
Changes in
average
rates
Total
Increase
(Decrease)
Changes
in average
volume
Changes in
average
rates
Total
Increase
(Decrease)
$
1,566
(282)
(127)
50
1,207
31
(103)
(255)
-
(1)
(328)
1,535
$
(212)
(33)
70
47
(128)
32
(181)
181
83
0
115
(243)
1,354
1,823
(1,031)
(315)
(57)
97
1,079
63
(284)
(74)
83
(1)
(213)
1,292
(729)
375
(35)
1,434
29
(185)
(477)
0
(1)
(634)
2,068
129
(302)
(4)
(1,208)
(96)
(133)
46
13
1
(169)
(1,039)
792
(600)
73
(39)
226
(67)
(318)
(431)
13
-
(803)
1,029
Net interest income on a tax equivalent basis totaled $38.8 million in 2016 as compared to $37.5 million in
2015. The interest rate spread, which represents the rate earned on interest-earning assets less the rate paid on
interest-bearing liabilities, was 3.81% in 2016, as compared to a net interest spread of 3.82% in 2015. The net yield
on interest-earning assets was 3.94% in 2016 and 2015.
Tax equivalent interest income increased $1.1 million in 2016 primarily due to an increase in interest
income resulting from an increase in the average outstanding principal balance of loans, which was partially offset
by a decrease in the average outstanding balance of investment securities. The average outstanding principal
balance of loans increased $33.9 million to $703.5 million in 2016 compared to $669.6 million in 2015. The
average outstanding balance of investment securities decreased $14.4 million to $257.0 million in 2016 compared to
$271.4 million in 2015. The yield on interest-earning assets was 4.27% in 2016 compared to 4.31% in 2015.
Interest expense decreased $213,000 in 2016 compared to 2015. The decrease in interest expense is
primarily due to a decrease in the average outstanding balance of FHLB borrowings and time deposits. Average
interest-bearing liabilities decreased by $2.3 million to $705.3 million in 2016 compared to $707.6 million in 2015.
The cost of funds decreased to 0.46% in 2016 from 0.49% in 2015.
In 2015 net interest income on a tax equivalent basis was $37.5 million compared to $36.5 million in 2014.
The net interest spread was 3.82% in 2015 compared to 3.70% in 2014. The net yield on interest-earning assets in
2015 increased to 3.94% from the 2014 net yield on interest-earning assets of 3.84%.
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, 2016 was a credit of $1.2 million, as
compared to a credit of $17,000 for the year ended December 31, 2015. The credits to provision for loan losses for
the years ended December 31, 2016, 2015 and 2014 resulted from, and were considered appropriate as part of,
management’s assessment and estimate of the risks in the total loan portfolio and determination of the total
allowance for loan losses. The primary factors contributing to the decrease in the allowance for loan losses at
December 31, 2016 to $7.6 million from $9.6 million at December 31, 2015 were the continuing positive trends in
indicators of potential losses on loans, primarily non-accrual loans and the reduction in net charge-offs since 2012,
as shown in Table 3 below:
A-8
Table 3 - Net Charge-off Analysis
(Dollars in thousands)
Real estate loans
Construction and land development
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate
Commercial loans
Farm loans
Consumer loans (1)
All other loans
Total loans
Net charge-offs
Net charge-offs/(recoveries) as a
percent of average loans
2016
Years ended December 31,
2015
2013
2014
2012
2016
Years ended December 31,
2014
2013
2015
2012
$
(3)
220
-
299
-
516
(25)
-
342
-
$
833
153
584
95
308
-
1,140
(64)
-
400
-
1,476
456
237
174
119
-
986
376
-
358
-
1,720
400
1,613
131
395
-
2,539
458
-
509
-
3,506
4,200
814
(0.01%)
0.25% 0.78% 0.58% 4.99%
0.09% 0.27% 0.12% 0.82% 0.39%
668
563
-
6,245
451
-
409
-
7,105
0.00% 0.21% 0.36% 0.26% 1.25%
0.12% 0.13% 0.05% 0.20% 0.27%
0.00% 0.00% 0.00% 0.00% 0.00%
0.09% 0.20% 0.18% 0.48% 1.12%
(0.03%) (0.07%)
0.53% 0.73% 0.75%
0.00% 0.00% 0.00% 0.00% 0.00%
3.38% 4.00% 3.63% 5.27% 4.00%
0.00% 0.00% 0.00% 0.00% 0.00%
0.12% 0.22% 0.27% 0.57% 1.10%
(Reduction of) provision for loan losses
for the period
$
(1,206)
(17)
(699)
2,584
4,924
Allowance for loan losses at end of period
$
7,550
9,589
11,082
13,501
14,423
Total loans at end of period
$
723,811
689,091
651,891
620,960
619,974
Non-accrual loans at end of period
$
3,825
8,432
10,728
13,836
17,630
Allowance for loan losses as a percent of
total loans outstanding at end of period
Non-accrual loans as a percent of
1.04%
1.39%
1.70%
2.17%
2.33%
total loans outstanding at end of period
0.53%
1.22%
1.65%
2.23%
2.84%
(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.
Another factor considered in taking a credit to provision expense in the years ended December 31, 2016,
2015 and 2014 was the decline in the construction and land development portfolio. This portfolio experienced the
highest percentage of loss in 2012 as shown in Table 3 above. The balance outstanding was $61.7 million at
December 31, 2016 and $65.8 million at December 31, 2015, compared to the maximum balance of $213.7 million
at December 31, 2008. 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 $14.0 million for the year ended December 31, 2016,
compared to $13.3 million for the year ended December 31, 2015. The increase in non-interest income is primarily
attributable to $729,000 in gains on the sale of securities during the year ended December 31, 2016 and a $298,000
increase in mortgage banking income during the year ended December 31, 2016, as compared to the year ended
December 31, 2015.
Non-interest income was $13.3 million for the year ended December 31, 2015, compared to $12.2 million for
the year ended December 31, 2014. The increase in non-interest income is primarily attributable to a $867,000 change
in gain/(loss) on sales and write-downs of other real estate, a $671,000 increase in miscellaneous non-interest income
and a $326,000 increase in mortgage banking income, which were partially offset by a $463,000 decrease in service
charges and fees. The $671,000 increase in miscellaneous non-interest income is primarily due to a $282,000 increase
in debit card income for the year ended December 31, 2015, as compared to the year ended December 31, 2014, and
$263,000 in net MasterCard debit card incentives recognized in the fourth quarter of 2015.
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 2016, 2015 or 2014.
Table 4 presents a summary of non-interest income for the years ended December 31, 2016, 2015 and
2014.
A-9
Table 4 - Non-Interest Income
(Dollars in thousands)
Service charges
Other service charges and fees
Gain on sale of securities
Mortgage banking income
Insurance and brokerage commissions
Gain/(loss) on sale and write-down of other real estate
Visa debit card income
Net appraisal management fee income
Miscellaneous
Total non-interest income
2016
$
4,497
890
729
1,428
632
64
3,589
886
1,261
13,976
$
2015
2014
4,647
931
-
1,130
714
245
3,452
635
1,558
13,312
4,961
1,080
266
804
701
(622)
3,170
525
1,279
12,164
Non-Interest Expense. Non-interest expense was $40.0 million for the year ended December 31, 2016, as
compared to $35.8 million for the year ended December 31, 2015. The increase in non-interest expense included:
(1) a $979,000 increase in salaries and benefits expense resulting primarily from an increase in the number of full-
time equivalent employees, salary increases and an increase in compensation expense for restricted stock units, (2) a
$971,000 increase in professional fees primarily due to a $1.2 million increase in consulting fees due to expenses
associated with the Order issued in August 2015, (3) a $477,000 increase in occupancy expense primarily due to a
$588,000 increase in equipment maintenance expense and (4) a $1.5 million increase in non-interest expenses other
than salary, employee benefits and occupancy expenses primarily due to a $756,000 increase in penalties associated
with the prepayment of FHLB borrowings during the year ended December 31, 2016, as compared to the year ended
December 31, 2015.
Non-interest expense was $35.8 million for the year ended December 31, 2015, as compared to $35.8
million for the year ended December 31, 2014. Salaries and benefits expense increased by $755,000 resulting
primarily from an increase in the number of full-time equivalent employees and annual salary increases, and such
increase was offset by a $757,000 decrease in other non-interest expenses during the year ended December 31, 2015,
as compared to the year ended December 31, 2014. The decrease in other non-interest expenses is primarily due to
$870,000 amortization expense incurred during 2014 that was associated with North Carolina income tax credits
purchased in 2014.
Table 5 presents a summary of non-interest expense for the years ended December 31, 2016, 2015 and
2014.
Table 5 - Non-Interest Expense
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense
Office supplies
FDIC deposit insurance
Visa debit card expense
Professional services
Postage
Telephone
Director fees and expense
Advertising
Consulting fees
Taxes and licenses
Foreclosure/OREO expense
Internet banking expense
FHLB advance prepayment penalty
Other operating expense
Total non-interest expense
2016
2015
2014
$
19,264
6,765
465
494
1,141
182
224
754
326
1,136
2,257
272
120
710
1,260
4,612
39,982
$
18,285
6,288
422
681
988
564
249
588
304
784
904
301
398
671
504
3,847
35,778
17,530
6,251
448
739
905
798
280
574
237
804
609
301
317
644
869
4,365
35,671
Income Taxes. The Company reported income tax expense of $2.6 million, $3.1 million and $1.9 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The Company’s effective tax rates were
21.82%, 24.35% and 17.10% in 2016, 2015 and 2014, respectively. The lower effective tax rate for 2014 is
primarily due to North Carolina income tax credits purchased during 2014.
A-10
Liquidity. The objectives of the Company’s liquidity policy are to provide for the availability of adequate
funds to meet the needs of loan demand, deposit withdrawals, maturing liabilities and to satisfy regulatory
requirements. Both deposit and loan customer cash needs can fluctuate significantly depending upon business
cycles, economic conditions and yields and returns available from alternative investment opportunities. In addition,
the Company’s liquidity is affected by off-balance sheet commitments to lend in the form of unfunded commitments
to extend credit and standby letters of credit. As of December 31, 2016, such unfunded commitments to extend
credit were $195.5 million, while commitments in the form of standby letters of credit totaled $3.7 million.
The Company uses several funding sources to meet its liquidity requirements. The primary funding source
is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposits of
denominations less than $250,000. The Company considers these to be a stable portion of the Company’s liability
mix and the result of on-going consumer and commercial banking relationships. As of December 31, 2016, the
Company’s core deposits totaled $865.4 million, or 97% of total deposits.
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 2.50% as of December 31, 2016.
At December 31, 2016, the Bank had a significant amount of deposits in amounts greater than $250,000.
Brokered deposits, of $7.2 million at December 31, 2016, are comprised of certificates of deposit participated
through the Certificate of Deposit Account Registry Service (“CDARS”) on behalf of local customers. The balance
and cost of brokered deposits are more susceptible to changes in the interest rate environment than other deposits.
Access to the brokered deposit market could be restricted if the Bank were to fall below the well capitalized level.
For additional information, please see the section below entitled “Deposits.”
The Bank has a line of credit with the FHLB equal to 20% of the Bank’s total assets, with an outstanding
balance of $20.0 million at December 31, 2016. At December 31, 2016, the carrying value of loans pledged as
collateral totaled approximately $128.3 million. The remaining availability under the line of credit with the FHLB
was $66.8 million at December 31, 2016. The Bank had no borrowings from the FRB at December 31, 2016. 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, 2016, the carrying value of loans pledged as collateral to the FRB totaled
approximately $374.5 million.
The Bank also had the ability to borrow up to $59.5 million for the purchase of overnight federal funds
from five correspondent financial institutions as of December 31, 2016.
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 24.78%,
26.10%, and 31.76% at December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014.
As disclosed in the Company’s Consolidated Statements of Cash Flows included elsewhere herein, net cash
provided by operating activities was approximately $12.2 million during 2016. Net cash used in investing activities
was $23.6 million during 2016 and net cash provided by financing activities was $41.7 million during 2016.
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, 2016.
A-11
Table 6 - Interest Sensitivity Analysis
(Dollars in thousands)
Interest-earning assets:
Loans
Mortgage loans held for sale
Investment securities available for sale
Interest-bearing deposit accounts
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
NOW, savings, and money market deposits
Time deposits
FHLB borrowings
Securities sold under
agreement to repurchase
Trust preferred securities
Total interest-bearing liabilities
Immediate
$
307,490
5,709
-
16,481
-
329,680
477,054
15,313
-
36,434
-
528,801
1-3
months
4-12
months
Total
Within One
Year
Over One
Year & Non-
sensitive
22,764
-
6,602
-
-
29,366
-
17,946
20,000
-
20,619
58,565
15,584
-
14,625
-
-
30,209
-
53,558
-
-
-
53,558
345,838
5,709
21,227
16,481
-
389,255
477,054
86,817
20,000
36,434
20,619
640,924
377,973
-
228,719
-
3,254
609,946
-
57,196
-
-
-
57,196
Total
723,811
5,709
249,946
16,481
3,254
999,201
477,054
144,013
20,000
36,434
20,619
698,120
Interest-sensitive gap
$
(199,121)
(29,199)
(23,349)
(251,669)
552,750
301,081
Cumulative interest-sensitive gap
$
(199,121)
(228,320)
(251,669)
(251,669)
301,081
Interest-earning assets as a percentage of
interest-bearing liabilities
62.34%
50.14%
56.40%
60.73%
1066.41%
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, 2016, rate sensitive assets and rate sensitive
liabilities totaled $999.2 million and $698.1 million, respectively.
Included in the rate sensitive assets are $288.9 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, 2016, the Bank had $182.1 million in loans with interest rate floors. The floors were in effect on
$108.9 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average
rate on these loans is 0.62% 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, 2016, the
market value of AFS securities totaled $249.9 million, compared to $268.5 million and $281.1 million at December
31, 2015 and 2014, respectively. Table 7 presents the fair value of the AFS securities held at December 31, 2016,
2015 and 2014.
A-12
Table 7 - Summary of Investment Portfolio
(Dollars in thousands)
U. S. Government sponsored enterprises
State and political subdivisions
Mortgage-backed securities
Corporate bonds
Trust preferred securities
Equity securities
Total securities
2016
$
38,222
141,856
67,585
1,533
750
-
249,946
$
2015
2014
38,417
148,245
77,887
1,906
750
1,325
268,530
34,048
152,246
90,210
2,467
750
1,378
281,099
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 $252.7 million in 2016, $266.8 million in 2015
and $287.4 million in 2014. Table 8 presents the market value of AFS securities held by the Company by maturity
category at December 31, 2016. 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 36.64% for
securities that are both federal and state tax exempt and an effective tax rate of 32.64% for federal tax exempt
securities.
Table 8 - Maturity Distribution and Weighted Average Yield on Investments
(Dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
One Year or Less
Through 5 Years
Through 10 Years
After 10 Years
Totals
After One Year
After 5 Years
Book value:
U.S. Government
sponsored enterprises
$
1,381
State and political subdivisions
Mortgage-backed securities
Corporate bonds
Trust preferred securities
Equity securities
Total securities
5,423
12,023
500
-
-
1.88%
3.44%
2.89%
5.58%
-
-
7,644
73,223
26,622
-
-
-
2.13%
3.11%
2.92%
0.00%
-
-
22,553
53,944
13,907
1,000
500
-
2.57%
3.19%
2.85%
1.96%
4.75%
-
6,610
5,242
14,102
-
250
-
$
19,327
2.91%
107,489
2.90%
91,904
2.82%
26,204
2.41%
3.82%
3.00%
-
8.13%
0.00%
3.33%
38,188
137,832
66,654
1,500
750
-
244,924
1.74%
3.40%
2.81%
1.48%
5.88%
0.00%
2.55%
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, Union, Wake, Durham and Forsyth
counties in North Carolina.
Although the Bank 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, 2016, the Bank had $115.7 million in residential
mortgage loans, $99.8 million in home equity loans and $330.6 million in commercial mortgage loans, which
include $266.5 million using commercial property as collateral and $64.1 million using residential property as
collateral. Residential mortgage loans include $75.5 million made to customers in the Bank’s traditional banking
offices and $40.2 million in mortgage loans originated in the Bank’s Banco de la Gente offices. All residential
mortgage loans are originated as fully amortizing loans, with no negative amortization.
At December 31, 2016, the Bank had $61.7 million in construction and land development loans. Table 9
presents a breakout of these loans.
A-13
Table 9 - Construction and Land Development Loans
(Dollars in thousands)
Land acquisition and development - commercial purposes
Land acquisition and development - residential purposes
1 to 4 family residential construction
Commercial construction
Total acquisition, development and construction
Number of
Loans
56
223
92
18
389
Balance
Outstanding
9,355
$
24,040
18,218
10,136
61,749
$
Non-accrual
Balance
-
22
-
-
22
The mortgage loans originated in the traditional banking offices are generally 15 to 30 year fixed rate loans
with attributes that prevent the loans from being sellable in the secondary market. These factors may include higher
loan-to-value ratio, limited documentation on income, non-conforming appraisal or non-conforming property type.
These loans are generally made to existing Bank customers and have been originated throughout the Bank’s nine
county service area, with no geographic concentration.
Banco de la Gente single family residential stated income loans originated from 2005 to 2009 were
primarily adjustable rate mortgage loans that adjust annually after the end of the first five years of the loan. The
loans are tied to the one-year T-Bill index and, if they were to adjust at December 31, 2016, would have a reduction
in the interest rate on the loan. The underwriting on these loans includes both full income verification and no
income verification, with loan-to-value ratios of up to 95% without private mortgage insurance. A majority of these
loans would be considered subprime loans, as they were underwritten using stated income rather than fully
documented income verification. No other loans in the Bank’s portfolio would be considered subprime. The
majority of these loans have been originated within the Charlotte, North Carolina metro area (Mecklenburg County).
Total losses on this portfolio, since the first loans were originated in 2004, have amounted to approximately $3.7
million through December 31, 2016.
The composition of the Bank’s loan portfolio at December 31 is presented in Table 10.
Table 10 - Loan Portfolio
(Dollars in thousands)
Real estate loans
Construction and land development
Single-family residential
Single-family residential- Banco de la
Gente stated income
Commercial
M ultifamily and farmland
Total real estate loans
Loans not secured by real estate
Commercial loans
Farm loans
Consumer loans
All other loans
Total loans
Less: Allowance for loan losses
2016
2015
2014
2013
2012
Amount
% of
Loans
Amount
% of
Loans
Amount
% of
Loans
Amount
% of
Loans
Amount
% of
Loans
$
61,749
240,700
8.53%
33.25%
65,791
220,690
9.55%
32.03%
57,617
206,417
8.84%
31.66%
63,742
195,975
10.27%
31.56%
73,176
195,003
11.80%
31.45%
40,189
247,521
21,047
611,206
5.55%
34.20%
2.91%
84.44%
43,733
228,526
18,080
576,820
6.35%
33.16%
2.62%
83.71%
47,015
228,558
12,400
552,007
7.21%
35.06%
1.90%
84.68%
49,463
209,287
11,801
530,268
7.97%
33.70%
1.90%
85.39%
52,019
200,633
8,951
529,782
8.39%
32.36%
1.44%
85.45%
12.11%
0.00%
1.36%
2.10%
100.00%
87,596
-
9,832
15,177
723,811
7,550
13.22%
0.00%
1.46%
1.63%
100.00%
91,010
3
10,027
11,231
689,091
9,589
679,502
11.71%
0.00%
1.54%
2.08%
100.00%
76,262
7
10,060
13,555
651,891
11,082
640,809
10.97%
0.00%
1.54%
2.10%
100.00%
68,047
19
9,593
13,033
620,960
13,501
607,459
64,295
11
10,148
15,738
619,974
14,423
605,551
10.38%
0.00%
1.64%
2.54%
100.00%
Net loans
$
716,261
As of December 31, 2016, gross loans outstanding were $723.8 million, compared to $689.1 million at
December 31, 2015. Average loans represented 71% and 70% of total earning assets for the years ended December
31, 2016 and 2015, respectively. The Bank had $5.7 million and $4.1 million in mortgage loans held for sale as of
December 31, 2016 and 2015, respectively.
Troubled debt restructured (“TDR”) loans modified in 2016, past due TDR loans and non-accrual TDR
loans totaled $5.9 million and $8.8 million at December 31, 2016 and December 31, 2015, 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 $81,000 and $354,000 in
performing loans classified as TDR loans at December 31, 2016 and December 31, 2015, respectively.
Table 11 identifies the maturities of all loans as of December 31, 2016 and addresses the sensitivity of these
loans to changes in interest rates.
A-14
Table 11 - Maturity and Repricing Data for Loans
(Dollars in thousands)
Real estate loans
Construction and land development
Single-family residential
Single-family residential- Banco de la Gente
stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate
Commercial loans
Farm loans
Consumer loans
All other loans
Total loans
Total fixed rate loans
Total floating rate loans
Total loans
Within one
year or less
After one year
through five
years
After five
years
Total loans
$
40,674
112,279
17,402
99,527
6,172
276,054
56,373
-
4,748
8,663
345,838
$
$
4,924
340,914
$
345,838
12,626
73,957
-
106,413
5,167
198,163
17,907
-
4,880
4,727
225,677
196,665
29,012
225,677
8,449
54,464
22,787
41,581
9,708
136,989
13,316
-
204
1,787
152,296
152,296
-
152,296
61,749
240,700
40,189
247,521
21,047
611,206
87,596
-
9,832
15,177
723,811
353,885
369,926
723,811
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, 2016, outstanding loan commitments totaled $199.3 million.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the commitment contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements. Additional information
regarding commitments is provided below in the section entitled “Contractual Obligations and Off-Balance Sheet
Arrangements” and in Note 10 to the Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses reflects management’s assessment and estimate
of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. The Bank
periodically analyzes the loan portfolio in an effort to review asset quality and to establish an allowance for loan
losses that management believes will be adequate in light of anticipated risks and loan losses. In assessing the
adequacy of the allowance, size, quality and risk of loans in the portfolio are reviewed. Other factors considered are:
• the Bank’s loan loss experience;
• the amount of past due and non-performing loans;
• specific known risks;
• the status and amount of other past due and non-performing assets;
• underlying estimated values of collateral securing loans;
• current and anticipated economic conditions; and
• other factors which management believes affect the allowance for potential credit losses.
Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a
loan grading system that begins upon loan origination and continues until the loan is collected or collectability
becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and
assigns one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes
changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar
amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any
changes in these risk grades, management considers assessments as determined by the third party credit review firm
(as described below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk
assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to
originate or renew the loan. The Bank’s Board of Directors reviews, on a monthly basis, an analysis of the Bank’s
reserves relative to the range of reserves estimated by the Bank’s Credit Administration.
A-15
As an additional measure, the Bank engages an independent third party to review the underwriting,
documentation and risk grading analyses. This independent third party reviews and evaluates loan relationships
greater than $1.0 million, excluding loans in default, and loans in process of litigation or liquidation. The third
party’s evaluation and report is shared with management and the Bank’s Board of Directors.
Management considers certain commercial loans with weak credit risk grades to be individually impaired
and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve
levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan
and other matters related to credit risk.
Management uses the information developed from the procedures described above in evaluating and
grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio
and to assist management in estimating the allowance for loan losses. The provision for loan losses charged or
credited to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a
level appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each
quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net
charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other
macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through
an analysis of the appropriateness of the allowance for loan losses.
The allowance for loan losses is comprised of three components: specific reserves, general reserves and
unallocated reserves. After a loan has been identified as impaired, management measures impairment. When the
measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on
management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any
underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance
calculations as described below.
The general allowance reflects reserves established under GAAP for collective loan impairment. These
reserves are based upon historical net charge-offs using the greater of the last two, three, four or five years’ loss
experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank
considers information derived from its loan risk ratings and external data related to industry and general economic
trends in establishing reserves.
The unallocated allowance is determined through management’s assessment of probable losses that are in
the portfolio but are not adequately captured by the other two components of the allowance, including consideration
of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects
management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due
to the subjectivity involved in determining the overall allowance, including the unallocated portion, the unallocated
portion may fluctuate from period to period based on management’s evaluation of the factors affecting the
assumptions used in calculating the allowance.
There were no significant changes in the estimation methods or fundamental assumptions used in the
evaluation of the allowance for loan losses for the year ended December 31, 2016 as compared to the year ended
December 31, 2015. 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, stated income mortgage loans from the Banco de la Gente 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 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. These loans were made as stated income loans rather than full
documentation loans because the customer may not have had complete documentation on the income supporting the
loan.
Various regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgments
of information available to them at the time of their examinations. Management believes it has established the
allowance for credit losses pursuant to GAAP, and has taken into account the views of its regulators and the current
economic environment. Management considers the allowance for loan losses adequate to cover the estimated losses
inherent in the Bank’s loan portfolio as of the date of the financial statements. Although management uses the best
information available to make evaluations, significant future additions to the allowance may be necessary based on
changes in economic and other conditions, thus adversely affecting the operating results of the Company.
A-16
Net charge-offs for 2016 and 2015 were $833,000 and $1.5 million, respectively. The ratio of net charge-
offs to average total loans was 0.12% in 2016, 0.22% in 2015 and 0.27% in 2014. The Bank strives to proactively
work with its customers to identify potential problems. If found, the Bank works to quickly recognize identifiable
losses and to establish a plan, with the borrower, if possible, to have the loans paid off. This process of early
identification increased the levels of charge-offs and provision for loan losses in 2009 through 2013 as compared to
historical periods prior to 2009. The years ended December 31, 2014, 2015 and 2016 saw a return of net charge-offs
to pre-crisis levels. Management expects this to continue in 2017. The allowance for loan losses was $7.6 million or
1.0% of total loans outstanding at December 31, 2016. For December 31, 2015 and 2014, the allowance for loan
losses amounted to $9.6 million or 1.4% of total loans outstanding and $11.1 million, or 1.7% of total loans
outstanding, respectively.
Table 12 presents the percentage of loans assigned to each risk grade at December 31, 2016 and 2015.
Table 12 - Loan Risk Grade Analysis
Risk Grade
Risk Grade 1 (Excellent Quality)
Risk Grade 2 (High Quality)
Risk Grade 3 (Good Quality)
Risk Grade 4 (Management Attention)
Risk Grade 5 (Watch)
Risk Grade 6 (Substandard)
Risk Grade 7 (Doubtful)
Risk Grade 8 (Loss)
Percentage of Loans
By Risk Grade
2016
2015
2.28%
26.82%
54.43%
11.99%
3.07%
1.41%
0.00%
0.00%
2.46%
24.40%
53.08%
14.26%
3.27%
2.53%
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)
Allowance for loan losses at beginning
2016
$
9,589
2015
11,082
2014
13,501
2013
14,423
2012
16,604
Loans charged off:
Commercial
Real estate - mortgage
Real estate - construction
Consumer
Total loans charged off
Recoveries of losses previously charged off:
Commercial
Real estate - mortgage
Real estate - construction
Consumer
Total recoveries
Net loans charged off
146
593
7
492
1,238
170
74
10
151
405
833
38
1,064
197
545
1,844
101
77
45
145
368
1,476
430
789
884
534
2,637
54
259
428
176
917
1,720
Provision for loan losses
(1,206)
(17)
(699)
502
2,441
777
652
4,372
44
302
377
143
866
3,506
2,584
555
2,491
4,728
557
8,331
104
446
528
148
1,226
7,105
4,924
Allowance for loan losses at end of year
$
7,550
9,589
11,082
13,501
14,423
Loans charged off net of recoveries, as
a percent of average loans outstanding
Allowance for loan losses as a percent
0.12%
0.22%
0.27%
0.57%
1.10%
of total loans outstanding at end of year
1.04%
1.39%
1.70%
2.17%
2.33%
A-17
Non-performing Assets. Non-performing assets declined to $4.1 million or 0.4% of total assets at
December 31, 2016, compared to $9.2 million or 0.9% of total assets at December 31, 2015. The decline in non-
performing assets is due to a $4.6 million decrease in non-accrual loans and a $456,000 decrease in other real estate
owned properties. Non-performing loans include $21,000 in construction and land development loans, $3.7 million
in commercial and residential mortgage loans and $55,000 in other loans at December 31, 2016, as compared to
$146,000 in construction and land development loans, $8.1 million in commercial and residential mortgage loans
and $181,000 in other loans at December 31, 2015. Other real estate owned totaled $283,000 and $739,000 as of
December 31, 2016 and 2015, respectively. The Bank had no repossessed assets as of December 31, 2016 and 2015.
At December 31, 2016, the Bank had non-performing loans, defined as non-accrual and accruing loans past
due more than 90 days, of $3.8 million or 0.53% of total loans. Non-performing loans at December 31, 2015 were
$8.4 million or 1.23% 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 be more in-line
with the levels at December 31, 2016 as opposed to the level of non-accruals experienced in 2012.
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)
Non-accrual loans
Loans 90 days or more past due and still accruing
Total non-performing loans
All other real estate owned
Repossessed assets
Total non-performing assets
TDR loans not included in above,
2016
2015
$
3,825
-
3,825
283
-
4,108
$
8,432
17
8,449
739
-
9,188
2014
10,728
-
10,728
2,016
-
12,744
2013
13,836
882
14,718
1,679
-
16,397
2012
17,630
2,403
20,033
6,254
10
26,297
(not 90 days past due or on nonaccrual)
3,337
5,102
7,217
7,953
10,864
As a percent of total loans at year end
Non-accrual loans
Loans 90 days or more past due and still accruing
Total non-performing assets
0.53%
0.00%
1.22%
0.00%
1.65%
0.00%
2.23%
0.14%
2.84%
0.39%
as a percent of total assets at year end
0.38%
0.88%
1.22%
1.58%
2.60%
Total non-performing loans
as a percent of total loans at year-end
0.53%
1.23%
1.65%
2.37%
3.23%
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, 2016, total deposits were $892.9 million, compared to $832.2
million at December 31, 2015. Core deposits, which include demand deposits, savings accounts and non-brokered
certificates of deposits of denominations less than $250,000, amounted to $865.4 million at December 31, 2015,
compared to $805.0 million at December 31, 2015.
Time deposits in amounts of $250,000 or more totaled $26.8 million and $26.9 million at December 31,
2016 and 2015, respectively. At December 31, 2016, brokered deposits amounted to $7.2 million as compared to
$4.3 million at December 31, 2015. CDARS balances included in brokered deposits amounted to $7.2 million and
$4.1 million as of December 31, 2016 and 2015, 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, 2016 have a
weighted average rate of 0.53% with a weighted average original term of 23 months.
A-18
Table 15 is a summary of the maturity distribution of time deposits in amounts of $250,000 or more as of
December 31, 2016.
Table 15 - Maturities of Time Deposits of $250,000 or greater
(Dollars in thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
2016
$
7,001
4,619
3,971
11,180
26,771
$
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. At December 31, 2016
and 2015, FHLB borrowings totaled $20.0 million and $43.5 million, respectively. Average FHLB borrowings for
2016 and 2015 were $42.9 million and $49.8 million, respectively. The maximum amount of outstanding FHLB
borrowings was $43.5 million in 2016 and $50.0 million in 2015. The FHLB borrowings outstanding at December
31, 2016 had interest rates ranging from 2.68% to 4.12% and all mature in 2018. The weighted average rate on
FHLB borrowings was 3.87% and 3.48% at December 31, 2016 and 2015, respectively. Additional information
regarding FHLB borrowings is provided in Note 6 to the Consolidated Financial Statements.
The Bank had no borrowings from the FRB at December 31, 2016 and 2015. 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, 2016, the carrying value of loans pledged as collateral totaled approximately $374.5
million.
Securities sold under agreements to repurchase were $36.4 million at December 31, 2016, as compared to
$27.9 million at December 31, 2015.
Junior subordinated debentures were $20.6 million as of December 31, 2016 and 2015.
Contractual Obligations and Off-Balance Sheet Arrangements. The Company’s contractual obligations
and other commitments as of December 31, 2016 are summarized in Table 16 below. The Company’s contractual
obligations include the repayment of principal and interest related to FHLB advances and 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)
Contractual Cash Obligations
Long-term borrowings
Junior subordinated debentures
Corporate Center renovation
Operating lease obligations
Total
Other Commitments
Commitments to extend credit
Standby letters of credit
and financial guarantees written
Income tax credits
Total
Within One
Year
One to
Three Years
Three to
Five Years
Five Years
or More
Total
-
$
-
2,170
632
2,802
$
20,000
-
-
1,212
21,212
-
-
-
1,193
1,193
-
20,619
-
1,611
22,230
20,000
20,619
2,170
4,648
47,437
$
70,204
20,389
18,833
86,102
195,528
3,728
639
74,571
$
-
2,025
22,414
-
81
18,914
-
119
86,221
3,728
2,864
202,120
A-19
The Company enters into derivative contracts to manage various financial risks. A derivative is a financial
instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or
referenced interest rate. Derivative contracts are carried at fair value on the consolidated balance sheet with the fair
value representing the net present value of expected future cash receipts or payments based on market interest rates
as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only
provide the basis for calculating payments between counterparties and are not a measure of financial risk.
Therefore, the derivative amounts recorded on the balance sheet do not represent the amounts that may ultimately be
paid under these contracts. Further discussions of derivative instruments are included above in the section entitled
“Asset Liability and Interest Rate Risk Management” beginning on page A-11 and in Notes 1, 10 and 15 to the
Consolidated Financial Statements.
Capital Resources. Shareholders’ equity was $107.4 million, or 9.9% of total assets, as of December 31,
2016, compared to $104.9 million, or 10.1% of total assets, as of December 31, 2015. The increase in shareholders’
equity is primarily due to an increase in retained earnings due to net income, which was partially offset by a
decrease in accumulated other comprehensive income resulting from a decrease in the unrealized gain on investment
securities and a $2.0 million decrease in common stock due to 92,738 shares of common stock being repurchased
under the Company’s stock repurchase program implemented during the second quarter of 2016.
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 10.51%, 10.27% and
9.35% for 2016, 2015 and 2014, respectively. The return on average shareholders’ equity was 8.11% at December
31, 2016 as compared to 9.03% and 9.69% at December 31, 2015 and December 31, 2014, respectively. Total cash
dividends paid on common stock were $2.1 million, $1.6 million and $1.0 million during 2016, 2015 and 2014,
respectively. The Company did not pay any dividends on preferred stock during 2016 and 2015.
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 2014, the Company’s Board of Directors authorized a stock repurchase program (“the 2014 Stock
Repurchase Program”), pursuant to which up to $2 million was allocated to repurchase the Company’s common
stock. All purchases under the 2014 Stock Repurchase Program were made periodically as permitted by securities
laws and other legal requirements in the open market or in privately negotiated transactions. The timing and amount
of the repurchase of shares was determined by the Company’s management, based on its evaluation of market
conditions and other factors. The Company had repurchased approximately $2.0 million, or 106,587 shares of its
common stock, under the 2014 Stock Repurchase Program as of December 31, 2015.
In the second quarter of 2016, the Company’s Board of Directors authorized another stock repurchase
program (“the 2016 Stock Repurchase Program”), pursuant to which up to $2 million was allocated to repurchase
the Company’s common stock. All purchases under the 2016 Stock Repurchase Program were made periodically as
permitted by securities laws and other legal requirements in the open market or in privately negotiated transactions.
The timing and amount of the repurchase of shares was determined by the Company’s management, based on its
evaluation of market conditions and other factors. The Company repurchased approximately $2.0 million, or 92,738
shares of its common stock, under the 2016 Stock Repurchase Program during 2016.
In 2013, the Federal Reserve Board approved its final rule on the Basel III capital standards, which
implement changes to the regulatory capital framework for banking organizations. The Basel III capital standards,
which became effective January 1, 2015, include new risk-based capital and leverage ratios, which will be 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 will be added to the
minimum requirements for capital adequacy purposes beginning on January 1, 2016 at 0.625% and will be phased in
through 2019 (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019). This
will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii)
a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, an institution is 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.
A-20
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 Basel III capital standards referenced above. Tier 1 capital is
generally defined as shareholders’ equity and trust preferred securities less all intangible assets and goodwill. Tier 1
capital at December 31, 2016 and December 31, 2015 includes $20.0 million in trust preferred securities. The
Company’s Tier 1 capital ratio was 15.20% and 15.37% at December 31, 2016 and December 31, 2015,
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 16.12% and 16.63% at
December 31, 2016 and December 31, 2015, 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 12.75% and 12.79%
at December 31, 2016 and December 31, 2015, respectively. Financial institutions are also required to maintain a
leverage ratio of Tier 1 capital to total average assets of 4.0% or greater. The Company’s Tier 1 leverage capital
ratio was 11.19% and 11.44% at December 31, 2016 and December 31, 2015, respectively.
The Bank’s Tier 1 risk-based capital ratio was 14.85% at December 31, 2016 and 2015. The total risk-
based capital ratio for the Bank was 15.78% and 16.11% at December 31, 2016 and December 31, 2015,
respectively. The Bank’s common equity Tier 1 capital ratio was 14.85% at December 31, 2016 and 2015. The
Bank’s Tier 1 leverage capital ratio was 10.88% and 11.03% at December 31, 2016 and December 31, 2015,
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, 2016.
The Company’s key equity ratios as of December 31, 2016, 2015 and 2014 are presented in Table 17.
Table 17 - Equity Ratios
Return on average assets
Return on average equity
Dividend payout ratio *
Average equity to average assets
2016
2015
2014
0.85%
8.11%
22.95%
10.51%
0.93%
9.03%
16.34%
10.27%
0.91%
9.69%
10.89%
9.35%
* As a percentage of net earnings available to common shareholders.
Quarterly Financial Data. The Company’s consolidated quarterly operating results for the years ended
December 31, 2016 and 2015 are presented in Table 18.
Table 18 - Quarterly Financial Data
(Dollars in thousands, except per
share amounts)
Total interest income
Total interest expense
Net interest income
$
(Reduction of) provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes (benefit)
Net earnings
2016
2015
First Second Third Fourth
10,107
9,905
821
809
9,286
9,096
9,815
813
9,002
9,982
828
9,154
$
First Second Third Fourth
9,961
9,567
851
884
9,110
8,683
9,947
874
9,073
9,191
875
8,316
(216)
3,324
9,492
3,144
691
2,453
(531)
3,572
9,109
3,996
1,032
2,964
(360)
3,414
9,598
3,330
872
2,458
(99)
3,666
11,783
1,268
(34)
1,302
173
3,245
8,748
3,007
679
2,328
(214)
3,297
8,337
3,490
866
2,624
235
3,266
8,669
3,435
942
2,493
0.45
0.45
(211)
3,504
10,024
2,801
613
2,188
0.40
0.39
Basic net earnings per share
Diluted net earnings per share
0.45
0.44
0.54
0.53
0.45
0.44
$
0.24
0.24
$
$
0.41
0.41
0.47
0.47
A-21
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest
rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest
income in future periods.
The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking
activities. The structure of the Company’s loan and deposit portfolios is such that a significant decline (increase) in
interest rates may adversely (positively) impact net market values and interest income. Management seeks to
manage the risk through the utilization of its investment securities and off-balance sheet derivative instruments.
During the years ended December 31, 2016, 2015 and 2014, 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, 2016. 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, 2016. 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
Fixed rate
Average interest rate
Variable rate
Average interest rate
Total
Investment Securities
Interest bearing cash
Average interest rate
Securities available for sale
Average interest rate
Nonmarketable equity securities
Average interest rate
Debt Obligations
Deposits
Average interest rate
Advances from FHLB
Average interest rate
Securities sold under agreement
to repurchase
Average interest rate
Junior subordinated debentures
Average interest rate
2017
$
$
44,846
4.89%
75,294
4.66%
$
$
16,481
0.59%
44,217
4.06%
-
$
-
$
86,781
0.33%
-
$
-
$
36,434
0.10%
-
$
-
2018
59,309
4.65%
38,558
4.51%
2019
45,286
4.75%
45,379
4.28%
2020
53,841
4.76%
35,034
4.36%
2021
56,949
4.58%
36,069
4.45%
Thereafter
116,964
5.44%
121,991
3.93%
-
-
20,188
4.51%
-
-
33,212
0.56%
20,000
3.73%
-
-
-
-
-
-
22,762
4.39%
-
-
15,117
0.61%
-
-
-
-
-
-
-
-
23,691
4.20%
-
-
5,384
0.75%
-
-
-
-
-
-
-
-
31,668
4.59%
-
-
3,519
0.75%
-
-
-
-
-
-
-
-
107,420
4.30%
2,635
3.38%
748,905
0.07%
-
-
-
-
20,619
2.47%
Total
377,195
Fair Value
375,900
352,325
352,325
729,520
728,225
16,481
16,481
249,946
249,946
2,635
2,635
892,918
884,510
20,000
18,864
36,434
36,434
20,619
20,619
A-22
Table 20 presents the simulated impact to net interest income under varying interest rate scenarios and the
theoretical impact of rate changes over a twelve-month period referred to as “rate ramps.” The table shows the
estimated theoretical impact on the Company’s tax equivalent net interest income from hypothetical rate changes of
plus and minus 1%, 2% and 3% as compared to the estimated theoretical impact of rates remaining unchanged. The
table also shows the simulated impact to market value of equity under varying interest rate scenarios and the
theoretical impact of immediate and sustained rate changes referred to as “rate shocks” of plus and minus 1%, 2%
and 3% as compared to the theoretical impact of rates remaining unchanged. The prospective effects of the
hypothetical interest rate changes are based upon various assumptions, including relative and estimated levels of key
interest rates. This type of modeling has limited usefulness because it does not allow for the strategies management
would utilize in response to sudden and sustained rate changes. Also, management does not believe that rate
changes of the magnitude presented are likely in the forecast period presented.
Table 20 - Interest Rate Risk
(Dollars in thousands)
Hypothetical rate change (ramp over 12 months)
+3%
+2%
+1%
0%
-1%
-2%
-3%
Hypothetical rate change (immediate shock)
+3%
+2%
+1%
0%
-1%
-2%
-3%
Estimated Resulting Theoretical Net
Interest Income
Amount
% Change
$
$
$
$
$
$
$
41,807
41,635
40,839
39,847
39,177
38,936
38,900
4.92%
4.49%
2.49%
0.00%
-1.68%
-2.29%
-2.38%
Estimated Resulting Theoretical
Market Value of Equity
Amount
% Change
$
$
$
$
$
$
$
154,428
161,219
158,700
145,641
122,977
83,648
70,407
6.03%
10.70%
8.97%
0.00%
-15.56%
-42.57%
-51.66%
A-23
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Financial Statements
December 31, 2016, 2015 and 2014
INDEX
PAGE(S)
Reports of Independent Registered Public Accounting Firm on the Consolidated Financial Statements A-25 - A-28
Financial Statements
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Earnings for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015
and 2014
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2016, 2015 and 2014
A-29
A-30
A-31
A-32
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
A-33 - A-34
Notes to Consolidated Financial Statements
A-35 - A-67
A-24
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Peoples Bancorp of North Carolina, Inc.
We have audited the accompanying consolidated balance sheets of Peoples Bancorp of North Carolina, Inc.
and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements
of earnings, comprehensive income, changes in shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Peoples Bancorp of North Carolina, Inc. and subsidiaries as of December 31, 2016 and
2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Peoples Bancorp of North Carolina, Inc.’s internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 16,
2017 expressed an unqualified opinion on the effectiveness of Peoples Bancorp of North Carolina, Inc.’s
internal control over financial reporting.
/s/ Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 16, 2017
Elliott Davis Decosimo PLLC | www.elliottdavis.com
A-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Peoples Bancorp of North Carolina, Inc.
We have audited Peoples Bancorp of North Carolina, Inc.’s (the “Company”) internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The Company’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Elliott Davis Decosimo PLLC | www.elliottdavis.com
A-26
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Peoples Bancorp of North Carolina, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2016, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in
2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Peoples Bancorp of North Carolina, Inc. as of December 31,
2016 and 2015, and the related consolidated statements of earnings, comprehensive income, changes in
shareholders’ equity and cash flows for the years then ended, and our report dated March 16, 2017 expressed
an unqualified opinion thereon.
/s/ Elliott Davis Decosimo, PLLC
Charlotte, North Carolina
March 16, 2017
A-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Peoples Bancorp of North Carolina, Inc.
We have audited the accompanying consolidated statements of earnings, comprehensive income (loss),
changes in shareholders’ equity and cash flows for the year ended December 31, 2014 and the related notes to
the consolidated financial statements. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, 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. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
results of their operations and their cash flows for the year ended December 31, 2014, in conformity with U.S.
generally accepted accounting principles.
Atlanta, Georgia
March 25, 2015
A-28
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Balance Sheets
December 31, 2016 and December 31, 2015
(Dollars in thousands)
Assets
December 31,
2016
December 31,
2015
Cash and due from banks, including reserve requirements
$
53,613
of $16,576 at 12/31/16 and $14,587 at 12/31/15
Interest-bearing deposits
Cash and cash equivalents
Investment securities available for sale
Other investments
Total securities
Mortgage loans held for sale
Loans
Less allowance for loan losses
Net loans
Premises and equipment, net
Cash surrender value of life insurance
Other real estate
Accrued interest receivable and other assets
Total assets
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand
NOW, MMDA & savings
Time, $250,000 or more
Other time
Total deposits
Securities sold under agreements to repurchase
FHLB borrowings
Junior subordinated debentures
Accrued interest payable and other liabilities
Total liabilities
Commitments (Note 10)
Shareholders' equity:
16,481
70,094
249,946
2,635
252,581
5,709
723,811
(7,550)
716,261
16,452
14,952
283
11,659
1,087,991
271,851
477,054
26,771
117,242
892,918
36,434
20,000
20,619
10,592
980,563
$
$
29,194
10,569
39,763
268,530
3,636
272,166
4,149
689,091
(9,589)
679,502
16,976
14,546
739
10,640
1,038,481
244,231
431,052
26,891
130,001
832,175
27,874
43,500
20,619
9,449
933,617
Series A preferred stock, $1,000 stated value; authorized
5,000,000 shares; no shares issued and outstanding
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,417,800 shares
at December 31, 2016 and 5,510,538 shares at December 31, 2015
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
-
-
44,187
60,254
2,987
107,428
46,171
53,183
5,510
104,864
Total liabilities and shareholders' equity
$
1,087,991
1,038,481
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, 2016, 2015 and 2014
(Dollars in thousands, except per share amounts)
Interest income:
Interest and fees on loans
Interest on due from banks
Interest on investment securities:
U.S. Government sponsored enterprises
States and political subdivisions
Other
Total interest income
Interest expense:
NOW, MMDA & savings deposits
Time deposits
FHLB borrowings
Junior subordinated debentures
Other
Total interest expense
Net interest income
(Reduction of) provision for loan losses
2016
2015
2014
$
32,452
123
2,531
4,454
249
39,809
495
586
1,661
485
44
3,271
36,538
(1,206)
31,098
26
2,616
4,600
326
38,666
432
870
1,735
402
45
3,484
35,182
(17)
30,305
65
2,995
4,677
378
38,420
499
1,188
2,166
389
45
4,287
34,133
(699)
Net interest income after provision for loan losses
37,744
35,199
34,832
Non-interest income:
Service charges
Other service charges and fees
Gain on sale of securities
Mortgage banking income
Insurance and brokerage commissions
Gain (loss) on sales and write-downs of
other real estate
Miscellaneous
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Occupancy
Professional fees
Advertising
Debit card expense
FDIC insurance
Other
Total non-interest expense
Earnings before income taxes
Income tax expense
Net earnings
Basic net earnings per common share
Diluted net earnings per common share
Cash dividends declared per common share
4,497
890
729
1,428
632
64
5,736
13,976
19,264
6,765
2,439
1,136
1,141
494
8,743
39,982
11,738
2,561
9,177
1.68
1.65
0.38
$
$
$
$
4,647
931
-
1,130
714
245
5,645
13,312
18,285
6,288
1,468
784
988
681
7,284
35,778
12,733
3,100
9,633
1.73
1.72
0.28
4,961
1,080
266
804
701
(622)
4,974
12,164
17,530
6,251
1,401
804
905
739
8,041
35,671
11,325
1,937
9,388
1.67
1.66
0.18
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, 2016, 2015 and 2014
(Dollars in thousands)
Net earnings
$
9,177
9,633
9,388
2016
2015
2014
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities
available for sale
Reclassification adjustment for gains on
securities available for sale
included in net earnings
Total other comprehensive income (loss),
before income taxes
Income tax (benefit) expense related to other
comprehensive (loss) income:
Unrealized holding gains (losses) on securities
available for sale
Reclassification adjustment for gains on
securities available for sale
included in net earnings
Total income tax expense (benefit) related to
other comprehensive income (loss)
Total other comprehensive income (loss),
net of tax
Total comprehensive income
$
See accompanying Notes to Consolidated Financial Statements.
(3,274)
(729)
(4,003)
(1,196)
(284)
(1,480)
(2,523)
6,654
93
-
93
36
-
36
57
9,690
11,117
(266)
10,851
4,330
(104)
4,226
6,625
16,013
A-31
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
Balance, December 31, 2013
Common stock
repurchase
Cash dividends declared on
common stock
Stock options exercised
Net earnings
Change in accumulated other
comprehensive income,
net of tax
Balance, December 31, 2014
Common stock
repurchase
Cash dividends declared on
common stock
Net earnings
Change in accumulated other
comprehensive income,
net of tax
Balance, December 31, 2015
Common stock
repurchase
Cash dividends declared on
common stock
Net earnings
Change in accumulated other
comprehensive income,
net of tax
Balance, December 31, 2016
Common
Stock
Shares
5,613,495
$
Common
Stock
Amount
48,133
Retained
Earnings
36,758
Accumulated
Other
Comprehensive
Income (loss)
(1,172)
(4,537)
(82)
-
-
3,630
-
-
37
-
(1,022)
-
9,388
-
-
-
-
Total
83,719
(82)
(1,022)
37
9,388
-
5,612,588
$
-
48,088
-
45,124
6,625
5,453
6,625
98,665
(102,050)
(1,917)
-
-
-
-
-
(1,574)
9,633
-
-
-
(1,917)
(1,574)
9,633
-
5,510,538
$
-
46,171
-
53,183
57
5,510
57
104,864
(92,738)
(1,984)
-
-
-
-
-
(2,106)
9,177
-
-
-
(1,984)
(2,106)
9,177
-
5,417,800
$
-
44,187
-
60,254
(2,523)
2,987
(2,523)
107,428
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, 2016, 2015 and 2014
(Dollars in thousands)
2016
2015
2014
$
9,177
9,633
9,388
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion
Reduction of provision for loan losses
Deferred income taxes
Gain on sale of investment securities
Gain on sale of other real estate
Write-down of other real estate
Restricted stock expense
Proceeds from sales of loans held for sale
Origination of loans held for sale
Change in:
Cash surrender value of life insurance
Other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investment securities available for sale
Proceeds from sales, calls and maturities of investment securities
available for sale
Proceeds from paydowns of investment securities available for sale
Purchases of other investments
FHLB stock redemption
Net change in loans
Purchases of premises and equipment
Proceeds from sale of other real estate and repossessions
Net cash used by investing activities
Cash flows from financing activities:
Net change in deposits
Net change in securities sold under agreement to repurchase
Proceeds from FHLB borrowings
Repayments of FHLB borrowings
Proceeds from FRB borrowings
Repayments of FRB borrowings
Proceeds from Fed Funds Purchased
Repayments of Fed Funds Purchased
Stock options exercised
Common stock repurchased
Cash dividends paid on common stock
Net cash (used) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
A-33
5,423
(1,206)
(547)
1,097
(81)
17
932
67,764
(69,324)
(406)
(818)
211
12,239
6,053
(17)
673
-
(363)
118
487
50,770
(53,544)
(421)
(408)
882
13,863
6,889
(699)
178
(266)
(5)
627
389
40,898
(40,020)
(419)
(2,534)
(12,509)
1,917
(12,707)
(19,220)
(32,851)
4,053
20,675
(255)
1,256
(36,116)
(1,610)
1,083
(23,621)
60,743
8,560
6,000
(29,500)
1
(1)
9,112
(9,112)
-
(1,984)
(2,106)
41,713
30,331
39,763
70,094
5,475
22,732
(6)
401
(43,441)
(2,354)
6,287
(30,126)
17,475
(20,556)
20,001
(26,501)
1
(1)
5,192
(5,192)
-
(1,917)
(1,574)
(13,072)
(29,335)
69,098
39,763
36,148
20,202
-
959
(36,692)
(3,120)
3,456
(11,898)
15,339
3,034
-
(15,000)
1
(1)
2,602
(2,602)
37
(82)
(1,022)
2,306
(7,675)
76,773
69,098
PEOPLES BANCORP OF NORTH CAROLINA, INC.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
2016
2015
2014
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
$
$
3,415
2,028
Noncash investing and financing activities:
Change in unrealized (loss) gain on investment securities
available for sale, net
$
Transfer of loans to other real estate and repossessions $
$
Financed portion of sale of other real estate
$
Accrued redemption of Series A Preferred Stock
(2,523)
563
-
-
See accompanying Notes to Consolidated Financial Statements.
3,518
2,278
57
4,825
60
-
4,388
1,939
6,625
4,415
374
(12,524)
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, Union, Wake, Durham and Forsyth
counties in North Carolina.
Peoples Investment Services, Inc. is a wholly owned subsidiary of the Bank and began operations in 1996 to
provide investment and trust services through agreements with an outside party.
Real Estate Advisory Services, Inc. (“REAS”) is a wholly owned subsidiary of the Bank and began operations in
1997 to provide real estate appraisal and property management services to individuals and commercial customers
of the Bank.
Community Bank Real Estate Solutions, LLC (“CBRES”) is a wholly owned subsidiary of the Bank and began
operations in 2009 as a “clearing house” for appraisal services for community banks. Other banks are able to
contract with CBRES to find and engage appropriate appraisal companies in the area where the property is
located. CBRES was moved from a wholly owned subsidiary of Peoples Bancorp of North Carolina, Inc. to a
wholly owned subsidiary of the Bank effective August 31, 2016.
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 four offices focused on the Latino population under the name Banco de la Gente. These
offices are operated as a division of the Bank. Banco de la Gente offers 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 and therefore is
not considered a reportable segment of the Company (as defined below).
Principles of Consolidation
The consolidated financial statements include the financial statements of Bancorp and its wholly owned
subsidiary, the Bank, along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc., REAS,
CBRES and PBREH (collectively called the “Company”). All significant intercompany balances and transactions
have been eliminated in consolidation.
Basis of Presentation
The accounting principles followed by the Company, and the methods of applying these principles, conform with
accounting principles generally accepted in the United States of America (“GAAP”) and with general practices in
the banking industry. In preparing the financial statements in conformity with GAAP, management is required to
make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could
differ significantly from these estimates. Material estimates common to the banking industry that are particularly
susceptible to significant change in the near term include, but are not limited to, the determination of the
allowance for loan losses and valuation of real estate acquired in connection with or in lieu of foreclosure on
loans.
Cash and Cash Equivalents
Cash, due from banks and interest-bearing deposits are considered cash and cash equivalents for cash flow
reporting purposes.
A-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, 2016 and
2015, the Company classified all of its investment securities as available for sale.
Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and are reported as a separate component of shareholders’ equity until realized.
Management evaluates investment securities for other-than-temporary impairment on an annual basis. A decline
in the market value of any investment below cost that is deemed other-than-temporary is charged to earnings for
the decline in value deemed to be credit related and a new cost basis in the security is established. The decline in
value attributed to non-credit related factors is recognized in comprehensive income.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the
yield. Realized gains and losses for securities classified as available for sale are included in earnings and are
derived using the specific identification method for determining the cost of securities sold.
Other Investments
Other investments include equity securities with no readily determinable fair value. These investments are carried
at cost.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of mortgage loans
held for sale approximates the market value.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at
the principal amount outstanding, net of the allowance for loan losses. Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount outstanding. The recognition of certain loan
origination fee income and certain loan origination costs is deferred when such loans are originated and amortized
over the life of the loan.
A loan is impaired when, based on current information and events, it is probable that all amounts due according to
the contractual terms of the loan will not be collected. Impaired loans are measured based on the present value of
expected future cash flows, discounted at the loan’s effective interest rate, or at the loan’s observable market price,
or the fair value of the collateral if the loan is collateral dependent.
Accrual of interest is discontinued on a loan when management believes, after considering economic conditions
and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Interest
previously accrued but not collected is reversed against current period earnings.
Allowance for Loan Losses
The allowance for loan losses reflects management’s assessment and estimate of the risks associated with
extending credit and its evaluation of the quality of the loan portfolio. The Bank periodically analyzes the loan
portfolio in an effort to review asset quality and to establish an allowance for loan losses that management
believes will be adequate in light of anticipated risks and loan losses. In assessing the adequacy of the allowance,
size, quality and risk of loans in the portfolio are reviewed. Other factors considered are:
• the Bank’s loan loss experience;
• the amount of past due and non-performing loans;
• specific known risks;
• the status and amount of other past due and non-performing assets;
• underlying estimated values of collateral securing loans;
• current and anticipated economic conditions; and
• other factors which management believes affect the allowance for potential credit losses.
A-36
Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan
grading system that begins upon loan origination and continues until the loan is collected or collectability becomes
doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns
one of eight risk grades. The loan officer monitors the loan’s performance and credit quality and makes changes to
the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive
in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these
risk grades, management considers assessments as determined by the third party credit review firm (as described
below), regulatory examiners and the Bank’s Credit Administration. Any issues regarding the risk assessments are
addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or
renew the loan. The Bank’s Board of Directors reviews, on a monthly basis, an analysis of the Bank’s reserves
relative to the range of reserves estimated by the Bank’s Credit Administration.
As an additional measure, the Bank engages an independent third party to review the underwriting, documentation
and risk grading analyses. This independent third party reviews and evaluates loan relationships greater than $1.0
million, excluding loans in default, and loans in process of litigation or liquidation. The third party’s evaluation
and report is shared with management and the Bank’s Board of Directors.
Management considers certain commercial loans with weak credit risk grades to be individually impaired and
measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve
levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of
loan and other matters related to credit risk.
Management uses the information developed from the procedures described above in evaluating and grading the
loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to
assist management in estimating the allowance for loan losses. The provision for loan losses charged or credited
to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level
appropriate to absorb probable incurred losses in the loan portfolio at the balance sheet date. The amount each
quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio,
net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and
other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management
through an analysis of the appropriateness of the allowance for loan losses.
The allowance for loan losses is comprised of three components: specific reserves, general reserves and
unallocated reserves. After a loan has been identified as impaired, management measures impairment. When the
measure of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is
recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on
management’s current evaluation of the Bank’s loss exposure for each credit, given the appraised value of any
underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance
calculations as described below.
The general allowance reflects reserves established under GAAP for collective loan impairment. These reserves
are based upon historical net charge-offs using the greater of the last two, three, four or five years’ loss
experience. This charge-off experience may be adjusted to reflect the effects of current conditions. The Bank
considers information derived from its loan risk ratings and external data related to industry and general economic
trends in establishing reserves.
The unallocated allowance is determined through management’s assessment of probable losses that are in the
portfolio but are not adequately captured by the other two components of the allowance, including consideration
of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects
management’s acknowledgement of the imprecision and subjectivity that underlie the modeling of credit risk. Due
to the subjectivity involved in determining the overall allowance, including the unallocated portion, the
unallocated portion may fluctuate from period to period based on management’s evaluation of the factors affecting
the assumptions used in calculating the allowance.
There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of
the allowance for loan losses for the year ended December 31, 2016 as compared to the year ended December 31,
2015. Revisions, estimates and assumptions may be made in any period in which the supporting factors indicate
that loss levels may vary from the previous estimates.
A-37
Effective December 31, 2012, stated income mortgage loans from the Banco de la Gente 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 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. These loans were made as stated income loans rather than full
documentation loans because the customer may not have had complete documentation on the income supporting
the loan.
Various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s
allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgments of
information available to them at the time of their examinations. Management believes it has established the
allowance for credit losses pursuant to GAAP, and has taken into account the views of its regulators and the
current economic environment. Management considers the allowance for loan losses adequate to cover the
estimated losses inherent in the Bank’s loan portfolio as of the date of the financial statements. Although
management uses the best information available to make evaluations, significant future additions to the allowance
may be necessary based on changes in economic and other conditions, thus adversely affecting the operating
results of the Company.
Mortgage Banking Activities
Mortgage banking income represents net gains from the sale of mortgage loans and fees received from borrowers
and loan investors related to the Bank’s origination of single-family residential mortgage loans.
Mortgage loans serviced for others are not included in the accompanying balance sheets. The unpaid principal
balances of mortgage loans serviced for others was approximately $1.4 million, $1.6 million and $2.1 million at
December 31, 2016, 2015 and 2014, respectively.
The Bank originates certain fixed rate mortgage loans and commits these loans for sale. The commitments to
originate fixed rate mortgage loans and the commitments to sell these loans to a third party are both derivative
contracts. The fair value of these derivative contracts is immaterial and has no effect on the recorded amounts in
the financial statements.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily
using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise
disposed, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss is
reflected in earnings for that period. The cost of maintenance and repairs that do not improve or extend the useful
life of the respective asset is charged to earnings as incurred, whereas significant renewals and improvements are
capitalized. The range of estimated useful lives for premises and equipment are generally as follows:
Buildings and improvements
Furniture and equipment
10 - 50 years
3 - 10 years
Other Real Estate
Foreclosed assets include all assets received in full or partial satisfaction of a loan. Foreclosed assets are reported
at fair value less estimated selling costs. Any write-downs at the time of foreclosure are charged to the allowance
for loan losses. Subsequent to foreclosure, valuations are periodically performed by management, and a valuation
allowance is established if fair value less estimated selling costs declines below carrying value. Costs relating to
the development and improvement of the property are capitalized. Revenues and expenses from operations are
included in other expenses. Changes in the valuation allowance are included in loss on sale and write-down of
other real estate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Additionally, the recognition of future tax benefits, such as net operating loss carryforwards, is required to the
extent that the realization of such benefits is more likely than not to occur. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which the assets and
liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income tax expense in the period that includes the enactment date.
A-38
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 fair value of instruments that are not intended as a hedge
are accounted for in the earnings of the period of the change.
If a derivative instrument designated as a fair value hedge is terminated or the hedge designation removed, the
difference between a hedged item’s then carrying amount and its face amount is recognized into income over the
original hedge period. Likewise, if a derivative instrument designated as a cash flow hedge is terminated or the
hedge designation removed, related amounts accumulated in other accumulated comprehensive income are
reclassified into earnings over the original hedge period during which the hedged item affects income.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether
the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and
whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives
designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or
other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for
the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge
or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into
derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting
does not apply or the Company elects not to apply hedge accounting.
The Company formally documents all hedging relationships, including an assessment that the derivative
instruments are expected to be highly effective in offsetting the changes in fair values or cash flows of the hedged
items.
A-39
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 “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 262,520 shares are currently reserved for possible issuance under the
Plan. All stock-based rights under the Plan must be granted or awarded by May 7, 2019 (i.e., ten years from the
Plan effective date).
The Company granted 29,514 restricted stock units under the Plan at a grant date fair value of $7.90 per share
during the first quarter of 2012, of which 5,355 restricted stock units were forfeited by the executive officers of the
Company as required by the agreement with the U.S. Department of the Treasury (“UST”) in conjunction with the
Company’s participation in the Capital Purchase Program (“CPP”) under the Troubled Asset Relief Program
(“TARP”). In July 2012, the Company granted 5,355 restricted stock units at a grant date fair value of $8.25 per
share. The Company granted 26,795 restricted stock units under the Plan at a grant date fair value of $11.90 per
share during the second quarter of 2013. The Company granted 21,056 restricted stock units under the Plan at a
grant date fair value of $15.70 per share during the first quarter of 2014. The Company granted 15,075 restricted
stock units under the Plan at a grant date fair value of $17.97 per share during the first quarter of 2015. The
Company granted 5,040 restricted stock units under the Plan at a grant date fair value of $18.60 per share during
the first quarter of 2016. The Company recognizes compensation expense on the restricted stock units over the
period of time the restrictions are in place (five years from the grant date for the 2012 grants, four years from the
grant date for the 2013, 2015 and 2016 grants and three years from the grant date for the 2014 grants). The
amount of expense recorded each period reflects the changes in the Company’s stock price during such period. As
of December 31, 2016, the total unrecognized compensation expense related to the restricted stock unit grants
under the Plan was $396,000.
The Company recognized compensation expense for restricted stock units granted under the Plan of $932,000,
$487,000 and $389,000 for the years ended December 31, 2016, 2015 and 2014, 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, 2016, 2015 and 2014 are as follows:
For the year ended December 31, 2016
Basic earnings per share
Effect of dilutive securities:
Restricted stock units
Diluted earnings per share
For the year ended December 31, 2015
Basic earnings per share
Effect of dilutive securities:
Restricted stock units
Diluted earnings per share
Net Earnings
(Dollars in
thousands)
9,177
-
9,177
Net Earnings
(Dollars in
thousands)
9,633
-
9,633
$
$
$
$
Weighted
Average
Number of
Shares
5,477,245
70,734
5,547,979
Weighted
Average
Number of
Shares
5,559,235
47,954
5,607,189
Per Share
Amount
1.68
1.65
Per Share
Amount
1.73
1.72
$
$
$
$
A-40
For the year ended December 31, 2014
Basic earnings per share
Effect of dilutive securities:
Restricted stock units
Diluted earnings per share
Net Earnings
(Dollars in
thousands)
9,388
-
9,388
$
$
Weighted
Average
Number of
Shares
5,615,666
26,326
5,641,992
Per Share
Amount
1.67
1.66
$
$
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-02, (Topic 842): Leases. ASU No. 2016-02 increases transparency and comparability among
organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information
about leasing arrangements. ASU No. 2016-02 is effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2018. The adoption of this guidance is not expected to have a
material impact on the Company’s results of operations, financial position or disclosures.
In June 2016, FASB issued ASU No. 2016-13, (Topic 326): Measurement of Credit Losses on Financial
Instruments. ASU No. 2016-13 provides guidance to change the accounting for credit losses and modify the
impairment model for certain debt securities. ASU No. 2016-13 is effective for annual periods, and interim
periods within those annual periods, beginning after December 15, 2019. The Company is currently evaluating
the effect that implementation of the new standard will have on its results of operations, financial position and
disclosures.
In October 2016, FASB issued ASU No. 2016-16, (Topic 740): Intra-Entity Transfers of Assets Other Than
Inventory. ASU No. 2016-16 eliminates the exception for all intra-entity sales of assets other than inventory.
ASU No. 2016-16 is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. The adoption of this guidance is not expected to have a material impact on the Company’s
results of operations, financial position or disclosures.
In October 2016, FASB issued ASU No. 2016-17, (Topic 810): Interests Held through Related Parties That Are
under Common Control. ASU No. 2016-17 amends the consolidation guidance on how a reporting entity that is
the single decision maker of a variable interest entity should treat indirect interests in the entity held through
related parties that are under common control with the reporting entity when determining whether it is the primary
beneficiary of that variable interest entity. ASU No. 2016-17 is effective for annual periods, and interim periods
within those annual periods, beginning after December 15, 2016. The adoption of this guidance is not expected to
have a material impact on the Company’s results of operations, financial position or disclosures.
In November 2016, FASB issued ASU No. 2016-18, (Topic 230): Restricted Cash. ASU No. 2016-18 clarifies
guidance on the classification and presentation of restricted cash in the statement of cash flows. ASU No. 2016-
18 is effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2017. The adoption of this guidance is not expected to have a material impact on the Company’s results of
operations, financial position or disclosures.
In December 2016, FASB issued ASU No. 2016-20, (Topic 606): Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers. ASU No. 2016-20 make a limited number of revisions to
several pieces of the revenue recognition standard issued in 2014. ASU No. 2016-20 is effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of
this guidance is not expected to have a material impact on the Company’s results of operations, financial position
or disclosures.
Other accounting standards that have been issued or proposed by FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s results of operations, financial position or disclosures.
Reclassification
Certain amounts in the 2014 and 2015 consolidated financial statements have been reclassified to conform to the
2016 presentation.
A-41
(2)
Investment Securities
Investment securities available for sale at December 31, 2016 and 2015 are as follows:
(Dollars in thousands)
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Corporate bonds
Trust preferred securities
Total
$
$
(Dollars in thousands)
Amortized
Cost
66,654
38,188
137,832
1,500
750
244,924
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Corporate bonds
Trust preferred securities
Equity securities
Total
Amortized
Cost
$
76,406
38,173
141,500
1,928
750
748
259,505
$
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
1,221
308
4,176
33
-
5,738
290
274
152
-
-
716
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
1,526
399
6,817
-
-
577
9,319
45
155
72
22
-
-
294
Estimated
Fair Value
67,585
38,222
141,856
1,533
750
249,946
Estimated
Fair Value
77,887
38,417
148,245
1,906
750
1,325
268,530
The current fair value and associated unrealized losses on investments in debt securities with unrealized losses at
December 31, 2016 and 2015 are summarized in the tables below, with the length of time the individual securities
have been in a continuous loss position.
(Dollars in thousands)
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Total
$
(Dollars in thousands)
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Corporate bonds
Total
$
Less than 12 Months
December 31, 2016
12 Months or More
Fair Value
15,594
$
Unrealized
Losses
290
Fair Value
-
10,120
10,441
36,155
94
123
507
9,562
561
10,123
Less than 12 Months
December 31, 2015
12 Months or More
Fair Value
7,891
$
Unrealized
Losses
45
Fair Value
-
Unrealized
Losses
-
180
29
209
Unrealized
Losses
-
142
68
-
210
Total
Fair Value
15,594
Unrealized
Losses
290
19,682
11,002
46,278
274
152
716
Total
Fair Value
7,891
Unrealized
Losses
45
13,902
6,128
1,500
29,421
155
72
22
294
3,074
2,198
1,500
14,663
13
4
22
84
10,828
3,930
-
14,758
A-42
At December 31, 2016, unrealized losses in the investment securities portfolio relating to debt securities totaled
$716,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to
be temporary. From the December 31, 2016 tables above, one out of 168 securities issued by state and political
subdivisions contained unrealized losses and five out of 80 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 2016, 2015 or 2014.
The amortized cost and estimated fair value of investment securities available for sale at December 31, 2016, 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, 2016
(Dollars in thousands)
Due within one year
Due from one to five years
Due from five to ten years
Due after ten years
Mortgage-backed securities
Equity securities
Total
Amortized
Cost
7,304
81,366
77,498
12,102
66,654
-
244,924
$
$
Estimated
Fair Value
7,341
84,100
78,751
12,169
67,585
-
249,946
During 2016, proceeds from sales of securities available for sale were $1.5 million and resulted in gross gains of
$729,000. No securities available for sale were sold during the year ended December 31, 2015. During 2014,
proceeds from sales of securities available for sale were $20.2 million and resulted in gross gains of $291,000 and
gross losses of $25,000.
Securities with a fair value of approximately $95.6 million and $91.0 million at December 31, 2016 and 2015,
respectively, were pledged to secure public deposits, Federal Home Loan Bank of Atlanta (“FHLB”) borrowings
and for other purposes as required by law.
GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements.
There is a three-level fair value hierarchy for fair value measurements. Level 1 inputs are quoted prices in active
markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2
inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The table below
presents the balance of securities available for sale, which are measured at fair value on a recurring basis by level
within the fair value hierarchy as of December 31, 2016 and 2015.
(Dollars in thousands)
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Corporate bonds
Trust preferred securities
December 31, 2016
Fair Value
Measurements
$
67,585
Level 1
Valuation
-
Level 2
Valuation
67,585
Level 3
Valuation
-
$
$
$
$
38,222
141,856
1,533
750
-
-
-
-
38,222
141,856
1,533
-
-
-
-
750
A-43
(Dollars in thousands)
Mortgage-backed securities
U.S. Government
sponsored enterprises
State and political subdivisions
Corporate bonds
Trust preferred securities
Equity securities
December 31, 2015
Fair Value
Measurements
$
77,887
Level 1
Valuation
-
Level 2
Valuation
77,887
Level 3
Valuation
-
$
$
$
$
$
38,417
148,245
1,906
750
1,325
-
-
-
-
1,325
38,417
148,245
1,906
-
-
-
-
-
750
-
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, 2016.
(Dollars in thousands)
Balance, beginning of period
Change in book value
Change in gain/(loss) realized and unrealized
Purchases/(sales and calls)
Transfers in and/or (out) of Level 3
Balance, end of period
Investment Securities
Available for Sale
Level 3 Valuation
$
750
-
-
-
-
750
$
Change in unrealized gain/(loss) for assets still held in Level 3
$
-
(3)
Loans
Major classifications of loans at December 31, 2016 and 2015 are summarized as follows:
A-44
December 31, 2016
December 31, 2015
(Dollars in thousands)
Real estate loans:
Construction and land development
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate:
Commercial loans
Farm loans
Consumer loans
All other loans
Total loans
Less allowance for loan losses
$
61,749
240,700
40,189
247,521
21,047
611,206
87,596
-
9,832
15,177
723,811
7,550
65,791
220,690
43,733
228,526
18,080
576,820
91,010
3
10,027
11,231
689,091
9,589
679,502
Total net loans
$
716,261
The above table includes deferred costs, net of deferred fees, totaling $1.4 million and $488,000 at December 31,
2016 and 2015, respectively.
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, Union, Wake,
Durham and Forsyth 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, 2016, construction
and land development loans comprised approximately 9% 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,
2016, single-family residential loans comprised approximately 39% of the Bank’s total loan portfolio,
including Banco de la Gente single-family residential stated income loans which were approximately 6%
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, 2016, commercial real estate loans
comprised approximately 34% of the Bank’s total loan portfolio.
• Commercial loans – Repayment is generally dependent upon the successful operation of the borrower’s
business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise,
be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2016,
commercial loans comprised approximately 12% of the Bank’s total loan portfolio.
A-45
Loans are considered past due if the required principal and interest payments have not been received as of the date
such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower
may be unable to meet payment obligations as they become due, as well as when required by regulatory
provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past
due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
The following tables present an age analysis of past due loans, by loan type, as of December 31, 2016 and 2015:
December 31, 2016
(Dollars in thousands)
Real estate loans:
Construction and land development
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate:
Commercial loans
Farm loans
Consumer loans
All other loans
Total loans
December 31, 2015
(Dollars in thousands)
Real estate loans:
Construction and land development
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate:
Commercial loans
Farm loans
Consumer loans
All other loans
Total loans
$
$
$
$
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
-
4,890
5,250
342
471
10,953
273
-
68
3
11,297
10
80
249
126
-
465
-
-
6
-
471
10
4,970
61,739
235,730
61,749
240,700
5,499
468
471
11,418
273
-
74
3
11,768
34,690
247,053
20,576
599,788
40,189
247,521
21,047
611,206
87,323
-
9,758
15,174
712,043
87,596
-
9,832
15,177
723,811
-
-
-
-
-
-
-
-
-
-
-
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
17
1,385
114
157
-
1,673
40
-
8
-
1,721
347
4,207
65,444
216,483
65,791
220,690
7,135
2,776
-
14,465
225
-
144
-
14,834
36,598
225,750
18,080
562,355
43,733
228,526
18,080
576,820
90,785
3
9,883
11,231
674,257
91,010
3
10,027
11,231
689,091
-
-
-
-
-
-
17
-
-
-
17
330
2,822
7,021
2,619
-
12,792
185
-
136
-
13,113
A-46
The following table presents the Bank’s non-accrual loans as of December 31, 2016 and 2015:
(Dollars in thousands)
Real estate loans:
Construction and land development
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total real estate loans
Loans not secured by real estate:
Commercial loans
Consumer loans
Total
December 31, 2016
December 31, 2015
$
$
22
1,662
1,340
669
78
3,771
21
33
3,825
146
4,023
1,106
2,992
-
8,267
113
52
8,432
At each reporting period, the Bank determines which loans are impaired. Accordingly, the Bank’s impaired loans
are reported at their estimated fair value on a non-recurring basis. An allowance for each impaired loan that is
collateral-dependent is calculated based on the fair value of its collateral. The fair value of the collateral is based
on appraisals performed by REAS, a subsidiary of the Bank. REAS is staffed by certified appraisers that also
perform appraisals for other companies. Factors, including the assumptions and techniques utilized by the
appraiser, are considered by management. If the recorded investment in the impaired loan exceeds the measure of
fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses. An
allowance for each impaired loan that is not collateral dependent is calculated based on the present value of
projected cash flows. If the recorded investment in the impaired loan exceeds the present value of projected cash
flows, a valuation allowance is recorded as a component of the allowance for loan losses. Impaired loans under
$250,000 are not individually evaluated for impairment with the exception of the Bank’s troubled debt
restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for
impairment. Impaired loans collectively evaluated for impairment totaled $5.9 million and $8.4 million at
December 31, 2016 and 2015, respectively. Accruing impaired loans were $23.5 million and $25.0 million at
December 31, 2016 and December 31, 2015, respectively. Interest income recognized on accruing impaired loans
was $1.2 million and $1.3 million for the years ended December 31, 2016 and 2015, respectively. No interest
income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.
The following tables present the Bank’s impaired loans as of December 31, 2016, 2015 and 2014:
December 31, 2016
(Dollars in thousands)
Unpaid
Contractual
Principal
Balance
Recorded
Investment
With No
Allowance
Recorded
Investment
With
Allowance
Recorded
Investment
in Impaired
Loans
Related
Allowance
Average
Outstanding
Impaired
Loans
YTD
Interest
Income
Recognized
Real estate loans:
Construction and land development $
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total impaired real estate loans
Loans not secured by real estate:
Commercial loans
Consumer loans
Total impaired loans
$
282
5,354
18,611
3,750
78
28,075
27
211
28,313
-
703
-
1,299
-
2,002
-
-
2,002
278
4,323
18,074
2,197
78
24,950
27
202
25,179
278
5,026
18,074
3,496
78
26,952
27
202
27,181
11
47
1,182
166
-
1,406
-
3
1,409
330
7,247
17,673
4,657
78
29,985
95
222
30,302
13
164
861
152
-
1,190
-
8
1,198
A-47
December 31, 2015
(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 $
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total impaired real estate loans
Loans not secured by real estate:
Commercial loans
Consumer loans
Total impaired loans
$
643
8,828
20,375
4,556
96
34,498
180
286
34,964
December 31, 2014
(Dollars in thousands)
216
1,489
-
-
-
1,705
-
-
1,705
226
6,805
19,215
4,893
83
31,222
161
260
31,643
442
8,294
19,215
4,893
83
32,927
161
260
33,348
12
189
1,143
179
-
1,523
3
4
1,530
705
10,852
18,414
5,497
93
35,561
132
283
35,976
18
224
921
89
6
1,258
5
11
1,274
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 $
Single-family residential
Single-family residential -
Banco de la Gente stated income
Commercial
Multifamily and farmland
Total impaired real estate loans
5,481
6,717
21,243
4,752
111
38,304
3,639
933
-
1,485
-
6,057
Loans not secured by real estate:
Commercial loans
Farm loans (non RE)
Consumer loans
Total impaired loans
$
218
-
318
38,840
-
6,057
555
5,540
20,649
2,866
110
29,720
201
-
313
30,234
4,194
6,473
20,649
4,351
110
35,777
31
154
1,191
272
1
1,649
5,248
7,430
19,964
4,399
154
37,195
201
4
641
313
36,291
5
1,658
309
38,145
20
214
952
76
-
1,262
2
12
1,276
The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-
recurring basis at December 31, 2016 and 2015 are presented below. The Company’s valuation methodology is
discussed in Note 15.
(Dollars in thousands)
Mortgage loans held for sale
Impaired loans
Other real estate
(Dollars in thousands)
Mortgage loans held for sale
Impaired loans
Other real estate
Fair Value
Measurements
December 31, 2016
$
5,709
$
25,931
$
283
Level 1
Valuation
-
-
-
Level 2
Valuation
Level 3
Valuation
Fair Value
Measurements
December 31, 2015
$
4,149
$
31,818
$
739
Level 1
Valuation
-
-
-
Level 2
Valuation
A-48
-
-
-
-
-
-
5,709
25,931
283
Level 3
Valuation
4,149
31,818
739
(Dollars in thousands)
Mortgage loans
held for sale
Impaired loans
Fair Value
December 31, 2016
$
5,709
Fair Value
December 31, 2015
4,149
$
25,931
31,818
Other real estate
$
283
739
General Range
of Significant
Unobservable
Input Values
N/A
0 - 25%
0 - 25%
Significant
Unobservable
Inputs
N/A
Valuation
Technique
Rate lock
commitment
Appraised value
and discounted
cash flows
Discounts to
reflect current
market conditions
and ultimate
collectability
Appraised value Discounts to
reflect current
market conditions
and estimated
costs to sell
Changes in the allowance for loan losses for the year ended December 31, 2016 were as follows:
(Dollars in thousands)
Real Estate Loans
Single-
Family
Residential
- Banco de
la Gente
Stated
Income
Construction
and Land
Development
Single-
Family
Residential
Multifamily
and
Commercial
Farmland Commercial Farm
Consumer
and All
Other
Unallocated
Total
-
-
-
-
-
-
-
-
-
-
-
172
(492)
151
373
204
-
204
204
25,009
-
25,009
479
-
-
(108)
371
9,589
(1,238)
405
(1,206)
7,550
-
1,319
371
371
6,231
7,550
-
-
-
723,811
21,301
702,510
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance
Loans:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$
$
2,185
(7)
10
(1,036)
1,152
2,534
(275)
55
(188)
2,126
1,460
-
-
(83)
1,377
1,917
(318)
19
(25)
1,593
$
-
-
1,160
159
1,152
1,152
$
2,126
2,126
217
1,377
1,434
1,593
-
-
-
52
52
-
52
52
842
(146)
170
(191)
675
-
675
675
$
61,749
240,700
40,189
247,521
21,047
87,596
$
-
935
16,718
3,648
-
-
$
61,749
239,765
23,471
243,873
21,047
87,596
A-49
Changes in the allowance for loan losses for the year ended December 31, 2015 were as follows:
(Dollars in thousands)
Real Estate Loans
Single-
Family
Residential
- Banco de
la Gente
Stated
Income
Construction
and Land
Development
Single-
Family
Residential
Multifamily
and
Commercial
Farmland Commercial Farm
Consumer
and All
Other
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance
Loans:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$
$
2,785
(198)
45
(447)
2,185
2,566
(618)
34
552
2,534
1,610
(117)
22
(55)
1,460
1,902
(329)
21
323
1,917
$
-
96
1,115
171
2,185
2,185
$
2,438
2,534
345
1,460
1,746
1,917
7
-
-
(7)
-
-
-
-
1,098
(37)
101
(320)
842
-
842
842
$
65,791
220,690
43,733
228,526
18,080
91,010
$
216
2,636
17,850
4,212
-
-
$
65,575
218,054
25,883
224,314
18,080
91,010
-
-
-
-
-
-
-
-
3
-
3
233
(545)
145
339
172
-
172
172
21,258
-
21,258
881
-
-
(402)
479
11,082
(1,844)
368
(17)
9,589
-
1,382
479
479
8,207
9,589
-
-
-
689,091
24,914
664,177
Changes in the allowance for loan losses for the year ended December 31, 2014 were as follows:
(Dollars in thousands)
Real Estate Loans
Single-
Family
Residential
- Banco de
la Gente
Stated
Income
Construction
and Land
Development
Single-
Family
Residential
Multifamily
and
Commercial
Farmland Commercial Farm
Consumer
and All
Other
Unallocated
Total
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Ending balance
Loans:
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$
$
3,218
(884)
428
23
2,785
3,123
(309)
72
(320)
2,566
1,863
(190)
16
(79)
1,610
2,219
(290)
171
(198)
1,902
$
-
82
1,155
260
2,785
2,785
$
2,484
2,566
455
1,610
1,642
1,902
37
-
-
(30)
7
-
7
7
1,069
(430)
54
405
1,098
-
1,098
1,098
$
57,617
206,417
47,015
228,558
12,400
76,262
$
3,639
2,298
18,884
3,345
-
-
$
53,978
204,119
28,131
225,213
12,400
76,262
-
-
-
-
-
-
-
-
7
-
7
245
(534)
176
346
233
-
233
233
23,615
-
23,615
1,727
-
-
(846)
881
13,501
(2,637)
917
(699)
11,082
-
1,497
881
881
9,585
11,082
-
-
-
651,891
28,166
623,725
The Bank utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a
scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics
of the eight risk grades is as follows:
• Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit
risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans
would fall in this grade.
• Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range
of acceptability. The organization or individual is established with a history of successful performance
though somewhat susceptible to economic changes.
A-50
• Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of
acceptability but higher than normal. This may be a new organization or an existing organization in a
transitional phase (e.g. expansion, acquisition, market change).
• Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are
acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not
problem credits presently, but may be in the future if the borrower is unable to change its present course.
• Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some
recent past due history on repayment and there are potential weaknesses that may, if not corrected,
weaken the asset or inadequately protect the Company’s position at some future date.
• Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net
worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-
defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
• Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans
classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.
Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of
accuracy. Once the loss position is determined, the amount is charged off.
• Risk Grade 8 – Loss: Loans classified as Loss are considered uncollectable and of such little value that
their continuance as bankable assets is not warranted. This classification does not mean that the asset has
absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off
this worthless loan even though partial recovery may be realized in the future. Loss is a temporary grade
until the appropriate authority is obtained to charge the loan off.
The following tables present the credit risk profile of each loan type based on internally assigned risk grades as of
December 31, 2016 and 2015.
December 31, 2016
(Dollars in thousands)
Real Estate Loans
Single-
Family
Residential
- Banco de
la Gente
Stated
Income
Construction
and Land
Development
Single-
Family
Residential
Multifamily
and
Commercial
Farmland Commercial Farm Consumer All Other
Total
1- Excellent Quality
2- High Quality
3- Good Quality
4- Management Attention
5- Watch
6- Substandard
7- Doubtful
8- Loss
Total
-
$
9,784
33,633
10,892
7,229
211
-
-
61,749
$
14,996
109,809
82,147
25,219
4,682
3,847
-
-
240,700
-
-
16,703
15,580
3,943
3,963
-
-
40,189
-
39,769
176,109
24,753
4,906
1,984
-
-
247,521
-
2,884
14,529
2,355
1,201
78
-
-
21,047
541
26,006
55,155
5,586
246
62
-
-
87,596
-
-
-
-
-
-
-
-
-
959
3,335
4,842
619
31
42
-
4
9,832
-
2,507
10,921
1,749
-
-
-
-
15,177
16,496
194,094
394,039
86,753
22,238
10,187
-
4
723,811
December 31, 2015
(Dollars in thousands)
Real Estate Loans
Single-
Family
Residential
- Banco de
la Gente
Stated
Income
Construction
and Land
Development
Single-
Family
Residential
Multifamily
and
Commercial
Farmland Commercial Farm Consumer All Other
Total
1- Excellent Quality
2- High Quality
3- Good Quality
4- Management Attention
5- Watch
6- Substandard
7- Doubtful
8- Loss
Total
-
$
10,144
35,535
12,544
7,265
303
-
-
65,791
$
15,189
86,061
78,843
30,259
4,322
6,016
-
-
220,690
-
-
19,223
15,029
3,308
6,173
-
-
43,733
A-51
-
38,647
148,805
31,824
4,561
4,689
-
-
228,526
-
2,998
12,058
335
2,689
-
-
-
18,080
700
24,955
58,936
5,905
332
182
-
-
91,010
-
-
3
-
-
-
-
-
3
1,091
3,647
4,571
620
43
55
-
-
10,027
-
1,665
7,828
1,738
-
-
-
-
11,231
16,980
168,117
365,802
98,254
22,520
17,418
-
-
689,091
TDR loans modified in 2016, past due TDR loans and non-accrual TDR loans totaled $5.9 million and $8.8
million at December 31, 2016 and December 31, 2015, 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 $81,000 and $354,000 in performing loans
classified as TDR loans at December 31, 2016 and December 31, 2015, respectively.
The following table presents an analysis of loan modifications during the year ended December 31, 2016:
Year ended December 31, 2016
(Dollars in thousands)
Real estate loans:
Single-family residential
Total TDR loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
3
3
$
$
124
124
121
121
During the year ended December 31, 2016, three loans were modified that were considered to be new TDR loans.
The interest rate was modified on these TDR loans.
The following table presents an analysis of loan modifications during the year ended December 31, 2015:
Year ended December 31, 2015
(Dollars in thousands)
Real estate loans:
Construction and land development
Single-family residential
Total TDR loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
1
3
4
$
$
216
288
504
216
271
487
During the year ended December 31, 2015, four loans were modified that were considered to be new TDR loans.
The interest rate was modified on these TDR loans.
There were no TDR loans with a payment default occurring within 12 months of the restructure date, and the
payment default occurring during the years ended December 31, 2016 and 2015. TDR loans are deemed to be in
default if they become past due by 90 days or more.
(4)
Premises and Equipment
Major classifications of premises and equipment at December 31, 2016 and 2015 are summarized as follows:
(Dollars in thousands)
Land
Buildings and improvements
Furniture and equipment
Total premises and equipment
Less accumulated depreciation
2016
2015
$
3,670
16,398
19,996
40,064
23,612
3,669
15,889
19,462
39,020
22,044
16,976
Total net premises and equipment
$
16,452
A-52
The Company recognized approximately $2.1 million in depreciation expense for the year ended December 31,
2016. Depreciation expense was approximately $2.4 million and $2.5 million for the years ended December 31,
2015 and 2014, respectively.
(5)
Time Deposits
At December 31, 2016, the scheduled maturities of time deposits are as follows:
(Dollars in thousands)
2017
2018
2019
2020
2021 and thereafter
Total
$
86,817
33,184
15,207
5,287
3,518
$
144,013
At December 31, 2016 and 2015, the Bank had approximately $7.2 million and $4.3 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 $7.2 million and $4.1 million as of December 31, 2016 and 2015, respectively. The weighted average rate
of brokered deposits as of December 31, 2016 and 2015 was 0.05% and 0.10%, respectively.
(6)
Federal Home Loan Bank and Federal Reserve Bank Borrowings
The Bank has borrowings from the FHLB with monthly or quarterly interest payments at December 31, 2016. The
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, 2016, the
carrying value of loans pledged as collateral totaled approximately $128.3 million. The remaining availability
under the line of credit with the FHLB was $66.8 million at December 31, 2016.
Borrowings from the FHLB outstanding at December 31, 2016 and 2015 consist of the following:
December 31, 2016
(Dollars in thousands)
Maturity Date
October 17, 2018
October 17, 2018
October 17, 2018
May 8, 2018
December 31, 2015
(Dollars in thousands)
Maturity Date
October 17, 2018
October 17, 2018
October 17, 2018
October 17, 2018
May 8, 2018
May 8, 2018
Call Date
N/A
N/A
N/A
N/A
Rate
Rate Type
Amount
4.050% Adjustable Rate Hybrid
$
4.065% Adjustable Rate Hybrid
4.120% Adjustable Rate Hybrid
2.683% Adjustable Rate Hybrid
$
5,000
5,000
5,000
5,000
20,000
Call Date
N/A
N/A
N/A
N/A
N/A
N/A
Rate
Rate Type
Amount
3.485% Adjustable Rate Hybrid
$
3.725% Adjustable Rate Hybrid
3.500% Adjustable Rate Hybrid
3.555% Adjustable Rate Hybrid
2.144% Adjustable Rate Hybrid
3.734%
Floating to Fixed
$
5,000
15,000
5,000
5,000
5,000
8,500
43,500
A-53
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 $1.8 million and $2.8 million of FHLB
stock, included in other investments, at December 31, 2016 and 2015, respectively.
The Bank prepaid FHLB borrowings totaling $23.5 million in 2016 with prepayment penalties totaling $1.3
million. The Bank prepaid FHLB borrowings totaling $6.5 million in 2015 with prepayment penalties totaling
$504,000.
As of December 31, 2016 and 2015, 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, 2016, the carrying value of loans pledged as collateral totaled
approximately $374.5 million. Availability under the line of credit with the FRB was $289.7 million at December
31, 2016.
(7)
Junior Subordinated Debentures
In June 2006, the Company formed a second wholly owned Delaware statutory trust, PEBK Capital Trust II
(“PEBK Trust II”), which issued $20.0 million of guaranteed preferred beneficial interests in the Company’s
junior subordinated deferrable interest debentures. All of the common securities of PEBK Trust II are owned by
the Company. The proceeds from the issuance of the common securities and the trust preferred securities were
used by PEBK Trust II to purchase $20.6 million of junior subordinated debentures of the Company. The
proceeds received by the Company from the sale of the junior subordinated debentures were used to repay in
December 2006 the trust preferred securities issued in December 2001 by PEBK Capital Trust, a wholly owned
Delaware statutory trust of the Company, and for general purposes. The debentures represent the sole assets of
PEBK Trust II. PEBK Trust II is not included in the consolidated financial statements.
The trust preferred securities issued by PEBK Trust II accrue and pay interest quarterly at a floating rate of three-
month LIBOR plus 163 basis points. The Company has guaranteed distributions and other payments due on the
trust preferred securities to the extent PEBK Trust II does not have funds with which to make the distributions and
other payments. The net combined effect of all the documents entered into in connection with the trust preferred
securities is that the Company is liable to make the distributions and other payments required on the trust preferred
securities.
These trust preferred securities are mandatorily redeemable upon maturity of the debentures on June 28, 2036, or
upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures
purchased by PEBK Trust II, in whole or in part, which became effective on June 28, 2011. As specified in the
indenture, if the debentures are redeemed prior to maturity, the redemption price will be the principal amount plus
any accrued but unpaid interest.
(8)
Income Taxes
The provision for income taxes is summarized as follows:
(Dollars in thousands)
Current expense
Deferred income tax expense
Total income tax
2016
2015
2014
$
$
1,464
1,097
2,561
2,427
673
3,100
1,759
178
1,937
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:
A-54
(Dollars in thousands)
2016
2015
2014
Tax expense at statutory rate (34%)
State income tax, net of federal income tax effect
Tax-exempt interest income
Increase in cash surrender value of life insurance
Nondeductible interest and other expense
Other
Total
$
$
3,991
339
(1,681)
(138)
78
(28)
2,561
4,329
494
(1,682)
(143)
103
(1)
3,100
3,851
(283)
(1,630)
(143)
119
23
1,937
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, 2016 and 2015.
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Accrued retirement expense
Other real estate
Federal credit carryforward
State credit carryforward
Restricted stock
Accrued bonuses
Interest income on nonaccrual loans
Other than temporary impairment
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan fees
Accumulated depreciation
Prepaid expenses
Other
Unrealized gain on available for sale securities
Total gross deferred tax liabilities
Net deferred tax asset
2016
2015
$
$
2,717
1,616
-
326
14
745
216
27
14
23
5,698
797
532
78
23
1,807
3,237
2,461
3,513
1,574
33
-
-
417
238
88
374
16
6,253
588
172
59
70
3,308
4,197
2,056
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 tax filings for years 2013 through 2016 were at year end 2016 open to audit under statutes of
limitations by the Internal Revenue Service and State taxing authorities.
(9)
Related Party Transactions
The Company conducts transactions with its directors and executive officers, including companies in which they
have beneficial interests, in the normal course of business. It is the policy of the Company that loan transactions
with directors and officers are made on substantially the same terms as those prevailing at the time made for
comparable loans to other persons. The following is a summary of activity for related party loans for 2016 and
2015:
A-55
(Dollars in thousands)
Beginning balance
New loans
Repayments
Ending balance
2016
2015
$
$
5,674
6,048
(7,219)
4,503
6,055
7,857
(8,238)
5,674
At December 31, 2016 and 2015, the Company had deposit relationships with related parties of approximately
$27.8 million and $22.1 million, respectively.
A director of the Company is an officer and partial owner of the construction company engaged to renovate the
Bank’s Corporate Center located at 518 West C Street, Newton, North Carolina. During 2016 the Company paid
a total of approximately $209,000 to this construction company for such renovation work. At December 31, 2016,
the remaining commitment to this construction company for renovation work not yet completed was
approximately $2.2 million.
(10)
Commitments and Contingencies
The Company leases various office spaces for banking and operational facilities and equipment under operating
lease arrangements. Future minimum lease payments required for all operating leases having a remaining term in
excess of one year at December 31, 2016 are as follows:
(Dollars in thousands)
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
Total minimum obligation
$
$
632
611
601
602
591
1,611
4,648
Total rent expense was approximately $752,000, $702,000 and $691,000 for the years ended December 31, 2016,
2015 and 2014, respectively.
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to extend credit, standby
letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments.
The exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
In most cases, the Bank requires collateral or other security to support financial instruments with credit risk.
(Dollars in thousands)
Financial instruments whose contract amount represent credit risk:
Commitments to extend credit
Standby letters of credit and financial guarantees written
$
$
195,528
3,728
189,351
3,872
Contractual Amount
2016
2015
A-56
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 $199.3 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 $59.5 million available for the purchase of overnight federal funds from five correspondent
financial institutions as of December 31, 2016.
At December 31, 2016, the Bank has a commitment to invest $3 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 funded $136,000 of this commitment in 2016.
(11)
Employee and Director Benefit Programs
The Company has a profit sharing and 401(k) plan for the benefit of substantially all employees subject to certain
minimum age and service requirements. Under the 401(k) plan, the Company matched employee contributions to a
maximum of 4.00% of annual compensation in 2014, 2015 and 2016. The Company’s contribution pursuant to
this formula was approximately $565,000, $539,000 and $439,000 for the years 2016, 2015 and 2014,
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. Prior to January 1, 2015, the vesting schedule
for the 401(k) plan began at 20 percent after two years of employment and graduated 20 percent each year until
reaching 100 percent after six years of employment. Effective January 1, 2015, 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 $428,000, $413,000 and $422,000 for the years 2016, 2015 and
2014, respectively.
The Company is currently paying medical benefits for certain retired employees. The Company did not incur any
postretirement medical benefits expense in 2016, 2015 and 2014 due to an excess accrual balance.
The following table sets forth the change in the accumulated benefit obligation for the Company’s two
postretirement benefit plans described above:
(Dollars in thousands)
Benefit obligation at beginning of period
Service cost
Interest cost
Benefits paid
Benefit obligation at end of period
A-57
2016
2015
$
$
3,993
346
67
(232)
4,174
3,812
334
65
(218)
3,993
The amounts recognized in the Company’s Consolidated Balance Sheet as of December 31, 2016 and 2015 are
shown in the following two tables:
(Dollars in thousands)
Benefit obligation
Fair value of plan assets
(Dollars in thousands)
Funded status
Unrecognized prior service cost/benefit
Unrecognized net actuarial loss
Net amount recognized
Unfunded accrued liability
Intangible assets
Net amount recognized
2016
2015
4,174
-
3,993
-
2016
2015
(4,174)
-
-
(4,174)
(4,174)
-
(4,174)
(3,993)
-
-
(3,993)
(3,993)
-
(3,993)
$
$
$
$
$
Net periodic benefit cost of the Company’s postretirement benefit plans for the years ended December 31, 2016,
2015 and 2014 consisted of the following:
(Dollars in thousands)
Service cost
Interest cost
Net periodic cost
2016
2015
2014
$
$
346
67
413
334
65
399
348
67
415
Weighted average discount rate assumption
used to determine benefit obligation
5.47%
5.47%
5.47%
The Company paid benefits under the two postretirement plans totaling $232,000 and $218,000 during the years
ended December 31, 2016 and 2015, respectively. Information about the expected benefit payments for the
Company’s two postretirement benefit plans is as follows:
(Dollars in thousands)
Year ending December 31,
2017
2018
2019
2020
2021
Thereafter
(12)
Regulatory Matters
$
$
$
$
$
$
263
275
310
363
364
9,077
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.
A-58
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, 2016, that
the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
There have been no conditions or events since that notification that management believes have changed the Bank’s
category.
In 2013, the Federal Reserve Board approved its final rule on the Basel III capital standards, which implement
changes to the regulatory capital framework for banking organizations. The Basel III capital standards, which
became effective January 1, 2015, include new risk-based capital and leverage ratios, which will be 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 will be added to
the minimum requirements for capital adequacy purposes beginning on January 1, 2016 at 0.625% and will be
phased in through 2019 (increasing by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1,
2019). This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital
ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules,
institutions would be subject to limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum
percentage of eligible retained earnings that could be utilized for such actions.
The Company’s and the Bank’s actual capital amounts and ratios are presented below:
A-59
(Dollars in thousands)
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio Amount
Ratio
As of December 31, 2016:
Total Capital (to Risk-Weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Average Assets)
Consolidated
Bank
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated
Bank
As of December 31, 2015:
Total Capital (to Risk-Weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated
Bank
Tier 1 Capital (to Average Assets)
Consolidated
Bank
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated
Bank
$
$
131,991
129,035
$
$
124,441
121,485
$
$
124,441
121,485
$
$
104,441
121,485
$
$
129,203
124,910
$
$
119,354
115,160
$
$
119,354
115,160
$
$
99,354
115,160
16.12%
15.78%
15.20%
14.85%
11.19%
10.88%
12.75%
14.85%
16.63%
16.11%
15.37%
14.85%
11.44%
11.03%
12.79%
14.85%
65,508
65,426
49,131
49,069
44,488
44,677
36,848
36,802
62,137
62,026
46,603
46,519
41,743
41,776
34,952
34,890
8.00%
8.00% 81,782
N/A
N/A
10.00%
6.00%
6.00% 65,426
N/A
4.00%
4.00% 55,846
N/A
4.50%
4.50% 53,158
N/A
N/A
8.00%
N/A
5.00%
N/A
6.50%
8.00%
8.00% 77,532
N/A
N/A
10.00%
6.00%
6.00% 62,026
N/A
4.00%
4.00% 52,220
N/A
4.50%
4.50% 50,396
N/A
N/A
8.00%
N/A
5.00%
N/A
6.50%
On August 31, 2015, the FDIC and the Commissioner issued a Consent Order (the “Order”) in connection with
compliance by the Bank with the Bank Secrecy Act and its implementing regulations (collectively, the “BSA”).
The Order was issued pursuant to the consent of the Bank. In consenting to the issuance of the Order, the Bank
did not admit or deny any unsafe or unsound banking practices or violations of law or regulation.
The Order requires the Bank to take certain affirmative actions to comply with its obligations under the BSA,
including, without limitation, strengthening its Board of Directors’ oversight of BSA activities; reviewing,
enhancing, adopting and implementing a revised BSA compliance program; completing a BSA risk assessment;
developing a revised system of internal controls designed to ensure full compliance with the BSA; reviewing and
revising customer due diligence and risk assessment processes, policies and procedures; developing, adopting and
implementing effective BSA training programs; assessing BSA staffing needs and resources and appointing a
qualified BSA officer; establishing an independent BSA testing program; ensuring that all reports required by the
BSA are accurately and properly filed and engaging an independent firm to review past account activity to
determine whether suspicious activity was properly identified and reported.
Prior to implementation, certain of the actions described above are subject to review by and approval or non-
objection from the FDIC and the Commissioner. The Order will remain in effect and be enforceable until it is
modified, terminated, suspended or set aside by the FDIC and the Commissioner.
The Bank continues to make progress in addressing the issues identified in the Order and expects that it will be
able to undertake and implement all required actions within the time period specified in the Order. The Bank has
incurred and will continue to incur additional non-interest expenses associated with the implementation of
corrective actions; however, these expenses are not expected to have a significant impact on the results of
operations or financial position of the Company. Operating under the Order will limit the Company’s ability to
participate in acquisitions, to open new branches, and to allocate funds to its stock repurchase plan until such time
as the Order has been modified, terminated, suspended or set aside by the FDIC and the Commissioner.
A-60
(13)
Shareholders’ Equity
Shareholders’ equity was $107.4 million, or 9.9% of total assets, as of December 31, 2016, compared to $104.9
million, or 10.1% of total assets, as of December 31, 2015. The increase in shareholders’ equity is primarily due
to an increase in retained earnings due to net income, which was partially offset by a decrease in accumulated
other comprehensive income resulting from a decrease in the unrealized gain on investment securities and a $2.0
million decrease in common stock due to 92,738 shares of common stock being repurchased under the Company’s
stock repurchase program implemented during the second quarter of 2016.
Annualized return on average equity for the year ended December 31, 2016 was 8.11% compared to 9.03% for the
year ended December 31, 2015. Total cash dividends paid on common stock were $2.1 million and $1.6 million
for the years ended December 31, 2016 and 2015, 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 any additional series of preferred
stock.
In 2014, the Company’s Board of Directors authorized a stock repurchase program (“the 2014 Stock Repurchase
Program”), pursuant to which up to $2 million was allocated to repurchase the Company’s common stock. All
purchases under the 2014 Stock Repurchase Program were made periodically as permitted by securities laws and
other legal requirements in the open market or in privately negotiated transactions. The timing and amount of the
repurchase of shares was determined by the Company’s management, based on its evaluation of market conditions
and other factors. The Company had repurchased approximately $2.0 million, or 106,587 shares of its common
stock, under the 2014 Stock Repurchase Program as of December 31, 2015.
In the second quarter of 2016, the Company’s Board of Directors authorized another stock repurchase program
(“the 2016 Stock Repurchase Program”), pursuant to which up to $2 million was allocated to repurchase the
Company’s common stock. All purchases under the 2016 Stock Repurchase Program were made periodically as
permitted by securities laws and other legal requirements in the open market or in privately negotiated
transactions. The timing and amount of any repurchase of shares was determined by the Company’s management,
based on its evaluation of market conditions and other factors. The Company repurchased approximately $2.0
million, or 92,738 shares of its common stock, under the 2016 Stock Repurchase Program during 2016.
(14)
Other Operating Income and Expense
Miscellaneous non-interest income for the years ended December 31, 2016, 2015 and 2014 included the following
items that exceeded one percent of total revenues at some point during the following three-year period:
(Dollars in thousands)
Visa debit card income
Net appraisal management fee income
Insurance and brokerage commissions
2016
2015
2014
$
$
$
3,589
886
631
3,452
635
713
3,170
525
701
Other non-interest expense for the years ended December 31, 2016, 2015 and 2014 included the following items
that exceeded one percent of total revenues at some point during the following three-year period:
(Dollars in thousands)
Advertising
FDIC insurance
Visa debit card expense
Telephone
Foreclosure/OREO expense
Internet banking expense
FHLB advance prepayment penalty
Consulting
NC Tax Credit Amortization
2016
2015
2014
$
$
$
$
$
$
$
$
$
1,136
494
1,140
754
120
710
1,260
2,257
-
784
681
988
588
398
671
504
904
-
804
739
905
574
317
644
869
609
870
A-61
(15)
Fair Value of Financial Instruments
The Company is required to disclose fair value information about financial instruments, whether or not recognized
on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are
not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The
use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation
value of the Company, but rather a good faith estimate of the increase or decrease in the value of financial
instruments held by the Company since purchase, origination, or issuance.
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
• Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
• Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
• Level 3 – Valuation is generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions reflect estimates of
assumptions that market participants would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar techniques.
Cash and Cash Equivalents
For cash, due from banks and interest-bearing deposits, the carrying amount is a reasonable estimate of
fair value. Cash and cash equivalents are reported in the Level 1 fair value category.
Investment Securities Available for Sale
Fair values of investment securities available for sale are determined by obtaining quoted prices on
nationally recognized securities exchanges when available. If quoted prices are not available, fair value
is determined using matrix pricing, which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities. Fair values for investment
securities with quoted market prices are reported in the Level 1 fair value category. Fair value
measurements obtained from independent pricing services are reported in the Level 2 fair value category.
All other fair value measurements are reported in the Level 3 fair value category.
Other Investments
For other investments, the carrying value is a reasonable estimate of fair value. Other investments are
reported in the Level 3 fair value category.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of aggregate cost or market value. The cost of
mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in
the Level 3 fair value category.
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.
A-62
Deposits
The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable
on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the
future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits
are reported in the Level 2 fair value category.
Securities Sold Under Agreements to Repurchase
For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair
value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.
FHLB Borrowings
The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a
discount rate comparable to the current market rate for such borrowings. FHLB borrowings are reported
in the Level 2 fair value category.
Junior Subordinated Debentures
Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying
amount is a reasonable estimate of fair value. Junior subordinated debentures are reported in the Level 2
fair value category.
Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally short-term and at variable
interest rates. Therefore, both the carrying value and estimated fair value associated with these
instruments are immaterial.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company’s entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company’s financial instruments,
fair value estimates are based on many judgments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and liabilities that are not considered financial
instruments include deferred income taxes and premises and equipment. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
The fair value presentation for recurring assets is presented in Note 2. There were no recurring liabilities at
December 31, 2016 and 2015. The fair value presentation for non-recurring assets is presented in Note 3. There
were no non-recurring liabilities at December 31, 2016 and 2015. The carrying amount and estimated fair value
of the Company’s financial instruments at December 31, 2016 and 2015 are as follows:
A-63
(Dollars in thousands)
Assets:
Cash and cash equivalents
Investment securities available for sale
Other investments
Mortgage loans held for sale
Loans, net
Cash surrender value of life insurance
Liabilities:
Deposits
Securities sold under agreements
to repurchase
FHLB borrowings
Junior subordinated debentures
(Dollars in thousands)
Assets:
Cash and cash equivalents
Investment securities available for sale
Other investments
Mortgage loans held for sale
Loans, net
Cash surrender value of life insurance
Liabilities:
Deposits
Securities sold under agreements
to repurchase
FHLB borrowings
Junior subordinated debentures
Carrying
Amount
70,094
249,946
2,635
5,709
716,261
14,952
892,918
36,434
20,000
20,619
Carrying
Amount
39,763
268,530
3,636
4,149
679,502
14,546
832,175
27,874
43,500
20,619
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Fair Value Measurements at December 31, 2016
Level 1
Level 2
Level 3
Total
70,094
-
-
-
-
-
-
249,196
-
-
-
14,952
-
750
2,635
5,709
720,675
-
70,094
249,946
2,635
5,709
720,675
14,952
-
-
-
-
-
884,510
884,510
36,434
18,864
20,619
-
-
-
36,434
18,864
20,619
Fair Value Measurements at December 31, 2015
Level 1
Level 2
Level 3
Total
39,763
1,325
-
-
-
-
-
266,455
-
-
-
14,546
-
750
3,636
4,149
683,540
-
39,763
268,530
3,636
4,149
683,540
14,546
-
-
-
-
-
827,874
827,874
27,874
43,144
20,619
-
-
-
27,874
43,144
20,619
A-64
(16)
Peoples Bancorp of North Carolina, Inc. (Parent Company Only) Condensed Financial Statements
Balance Sheets
December 31, 2016 and 2015
(Dollars in thousands)
Assets
2016
2015
Cash
Interest-bearing time deposit
Investment in subsidiaries
Investment in PEBK Capital Trust II
Investment securities available for sale
Other assets
Total assets
Liabilities and Shareholders' Equity
Junior subordinated debentures
Liabilities
Shareholders' equity
Total liabilities and shareholders' equity
$
$
$
$
957
1,000
124,471
619
750
275
128,072
20,619
25
107,428
128,072
553
1,000
121,848
619
1,234
249
125,503
20,619
20
104,864
125,503
Statements of Earnings
For the Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
Revenues:
Interest and dividend income
Gain on sale of securities
Total revenues
Expenses:
Interest
Other operating expenses
Total expenses
Income before income tax benefit and equity in
undistributed earnings of subsidiaries
Income tax benefit
Income before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net earnings
2016
2015
2014
$
$
4,569
405
4,974
485
513
998
3,976
178
4,154
5,023
9,177
3,979
-
3,979
403
538
941
3,038
262
3,300
6,333
9,633
2,718
-
2,718
389
527
916
1,802
239
2,041
7,347
9,388
A-65
Statements of Cash Flows
For the Years Ended December 31, 2016, 2015 and 2014
(Dollars in thousands)
Net cash provided by operating activities
3,815
3,299
2016
2015
2014
$
9,177
9,633
9,388
(7,347)
-
28
(5)
1
(12,632)
(10,567)
500
-
(1,000)
(500)
(1,022)
(82)
37
(1,067)
(5,023)
(405)
(6,333)
-
61
-
5
-
(4)
3
-
-
-
-
-
-
(1,574)
(1,917)
-
(3,491)
669
10
-
679
(2,106)
(1,984)
-
(4,090)
404
553
957
(192)
(12,134)
745
553
12,879
745
(2,523)
-
57
-
6,625
(12,524)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Equity in undistributed earnings of subsidiaries
Gain on sale of investment securities
Change in:
Other assets
Accrued income
Accrued expense
Other liabilities
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale
In kind transfer from parent to Bank
Net change in interest-bearing time deposit
Net cash provided (used) by investing activities
Cash flows from financing activities:
Cash dividends paid on common stock
Stock repurchase
Proceeds from exercise of stock options
Net cash used by financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net
Accrued redemption of Series A Preferred Stock
$
$
A-66
(17)
Quarterly Data
(Dollars in thousands, except per
share amounts)
Total interest income
Total interest expense
Net interest income
$
(Reduction of) provision for loan losses
Other income
Other expense
Income before income taxes
Income taxes (benefit)
Net earnings
2016
2015
First Second Third Fourth
10,107
9,905
821
809
9,286
9,096
9,815
813
9,002
9,982
828
9,154
$
First Second Third Fourth
9,961
9,567
851
884
9,110
8,683
9,191
875
8,316
9,947
874
9,073
(216)
3,324
9,492
3,144
691
2,453
(531)
3,572
9,109
3,996
1,032
2,964
(360)
3,414
9,598
3,330
872
2,458
(99)
3,666
11,783
1,268
(34)
1,302
173
3,245
8,748
3,007
679
2,328
(214)
3,297
8,337
3,490
866
2,624
235
3,266
8,669
3,435
942
2,493
0.45
0.45
(211)
3,504
10,024
2,801
613
2,188
0.40
0.39
Basic net earnings per share
Diluted net earnings per share
0.45
0.44
0.54
0.53
0.45
0.44
$
0.24
0.24
$
$
0.41
0.41
0.47
0.47
A-67
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, Secretary and Treasurer, Denver Equipment 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 Medical Consultants, PLLC
Larry E. Robinson
Shareholder, Director, Chairman of the Board and Chief Executive Officer, The Blue Ridge Distributing Co., Inc.
(beer and wine distributor)
Director and member of the Board of Directors, United Beverages of North Carolina, LLC (beer distributor)
William Gregory (Greg) Terry
President, DFH Holdings
Operator/General Manager, Drum & Willis-Reynolds Funeral Homes and Crematory
Dan Ray Timmerman, Sr.
Chairman of the Board and Chief Executive Officer, Timmerman Manufacturing, Inc. (wrought iron furniture, railings
and gates manufacturer)
Benjamin I. Zachary
President, Treasurer, General Manager and Director, Alexander Railroad Company
OFFICERS
Lance A. Sellers
President and Chief Executive Officer
A. Joseph Lampron, Jr.
Executive Vice President, Chief Financial Officer, Corporate Treasurer and Assistant Corporate Secretary
William D. Cable, Sr.
Executive Vice President, Corporate Secretary and Assistant Corporate Treasurer
A-68
BR710577-0317-COMBO