PEOPLES BANCORP OF NORTH CAROLINA INC - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: March 31, 2021

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

000-27205

(Commission File No.)

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina	56-2132396
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
518 West C Street, Newton, North Carolina	28658
(Address of principal executive offices)	(Zip Code)

 

(828) 464-5620

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name on each exchange on which registered

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 5,789,166 shares of common stock, outstanding at April 30, 2021.

INDEX

 

		PAGE(S)
Item 1.	Financial Statements
	Consolidated Balance Sheets at March 31, 2021 (Unaudited) and December 31, 2020 (Audited)	3
	Consolidated Statements of Earnings for the three months ended March 31, 2021 and 2020 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2021 and 2020 (Unaudited)	6
	Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (Unaudited)	7-8
	Notes to Consolidated Financial Statements (Unaudited)	9-28
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29-42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43

 

 

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults upon Senior Securities	44
Item 5.	Other Information	44
Item 6.	Exhibits	44-47
Signatures		48
Certifications		49-51

 

Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was 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 include, but are not limited to, (1) competition in the markets served by the registrant and its subsidiaries, (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 environments 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 other filings with the Securities and Exchange Commission, including but not limited to, those described in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

 

 

  

	March 31,	December 31,
Assets	2021	2020
	(Unaudited)	(Audited)
Cash and due from banks, including reserve requirements
of $0 at both 3/31/21 and 12/31/20	$43,726	42,737
Interest-bearing deposits	165,311	118,843
Cash and cash equivalents	209,037	161,580
Investment securities available for sale	325,517	245,249
Other investments	3,791	4,155
Total securities	329,308	249,404
Mortgage loans held for sale	4,236	9,139
Loans	946,497	948,639
Less allowance for loan losses	(9,532)	(9,908)
Net loans	936,965	938,731
Premises and equipment, net	18,184	18,600
Cash surrender value of life insurance	17,065	16,968
Other real estate	128	128
Right of use lease asset	3,182	3,423
Accrued interest receivable and other assets	19,473	18,202
Total assets	$1,537,578	1,416,175
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$524,176	456,980
Interest-bearing demand, MMDA & savings	701,798	657,834
Time, $250,000 or more	28,109	25,771
Other time	80,382	80,501
Total deposits	1,334,465	1,221,086
Securities sold under agreements to repurchase	31,916	26,201
Junior subordinated debentures	15,464	15,464
Lease liability	3,232	3,471
Accrued interest payable and other liabilities	12,472	10,054
Total liabilities	1,397,549	1,276,276
Commitments
Shareholders' equity:
Preferred stock, no par value; authorized
5,000,000 shares; no shares issued and outstanding	-	-
Common stock, no par value; authorized
20,000,000 shares; issued and outstanding 5,789,166 shares
at March 31, 2021 and 5,787,504 shares at December 31, 2020	56,910	56,871
Common stock held by deferred compensation trust, at cost; 156,808 shares at March 31, 2021 and 155,469 shares at December 31, 2020	(1,849)	(1,796)
Deferred compensation	1,849	1,796
Retained earnings	80,819	77,628
Accumulated other comprehensive income	2,300	5,400
Total shareholders' equity	140,029	139,899
Total liabilities and shareholders' equity	$1,537,578	1,416,175

 

 

	2021	2020
	(Unaudited)	(Unaudited)
Interest income:
Interest and fees on loans	$10,664	10,680
Interest on due from banks	35	43
Interest on federal funds sold	-	123
Interest on investment securities:
U.S. Government sponsored enterprises	538	685
State and political subdivisions	639	641
Other	46	78
Total interest income	11,922	12,250
Interest expense:
Interest-bearing demand, MMDA & savings deposits	497	525
Time deposits	212	277
FHLB borrowings	-	64
Junior subordinated debentures	71	130
Other	35	45
Total interest expense	815	1,041
Net interest income	11,107	11,209
Provision for (reduction of provision for) loan losses	(455)	1,521
Net interest income after provision for loan losses	11,562	9,688
Non-interest income:
Service charges	926	1,108
Other service charges and fees	212	193
Mortgage banking income	870	322
Insurance and brokerage commissions	260	242
Appraisal management fee income	1,816	1,350
Miscellaneous	1,789	1,380
Total non-interest income	5,873	4,595
Non-interest expense:
Salaries and employee benefits	6,183	5,724
Occupancy	1,953	1,921
Professional fees	337	333
Advertising	143	218
Debit card expense	232	230
Appraisal management fee expense	1,456	1,034
Other	1,964	1,989
Total non-interest expense	12,268	11,449
Earnings before income taxes	5,167	2,834
Income tax expense	1,046	467
Net earnings	$4,121	2,367
Basic net earnings per share	$0.73	0.41
Diluted net earnings per share	$0.71	0.40
Cash dividends declared per share	$0.16	0.30

 

	2021	2020
	(Unaudited)	(Unaudited)
Net earnings	$4,121	2,367
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities
available for sale	(4,026)	2,715
Income tax expense (benefit) related to other
comprehensive gain (loss):
Unrealized holding gains (losses) on securities
available for sale	(926)	625
Total other comprehensive income (loss),
net of tax	(3,100)	2,090
Total comprehensive income	$1,021	4,457

 

					Common Stock
					Held by	Accumulated
					Deferred	Other
	Common Stock		Retained	Deferred	Compensation	Comprehensive
	Shares	Amount	Earnings	Compensation	Trust	Income	Total
	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)	(Unaudited)
Balance, December 31, 2020	5,787,504	$56,871	77,628	1,796	(1,796)	5,400	139,899
Cash dividends declared on
common stock	-	-	(930)	-	-	-	(930)
Restricted stock units exercised	1,662	39	-	-	-	-	39
Equity incentive plan, net	-	-	-	53	(53)	-	-
Net earnings	-	-	4,121	-	-	-	4,121
Change in accumulated other
comprehensive loss, net of tax	-	-	-	-	-	(3,100)	(3,100)
Balance, March 31, 2021	5,789,166	$56,910	80,819	1,849	(1,849)	2,300	140,029
Balance, December 31, 2019	5,912,300	$59,813	70,663	1,588	(1,588)	3,644	134,120
Common stock repurchase	(126,800)	(2,999)	-	-	-	-	(2,999)
Cash dividends declared on
common stock	-	-	(1,779)	-	-	-	(1,779)
Restricted stock units exercised	2,004	57	-			-	57
Equity incentive plan, net	-	-	-	64	(64)	-	-
Net earnings	-	-	2,367	-	-	-	2,367
Change in accumulated other
comprehensive income, net of tax	-	-	-	-	-	2,090	2,090
Balance, March 31, 2020	5,787,504	$56,871	71,251	1,652	(1,652)	5,734	133,856

See accompanying Notes to Consolidated Financial Statements.
 

 

	2021	2020
	(Unaudited)	(Unaudited)
Cash flows from operating activities:
Net earnings	$4,121	2,367
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion	1,198	1,038
Provision for (reduction of provision for) loan losses	(455)	1,521
Deferred income taxes	(9)	(8)
Restricted stock expense	(44)	(77)
Proceeds from sales of mortgage loans held for sale	28,939	14,876
Origination of mortgage loans held for sale	(24,036)	(16,608)
Change in:
Cash surrender value of life insurance	(97)	(95)
Right of use lease asset	241	195
Other assets	(336)	165
Lease liability	(239)	(189)
Other liabilities	2,462	(1,298)
Net cash provided by operating activities	11,745	1,887
Cash flows from investing activities:
Purchases of investment securities available for sale	(90,470)	(10,958)
Proceeds from sales, calls and maturities of investment securities
available for sale	645	2,343
Proceeds from paydowns of investment securities available for sale	4,981	5,138
Proceeds from paydowns of other investment securities	44	44
Redemption (purchase) of FHLB stock	331	(3,031)
Net change in loans	2,221	(30,779)
Purchases of premises and equipment	(243)	(391)
Net cash used in investing activities	(82,491)	(37,634)
Cash flows from financing activities:
Net change in deposits	113,379	17,441
Net change in securities sold under agreement to repurchase	5,715	4,314
Proceeds from FHLB borrowings	-	70,000
Proceeds from Fed Funds purchased	-	6,935
Repayments of Fed Funds purchased	-	(6,935)
Repayments of Junior Subordinated Debentures	-	(155)
Restricted stock units exercised	39	57
Common stock repurchased	-	(2,999)
Cash dividends paid on common stock	(930)	(1,779)
Net cash provided by financing activities	118,203	86,879
Net change in cash and cash equivalents	47,457	51,132
Cash and cash equivalents at beginning of period	161,580	52,387
Cash and cash equivalents at end of period	$209,037	103,519

 

  See accompanying Notes to Consolidated Financial Statements.

 

 

	2021	2020
	(Unaudited)	(Unaudited)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$802	994
Income taxes	$-	-
Noncash investing and financing activities:
Change in unrealized gain (loss) on investment securities
available for sale, net	$(3,100)	2,090
Issuance of accrued restricted stock units	$39	57

 

PEOPLES BANCORP OF NORTH CAROLINA, INC.

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly owned subsidiary, Peoples Bank (the “Bank”), along with the Bank’s wholly owned subsidiaries, Peoples Investment Services, Inc. (“PIS”), Real Estate Advisory Services, Inc. (“REAS”), Community Bank Real Estate Solutions, LLC (“CBRES”) and PB Real Estate Holdings, LLC (collectively called the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Bank formerly operated three banking offices focused on the Latino population that were operated as a division of the Bank under the name Banco de la Gente (“Banco”). Two of these offices remain open as Bank branches that offer the same banking services offered in the Bank’s other branches such as the taking of deposits and the making of loans.

 

The consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2020) are unaudited. In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”). Actual results could differ from those estimates.

 

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 the specific accounting guidance. A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2020 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 6, 2021 Annual Meeting of Shareholders.

 

Correction of an Error

Subsequent to issuance of the Company’s December 31, 2020 Form 10-K, it was identified that the Company’s non-qualified deferred compensation plan had not been properly recorded on the Consolidated Balance Sheets. The deferred compensation plan requires all deferral amounts and contributions to be held in a rabbi trust, and the assets held by the trust should be recorded on the Company’s financial statements along with a corresponding liability.

 

For balances related to mutual fund investments held in the trust, the accrued interest receivable and other assets, accrued interest payable and other liabilities, total assets, and total liabilities line items on the Consolidated Balance Sheets were adjusted as of December 31, 2020 to reflect the asset and corresponding liability associated with the portion of the trust held in mutual fund investments. This resulted in an increase to these line items of $1.3 million. Additionally, an adjustment to the presentation of the Company’s shareholders’ equity on the Consolidated Balance Sheets has been made to disclose the number of shares of Company stock held by the trust and the cost basis for those shares, as well as a corresponding liability for the deferred compensation as of December 31, 2020.

 

On the Consolidated Statements of Earnings, basic earnings per share has been adjusted from $0.40 to $0.41 for the three months ended March 31, 2020. The impact of the changes in the fair value of the mutual funds held in the trust and the changes in the deferred compensation liability that were not previously recorded were not considered material to the financial statements. These changes to basic earnings per share are also reflected within Note 4 to the financial statements.

 

In addition to the adjustments to the presentation of the Company’s shareholders' equity on the Consolidated Balance Sheets, the Company adjusted the presentation of the Consolidated Statements of Changes in Shareholders’ Equity for all periods presented to reflect the Company shares held within the plan, as well as the corresponding deferred compensation associated with these shares.

 

The Company’s Consolidated Statements of Cash Flows were adjusted for the three months ended March 31, 2020 in order to reflect the changes to other assets and other liabilities made on the Consolidated Balance Sheets.

 

 

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of the periods presented. All adjustments were not considered material to the financial statements.

               

Revenue Recognition

The Company has applied Accounting Standards Update (“ASU”) 2014-09 using a modified retrospective approach. The Company’s revenue is comprised of net interest income and noninterest income. The scope of ASU 2014-09 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of the Company’s revenues are not affected. Appraisal management fee income and expense from the Bank’s subsidiary, CBRES, was reported as a net amount prior to March 31, 2018, which was included in miscellaneous non-interest income. This income and expense is now reported on separate line items under non-interest income and non-interest expense. See below for additional information related to revenue generated from contracts with customers.

 

Revenue and Method of Adoption

The majority of the Company’s revenue is derived primarily from interest income from receivables (loans) and securities. Other revenues are derived from fees received in connection with deposit accounts, investment advisory, and appraisal services. On January 1, 2018, the Company adopted the requirements of ASU 2014-09. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

The Company adopted ASU 2014-09 using the modified retrospective transition approach which does not require restatement of prior periods. The method was selected as there were no material changes in the timing of revenue recognition resulting in no comparability issues with prior periods. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature of, and reason for, the change, which is solely a result of the adoption of the required standard. When applying the modified retrospective transition approach under ASU 2014-09, the Company has elected, as a practical expedient, to apply this approach only to contracts that were not completed as of January 1, 2018. A completed contract is considered to be a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that was in effect before January 1, 2018. There were no uncompleted contracts as of January 1, 2018 for which application of the new standard required an adjustment to retained earnings.

 

The following disclosures involve the Company’s material income streams derived from contracts with customers which are within the scope of ASU 2014-09. Through the Company’s wholly-owned subsidiary, PIS, the Company contracts with a registered investment advisor to perform investment advisory services on behalf of the Company’s customers. The Company receives commissions from this third party investment advisor based on the volume of business that the Company’s customers do with such investment advisor. Total revenue recognized from these contracts was $260,000 and $241,000 for the three months ended March 31, 2021 and 2020, respectively. The Company utilizes third parties to contract with the Company’s customers to perform debit and credit card clearing services. These third parties pay the Company commissions based on the volume of transactions that they process on behalf of the Company’s customers. Total revenue recognized from these contracts with these third parties was $1.2 million and $972,000 for the three months ended March 31, 2021 and 2020, respectively. Through the Company’s wholly-owned subsidiary, REAS, the Company provides property appraisal services for negotiated fee amounts on a per appraisal basis. Total revenue recognized from these contracts with customers was $180,000 and $181,000 for the three months ended March 31, 2021 and 2020, respectively Through the Company’s wholly-owned subsidiary, CBRES, the Company provides appraisal management services. Total revenue recognized from these contracts with customers was $1.8 million and $1.4 million for the three months ended March 31, 2021 and 2020, respectively. Due to the nature of the Company’s relationship with the customers that the Company provides services, the Company does not incur costs to obtain contracts and there are no material incremental costs to fulfill these contracts that should be capitalized.

 

Disaggregation of Revenue. The Company’s portfolio of services provided to the Company’s customers consists of over 50,000 active contracts. The Company has disaggregated revenue according to timing of the transfer of service. Total revenue for the three months ended March 31, 2021 derived from contracts in which services are transferred at a point in time was approximately $2.2 million. None of the Company’s revenue is derived from contracts in which services are transferred over time. Revenue is recognized as the services are provided to the customers. Economic factors, such as the financial stress impacting businesses and individuals as a result of the novel coronavirus (“COVID-19”) pandemic, could affect the nature, amount, and timing of these cash flows, as unfavorable economic conditions could impair a customers’ ability to provide payment for services. For the Company’s deposit contracts, this risk is mitigated as the Company generally deducts payments from customers’ accounts as services are rendered. For the Company’s appraisal services, the risk is mitigated in that the appraisal is not released until payment is received.

 

 

Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable on the balance sheet. Most contracts call for payment by a charge or deduction to the respective customer account but there are some that require a receipt of payment from the customer. For fee per transaction contracts, the customers are billed as the transactions are processed. The Company has no contracts in which customers are billed in advance for services to be performed. These types of contracts would create contract liabilities or deferred revenue, as the customers pay in advance for services. There are no contract liabilities or accounts receivables balances that are material to the Company’s balance sheet.

 

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASU 2014-09. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied as the service is provided to the customer at a point in time. There are no significant financing components in the Company’s contracts. Excluding deposit and appraisal service revenues which are primarily billed at a point in time as a fee for services incurred, all other contracts within the scope of ASU 2014-09 contain variable consideration in that fees earned are derived from market values of accounts which determine the amount of consideration to which the Company is entitled. The variability is resolved when the services are provided. The contracts do not include obligations for returns, refunds, or warranties. The contracts are specific to the amounts owed to the Company for services performed during a period should the contracts be terminated.

 

Significant Judgements. All of the Company’s contracts create performance obligations that are satisfied at a point in time excluding some immaterial deposit revenues. Revenue is recognized as services are billed to the customers. Variable consideration does exist for contracts related to the Company’s contract with its registered investment advisor as some revenues earned pursuant to that contract are based on market values of accounts at the end of the period.

 

 

Recently Adopted Accounting Guidance
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2019-07: Codification Updates to SEC Sections	Guidance updated for various Topics of the ASC to align the guidance in various SEC sections of the ASC with the requirements of certain SEC final rules.	Effective upon issuance	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-13: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)	Updates the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-18: Clarifying the Interaction between Topic 808 and Topic 606	Clarifies the interaction between the guidance for certain collaborative arrangements and the new revenue recognition financial accounting and reporting standard.	January 1, 2020 Early adoption permitted	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2018-19: Leases (Topic 842): Codification Improvements	Provides guidance to address concerns companies had raised about an accounting exception they would lose when assessing the fair value of underlying assets under the leases standard and clarify that lessees and lessors are exempt from a certain interim disclosure requirement associated with adopting the new standard.	January 1, 2020	The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

 

 

The following table provides a summary of ASU’s issued by the FASB that the Company has not adopted as of March 31, 2021, which may impact the Company’s financial statements.

 

Recently Issued Accounting Guidance Not Yet Adopted
ASU	Description	Effective Date	Effect on Financial Statements or Other Significant Matters
ASU 2016-13: Measurement of Credit Losses on Financial Instruments	Provides guidance to change the accounting for credit losses and modify the impairment model for certain debt securities.	See ASU 2019-10 below.	The Company will apply this guidance through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company is still evaluating the impact of this guidance on its consolidated financial statements. The Company has formed a Current Expected Credit Losses (“CECL”) committee and implemented a model from a third-party vendor for running CECL calculations. The Company is currently developing CECL model assumptions and comparing results to current allowance for loan loss calculations. The Company plans to run parallel calculations leading up to the effective date of this guidance to ensure it is prepared for implementation by the effective date. In addition to the Company’s allowance for loan losses, it will also record an allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and forecasts at that time.
ASU 2018-14: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (Subtopic 715-20)	Updates disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Aligns the implementation date of the topic for annual financial statements of nonpublic companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the leases topic.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments	Addresses unintended issues accountants flagged when implementing ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-13, Measurement of Credit Losses on Financial Instruments, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-05: Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief	Guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments.	See ASU 2019-10 below.	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures. See ASU 2016-13 above.
ASU 2019-10: Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates	Guidance to defer the effective dates for private companies, not-for-profit organizations, and certain smaller reporting companies applying standards on current expected credit losses (CECL), leases, hedging.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-11: Codification Improvements to Topic 326, Financial Instruments—Credit Losses	Guidance that addresses issues raised by stakeholders during the implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments affect a variety of Topics in the ASC.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	Guidance to simplify accounting for income taxes by removing specific technical exceptions that often produce information investors have a hard time understanding. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.	January 1, 2021	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

ASU 2020-02: Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)	Guidance to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119 related to the new credit losses standard and comments by the SEC staff related to the revised effective date of the new leases standard.	Effective upon issuance	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-03: Codification Improvements to Financial Instruments	Guidance to clarify that the contractual term of a net investment in a lease, determined in accordance with the leases standard, should be the contractual term used to measure expected credit losses under ASC 326.	January 1, 2023	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	Guidance that provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.	March 12, 2020 through December 31, 2022	The adoption of this guidance is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.

 

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 2020 consolidated financial statements have been reclassified to conform to the 2021 presentation.

 

 

Investment securities available for sale at March 31, 2021 and December 31, 2020 are as follows:

 

               (Dollars in thousands)

	March 31, 2021
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
U.S Treasuries	$7,960	-	-	7,960
U.S. Government
sponsored enterprises	12,939	282	202	13,019
Mortgage-backed securities	184,445	2,225	967	185,703
State and political subdivisions	117,186	3,070	1,421	118,835
Total	$322,530	5,577	2,590	325,517

 

               (Dollars in thousands)

	December 31, 2020
	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Estimated Fair Value
U.S. Government
sponsored enterprises	$7,384	331	208	7,507
Mortgage-backed securities	143,095	2,812	593	145,314
State and political subdivisions	87,757	4,758	87	92,428
Total	$238,236	7,901	888	245,249

 

The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2021 and December 31, 2020 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.

       

      

               (Dollars in thousands)

	March 31, 2021
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
U.S. Government
sponsored enterprises	$-	-	4,098	202	4,098	202
Mortgage-backed securities	82,322	947	1,979	20	84,301	967
State and political subdivisions	38,420	1,421	-	-	38,420	1,421
Total	$120,742	2,368	6,077	222	126,819	2,590

 

               (Dollars in thousands) 

	December 31, 2020
	Less than 12 Months		12 Months or More		Total
	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses	Fair Value	Unrealized Losses
U.S. Government
sponsored enterprises	$-	-	4,193	208	4,193	208
Mortgage-backed securities	80,827	565	4,762	28	85,589	593
State and political subdivisions	7,126	87	-	-	7,126	87
Total	$87,953	652	8,955	236	96,908	888

 

At March 31, 2021, unrealized losses in the investment securities portfolio relating to debt securities totaled $2.6 million. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the March 31, 2021 tables above, 33 out of 111 securities issued by state and political subdivisions and 30 out of 83 securities issued by U.S. Government sponsored enterprises contained unrealized losses. These unrealized losses are considered temporary because of acceptable financial condition and results of operations of entities that issued each security and the repayment sources of principal and interest on U.S. Government sponsored enterprises, including mortgage-backed securities, are government backed.

 

 

 

               (Dollars in thousands) 

	March 31, 2021	December 31, 2020
Real estate loans:
Construction and land development	$87,878	94,124
Single-family residential	264,356	272,325
Single-family residential -
Banco de la Gente non-traditional	26,278	26,883
Commercial	337,943	332,971
Multifamily and farmland	57,914	48,880
Total real estate loans	774,369	775,183
Loans not secured by real estate:
Commercial loans	160,892	161,740
Farm loans	860	855
Consumer loans	6,778	7,113
All other loans	3,598	3,748
Total loans	946,497	948,639
Less allowance for loan losses	9,532	9,908
Total net loans	$936,965	938,731

 

The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties, and also in Mecklenburg, Wake and Durham counties of North Carolina. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market. Risk characteristics of the major components of the Bank’s loan portfolio are discussed below:

 

 

 

 

 

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 of 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 March 31, 2021 and December 31, 2020:

 

	Loans 30-89 Days Past Due	Loans 90 or More Days Past Due	Total Past Due Loans	Total Current Loans	Total Loans	Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$434	-	434	87,444	87,878	-
Single-family residential	2,314	67	2,381	261,975	264,356	-
Single-family residential -
Banco de la Gente non-traditional	2,709	48	2,757	23,521	26,278	-
Commercial	713	-	713	337,230	337,943	-
Multifamily and farmland	-	-	-	57,914	57,914	-
Total real estate loans	6,170	115	6,285	768,084	774,369	-
Loans not secured by real estate:
Commercial loans	144	-	144	160,748	160,892	-
Farm loans	-	-	-	860	860	-
Consumer loans	33	2	35	6,743	6,778	-
All other loans	-	-	-	3,598	3,598	-
Total loans	$6,347	117	6,464	940,033	946,497	-