Item 1A - Risk Factors 15 - 26 N/A
Item 1B - Unresolved Staff Comments 27 N/A
Item 2 - Properties 27 N/A
Item 3 - Legal Proceedings 28 N/A
Item 4 - Mine Safety Disclosures 28 N/A
PART II
Item 5 - Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 28 - 30 N/A
Item 6 - Selected Financial Data 30 A-3
Item 7 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations 31 A-4 - A-25
Item 8 - Financial Statements and Supplementary Data 31 A-26 - A-71
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 31 N/A
Item 9A - Controls and Procedures 31- 32 N/A
Item 9B - Other Information 32 N/A
PART III
Item 11 - Executive Compensation 32 17- 27
Item 12 - Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 33 8-10
Item 13 - Certain Relationships and Related Transactions
and Director Independence 33 10 and 29
Item 14 - Principal Accountant Fees and Services 33 34
PART IV
Item 15 - Exhibits and Financial Statement Schedules 34 - 37 N/A
Signatures 38 N/A
3
PART I
ITEM
1. BUSINESS
GeneralBusiness
Peoples
Bancorp of North Carolina, Inc. (“Bancorp”), was formed
in 1999 to serve as the holding company for Peoples Bank (the
“Bank”). Bancorp is a bank holding company registered
with the Board of Governors of the Federal Reserve System (the
“Federal Reserve”) under the Bank Holding Company Act
of 1956, as amended (the “BHCA”). Bancorp’s
principal source of income is dividends declared and paid by the
Bank on its capital stock, if any. Bancorp has no operations and
conducts no business of its own other than owning the Bank.
Accordingly, the discussion of the business which follows concerns
the business conducted by the Bank, unless otherwise indicated.
Bancorp and its wholly owned subsidiary, the Bank, along with the
Bank’s wholly owned subsidiaries are collectively called the
“Company”, “we”, “our” or
“us” in this Annual Report on Form 10-K. Our principal
executive offices are located at 518 West C Street, Newtown, North
Carolina, 28658, and our telephone number is (828)
464-5620.
The
Bank, founded in 1912, is a state-chartered commercial bank serving
the citizens and business interests of the Catawba Valley and
surrounding communities through 18 banking offices, as of December
31, 2020, located in Lincolnton, Newton, Denver, Catawba, Conover,
Maiden, Claremont, Hiddenite, Hickory, Charlotte, Cornelius,
Mooresville, Raleigh, and Cary, North Carolina. The Bank also
operates loan production offices in Charlotte and Denver, North
Carolina. The Company’s fiscal year ends December 31. At
December 31, 2020, the Company had total assets of $1.4 billion,
net loans of $938.7 million, deposits of $1.2 billion, total
securities of $249.4 million, and shareholders’ equity of
$139.9 million.
The
Bank operates three banking offices focused on the Latino
population that were formerly operated as a division of the Bank
under the name Banco de la Gente (“Banco”). These
offices are now branded as Bank branches and considered a separate
market territory of the Bank as they offer normal and customary
banking services as are offered in the Bank’s other branches
such as the taking of deposits and the making of
loans.
The
Bank has a diversified loan portfolio, with no foreign loans and
few agricultural loans. Real estate loans are predominately
variable rate and fixed rate commercial property loans, which
include residential development loans to commercial customers.
Commercial loans are spread throughout a variety of industries with
no one particular industry or group of related industries
accounting for a significant portion of the commercial loan
portfolio. The majority of the Bank’s deposit and loan
customers are individuals and small to medium-sized businesses
located in the Bank’s market area. The Bank’s loan
portfolio also includes Individual Taxpayer Identification Number
(ITIN) mortgage loans generated through the Bank’s Banco
offices. Additional discussion of the Bank’s loan portfolio
and sources of funds for loans can be found in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” on pages A-4 through
A-25 of the Annual Report, 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”).
At
December 31, 2020, the Company employed 290 full-time employees and
27 part-time employees, which equated to 307 full-time equivalent
employees.
Subsidiaries
The
Bank is a subsidiary of the Company. At December 31, 2020, the Bank
had four subsidiaries, Peoples Investment Services, Inc., Real
Estate Advisory Services, Inc., Community Bank Real Estate
Solutions, LLC (“CBRES”) and PB Real Estate Holdings,
LLC. Through a relationship with Raymond James Financial Services,
Inc., Peoples Investment Services, Inc. provides the Bank’s
customers access to investment counseling and non-deposit
investment products such as stocks, bonds, mutual funds, tax
deferred annuities, and related brokerage services. Real Estate
Advisory Services, Inc. provides real estate appraisal and real
estate brokerage services. CBRES serves as a
“clearing-house” for appraisal services for community
banks. Other banks are able to contract with CBRES to find and
engage appropriate appraisal companies in the area where the
property to be appraised is located. This type of service ensures
that the appraisal process remains independent from the financing
process within the Bank. PB Real Estate Holdings, LLC acquires,
manages and disposes of real property, other collateral and other
assets obtained in the ordinary course of collecting debts
previously contracted. In 2019, the Company launched PB Insurance
Agency, which is part of CBRES.
4
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 Company redeemed $5.0
million of outstanding trust preferred securities in
2019.
The
trust preferred securities issued by PEBK Trust II accrue and pay
quarterly at a floating rate of three-month LIBOR plus 163 basis
points. The Company has guaranteed distributions and other payments
due on the trust preferred securities to the extent PEBK Trust II
does not have funds with which to make the distributions and other
payments. The net combined effect of the trust preferred securities
transaction is that the Company is obligated to make the
distributions and other payments required on the trust preferred
securities.
These
trust preferred securities are mandatorily redeemable upon maturity
of the debentures on June 28, 2036, or upon earlier redemption as
provided in the indenture. The Company has the right to redeem the
debentures purchased by PEBK Trust II, in whole or in part, which
became effective on June 28, 2011. As specified in the indenture,
if the debentures are redeemed prior to maturity, the redemption
price will be the principal amount plus any accrued but unpaid
interest.
Market Areaand
Competition
The
Bank’s primary market consists of the communities in an
approximate 50-mile radius around its headquarters office in
Newton, North Carolina. This area includes Catawba County,
Alexander County, Lincoln County, Iredell County and portions of
northeast Gaston County, North Carolina. The Bank is located only
40 miles north of Charlotte, North Carolina, and the Bank’s
primary market area is and will continue to be significantly
affected by its close proximity to this major metropolitan
area.
Employment in the
Bank’s primary market area is diversified among
manufacturing, retail and wholesale trade, technology, services and
utilities. Catawba County’s largest employers include Catawba
County Schools, Frye Regional Medical Center, Catawba Valley
Medical Center, Merchant Distributors, Inc. (wholesale food
distributor), Catawba County, CommScope, Inc. (manufacturer of
fiber optic cable and accessories), Corning Optical Communications
(manufacturer of fiber optic cable and accessories), Ethan Allen
(furniture manufacturer), HSM (manufacturing) and Advance Pierre
Foods (restaurants and bakeries). Lincoln County’s largest
employers include Lincoln County Schools, County of Lincoln, Atrium
Health Lincoln, RSI Home Products (manufacturing), Wal-Mart
Associates Inc., The Timken Company (manufacturing), Julius Blum
Inc. (manufacturing), Lowes Home Centers Inc., Cataler North
America (manufacturing) and Congruity HR (professional &
business services).
The
Bank has operated in the Catawba Valley region of North Carolina
for over 100 years and is the only financial institution
headquartered in Newton, North Carolina. Nevertheless, the Bank
faces strong competition both in attracting deposits and making
loans. Its most direct competition for deposits has historically
come from other commercial banks, credit unions and brokerage firms
located in its primary market area, including large financial
institutions. One national money center commercial bank is
headquartered in Charlotte, North Carolina. Based upon June 30,
2020 comparative data, the Bank had 20.32% of the deposits in
Catawba County, placing it second in deposit size among a total of
11 banks with branch offices in Catawba County; 16.20% of the
deposits in Lincoln County, placing it second in deposit size among
a total of ten banks with branch offices in Lincoln County; and
14.01% of the deposits in Alexander County, placing it fourth in
deposit size among a total of six banks with branch offices in
Alexander County.
The
Bank also faces additional significant competition for
investors’ funds from short-term money market securities and
other corporate and government securities. The Bank’s core
deposit base has grown principally due to economic growth in the
Bank’s market area coupled with the implementation of new and
competitive deposit products. The ability of the Bank to attract
and retain deposits depends on its ability to generally provide a
rate of return, liquidity and risk comparable to that offered by
competing investment opportunities.
5
The
Bank experiences strong competition for loans from commercial banks
and mortgage banking companies. The Bank competes for loans
primarily through the interest rates and loan fees it charges and
the efficiency and quality of services it provides to borrowers.
Competition is increasing as a result of the continuing reduction
of restrictions on the interstate operations of financial
institutions.
Lending Policies and Procedures
Our
lending activities follow written, non-discriminatory underwriting
standards and loan origination procedures established by the Board
of Directors of the Bank. The loan approval process is intended to
assess the borrower’s ability to repay the loan and the value
of the collateral that will secure the loan. To assess the
borrower’s ability to repay, we review the borrower’s
employment, credit history, and other information on the historical
and projected income and expenses of the borrower.
The objectives of our
lending program are to: (i) establish a sound asset structure; (ii)
provide a sound and profitable loan portfolio to (a) protect the
depositor’s funds and (b) maximize the shareholders’
return on their investment; (iii) promote the stable economic
growth and development of the market area served by the Bank; and
(iv) comply with all regulatory agency requirements and applicable
law.
The
Bank’s legal lending limit is set by state statutes and is
monitored by the FDIC and the Commissioner. Legal lending authority
is held by the Board of Directors. The legal lending limit may not
exceed 15% of the Bank's capital or, if greater, the percentage
permitted for national banks, if loans are not fully secured by
readily marketable collateral having a market value, as determined
by reliable and continuously available price quotations, at least
equal to the aggregate outstanding loan amount or up to 10% of the
Bank's capital or, if greater the percentage permitted for national
banks, if loans are fully secured (as described above) by readily
marketable collateral. The underwriting standards and loan
origination procedures include officer lending limits, which are
approved by the Board of Directors. The President/Chief Executive
Officer of the Bank has loan authority of up to the legal lending
limit of the Bank. The individual secured/unsecured lending
authority of the Chief Credit Officer/Executive Vice President is
set at $4 million.
It is
the policy of the Bank to ensure that its Board of Directors is
fully apprised of the status and critical factors affecting the
quality and performance of the loan portfolio. These factors
include, but are not limited to: (1) credit underwriting policies
and procedures; (2) results of loan reviews and loan audits; and,
(3) Credit concentrations (single borrowers and specific
industries).
Management
provides the Bank's Board of Directors with the loan portfolio
information as described below:
Monthly:
The
following reports are submitted to the Board of Directors for
review and approval on a monthly basis:
●
Loan Quality/Yield/Growth/Trend Report
●
Risk Grade Report with Details of Loans Risk Graded
5-8
●
Commercial Loan Delinquency
●
New Loans - $250,000 and Greater
●
Comparison on New Loans in Prior Month with Same Month in Prior
Year
●
Outstanding Commitments - $250,000 and greater
●
Commitment Pipeline Report – Outstanding commitments of
$2,000,000 and greater (pending final approval and/or acceptance by
the applicant)
●
Underwriting Exception Report (Commercial, and Consumer and
Mortgage)
●
Documentation Exception Report (Commercial and
Consumer)
Quarterly:
The
following reports are submitted to the Board of Directors for
review and approval on a quarterly basis:
●
Real Estate Secured Loans with Non-Conforming Loan-To-Value
Ratio
●
Status of Other Real Estate Owned
●
Nonaccrual
6
●
Impaired Loan Report
●
Letters of Credit Outstanding
●
Portfolio Status Report - Detailed analytical report summarizing
the composition of the bank's loan portfolio
●
Portfolio Stress Tests
●
Mortgage Report (see Mortgage Policy for complete list of
reports)
●
Documentation Exception Quarterly Trend Report
● Matured Home Equity Loan
Report
Semi-annually:
The
following reports are submitted to the Board of Directors for
review and approval on a semi-annual basis:
●
Participation Status Report
Annually:
On an
annual basis, the Board of Directors:
●
Reviews and approves the Bank’s credit underwriting policies
and procedures
●
Reviews findings of the annual independent loan review of borrowing
relationships of $1,000,000 and greater as well as a sample of
commercial relationships with exposures below $1.0 million prepared
by an independent loan review company engaged by the
Bank
●
Receives information from management detailing all new committed
borrowing relationships exceeding $3,000,000 and is informed during
the year if a borrowing relationship exceeds
$2,500,000
Investment Policies and Procedures
The
Bank’s investment policy is designed to provide flexibility
as necessary to maintain satisfactory liquidity while maximizing
earnings on funds available for investment. The Bank maintains an
investment portfolio of high-quality investment securities that is
managed in a manner consistent with safe and sound banking
practices. The characteristics and financial goals of the
investment portfolio are complementary to the Bank’s broader
business strategies and congruent with the Bank’s capital
policies, technical expertise, and risk tolerances.
The
Bank’s specific investment objectives are as
follows:
A.
Provide Earnings – Maximize the total return on invested
funds in a manner that is consistent with the Bank’s overall
financial goals and risk considerations. This objective is
fulfilled by investing in, holding, and divesting from individual
securities that, when considered in combination, contribute to a
superior risk/reward for the total portfolio.
B.
Provide Liquidity – Remain sufficiently liquid to meet
anticipated funding demands either through declines in deposits
and/or increases in loan demand. The Bank makes investments that
are marketable and capable of being converted to cash at their
market values in a relatively short period of time.
C.
Mitigate Interest Rate Risk – Utilize portfolio strategies to
assist the Bank in managing its overall interest rate sensitivity
position in accordance with the goals and objectives approved by
the Asset/Liability Management Committee ("ALCO") of the
Bank.
D.
Ensure the Safety of Principal –At all times, the safety of
principal is a primary consideration. Upon purchase, the
Bank’s investments are limited to investment-grade
instruments that fully comply with all applicable regulatory
guidelines and limitations.
E.
Manage Tax Liabilities – Conduct portfolio management in
light of the Bank's current and projected tax position in order to
improve overall profitability by reducing the Bank's tax exposure
to its minimum permissible level.
F. Meet
Pledging Requirements – Provide collateral for various
deposit and funding products such as public funds, trust deposits,
repurchase agreements and FHLB borrowings.
The
Board of Directors reviews and approves the Bank’s Investment
Policy annually or more frequently, if appropriate. All investment
portfolio activities are reported to the ALCO and the Board of
Directors. The Board of Directors oversees the establishment of
appropriate systems and internal controls designed to keep
portfolio strategies and holdings consistent with the overall
strategies of the Bank.
The
Board of Directors designates a Primary Investment Officer who is
directed to implement the Investment Policy of the Bank in a safe
and sound manner. The Primary Investment Officer of the Bank is
charged with the responsibility to actively manage the Bank's
investment portfolio, as previously defined, in conformity with the
preceding objectives and the following investment criteria. Such
responsibility includes the purchase and/or disposition of any
holding within the investment portfolio up to $8 million and the
ability to establish accounts with other depository institutions or
investment firms as needed to process investment activity approved
under this policy. Any activity over $8 million and less than 20%
of capital as defined by accounting principles generally accepted
in the United States of America ("GAAP") must be approved by a
majority of the ALCO. Transactions exceeding 20% of GAAP capital
must be approved by the Board of Directors. Also, any sale of
securities that will result in a gain of more than $500,000 or a
loss before income taxes exceeding the lesser of $250,000 or 2.5%
of the current year’s projected net income must be approved
by the Board of Directors. The Investment Officer may designate
certain investment functions to other officers of the Bank and may
also seek outside sources for investment advice or periodic
appraisals of the portfolio. The Executive Vice President/Chief
Financial Officer serves as the Primary Investment Officer unless
otherwise designated by the Board of Directors.
7
Human Capital Management
At December
31, 2020, the Company employed 290 full-time employees and 27
part-time employees, which equated to 307 full-time equivalent
employees. We are not a party to any collective bargaining
agreements, and we consider our employee relations to be
good.
Oversight of our corporate
culture is an important element of our Board of Director’s
oversight of risk because our people are critical to the success of
our corporate strategy. Our Board of Directors sets the “tone
at the top,” and holds senior management accountable for
embodying, maintaining, and communicating our culture to employees.
Our culture is guided by our guiding principles below:
Our Core Values
●
Employees –
We are informed, encouraged, and committed
●
Integrity –
We are fair and truthful
●
Exceptional
Customer Service – We surpass our customers’
expectation
●
Accountability
– We are accountable for our own actions and bank
goals.
●
Progressive and
Positive – We see change as an opportunity
●
Our brand
story
Our Bank Promise, Vision, and Mission
We are committed
to fostering, cultivating, and preserving a culture of diversity
and inclusion. We are working to cultivate our leaders and shape
future talent pools to help us meet the needs of our customers now
and in the future. Our human capital is the most valuable asset we
have. The collective sum of the individual differences, life
experiences, knowledge, inventiveness, innovation, self-expression,
unique capabilities, and talent that our employees invest in their
work represents a significant part of not only our culture but our
reputation and our achievement as well. We embrace our
employee’s differences. in age, color, disability, ethnicity,
family or marital status, gender identity or expression, language,
national origin, physical and mental ability, political
affiliation, race, religion, sexual orientation, socio-economic
status, veteran status, and other characteristics that make our
employees unique.
By emphasizing a
consistent set of principles that all employees follow, we believe
that our employees work experience is more satisfying, and they are
better able to serve their customers consistently and at a high
level.
Our employees are key
to our success as an organization. We are committed to attracting,
retaining and promoting top quality talent regardless of sex,
sexual orientation, gender identity, race, color, national origin,
age, religion and physical ability. We strive to identify and
select the best candidates for all open positions based on
qualifying factors for each job. We are dedicated to providing a
workplace for our employees that is inclusive, supportive, and free
of any form of discrimination or harassment; rewarding and
recognizing our employees based on their individual results and
performance; and recognizing and respecting all of the
characteristics and differences that make each of our employees
unique.
8
Employees have annual
assignments related to “valuing differences” and
diversity training is an integrated part of our leadership training
as well. We recently expanded our Diversity, Equity & Inclusion
(“DEI”) course library to support our ongoing culture
sustainability program development. We launched our
“Courageous Conversations” initiative in 2020, a
program we will continue to build on annually. We are an active
member of the North Carolina Bankers Association DEI Council doing
work to expand DEI programming and other resources for community
banks.
We also seek to design
careers with our organization that are fulfilling ones, with
competitive compensation and benefits alongside a positive
work-life balance. We dedicate resources to fostering professional
and personal growth with continuing education, on-the-job training
and development programs. We have worked closely with our employees
during the COVID-19 pandemic to ensure their safety and their
ability to take care of their family. Health safety protocols were
established, remote work arrangements were facilitated and
considerations were provided for family needs, such as child care,
all without any employee layoffs or furloughs.
Supervision and Regulation
Bank
holding companies and commercial banks are extensively regulated
under both federal and state law. The following is a brief summary
of certain statutes and rules and regulations that affect or will
affect the Company, the Bank and their subsidiaries. This summary
is qualified in its entirety by reference to the particular statute
and regulatory provisions referred to below and is not intended to
be an exhaustive description of the statutes or regulations
applicable to the business of the Company, the Bank and their
subsidiaries. Supervision, regulation and examination of the
Company and the Bank by the regulatory agencies are intended
primarily for the protection of depositors rather than shareholders
of the Company. Statutes and regulations which contain wide-ranging
proposals for altering the structures, regulations and competitive
relationship of financial institutions are introduced regularly.
The Company cannot predict whether or in what form any proposed
statute or regulation will be adopted or the extent to which the
business of the Company and the Bank may be affected by such
statute or regulation.
General. There are a number of obligations and
restrictions imposed on bank holding companies and their depository
institution subsidiaries by law and regulatory policy that are
designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event
the depository institution becomes in danger of default or in
default. For example, to mitigate the risk of failure, bank holding
companies are required to guarantee the compliance of any insured
depository institution subsidiary that may become
“undercapitalized” with the terms of the capital
restoration plan filed by such subsidiary with its appropriate
federal banking agency up to the lesser of (i) an amount equal to
5% of the bank’s total assets at the time the bank became
undercapitalized or (ii) the amount which is necessary (or would
have been necessary) to bring the bank into compliance with all
capital standards as of the time the bank fails to comply with such
capital restoration plan. The Company, as a registered bank holding
company, is subject to the regulation of the Federal Reserve. Under
a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions
in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a
bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve’s determination that such
activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding
company.
In
addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by its deposit
insurance funds as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by
the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the
best interest of the deposit insurance funds. The FDIC’s
claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders
of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
As a
result of the Company’s ownership of the Bank, the Company is
also registered under the bank holding company laws of North
Carolina. Accordingly, the Company is also subject to regulation