Peoples Bancorp of North Carolina(PEBK) - 2020 Q4 - Annual Report

Part I Business Peoples Bancorp of North Carolina, Inc. is a bank holding company for Peoples Bank, offering diversified financial services with $1.4 billion in assets General Business Peoples Bancorp operates Peoples Bank, providing commercial banking services through 18 branches and two loan production offices, managing a diversified loan portfolio Key Financial Metrics as of December 31, 2020 | Metric | Value (USD) | | :--- | :--- | | Total Assets | $1.4 billion | | Net Loans | $938.7 million | | Deposits | $1.2 billion | | Shareholders' Equity | $139.9 million | - The company employed 307 full-time equivalent employees as of December 31, 2020[22] - The Bank operates three former Banco de la Gente offices, now integrated as standard branches, which previously focused on the Latino population[19] Subsidiaries The Bank operates four subsidiaries providing investment, real estate, and insurance services, and formed PEBK Capital Trust II which issued $20.0 million in trust preferred securities - The Bank's subsidiaries offer investment counseling, real estate appraisal and brokerage, and foreclosed property management, with PB Insurance Agency launched in 2019[23] - In 2006, the Company formed PEBK Capital Trust II, issuing $20.0 million in trust preferred securities, of which $5.0 million was redeemed in 2019[24] Market Area and Competition The Bank's primary market is the Catawba Valley region of North Carolina, facing strong competition despite holding significant deposit market share Deposit Market Share (as of June 30, 2020) | County | Deposit Share | Rank | | :--- | :--- | :--- | | Catawba County | 20.32% | 2nd of 11 banks | | Lincoln County | 16.20% | 2nd of 10 banks | | Alexander County | 14.01% | 4th of 6 banks | - The Bank's primary market, a 50-mile radius around Newton, NC, is significantly influenced by its proximity to Charlotte[27] Lending Policies and Procedures Lending activities are governed by Board-approved underwriting standards, aiming for a sound loan portfolio, local economic growth, and regulatory compliance, with regular monitoring - The Bank's legal lending limit is 15% of capital for unsecured loans, with an additional 10% for fully secured loans[35] - The Board of Directors receives structured reports, including monthly updates on new loans and delinquencies, and quarterly reports on portfolio status and stress tests, to monitor the loan portfolio[37][38][49] Investment Policies and Procedures The Bank's investment policy aims to maximize earnings and liquidity while managing risk, with objectives including principal safety and tax management, overseen by the Board and CFO - Primary investment objectives include generating earnings, maintaining liquidity, mitigating interest rate risk, ensuring principal safety, managing tax liabilities, and meeting pledging requirements[42][43][44] - The Primary Investment Officer can approve transactions up to $8 million, with larger transactions requiring ALCO or Board approval based on thresholds relative to GAAP capital[48] Human Capital Management As of year-end 2020, the company employed 307 full-time equivalent staff, fostering a culture of diversity and inclusion, and supported employees during the COVID-19 pandemic without layoffs - The company employed 290 full-time and 27 part-time employees as of December 31, 2020[51] - The company fosters a culture of diversity and inclusion through initiatives like annual diversity training and the 'Courageous Conversations' program launched in 2020[52][56] - In response to the COVID-19 pandemic, the company facilitated remote work and provided family support without any employee layoffs or furloughs[57] Supervision and Regulation The company and Bank are extensively regulated by federal and state authorities, exceeding all capital requirements as of December 31, 2020, and received a 'satisfactory' CRA rating Capital Adequacy Ratios as of December 31, 2020 | Ratio | The Bank | The Company | | :--- | :--- | :--- | | Tier 1 Leverage Capital | 10.04% | 10.24% | | Common Equity Tier 1 Risk-Based Capital | 14.85% | 13.56% | | Tier 1 Risk-Based Capital | 14.85% | 15.07% | | Total Risk-Based Capital | 15.85% | 16.07% | - The company is subject to Basel III capital rules, requiring a minimum 4.5% common equity Tier 1 ratio and a 2.5% capital conservation buffer, fully phased in by January 1, 2019[67][68] - The Bank received a 'satisfactory' rating in its January 2020 Community Reinvestment Act (CRA) examination[79] - FDIC insurance expense was approximately $263,000 in 2020, $119,000 in 2019, and $328,000 in 2018, with the Bank fully utilizing its FDIC assessment credits in Q1 2020[76] Risk Factors The company faces diverse business, operational, regulatory, and stock-related risks, including COVID-19 impacts, credit risk, cybersecurity, and stock price volatility Risks Related to Our Business The company faces significant business risks including COVID-19 impacts, credit risk from its loan portfolio, CECL implementation, cybersecurity threats, and the LIBOR transition - The COVID-19 pandemic continues to pose risks, potentially leading to declines in credit quality, reduced loan demand, and remote work disruptions[102][103] Loan Portfolio Composition by Risk Category (as of Dec 31, 2020) | Loan Category | % of Total Loan Portfolio | | :--- | :--- | | Commercial Real Estate | ~35% | | Commercial Loans (incl. PPP) | ~17% | | Construction & Land Development | ~10% | | Single-Family Residential | ~32% | - The Current Expected Credit Loss (CECL) standard, effective January 1, 2023, is expected to cause earlier recognition of credit losses and may increase the allowance for loan losses[112][113][114] - The company faces significant cybersecurity risks and relies on third-party vendors for critical infrastructure, creating potential vulnerabilities[120][126] - The transition from LIBOR as a reference rate for numerous loans and borrowings presents considerable costs and risks[141][142] Risks Related to the Company's Stock Risks related to the company's stock include price volatility, lower trading liquidity, non-FDIC insurance, and the non-guaranteed nature of future dividend payments - The company's stock price is subject to volatility, and its relatively low trading volume may affect shareholder liquidity[169][170] - The common stock is not an FDIC-insured deposit and is subject to investment risk, including potential loss of principal[171] - Future dividend payments are not guaranteed and may be reduced or eliminated based on economic conditions, Board decisions, and regulatory limitations[172] Unresolved Staff Comments The company reports no unresolved staff comments - Not applicable[175] Properties As of December 31, 2020, the company operates from 19 offices and two loan production offices, owning 14 properties and leasing 7 - The company owns 14 properties, including its corporate office and branches, and leases 7 properties for branch and loan production office operations[177][178] Legal Proceedings The company is contesting a $1.4 million NCDOR tax credit disallowance, with management believing exposure is limited to $125,000 due to a guaranty - The NCDOR is seeking to disallow tax credits from 2014-2016, with a proposed adjustment of approximately $1.4 million[179] - The Bank has paid $1.2 million to the NCDOR to halt interest accrual while challenging the proposed adjustments[179] - A Guaranty Agreement is in place, which management believes limits the Bank's potential loss to approximately $125,000[179] Mine Safety Disclosures This item is reported as not applicable - Not applicable[180] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with dividend payments subject to regulatory limits, and the company engaged in share repurchases and equity awards in 2020 Comparison of Six-Year Cumulative Total Returns | Index | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Peoples Bancorp of North Carolina, Inc. | 100.00 | 132.06 | 180.73 | 146.57 | 201.50 | 146.15 | | NASDAQ Composite Index | 100.00 | 108.87 | 141.13 | 137.12 | 187.44 | 271.64 | | SNL Southeast Bank Index | 100.00 | 132.75 | 164.21 | 135.67 | 191.06 | 172.07 | Issuer Purchases of Equity Securities in 2020 | Description | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | For Deferred Compensation Plan | 10,150 | $20.46 | | Under Stock Repurchase Program | 126,800 | $28.39 (Feb 2020) | - On May 7, 2020, the Company awarded 7,635 restricted stock units to employees under its 2020 Omnibus Stock Ownership and Long Term Incentive Plan[194] Selected Financial Data Selected financial data is incorporated by reference from page A-3 of the company's 2020 Annual Report (Exhibit 13) - Selected Financial Data is incorporated by reference from page A-3 of the Annual Report (Exhibit 13)[195] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations is incorporated by reference from pages A-4 through A-23 of the 2020 Annual Report (Exhibit 13) - Management's Discussion and Analysis is incorporated by reference from pages A-4 through A-23 of the Annual Report (Exhibit 13)[196] Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosures about market risk are incorporated by reference from page A-24 of the 2020 Annual Report (Exhibit 13) - Quantitative and Qualitative Disclosures About Market Risk are incorporated by reference from page A-24 of the Annual Report (Exhibit 13)[197] Financial Statements and Supplementary Data Consolidated financial statements and supplementary data are incorporated by reference from pages A-26 through A-71 of the 2020 Annual Report (Exhibit 13) - The consolidated financial statements and supplementary data are incorporated by reference from pages A-26 through A-71 of the Annual Report (Exhibit 13)[198] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with accountants on accounting and financial disclosure - None[199] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes during Q4 2020 - Management concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period[200] - Management believes the Company maintained effective internal control over financial reporting as of December 31, 2020, based on COSO framework criteria[205] - No material changes to internal control over financial reporting occurred during the quarter ended December 31, 2020[201] Other Information The company reports no other information for this item - None[207] Part III Directors and Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement[208] Executive Compensation Information on executive compensation is incorporated by reference from the 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the Proxy Statement[209] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the Proxy Statement, detailing equity compensation plan securities authorized for issuance and future availability Equity Compensation Plan Information | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 25,868 | $ - | 292,365 | | Equity compensation plans not approved by security holders | - | - | - | | Total | 25,868 | $ - | 292,365 | Certain Relationships and Related Transactions and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the Proxy Statement[217] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the Proxy Statement[218] Part IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements, schedules, and numerous exhibits, with financial statements incorporated by reference from the 2020 Annual Report - The Consolidated Financial Statements are contained in the Annual Report, attached as Exhibit (13) and incorporated by reference[220] - A comprehensive list of exhibits is provided, including corporate governance documents, material agreements, compensation plans, and required certifications[220][221][222]