PEOPLES BANCORP OF NORTH CAROLINA INC - FORM 10-Q

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EX-32 - EXHIBIT (32) - PEOPLES BANCORP OF NORTH CAROLINA INC	ex32.htm
EX-31.B - EXHIBIT (31)(B) - PEOPLES BANCORP OF NORTH CAROLINA INC	ex31_b.htm
EX-31.A - EXHIBIT (31)(A) - PEOPLES BANCORP OF NORTH CAROLINA INC	ex31_a.htm

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, 2017

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

PEOPLES BANCORP OF NORTH CAROLINA, INC.
(Exact name of registrant as specified in its charter)

North Carolina
(State or other jurisdiction of incorporation or organization)

000-27205		56-2132396
(Commission File No.)		(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)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerate Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

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

Yes

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

5,437,740 shares of common stock, outstanding at April 30, 2017.

INDEX

PART I.	FINANCIAL INFORMATION		PAGE(S)

Item 1.		Financial Statements

		Consolidated Balance Sheets at March 31, 2017 (Unaudited) and
		December 31, 2016 (Audited)	3

		Consolidated Statements of Earnings for the three months ended March
		31, 2017 and 2016 (Unaudited)	4

		Consolidated Statements of Comprehensive Income for the three months
		ended March 31, 2017 and 2016 (Unaudited)	5

		Consolidated Statements of Changes in Shareholders' Equity for the three
		months ended March 31, 2017 and 2016 (Unaudited)	6

		Consolidated Statements of Cash Flows for the three months ended March
		31, 2017 and 2016 (Unaudited)	7-8

		Notes to Consolidated Financial Statements (Unaudited)	9-23

Item 2.		Management's Discussion and Analysis of Financial Condition
		and Results of Operations	24-33

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.		Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 1.		Legal Proceedings	36
Item 1A.		Risk Factors	36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.		Defaults upon Senior Securities	36
Item 5.		Other Information	36
Item 6.		Exhibits	36-38
Signatures			39
Certifications			40-42

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, 2016.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Balance Sheets

March 31, 2017 and December 31, 2016

(Dollars in thousands)
	March 31,			December 31,
Assets	2017			2016
	(Unaudited)			(Audited)

Cash and due from banks, including reserve requirements	$	55,491			53,613
of $7,145 at 3/31/17 and $6,075 at 12/31/16
Interest-bearing deposits		31,959			16,481
Cash and cash equivalents		87,450			70,094

Investment securities available for sale		244,863			249,946
Other investments		2,679			2,635
Total securities		247,542			252,581

Mortgage loans held for sale		1,340			5,709

Loans		735,861			723,811
Less allowance for loan losses		(7,263	)		(7,550	)
Net loans		728,598			716,261

Premises and equipment, net		18,597			16,452
Cash surrender value of life insurance		15,251			14,952
Other real estate		-			283
Accrued interest receivable and other assets		11,496			11,659
Total assets	$	1,110,274			1,087,991

Liabilities and Shareholders' Equity

Deposits:
Noninterest-bearing demand	$	275,369			271,851
NOW, MMDA & savings		494,273			477,054
Time, $250,000 or more		24,262			26,771
Other time		114,510			117,242
Total deposits		908,414			892,918

Securities sold under agreements to repurchase		42,163			36,434
FHLB borrowings		20,000			20,000
Junior subordinated debentures		20,619			20,619
Accrued interest payable and other liabilities		8,941			10,592
Total liabilities		1,000,137			980,563

Commitments

Shareholders' equity:
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 5,437,740 shares
at March 31, 2017 and 5,417,800 shares at December 31, 2016		44,745			44,187
Retained earnings		61,801			60,254
Accumulated other comprehensive income		3,591			2,987
Total shareholders' equity		110,137			107,428

Total liabilities and shareholders' equity	$	1,110,274			1,087,991

See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Earnings

Three Months Ended March 31, 2017 and 2016

(Dollars in thousands, except per share amounts)

	2017			2016
	(Unaudited)			(Unaudited)

Interest income:
Interest and fees on loans	$	8,280			8,023
Interest on due from banks		30			17
Interest on investment securities:
U.S. Government sponsored enterprises		604			658
State and political subdivisions		1,084			1,127
Other		66			80
Total interest income		10,064			9,905

Interest expense:
NOW, MMDA & savings deposits		132			120
Time deposits		128			162
FHLB borrowings		192			406
Junior subordinated debentures		135			113
Other		11			8
Total interest expense		598			809

Net interest income		9,466			9,096

Provision for (reduction of provision for) loan losses		(236	)		(216	)

Net interest income after provision for loan losses		9,702			9,312

Non-interest income:
Service charges		1,106			1,041
Other service charges and fees		155			334
Mortgage banking income		346			369
Insurance and brokerage commissions		168			158
Gain/(loss) on sale and write-down of
other real estate		(283	)		77
Miscellaneous		1,384			1,345
Total non-interest income		2,876			3,324

Non-interest expense:
Salaries and employee benefits		5,234			4,581
Occupancy		1,613			1,754
Professional fees		249			935
Advertising		246			162
Debit card expense		306			266
FDIC Insurance		86			171
Other		2,061			1,623
Total non-interest expense		9,795			9,492

Earnings before income taxes		2,783			3,144

Income tax expense		578			691

Net earnings	$	2,205			2,453

Basic net earnings per share	$	0.41			0.45
Diluted net earnings per share	$	0.40			0.44
Cash dividends declared per share	$	0.12			0.08


See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2017 and 2016

(Dollars in thousands)

	2017			2016
	(Unaudited)			(Unaudited)

Net earnings	$	2,205			2,453

Other comprehensive income:
Unrealized holding gains on securities
available for sale		586			1,472

Total other comprehensive income,
before income taxes		586			1,472

Income tax (benefit) expense related to other
comprehensive income:

Unrealized holding gains on securities
available for sale		(18	)		582

Total income tax (benefit) expense related to
other comprehensive income		(18	)		582

Total other comprehensive income,
net of tax		604			890

Total comprehensive income	$	2,809			3,343

See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Changes in Shareholders' Equity

Three Months Ended March 31, 2017 and 2016

(Dollars in thousands)

								Accumulated
								Other
	Common Stock				Retained			Comprehensive
	Shares		Amount		Earnings			Income		Total
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)

Balance, December 31, 2016		5,417,800	$	44,187		60,254			2,987		107,428

Cash dividends declared on
common stock		-		-		(658	)		-		(658	)
Restricted stock units exercised		19,940		558		-			-		558
Net earnings		-		-		2,205			-		2,205
Change in accumulated other
comprehensive income, net of tax		-		-		-			604		604
Balance, March 31, 2017		5,437,740	$	44,745		61,801			3,591		110,137

Balance, December 31, 2015		5,510,538	$	46,171		53,183			5,510		104,864

Cash dividends declared on
common stock		-		-		(447	)		-		(447	)
Net earnings		-		-		2,453			-		2,453
Change in accumulated other
comprehensive loss, net of tax		-		-		-			890		890
Balance, March 31, 2016		5,510,538	$	46,171		55,189			6,400		107,760

See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2017 and 2016

(Dollars in thousands)

	2017			2016
	(Unaudited)			(Unaudited)

Cash flows from operating activities:
Net earnings	$	2,205			2,453
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation, amortization and accretion		1,228			1,475
(Reduction)/Provision for loan losses		(236	)		(216	)
Deferred income taxes		(1,122	)		(547	)
Gain on sale of other real estate		-			(79	)
Write-down of other real estate		283			2
Loss on sale of premises and equipment		33			-
Restricted stock expense		430			70
Proceeds from sales of mortgage loans held for sale		18,376			16,607
Origination of mortgage loans held for sale		(14,007	)		(13,454	)
Change in:
Cash surrender value of life insurance		(299	)		(106	)
Other assets		1,302			435
Other liabilities		(1,523	)		(227	)

Net cash provided by operating activities		6,670			6,413

Cash flows from investing activities:
Purchases of investment securities available for sale		(3,071	)		(94	)
Proceeds from sales, calls and maturities of investment securities
available for sale		2,830			40
Proceeds from paydowns of investment securities available for sale		5,152			5,130
Purchases of FHLB stock		(44	)		-
FHLB stock redemption		-			2
Net change in loans		(12,101	)		(4,254	)
Purchases of premises and equipment		(2,647	)		(71	)
Proceeds from sale of other real estate and repossessions		-			786

Net cash provided (used) by investing activities		(9,881	)		1,539

Cash flows from financing activities:
Net change in deposits		15,496			20,942
Net change in securities sold under agreement to repurchase		5,729			8,182
Proceeds from Fed Funds purchased		-			8,985
Repayments of Fed Funds purchased		-			(8,995	)
Cash dividends paid on common stock		(658	)		(447	)

Net cash provided by financing activities		20,567			28,667

Net change in cash and cash equivalents		17,356			36,619

Cash and cash equivalents at beginning of period		70,094			39,763

Cash and cash equivalents at end of period	$	87,450			76,382

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Consolidated Statements of Cash Flows, continued

Three Months Ended March 31, 2017 and 2016

(Dollars in thousands)


	2017			2016
	(Unaudited)			(Unaudited)

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	297			809
Income taxes	$	-			397

Noncash investing and financing activities:
Change in unrealized gain on investment securities
available for sale, net	$	604			890
Issuance of accrued restricted stock units	$	(558	)		-
Transfers of loans to other real estate and repossessions	$	-			55

See accompanying Notes to Consolidated Financial Statements.

PEOPLES BANCORP OF NORTH CAROLINA, INC.

Notes to Consolidated Financial Statements (Unaudited)

(1)	Summary of Significant Accounting Policies

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., 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 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 consolidated financial statements in this report (other than the Consolidated Balance Sheet at December 31, 2016) 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 of the Company 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 2016 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 4, 2017 Annual Meeting of Shareholders.

Recently Issued Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, (Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 adds guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 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 January 2017, FASB issued ASU No. 2017-04, (Topic 350): Simplifying the Test for Goodwill Impairment. ASU No. 2017-04 provides guidance to simplify the accounting related to goodwill impairment. ASU No. 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. 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 February 2017, FASB issued ASU No. 2017-05, (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU No. 2017-05 clarifies the scope of established guidance on nonfinancial asset derecognition (issued as part of the new revenue standard, ASU No. 2014-09, Revenue from Contracts with Customers), as well as the accounting for partial sales of nonfinancial assets. ASU No. 2017-05 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.

(2)	Investment Securities

Investment securities available for sale at March 31, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	62,488		1,157		321		63,324
U.S. Government
sponsored enterprises		39,888		273		262		39,899
State and political subdivisions		135,128		4,826		101		139,854
Corporate bonds		1,500		36		-		1,536
Trust preferred securities		250		-		-		250
Total	$	239,254		6,292		684		244,863

(Dollars in thousands)
	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Mortgage-backed securities	$	66,654		1,221		290		67,585
U.S. Government
sponsored enterprises		38,188		308		274		38,222
State and political subdivisions		137,832		4,176		152		141,856
Corporate bonds		1,500		33		-		1,533
Trust preferred securities		750		-		-		750
Total	$	244,924		5,738		716		249,946

The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2017 and December 31, 2016 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, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	16,534		321		-		-		16,534		321
U.S. Government
sponsored enterprises		5,832		28		13,286		234		19,118		262
State and political subdivisions		7,101		74		562		27		7,663		101
Total	$	29,467		423		13,848		261		43,315		684

(Dollars in thousands)
	December 31, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities	$	15,594		290		-		-		15,594		290
U.S. Government
sponsored enterprises		10,120		94		9,562		180		19,682		274
State and political subdivisions		10,441		123		561		29		11,002		152
Total	$	36,155		507		10,123		209		46,278		716

At March 31, 2017, unrealized losses in the investment securities portfolio relating to debt securities totaled $684,000. The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary. From the March 31, 2017 tables above, 12 out of 163 securities issued by state and political subdivisions contained unrealized losses, 18 out of 78 securities issued by U.S. Government sponsored enterprises contained unrealized losses, and no securities issued by corporations 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.

The amortized cost and estimated fair value of investment securities available for sale at March 31, 2017, 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.

March 31, 2017
(Dollars in thousands)
	Amortized Cost		Estimated Fair Value
Due within one year	$	12,140	12,273
Due from one to five years		89,495	92,754
Due from five to ten years		64,550	65,871
Due after ten years		10,331	10,391
Mortgage-backed securities		62,488	63,324
Equity securities		250	250
Total	$	239,254	244,863

No securities available for sale were sold during the three months ended March 31, 2017 and 2016.

Securities with a fair value of approximately $91.1 million and $95.6 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits and for other purposes as required by law.

(3)

Loans

Major classifications of loans at March 31, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)
	March 31, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	65,438		61,749
Single-family residential		239,322		240,700
Single-family residential -
Banco de la Gente stated income		39,230		40,189
Commercial		247,940		247,521
Multifamily and farmland		29,078		21,047
Total real estate loans		621,008		611,206

Loans not secured by real estate:
Commercial loans		90,923		87,596
Farm loans		897		-
Consumer loans		9,634		9,832
All other loans		13,399		15,177

Total loans		735,861		723,811

Less allowance for loan losses		7,263		7,550

Total net loans	$	728,598		716,261

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

Construction and land development loans – The risk of loss is largely dependent on the initial estimate of whether the property's value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If the estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of March 31, 2017, 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 March 31, 2017, single-family residential loans comprised approximately 38% of the Bank's total loan portfolio, and include Banco's single-family residential stated income loans, which were approximately 5% 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 March 31, 2017, 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 March 31, 2017, commercial loans comprised approximately 12% of the Bank's total loan portfolio.

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 March 31, 2017 and December 31, 2016:

March 31, 2017
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	176		9		185		65,253		65,438		-
Single-family residential		2,859		119		2,978		236,344		239,322		-
Single-family residential -
Banco de la Gente stated income		4,688		54		4,742		34,488		39,230		-
Commercial		1,710		122		1,832		246,108		247,940		-
Multifamily and farmland		99		78		177		28,901		29,078		-
Total real estate loans		9,532		382		9,914		611,094		621,008		-

Loans not secured by real estate:
Commercial loans		333		-		333		90,590		90,923		-
Farm loans		-		-		-		897		897		-
Consumer loans		51		8		59		9,575		9,634		-
All other loans		-		-		-		13,399		13,399		-
Total loans	$	9,916		390		10,306		725,555		735,861		-

December 31, 2016
(Dollars in thousands)
	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Total Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
Real estate loans:
Construction and land development	$	-		10		10		61,739		61,749		-
Single-family residential		4,890		80		4,970		235,730		240,700		-
Single-family residential -
Banco de la Gente stated income		5,250		249		5,499		34,690		40,189		-
Commercial		342		126		468		247,053		247,521		-
Multifamily and farmland		471		-		471		20,576		21,047		-
Total real estate loans		10,953		465		11,418		599,788		611,206		-

Loans not secured by real estate:
Commercial loans		273		-		273		87,323		87,596		-
Farm loans		-		-		-		-		-		-
Consumer loans		68		6		74		9,758		9,832		-
All other loans		3		-		3		15,174		15,177		-
Total loans	$	11,297		471		11,768		712,043		723,811		-

The following table presents non-accrual loans as of March 31, 2017 and December 31, 2016:

(Dollars in thousands)
	March 31, 2017		December 31, 2016
Real estate loans:
Construction and land development	$	20		22
Single-family residential		1,492		1,662
Single-family residential -
Banco de la Gente stated income		1,405		1,340
Commercial		562		669
Multifamily and farmland		78		78
Total real estate loans		3,557		3,771

Loans not secured by real estate:
Commercial loans		-		21
Consumer loans		27		33
Total	$	3,584		3,825

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. Accruing impaired loans were $26.1 million, $23.5 million and $24.8 million at March 31, 2017, December 31, 2016 and March 31, 2016, respectively. Interest income recognized on accruing impaired loans was $372,000, $314,000 and $1.2 million for the three months ended March 31, 2017, the three months ended March 31, 2016 and the year ended December 31, 2016, respectively. No interest income is recognized on non-accrual impaired loans subsequent to their classification as non-accrual.

The following tables present impaired loans as of March 31, 2017 and December 31, 2016:

March 31, 2017
(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	$	270		-		265		265		9		272		4
Single-family residential		4,950		698		3,912		4,610		43		5,444		69
Single-family residential -
Banco de la Gente stated income		18,206		-		17,639		17,639		1,140		17,187		237
Commercial		3,617		1,269		2,081		3,350		68		3,572		59
Multifamily and farmland		78		-		78		78		-		78		-
Total impaired real estate loans		27,121		1,967		23,975		25,942		1,260		26,553		369

Loans not secured by real estate:
Commercial loans		5		-		5		5		-		16		-
Consumer loans		200		-		192		192		3		229		3
Total impaired loans	$	27,326		1,967		24,172		26,139		1,263		26,798		372

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	$	282		-		278		278		11		330		13
Single-family residential		5,354		703		4,323		5,026		47		7,247		164
Single-family residential -
Banco de la Gente stated income		18,611		-		18,074		18,074		1,182		17,673		861
Commercial		3,750		1,299		2,197		3,496		166		4,657		152
Multifamily and farmland		78		-		78		78		-		78		-
Total impaired real estate loans		28,075		2,002		24,950		26,952		1,406		29,985		1,190

Loans not secured by real estate:
Commercial loans		27		-		27		27		-		95		-
Consumer loans		211		-		202		202		3		222		8
Total impaired loans	$	28,313		2,002		25,179		27,181		1,409		30,302		1,198

Changes in the allowance for loan losses for the three months ended March 31, 2017 and 2016 were as follows:

(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		Commercial			Farm		Consumer and All Other			Unallocated		Total
Three months ended March 31, 2017
Allowance for loan losses:
Beginning balance	$	1,152			2,126			1,377			1,593		52		675			-		204			371		7,550
Charge-offs		-			(20	)		-			-		-		(2	)		-		(109	)		-		(131	)
Recoveries		8			7			-			7		-		8			-		50			-		80
Provision		(191	)		(110	)		(49	)		55		21		(53	)		-		33			58		(236	)
Ending balance	$	969			2,003			1,328			1,655		73		628			-		178			429		7,263

Allowance for loan losses March 31, 2017
Ending balance: individually
evaluated for impairment	$	-			-			1,120			62		-		-			-		-			-		1,182
Ending balance: collectively
evaluated for impairment		969			2,003			208			1,593		73		628			-		178			429		6,081
Ending balance	$	969			2,003			1,328			1,655		73		628			-		178			429		7,263

Loans March 31, 2017:
Ending balance	$	65,438			239,322			39,230			247,940		29,078		90,923			897		23,033			-		735,861

Ending balance: individually
evaluated for impairment	$	-			1,630			16,303			2,736		-		-			-		-			-		20,669
Ending balance: collectively
evaluated for impairment	$	65,438			237,692			22,927			245,204		29,078		90,923			897		23,033			-		715,192

(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		Commercial			Farm		Consumer and All Other			Unallocated		Total
Three months ended March 31, 2016
Allowance for loan losses:
Beginning balance	$	2,185			2,534			1,460			1,917			-		842			-		172			479		9,589
Charge-offs		-			(59	)		-			(106	)		-		(29	)		-		(128	)		-		(322	)
Recoveries		3			8			-			5			-		6			-		43			-		65
Provision		(344	)		(8	)		(37	)		(28	)		-		(9	)		-		103			107		(216	)
Ending balance	$	1,844			2,475			1,423			1,788			-		810			-		190			586		9,116

Allowance for loan losses March 31, 2016:
Ending balance: individually
evaluated for impairment	$	-			95			1,107			170			-		-			-		-			-		1,372
Ending balance: collectively
evaluated for impairment		1,844			2,380			316			1,618			-		810			-		190			586		7,744
Ending balance	$	1,844			2,475			1,423			1,788			-		810			-		190			586		9,116

Loans March 31, 2016:
Ending balance	$	63,973			223,104			42,951			228,166			18,122		91,784			2		24,931			-		693,033

Ending balance: individually
evaluated for impairment	$	-			2,612			17,711			4,890			-		-			-		-			-		25,213
Ending balance: collectively
evaluated for impairment	$	63,973			220,492			25,240			223,276			18,122		91,784			2		24,931			-		667,820

The provision for loan losses for the three months ended March 31, 2017 was a credit of $236,000, as compared to a credit of $216,000 for the three months ended March 31, 2016. The increase in the credit to the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2011 and 2012 are no longer included in the historical loss calculations.

The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 8. These risk grades are evaluated on an ongoing basis. A description of the general characteristics of the eight risk grades is as follows:

·	Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists. CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.

·	Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company's range of acceptability. The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.

·	Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company's range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).

Risk Grade 4 – Management Attention: These loans have higher risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends is observed. These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.

·	Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there has been some recent past due history on repayment and there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company's position at some future date.

Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any). There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Risk Grade 7 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified as 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 March 31, 2017 and December 31, 2016:

March 31, 2017
(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	Commercial	Farm	Consumer	All Other	Total

1- Excellent Quality	$	-	10,648	-	-	-	462	-	941	-	12,051
2- High Quality		10,141	110,210	-	40,047	2,853	20,133	-	3,210	1,197	187,791
3- Good Quality		37,888	85,707	16,331	179,746	22,628	64,341	853	4,807	10,473	422,774
4- Management Attention		10,203	24,524	15,458	21,720	2,334	5,446	44	604	1,729	82,062
5- Watch		6,909	4,912	3,728	5,817	1,185	505	-	24	-	23,080
6- Substandard		297	3,321	3,713	610	78	36	-	44	-	8,099
7- Doubtful		-	-	-	-	-	-	-	-	-	-
8- Loss		-	-	-	-	-	-	-	4	-	4
Total	$	65,438	239,322	39,230	247,940	29,078	90,923	897	9,634	13,399	735,861

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	Commercial	Farm	Consumer	All Other	Total

1- Excellent Quality	$	-	14,996	-	-	-	541	-	959	-	16,496
2- High Quality		9,784	109,809	-	39,769	2,884	26,006	-	3,335	2,507	194,094
3- Good Quality		33,633	82,147	16,703	176,109	14,529	55,155	-	4,842	10,921	394,039
4- Management Attention		10,892	25,219	15,580	24,753	2,355	5,586	-	619	1,749	86,753
5- Watch		7,229	4,682	3,943	4,906	1,201	246	-	31	-	22,238
6- Substandard		211	3,847	3,963	1,984	78	62	-	42	-	10,187
7- Doubtful		-	-	-	-	-	-	-	-	-	-
8- Loss		-	-	-	-	-	-	-	4	-	4
Total	$	61,749	240,700	40,189	247,521	21,047	87,596	-	9,832	15,177	723,811

Current year TDR modifications, past due TDR loans and non-accrual TDR loans totaled $4.7 million and $5.9 million at March 31, 2017 and December 31, 2016, respectively. The terms of these loans have been renegotiated to provide a concession to original terms, including a reduction in principal or interest as a result of the deteriorating financial position of the borrower. There were no performing loans classified as TDR loans at March 31, 2017. There was $81,000 in performing loans classified as TDR loans at December 31, 2016.

There were no new TDR modifications during the three months ended March 31, 2017 and 2016.

There were no loans modified as TDR that defaulted during the three months ended March 31, 2017 and 2016, which were within 12 months of their modification date. Generally, a TDR loan is considered to be in default once it becomes 90 days or more past due following a modification.

(4)	Net Earnings Per Share

Net earnings per share is based on the weighted average number of shares outstanding during the period while the effects of potential shares outstanding during the period are included in diluted earnings per share. The average market price during the year is used to compute equivalent shares.

The reconciliation of the amounts used in the computation of both "basic earnings per share" and "diluted earnings per share" for the three months ended March 31, 2017 and 2016 is as follows:

For the three months ended March 31, 2017
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,205		5,427,278	$	0.41
Effect of dilutive securities:
Restricted stock units		-		83,764
Diluted earnings per share	$	2,205		5,511,042	$	0.40


For the three months ended March 31, 2016
	Net Earnings (Dollars in thousands)		Weighted Average Number of Shares		Per Share Amount
Basic earnings per share	$	2,453		5,510,538	$	0.45
Effect of dilutive securities:
Restricted stock units		-		62,599
Diluted earnings per share	$	2,453		5,573,137	$	0.44

(5)	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 258,780 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 (or 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 granted 3,740 restricted stock units under the Plan at a grant date fair value of $27.50 per share during the first quarter of 2017. 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, 2016 and 2017 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 March 31, 2017, the total unrecognized compensation expense related to the restricted stock unit grants under the Plan was $444,000.

The Company recognized compensation expense for restricted stock unit awards granted under the Plan of $430,000 and $70,000 for the three months ended March 31, 2017 and 2016, respectively.

(6)	Fair Value

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 the lower of aggregate cost or market value. The cost of mortgage loans held for sale approximates the market value. Mortgage loans held for sale are reported in the Level 3 fair value category.

Loans

The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. Loans are reported in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance

For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value. Cash surrender value of life insurance is reported in the Level 2 fair value category.

Other Real Estate

The fair value of other real estate is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. Other real estate is reported in the Level 3 fair value category.

Deposits

The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Deposits are reported in the Level 2 fair value category.

Securities Sold Under Agreements to Repurchase

For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value. Securities sold under agreements to repurchase are reported in the Level 2 fair value category.

Federal Home Loan Bank ("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 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 March 31, 2017 and December 31, 2016.

(Dollars in thousands)
	March 31, 2017
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	63,324		-		63,324		-
U.S. Government
sponsored enterprises	$	39,899		-		39,899		-
State and political subdivisions	$	139,854		-		139,854		-
Corporate bonds	$	1,536		-		1,536		-
Trust preferred securities	$	250		-		-		250

(Dollars in thousands)
	December 31, 2016
	Fair Value Measurements		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage-backed securities	$	67,585		-		67,585		-
U.S. Government
sponsored enterprises	$	38,222		-		38,222		-
State and political subdivisions	$	141,856		-		141,856		-
Corporate bonds	$	1,533		-		1,533		-
Trust preferred securities	$	750		-		-		750

The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the three months ended March 31, 2017.

(Dollars in thousands)
	Investment Securities Available for Sale
	Level 3 Valuation
Balance, beginning of period	$	750
Change in book value		-
Change in gain/(loss) realized and unrealized		-
Purchases/(sales and calls)		(500	)
Transfers in and/or (out) of Level 3		-
Balance, end of period	$	250

Change in unrealized gain/(loss) for assets still held in Level 3	$	-

The fair value measurements for mortgage loans held for sale, impaired loans and other real estate on a non-recurring basis at March 31, 2017 and December 31, 2016 are presented below. The fair value measurement process uses certified appraisals and other market-based information; however, in many cases, it also requires significant input based on management's knowledge of, and judgment about, current market conditions, specific issues relating to the collateral and other matters. As a result, all fair value measurements for impaired loans and other real estate are considered Level 3.

(Dollars in thousands)
	Fair Value Measurements March 31, 2017		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	1,340		-		-		1,340
Impaired loans	$	24,876		-		-		24,876
Other real estate	$	-		-		-		-

(Dollars in thousands)
	Fair Value Measurements December 31, 2016		Level 1 Valuation		Level 2 Valuation		Level 3 Valuation
Mortgage loans held for sale	$	5,709		-		-		5,709
Impaired loans	$	25,772		-		-		25,931
Other real estate	$	283		-		-		283

(Dollars in thousands)
	Fair Value March 31, 2017		Fair Value December 31, 2016		Valuation Technique	Significant Unobservable Inputs		General Range of Significant Unobservable Input Values
Mortgage loans held for sale	$	1,340		5,709	Rate lock commitment		N/A		N/A
Impaired loans	$	24,876		25,772	Appraised value and discounted cash flows	Discounts to reflect current market conditions and ultimate collectability			0 - 25%
Other real estate	$	-		283	Appraised value	Discounts to reflect current market conditions and estimated costs to sell			0 - 25%

The carrying amount and estimated fair value of financial instruments at March 31, 2017 and December 31, 2016 are as follows:

(Dollars in thousands)
			Fair Value Measurements at March 31, 2017
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	87,450		87,450		-		-		87,450
Investment securities available for sale	$	244,863		-		244,613		250		244,863
Other investments	$	2,679		-		-		2,679		2,679
Mortgage loans held for sale	$	1,340		-		-		1,340		1,340
Loans, net	$	728,598		-		-		740,158		740,158
Cash surrender value of life insurance	$	15,251		-		15,251		-		15,251

Liabilities:
Deposits	$	908,414		-		-		898,994		898,994
Securities sold under agreements
to repurchase	$	42,163		-		42,163		-		42,163
FHLB borrowings	$	20,000		-		19,919		-		19,919
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

(Dollars in thousands)
			Fair Value Measurements at December 31, 2016
	Carrying Amount		Level 1		Level 2		Level 3		Total
Assets:
Cash and cash equivalents	$	70,094		70,094		-		-		70,094
Investment securities available for sale	$	249,946		-		249,196		750		249,946
Other investments	$	2,635		-		-		2,635		2,635
Mortgage loans held for sale	$	5,709		-		-		5,709		5,709
Loans, net	$	716,261		-		-		720,675		720,675
Cash surrender value of life insurance	$	14,952		-		14,952		-		14,952

Liabilities:
Deposits	$	892,918		-		-		884,510		884,510
Securities sold under agreements
to repurchase	$	36,434		-		36,434		-		36,434
FHLB borrowings	$	20,000		-		18,864		-		18,864
Junior subordinated debentures	$	20,619		-		20,619		-		20,619

(7)	Regulatory Matters

On August 31, 2015, the Federal Deposit Insurance Corporation ("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 Company. Operating under the Order will limit the Bank's and 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.

(8)	Subsequent Events

The Company has reviewed and evaluated subsequent events and transactions for material subsequent events through the date the financial statements are issued. Management has concluded that there were no material subsequent events.

Item 2. 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 and the Company's Consolidated Financial Statements and Notes thereto on pages A-24 through A-67 of 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.

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 the Company. The Company is the parent company of the Bank and a registered bank holding company operating under the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Bank is a North Carolina-chartered bank, with offices in Catawba, Lincoln, Alexander, Mecklenburg, Iredell and Wake counties, operating under the banking laws of North Carolina and the rules and regulations of the 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 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 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.

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, 0.75% on December 14, 2016 and 1.00% on March 15, 2017. This continued period of historically 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, December 2016 and March 2017 will be helpful, the negative impact of such low interest rates will remain until the Fed Funds rate increases to levels approaching historical norms.

Summary of Significant Accounting Policies

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. 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.

Many of the Company's assets and liabilities are recorded using various techniques that require significant judgment as to recoverability. The collectibility 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 collectibility. 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 the Consolidated Financial Statements. Fair value of the Company's financial instruments is discussed in Note (6) of the Notes to Consolidated Financial Statements (Unaudited) included in this Quarterly Report.

Results of Operations

Summary. Net earnings were $2.2 million or $0.41 basic net earnings per share and $0.40 diluted net earnings per share for the three months ended March 31, 2017, as compared to $2.5 million or $0.45 basic net earnings per share and $0.44 diluted net earnings per share for the same period one year ago. The decrease in first quarter net earnings is primarily attributable to a decrease in non-interest income and an increase in non-interest expense, which were partially offset by an increase in net interest income and an increase in the credit to the provision for loan losses, as discussed below.

The annualized return on average assets was 0.82% for the three months ended March 31, 2017, compared to 0.94% for the same period one year ago, and annualized return on average shareholders' equity was 8.25% for the three months ended March 31, 2017, compared to 9.13% for the same period one year ago.

Net Interest Income. Net interest income, the major component of the Company's net earnings, was $9.5 million for the three months ended March 31, 2017, compared to $9.1 million for the three months ended March 31, 2016. The increase in net interest income was primarily due to a $159,000 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 2016, combined with a $211,000 decrease in interest expense, which was primarily attributable to a decrease in the average outstanding balance of FHLB borrowings during the three months ended March 31, 2017, as compared to the same period one year ago.

Interest income was $10.1 million for the three months ended March 31, 2017, compared to $9.9 million for the three months ended March 31, 2016. The increase in interest income was primarily due to an increase in interest income on loans, which was partially offset by a decrease in interest income on investment securities. During the quarter ended March 31, 2017, average loans increased $37.7 million to $729.5 million from $691.8 million for the quarter ended March 31, 2016. During the quarter ended March 31, 2017, average investment securities available for sale decreased $16.1 million to $240.8 million from $256.9 million for the quarter ended March 31, 2016. The average yield on loans for the quarters ended March 31, 2017 and 2016 was 4.60% and 4.66%, respectively. The average yield on investment securities available for sale was 3.75% and 3.73% for the quarters ended March 31, 2017 and 2016, respectively. The average yield on earning assets was 4.35% for the quarters ended March 31, 2017 and 2016.

Interest expense was $598,000 for the three months ended March 31, 2017, compared to $809,000 for the three months ended March 31, 2016. The decrease in interest expense was the result of lower cost of funds and reductions in FHLB borrowings and certificates of deposit. The average rate paid on interest-bearing checking and savings accounts was 0.11% for the three months ended March 31, 2017 and 2016. The average rate paid on certificates of deposit was 0.37% for the quarter ended March 31, 2017, as compared to 0.42% for the same period one year ago. The average rate paid on interest-bearing liabilities was 0.34% for the three months ended March 31, 2017, as compared to 0.47% for the same period one year ago. During the quarter ended March 31, 2017, average certificates of deposit decreased $13.5 million to $140.9 million from $154.4 million for the quarter ended March 31, 2016. Average FHLB borrowings decreased $23.9 million to $20.0 million for the three months ended March 31, 2017 from $43.9 million for the three months ended March 31, 2016.

The following table 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 three months ended March 31, 2017 and 2016. 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 35.98% for securities that are both federal and state tax exempt and an effective tax rate of 32.98% 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.

	Three months ended							Three months ended
	March 31, 2017							March 31, 2016
(Dollars in thousands)	Average Balance			Interest		Yield / Rate		Average Balance			Interest		Yield / Rate
Interest-earning assets:

Loans receivable	$	729,475			8,281		4.60%	$	691,834			8,023		4.66%
Investments - taxable		69,666			439		2.56%		82,077			545		2.67%
Investments - nontaxable*		174,387			1,868		4.34%		179,124			1,893		4.25%
Other		15,336			30		0.79%		14,910			17		0.46%

Total interest-earning assets		988,864			10,618		4.35%		967,945			10,478		4.35%

Non-interest earning assets:
Cash and due from banks		43,050							34,503
Allowance for loan losses		(7,626	)						(9,611	)
Other assets		62,181							54,176

Total assets	$	1,086,469						$	1,047,013


Interest-bearing liabilities:

NOW, MMDA & savings deposits	$	480,964			132		0.11%	$	435,501			120		0.11%
Time deposits		140,927			128		0.37%		154,357			162		0.42%
FHLB borrowings		20,000			192		3.89%		43,940			406		3.72%
Trust preferred securities		20,619			135		2.66%		20,619			113		2.20%
Other		42,384			11		0.11%		33,136			8		0.10%

Total interest-bearing liabilities		704,894			598		0.34%		687,553			809		0.47%

Non-interest bearing liabilities and shareholders' equity:
Demand deposits		268,511							249,128
Other liabilities		4,679							2,294
Shareholders' equity		108,385							108,038

Total liabilities and shareholder's equity	$	1,086,469						$	1,047,013

Net interest spread				$	10,020		4.02%					9,669		3.88%

Net yield on interest-earning assets							4.11%							4.02%

Taxable equivalent adjustment
Investment securities				$	554							573

Net interest income				$	9,466							9,096

*Includes U.S. Government agency securities that are non-taxable for state income tax purposes of $38.3 million in 2017 and $37.8 million in 2016. Tax rates of 3.00% and 4.00% were used to calculate the tax equivalent yield on these securities in 2017 and 2016, respectively.

Changes in interest income and interest expense can result from variances in both volume and rates. The following table presents 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.

	Three months ended March 31, 2017 compared to three months ended March 31, 2016									Three months ended March 31, 2016 compared to three months ended March 31, 2015
(Dollars in thousands)	Changes in average volume			Changes in average rates			Total Increase (Decrease)			Changes in average volume			Changes in average rates			Total Increase (Decrease)
Interest income:
Loans: Net of unearned income	$	432			(174	)		258		$	430			-			430
Investments - taxable		(80	)		(26	)		(106	)		(98	)		22			(76	)
Investments - nontaxable		(51	)		26			(25	)		(5	)		(35	)		(40	)
Other		1			12			13			(2	)		10			8
Total interest income		302			(162	)		140			325			(3	)		322

Interest expense:
NOW, MMDA & savings deposits		12			-			12			5			4			9
Time deposits		(13	)		(21	)		(34	)		(38	)		(47	)		(85	)
FHLB borrowings		(225	)		11			(214	)		(53	)		41			(12	)
Trust preferred securities		-			22			22			-			16			16
Other		3			-			3			(3	)		-			(3	)
Total interest expense		(223	)		12			(211	)		(89	)		14			(75	)
Net interest income	$	525			(174	)		351		$	414			(17	)		397

Provision for Loan Losses. The provision for loan losses for the three months ended March 31, 2017 was a credit of $236,000, as compared to a credit of $216,000 for the three months ended March 31, 2016. The increase in the credit to the provision for loan losses is primarily attributable to a reduction in the required level of the allowance for loan losses resulting from lower historical loss rates used to calculate the ASC 450-20 reserve as the elevated level of loan losses incurred in 2011 and 2012 are no longer included in the historical loss calculations.

Non-Interest Income. Total non-interest income was $2.9 million for the three months ended March 31, 2017, compared to $3.3 million for the three months ended March 31, 2016. The decrease in non-interest income is primarily attributable to a $360,000 increase in net losses on other real estate owned properties and a $114,000 decrease in service charges and fees during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016.

Non-Interest Expense. Total non-interest expense was $9.8 million for the three months ended March 31, 2017, compared to $9.5 million for the three months ended March 31, 2016. The increase in non-interest expense was primarily due to a $653,000 increase in salaries and benefits expense and a $438,000 increase in other non-interest expense, which were partially offset by a $686,000 decrease in professional fees, and a $141,000 decrease in occupancy expense during the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. The increase in salaries and benefits expense is primarily due to an increase in the number of full-time equivalent employees and annual salary increases combined with an increase in expense associated with restricted stock units issued to officers due to an increase in the Company's stock price from $25.07 at December 31, 2016 to $29.70 at March 31, 2017. The increase in other non-interest expense is primarily due to increases in telecommunications expense, expense associated with restricted stock units issued to directors, deposit program expense and fraud/forgery expense. The decrease in professional fees is primarily due to a decrease in consulting fees associated with the Order issued in August 2015.

Income Taxes. The Company reported income tax expense of $578,000 and $691,000 for the three months ended March 31, 2017 and 2016, respectively. This represented an effective tax rate of 21% and 22% for the respective periods.

Analysis of Financial Condition

Investment Securities. Available for sale securities were $244.9 million at March 31, 2017, compared to $249.9 million at December 31, 2016. Average investment securities available for sale for the three months ended March 31, 2017 were $240.8 million, compared to $252.7 million for the year ended December 31, 2016.

Loans. At March 31, 2017, loans were $735.9 million, compared to $723.8 million at December 31, 2016. Average loans represented 74% and 71% of average earning assets for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. The Company had $1.3 million and $5.7 million in mortgage loans held for sale as of March 31, 2017 and December 31, 2016, respectively.

Although the Company has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by real estate, which is dependent upon the real estate market. Real estate mortgage loans include both commercial and residential mortgage loans. At March 31, 2017, the Company had $116.7 million in residential mortgage loans, $98.6 million in home equity loans and $353.9 million in commercial mortgage loans, which include $277.0 million secured by commercial property and $76.9 million secured by residential property. Residential mortgage loans include $77.5 million made to customers in the Company's traditional banking offices and $39.2 million in mortgage loans originated in the Company's Latino banking offices. All residential mortgage loans are originated as fully amortizing loans, with no negative amortization.

At March 31, 2017, the Company had $65.4 million in construction and land development loans. The following table presents a breakout of these loans.

(Dollars in thousands)
	Number of Loans	Balance Outstanding		Non-accrual Balance
Land acquisition and development - commercial purposes	53	$	9,122	$	-
Land acquisition and development - residential purposes	212		25,245		20
1 to 4 family residential construction	108		19,891		-
Commercial construction	19		11,180		-
Total construction and land development	392	$	65,438	$	20

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.

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.

Effective December 31, 2012, stated income mortgage loans from the former Banco division of the Bank were analyzed separately from other single family residential loans in the Bank's loan portfolio. These loans are first mortgage loans made to the Latino market, primarily in Mecklenburg, North Carolina and surrounding counties. These loans are non-traditional mortgages in that the customer normally did not have a credit history, so all credit information was accumulated by the loan officers. 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.

There were no significant changes in the estimation methods or fundamental assumptions used in the evaluation of the allowance for loan losses for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. 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.

The allowance for loan losses at March 31, 2017 was $7.3 million or 0.99% of total loans, compared to $7.6 million or 1.04% of total loans at December 31, 2016.

The following table presents the percentage of loans assigned to each risk grade at March 31, 2017 and December 31, 2016.


	Percentage of Loans
	By Risk Grade
Risk Grade	3/31/2017	12/31/2016
Risk Grade 1 (Excellent Quality)	1.64%	2.28%
Risk Grade 2 (High Quality)	25.52%	26.82%
Risk Grade 3 (Good Quality)	57.45%	54.44%
Risk Grade 4 (Management Attention)	11.15%	11.99%
Risk Grade 5 (Watch)	3.14%	3.07%
Risk Grade 6 (Substandard)	1.10%	1.41%
Risk Grade 7 (Doubtful)	0.00%	0.00%
Risk Grade 8 (Loss)	0.00%	0.00%

At March 31, 2017, including non-accrual loans, there were five relationships exceeding $1.0 million in the Watch risk grade (which totaled $8.4 million) and no relationships exceeding $1.0 million in the Substandard risk grade.

Non-performing Assets. Non-performing assets totaled $3.6 million at March 31, 2017 or 0.32% of total assets, compared to $4.1 million or 0.38% of total assets at December 31, 2016. Non-accrual loans were $3.6 million at March 31, 2017 and $3.8 million at December 31, 2016. As a percentage of total loans outstanding, non-accrual loans were 0.49% at March 31, 2017, compared to 0.53% at December 31, 2016. Non-accrual loans include $3.5 million in commercial and residential mortgage loans, $20,000 in construction and land development loans and $28,000 in other loans at March 31, 2017, compared to $3.7 million in commercial and residential mortgage loans, $22,000 in construction and land development loans and $54,000 in other loans at December 31, 2016. The Bank had no loans 90 days past due and still accruing at March 31, 2017 and December 31, 2016. The Bank had no other real estate owned at March 31, 2017. Other real estate totaled $283,000 at December 31, 2016.

Deposits. Total deposits at March 31, 2017 were $908.4 million compared to $892.9 million at December 31, 2016. Core deposits, which include non-interest bearing demand deposits, NOW, MMDA, savings and non-brokered certificates of deposit of denominations less than $250,000, were $883.4 million at March 31, 2017 as compared to $865.4 million at December 31, 2016. Certificates of deposit in amounts of $250,000 or more totaled $24.3 million at March 31, 2017, as compared to $26.8 million at December 31, 2016. At March 31, 2017, brokered deposits were $5.6 million as compared to $7.2 million at December 31, 2016. Brokered deposits outstanding as of March 31, 2017 had a weighted average rate of 0.07% with a weighted average original term of 27 months as compared to brokered deposits outstanding at December 31, 2016, which had a weighted average rate of 0.05% with a weighted average original term of 23 months.

Borrowed Funds. Borrowings from the FHLB totaled $20.0 million at March 31, 2017 and December 31, 2016. The average balance of FHLB borrowings for the three months ended March 31, 2017 was $20.0 million, compared to $42.9 million for the year ended December 31, 2016. The FHLB borrowings outstanding at March 31, 2017 had interest rates ranging from 2.84% to 4.26% and all mature in 2018.

Securities sold under agreements to repurchase were $42.2 million at March 31, 2017 compared to $36.4 million at December 31, 2016.

Junior Subordinated Debentures (related to Trust Preferred Securities). 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 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 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.

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 to be done in conjunction with the need to maintain adequate liquidity and the overall goal of maximizing net interest income.

The Company manages its exposure to fluctuations in interest rates through policies established by our Asset/Liability Committee ("ALCO"). 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 securities. Rate sensitive liabilities include interest-bearing checking accounts, money market deposit accounts, savings accounts, time deposits and borrowed funds. Average rate sensitive assets for the three months ended March 31, 2017 totaled $988.9 million, exceeding average rate sensitive liabilities of $704.9 million by $284.0 million.

The Company has an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. By 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 minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company. The Company did not have any interest rate derivatives outstanding as of March 31, 2017.

Included in the rate sensitive assets are $284.9 million in variable rate loans indexed to prime rate subject to immediate repricing upon changes by the Federal Open Market Committee ("FOMC"). The Company utilizes interest rate floors on certain variable rate loans to protect against further downward movements in the prime rate. At March 31, 2017, the Company had $178.8 million in loans with interest rate floors. The floors were in effect on $54.8 million of these loans pursuant to the terms of the promissory notes on these loans. The weighted average rate on these loans is 0.74% higher than the indexed rate on the promissory notes without interest rate floors.

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 March 31, 2017, such unfunded commitments to extend credit were $195.9 million, while commitments in the form of standby letters of credit totaled $3.7 million.

The Company uses several sources to meet its liquidity requirements. The primary source is core deposits, which includes demand deposits, savings accounts and non-brokered certificates of deposit 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 March 31, 2017, the Company's core deposits totaled $883.4 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 agreements to repurchase and FHLB borrowings. The Bank is also able to borrow from the Federal Reserve Bank ("FRB") on a short-term basis. The Company's policies include the ability to access wholesale funding of up to 40% of total assets. The Company's wholesale funding includes FHLB borrowings, FRB borrowings, brokered deposits, internet certificates of deposit and certificates of deposit issued to the State of North Carolina. The Company's ratio of wholesale funding to total assets was 2.31% as of March 31, 2017.

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 March 31, 2017 and December 31, 2016. At March 31, 2017, the carrying value of loans pledged as collateral to the FHLB totaled $130.0 million compared to $128.3 million at December 31, 2016. The remaining availability under the line of credit with the FHLB was $67.1 million at March 31, 2017 compared to $66.8 million at December 31, 2016. The Bank had no borrowings from the FRB at March 31, 2017 or December 31, 2016. FRB borrowings are collateralized by a blanket assignment on all qualifying loans that the Bank owns which are not pledged to the FHLB. At March 31, 2017, the carrying value of loans pledged as collateral to the FRB totaled $382.2 million compared to $374.5 million at December 31, 2016.

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 March 31, 2017.

The liquidity ratio for the Bank, which is defined as net cash, interest-bearing deposits, federal funds sold and certain investment securities, as a percentage of net deposits and short-term liabilities was 27.14% at March 31, 2017 and 24.78% at December 31, 2016. The minimum required liquidity ratio as defined in the Bank's Asset/Liability and Interest Rate Risk Management Policy was 10% at March 31, 2017 and December 31, 2016.

Contractual Obligations and Off-Balance Sheet Arrangements. The Company's contractual obligations and other commitments as of March 31, 2017 and December 31, 2016 are summarized in the table 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.

(Dollars in thousands)
	March 31, 2017		December 31, 2016
Contractual Cash Obligations
Long-term borrowings	$	20,000	20,000
Junior subordinated debentures		20,619	20,619
Corporate Center renovation		1,399	2,170
Operating lease obligations		4,582	4,648
Total	$	46,600	47,437
Other Commitments
Commitments to extend credit	$	195,902	195,528
Standby letters of credit and financial guarantees written		3,717	3,728
Income tax credits		2,730	2,864
Total	$	202,349	202,120

The Company enters into derivative contracts from time to time 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. Further discussions of derivative instruments are included above in the section entitled "Asset Liability and Interest Rate Risk Management".

Capital Resources. Shareholders' equity was $110.1 million, or 9.9% of total assets, as of March 31, 2017, compared to $107.4 million, or 9.9% of total assets, as of December 31, 2016. The increase in shareholders' equity is primarily due to an increase in retained earnings due to net income and an increase in accumulated other comprehensive income resulting from an increase in the unrealized gain on investment securities.

Annualized return on average equity for the three months ended March 31, 2017 was 8.25% compared to 9.13% for the three months ended March 31, 2016. Total cash dividends paid on common stock were $658,000 and $447,000 for the three months ended March 31, 2017 and 2016, 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 the 2016, the Company's Board of Directors authorized a stock repurchase program, pursuant to which up to $2 million was allocated to repurchase the Company's common stock. Any purchases under the Company's 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 were determined by the Company's management, based on its evaluation of market conditions and other factors. The Company has repurchased approximately $2.0 million, or 92,738 shares of its common stock, under this program as of March 31, 2017.

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 are being phased in from 2015 to 2019. The new minimum capital level requirements applicable to the Company and the Bank under the final rules are as follows: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total risk based capital ratio of 8% (unchanged from previous rules); and (iv) a Tier 1 leverage ratio of 4% (unchanged from previous rules). An additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes beginning on January 1, 2016 at 0.625% and is being 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.

Under the regulatory capital guidelines, financial institutions are currently required to maintain a total risk-based capital ratio of 8.0% or greater, with a Tier 1 risk-based capital ratio of 6.0% or greater and a common equity Tier 1 capital ratio of 4.5% or greater, as required by the Basel III capital standards referenced above. Tier 1 capital is generally defined as shareholders' equity and trust preferred securities less all intangible assets and goodwill. Tier 1 capital at March 31, 2017 and December 31, 2016 includes $20.0 million in trust preferred securities. The Company's Tier 1 capital ratio was 15.45% and 15.20% at March 31, 2017 and December 31, 2016, 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 16.34% and 16.12% at March 31, 2017 and December 31, 2016, respectively. The Company's common equity Tier 1 capital consists of common stock and retained earnings. The Company's common equity Tier 1 capital ratio was 13.01% and 12.75% at March 31, 2017 and December 31, 2016, 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 11.65% and 11.19% at March 31, 2017 and December 31, 2016, respectively.

The Bank's Tier 1 risk-based capital ratio was 15.14% and 14.85% at March 31, 2017 and December 31, 2016, respectively. The total risk-based capital ratio for the Bank was 16.03% and 15.78% at March 31, 2017 and December 31, 2016, respectively. The Bank's common equity Tier 1 capital ratio was 15.14% and 14.85% at March 31, 2017 and December 31, 2016, respectively. The Bank's Tier 1 leverage capital ratio was 11.34% and 10.88% at March 31, 2017 and December 31, 2016, 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 March 31, 2017.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There are no material changes from the Quantitative and Qualitative Disclosures About Market Risk as previously disclosed in the Company's Form 10-K in response to Item 3 to Form 10-K, filed with Securities and Exchange Commission on March 16, 2017.

Item 4. Controls and Procedures

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

	The discussion of the Order issued by the FDIC and the Commissioner in connection with compliance by the Bank with the BSA and its implementing regulations on August 31, 2015 as set forth in Note (7) of the Consolidated Financial Statements included in Item 1 hereof is incorporated herein by reference.

Item 1A.	Risk Factors

	There are no material changes from the Risk Factors as previously disclosed in the Company's Form 10-K in response to Item 1A. Part I to Form 10-K, filed with the Securities and Exchange Commission on March 16, 2017.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)

January 1 - 31, 2017	1,012		$	26.50	-	$	16,180

February 1 - 28, 2017	-			-	-	$	16,180

March 1 - 31, 2017	294			27.75	-	$	16,180

Total	1,306	(1)	$	26.78	-

(1) The Company purchased 1,306 shares on the open market in the three months ended March 31, 2017 for its deferred compensation plan. All purchases were funded by participant contributions to the plan.

(2) Reflects dollar value of shares that may yet be purchased under the Stock Repurchase Plan authorized by the Company's Board of Directors in 2016.

Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 5.	Other Information

	Not applicable

Item 6.	Exhibits

	Exhibit (3)(i)(a)	Articles of Incorporation of the Registrant, incorporated by reference to
		Exhibit (3)(i) to the Form 8-A filed with the Securities and Exchange
		Commission on September 2, 1999

	Exhibit (3)(i)(b)	Articles of Amendment dated December 19, 2008, regarding the Series A
		Preferred Stock, incorporated by reference to Exhibit (3)(1) to the Form 8-K filed
		with the Securities and Exchange Commission on December 29, 2008

	Exhibit (3)(i)(c)	Articles of Amendment dated February 26, 2010, incorporated by reference to
		Exhibit (3)(2) to the Form 10-K filed with the Securities and Exchange
		Commission on March 25, 2010

	Exhibit (3)(ii)	Second Amended and Restated Bylaws of the Registrant, incorporated by
		reference to Exhibit (3)(ii) to the Form 8-K filed with the Securities and
		Exchange Commission on June 24, 2015

	Exhibit (4)	Specimen Stock Certificate, incorporated by reference to Exhibit (4) to the Form
		8-A filed with the Securities and Exchange Commission on September 2, 1999

	Exhibit (10)(i)	Amended and Restated Executive Salary Continuation Agreement between
		Peoples Bank and Tony W. Wolfe dated December 18, 2008, incorporated by
		reference to Exhibit (10)(a)(iii) to the Form 8-K filed with the Securities and
		Exchange Commission on December 29, 2008

	Exhibit (10)(ii)	Amended and Restated Executive Salary Continuation Agreement between
		Peoples Bank and Joseph F. Beaman, Jr. dated December 18, 2008, incorporated
		by reference to Exhibit (10)(b)(iii) to the Form 8-K filed with the Securities and
		Exchange Commission on December 29, 2008

	Exhibit (10)(iii)	Amended and Restated Executive Salary Continuation Agreement between
		Peoples Bank and William D. Cable, Sr. dated December 18, 2008, incorporated
		by reference to Exhibit (10)(c)(iii) to the Form 8-K filed with the Securities and
		Exchange Commission on December 29, 2008

	Exhibit (10)(iv)	Employment agreement dated January 22, 2015 between the Registrant and
		William D. Cable, Sr., incorporated by reference to Exhibit (10)(c) to the Form 8-K
		filed with the Securities and Exchange Commission on February 9, 2015

	Exhibit (10)(v)	Amended and Restated Executive Salary Continuation Agreement between
		Peoples Bank and Lance A. Sellers dated December 18, 2008, incorporated by
		reference to Exhibit (10)(d)(iii) to the Form 8-K filed with the Securities and
		Exchange Commission on December 29, 2008

	Exhibit (10)(vi)	Employment agreement dated January 22, 2015 between the Registrant and
		Lance A. Sellers, incorporated by reference to Exhibit (10)(a) to the Form 8-K
		filed with the Securities and Exchange Commission on February 9, 2015

	Exhibit (10)(vii)	Amended and Restated Executive Salary Continuation Agreement between
		Peoples Bank and A. Joseph Lampron, Jr. dated December 18, 2008, incorporated
		by reference to Exhibit (10)(f)(iii) to the Form 8-K filed with the Securities and
		Exchange Commission on December 29, 2008

	Exhibit (10)(viii)	Employment agreement dated January 22, 2015 between the Registrant and A.
		Joseph Lampron, Jr., incorporated by reference to Exhibit (10)(b) to the Form 8-K
		filed with the Securities and Exchange Commission on February 9, 2015

	Exhibit (10)(ix)	Peoples Bank Directors' and Officers' Deferral Plan, incorporated by reference
		to Exhibit (10)(h) to the Form 10-K filed with the Securities and Exchange
		Commission on March 28, 2002

	Exhibit (10)(x)	Rabbi Trust for the Peoples Bank Directors' and Officers' Deferral Plan,
		incorporated by reference to Exhibit (10)(i) to the Form 10-K filed with the
		Securities and Exchange Commission on March 28, 2002

	Exhibit (10)(xi)	Description of Service Recognition Program maintained by Peoples Bank,
		incorporated by reference to Exhibit (10)(i) to the Form 10-K filed with the
		Securities and Exchange Commission on March 27, 2003

	Exhibit (10)(xii)	Capital Securities Purchase Agreement dated as of June 26, 2006, by and among
		the Registrant, PEBK Capital Trust II and Bear, Sterns Securities Corp.,
		incorporated by reference to Exhibit (10)(j) to the Form 10-Q filed with the
		Securities and Exchange Commission on November 13, 2006

	Exhibit (10)(xiii)	Amended and Restated Trust Agreement of PEBK Capital Trust II, dated as of
		June 28, 2006, incorporated by reference to Exhibit (10)(k) to the Form 10-Q filed
		with the Securities and Exchange Commission on November 13, 2006

	Exhibit (10)(xiv)	Guarantee Agreement of the Registrant dated as of June 28, 2006, incorporated
		by reference to Exhibit (10)(l) to the Form 10-Q filed with the Securities and
		Exchange Commission on November 13, 2006

	Exhibit (10)(xv)	Indenture, dated as of June 28, 2006, by and between the Registrant and LaSalle
		Bank National Association, as Trustee, relating to Junior Subordinated Debt
		Securities Due September 15, 2036, incorporated by reference to Exhibit (10)(m)
		to the Form 10-Q filed with the Securities and Exchange Commission on
		November 13, 2006

	Exhibit (10)(xvi)	Form of Amended and Restated Director Supplemental Retirement Agreement
		between Peoples Bank and Directors Robert C. Abernethy, James S. Abernethy,
		Douglas S. Howard, John W. Lineberger, Jr., Gary E. Matthews, Dr. Billy L.
		Price, Jr., Larry E. Robinson, W. Gregory Terry, Dan Ray Timmerman, Sr. and
		Benjamin I. Zachary, incorporated by reference to Exhibit (10)(n) to the Form
		8-K filed with the Securities and Exchange Commission on December 29, 2008

	Exhibit (10)(xvii)	2009 Omnibus Stock Ownership and Long Term Incentive Plan incorporated
		by reference to Exhibit (10)(o) to the Form 10-K filed with the Securities and
		Exchange Commission on March 20, 2009

	Exhibit (14)	Code of Business Conduct and Ethics of Peoples Bancorp of North Carolina,
		Inc., incorporated by reference to Exhibit (14) to the Form 10-K filed with the
		Securities and Exchange Commission on March 25, 2005

	Exhibit (31)(a)	Certification of principal executive officer pursuant to section 302 of the
		Sarbanes-Oxley Act of 2002

	Exhibit (31)(b)	Certification of principal financial officer pursuant to section 302 of the
		Sarbanes-Oxley Act of 2002

	Exhibit (32)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
		906 of the Sarbanes-Oxley Act of 2002

	Exhibit (101)	The following materials from the Company's 10-Q Report for the quarterly
		period ended March 31, 2017, formatted in XBRL: (i) the Condensed Consolidated
		Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the
		Condensed Consolidated Statements of Changes in Shareholders' Equity, (iv) the
		Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the
		Condensed Consolidated Financial Statements, tagged as blocks of text.*

		*Furnished, not filed.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Peoples Bancorp of North Carolina, Inc.



May 5, 2017		/s/ Lance A. Sellers
Date		Lance A. Sellers
		President and Chief Executive Officer
		(Principal Executive Officer)



May 5, 2017		/s/ A. Joseph Lampron, Jr.
Date		A. Joseph Lampron, Jr.
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Principal Accounting Officer)

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PEOPLES BANCORP OF NORTH CAROLINA INC Reports