Business context and reporting period
Peoples Bancorp of North Carolina, Inc. is a bank holding company whose principal subsidiary, Peoples Bank, serves North Carolina markets. Its business is primarily gathering deposits and lending, alongside mortgage banking, investment services, and appraisal-related businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017.
Financial performance and condition
Amounts are in millions except per-share data and ratios. Year-over-year comparisons are for the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $11.06 | $10.46 | $21.82 | $20.53 |
| Noninterest income | $4.02 | $3.93 | $7.75 | $7.37 |
| Net interest income | $10.55 | $9.84 | $20.84 | $19.31 |
| Provision for loan losses | $0.23 | $0.05 | $0.26 | $(0.19) credit |
| Noninterest expense | $10.56 | $9.98 | $20.60 | $20.34 |
| Net earnings | $3.18 | $2.81 | $6.48 | $5.02 |
| Diluted earnings per share | $0.53 | $0.47 | $1.08 | $0.83 |
- Profitability and margins: Q2 annualized return on average assets was 1.16% versus 1.02%; return on average equity was 10.86% versus 10.04%. For the first half, those measures were 1.20% versus 0.92% and 11.02% versus 9.05%. Reported net yield on interest-earning assets was 4.29% for both Q2 and the first half, compared with 4.16% and 4.13%, respectively, in 2017.
- Balance sheet: Total assets were $1.111 billion, up from $1.092 billion at year-end. Loans were $781.9 million, up from $759.8 million; deposits were $915.0 million, up from $907.0 million. Available-for-sale securities declined to $210.1 million from $229.3 million.
- Credit quality: The allowance for loan losses was $6.28 million, or 0.80% of loans, versus $6.37 million, or 0.84%, at year-end. Nonperforming assets were $4.4 million (0.39% of assets), compared with $3.8 million (0.35%). Nonaccrual loans were $4.3 million, or 0.55% of loans, versus $3.7 million, or 0.49%; there were no loans 90 days past due and still accruing at either date.
- Cash flow and liquidity: First-half operating cash flow was $7.8 million versus $8.8 million in 2017. Cash and cash equivalents increased $12.3 million during the period to $69.6 million. The Bank’s liquidity ratio was 20.44%, above its 10% policy minimum. Core deposits were $896.8 million, or 98.01% of deposits.
- Debt and capital: There were no FHLB or Federal Reserve borrowings at June 30. Repurchase-agreement funding was $46.6 million, up from $37.8 million at year-end; junior subordinated debentures were $20.6 million. Shareholders’ equity was $118.2 million, or 10.63% of assets. The Company’s Tier 1, total risk-based, common equity Tier 1, and leverage ratios were 15.27%, 15.97%, 13.04%, and 12.47%, respectively. The Bank was classified as well capitalized.
- Distributions: Cash dividends declared were $0.13 per share in Q2 and $0.26 per share for the first half, compared with $0.11 and $0.22 in 2017. First-half cash dividends paid totaled $1.6 million.
Material changes versus comparable periods
- Net earnings increased to $3.2 million in Q2 and $6.5 million for the first half. Management attributed the improvement mainly to higher net interest income and noninterest income, partly offset by higher loan-loss provision and operating expenses.
- Net interest income rose as loan balances and loan yields increased and interest expense declined. The Bank had paid off its remaining FHLB borrowings in October 2017. Higher loan rates reflected, in part, increases in the prime rate; management said Federal Reserve rate increases should continue to benefit net interest income.
- Noninterest expense increased, particularly salaries and benefits, which management linked to more full-time equivalent employees and annual salary increases. First-half occupancy and professional-fee expenses also rose.
- The effective tax rate fell to 16% for both Q2 and the first half, from 25% and 23%, respectively, principally following the Tax Cuts and Jobs Act’s reduction of the federal corporate tax rate.
- Unrealized losses on available-for-sale securities contributed to a $2.7 million decline in accumulated other comprehensive income during the first half. Management considered the securities’ unrealized losses temporary and primarily related to interest-rate changes.
- Past-due loans declined to $4.9 million from $9.1 million at year-end, while nonaccrual loans increased. The allowance declined in dollars and as a percentage of loans despite loan growth.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified earnings or financial guidance. Management said local businesses were growing and investing, while uncertainty in local, national, and international markets continued to limit activity. It described the higher federal funds rate as potentially supportive of future net interest income.
- Key risks: Results are sensitive to competition, interest rates, economic conditions and borrower credit quality, regulation, accounting standards, and tax or monetary-policy changes. A substantial portion of loans is real-estate-secured; commercial real estate was approximately 35% of loans, single-family residential approximately 37%, and construction and land development approximately 10%. Management also identified real-estate values, construction costs, refinancing, and borrower business performance as relevant credit risks.
- Commitments: Unfunded commitments to extend credit were $249.3 million and standby letters of credit were $3.5 million. The filing notes that not all credit commitments are expected to be drawn. Remaining FHLB line availability was $85.6 million; additional correspondent federal-funds capacity was $79.5 million.
- Accounting and other items: The Company adopted the new revenue-recognition standard in 2018 with no material retained-earnings adjustment; appraisal-management revenue and expense presentation changed to separate line items. The Company was evaluating the forthcoming lease standard and expected to recognize lease assets and liabilities; future minimum lease payments were $4.8 million at year-end 2017. It anticipated no material allowance impact from the forthcoming credit-loss standard, but the estimate remained under evaluation. Management reported no material subsequent events, no material pending legal proceedings beyond ordinary-course matters, and no material changes to previously disclosed risk factors or market-risk disclosures. Disclosure controls were judged effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth and higher interest rates continue to support net interest income as deposit costs and competition for funding evolve.
- Whether the rise in nonaccrual loans and nonperforming assets, and the lower allowance-to-loan ratio, remain consistent with credit trends and reserve adequacy.
- Real-estate and commercial-loan concentrations, including the performance of Banco de la Gente stated-income loans and commercial real estate exposures.
- How securities valuation changes affect accumulated other comprehensive income, capital, and reported equity.
- Future draws on credit commitments, liquidity sources, and the cost and availability of funding.
- Implementation effects of the lease and expected-credit-loss accounting standards, and any resulting balance-sheet or earnings changes.