Peoples Bancorp of North Carolina, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results include the company, Peoples Bank and subsidiaries. Dollar amounts are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $9.839 | $9.002 | $19.305 | $18.098 |
| Provision for loan losses | $0.049 expense | $0.531 credit | $0.187 credit | $0.748 credit |
| Non-interest income | $3.281 | $3.572 | $6.157 | $6.896 |
| Non-interest expense | $9.335 | $9.109 | $19.130 | $18.601 |
| Net earnings | $2.811 | $2.964 | $5.016 | $5.418 |
| Diluted earnings per share | $0.51 | $0.53 | $0.91 | $0.97 |
- Net earnings declined about 5% year over year in Q2 and 7% for the first half. Q2 annualized return on average assets was 1.02% (1.13% prior year); return on average equity was 10.04% (10.73%). First-half figures were 0.92% and 9.05%, respectively, versus 1.03% and 9.81%.
- Net interest income increased about 9% in Q2 and 7% year to date. Tax-equivalent net interest margin was 4.16% in Q2 (3.99% prior year) and 4.13% for the first half (4.00%). Loan growth and lower funding costs supported the increase.
- At June 30, assets were $1,107, liabilities $993 and shareholders’ equity $114, compared with $1,088, $981 and $107 at year-end 2016. Equity was 10.3% of assets. The company reported regulatory capital ratios above applicable minimums; the Bank was considered well capitalized.
- Total loans were $745, up $21 million from year-end; deposits were $892, essentially unchanged. Available-for-sale securities were $241, down from $250. Cash and cash equivalents were $75, up from $70.
- Debt and funding included $50.0 million of repurchase-agreement balances, $20.0 million of FHLB borrowings and $20.6 million of junior subordinated debentures. Repurchase agreements increased $13.5 million from year-end; FHLB borrowings were unchanged.
- First-half operating cash flow was $8.8 million, investing cash flow was negative $15.6 million and financing cash flow was positive $11.8 million. Cash and cash equivalents increased $5.0 million.
Material changes and asset quality
- Higher average loan balances and a 0.75 percentage-point increase in the prime rate since June 2016 lifted interest income; lower average FHLB borrowings and deposit costs reduced interest expense.
- Non-interest income fell, chiefly because the prior-year periods included $324,000 in securities-sale gains. First-half income also reflected a $283,000 loss/write-down on other real estate, versus an $80,000 net gain in first-half 2016.
- Non-interest expense increased, partly from higher salaries and benefits, advertising for a rebranding initiative launched in March 2017, and other costs. Lower professional fees partly offset those increases.
- The allowance for loan losses was $7.2 million, or 0.96% of loans, versus $7.6 million, or 1.04%, at year-end. Nonperforming assets rose to $4.7 million, or 0.42% of assets, from $4.1 million, or 0.38%; nonaccrual loans were $4.6 million versus $3.8 million. Past-due loans 90 days or more and still accruing totaled $55,000.
- Real estate secured a substantial portion of loans. Management identified construction, commercial real estate, and Banco de la Gente stated-income residential loans as areas with distinct credit risks. Net loans included $38.9 million of Banco stated-income loans.
Outlook, risks, contingencies and unusual items
- The filing gives no numerical earnings or revenue guidance. Management described local businesses as growing and investing, while noting continued uncertainty in local, national and international markets. It aims to grow in existing and nearby markets and says acquisitions are not necessary to provide a reasonable shareholder return.
- Management noted that prolonged low rates had pressured loan yields and that deposit costs had limited room to decline. Further rate changes, competition, economic conditions, credit quality and regulation could affect results.
- A 2015 FDIC and North Carolina banking regulator Consent Order remains in effect concerning Bank Secrecy Act compliance. The Bank reported progress and expected to complete required actions within the specified period, but incurred and expects further compliance costs. The Order restricts acquisitions, new branches and allocation of funds to the stock repurchase plan until modified or terminated.
- Unfunded commitments to extend credit were $204.8 million and standby letters of credit were $3.8 million. The company reported a 25.37% liquidity ratio, against a 10% policy minimum, and $61.7 million remaining FHLB line availability. These commitments may create future funding needs.
- The company reported no material subsequent events and no material changes to previously disclosed risk factors or market-risk disclosures. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the BSA Consent Order has been satisfied or changed, and the continuing cost and business restrictions associated with it.
- Trends in nonaccrual and past-due loans, criticized loan grades, and the adequacy of the allowance as the loan portfolio grows.
- Whether net interest margin gains persist as market rates, deposit costs and loan competition change.
- The sustainability of earnings given lower non-interest income, higher operating expenses and fewer prior-period securities gains.
- Liquidity and funding exposure, including growth in repurchase-agreement funding and the scale of unfunded credit commitments.