Business Context and Reporting Period
Peoples Bancorp of North Carolina, Inc. is a community bank holding company whose principal subsidiary, Peoples Bank, operates in North Carolina. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. Amounts below are in millions of dollars except per-share data and ratios.
Financial Performance and Position
| Metric | Q3 2015 / Sep. 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net earnings | $2.493; diluted EPS $0.45 | Q3 2014: $2.442; diluted EPS $0.43 |
| Nine-month net earnings | $7.445; diluted EPS $1.32 | Nine months 2014: $7.572; diluted EPS $1.34 |
| Net interest income | Q3: $9.073; nine months: $26.071 | Q3 2014: $8.507; nine months 2014: $25.431 |
| Net interest yield on earning assets | Q3: 4.02%; nine months: 3.92% | Q3 2014: 3.78%; nine months 2014: 3.85% |
| Total assets | $1,037.2 | December 31, 2014: $1,040.5 |
| Loans, gross | $684.8 | December 31, 2014: $651.9 |
| Deposits | $806.6 | December 31, 2014: $814.7 |
| Cash and cash equivalents | $44.6 | December 31, 2014: $69.1 |
| Shareholders’ equity | $102.9, or 9.9% of assets | December 31, 2014: $98.7 |
Earnings, Margins and Cash Flow
- Q3 net earnings increased about 2% year over year, supported by higher net interest income; higher non-interest expense and income tax expense partly offset the improvement. Nine-month net earnings decreased about 2%, as higher provision and operating costs outweighed growth in non-interest income and net interest income.
- Q3 interest income rose to $9.9 million from $9.6 million, while interest expense declined to $0.9 million from $1.1 million. Nine-month interest income was essentially unchanged at $28.7 million, while interest expense fell to $2.6 million from $3.3 million.
- Q3 non-interest income was $3.3 million versus $3.2 million; non-interest expense was $8.7 million versus $8.5 million. For the nine months, non-interest income was $9.8 million versus $9.2 million, and expense was $25.8 million versus $24.7 million.
- Annualized return on average assets was 0.95% for Q3 and 0.96% for the nine months, compared with 0.93% and 0.98%, respectively, in 2014. Return on average equity was 9.57% and 9.48%, versus 10.09% and 10.71%.
- Operating cash flow for the nine months was $14.3 million, versus $12.5 million in 2014. Investing activities used $26.7 million (versus $9.6 million); financing activities used $12.0 million (versus providing $5.9 million). Cash and cash equivalents declined $24.5 million during the period.
Credit, Funding and Capital
- The loan-loss provision was $0.235 million in Q3, compared with $0.256 million; for nine months, the provision was $0.193 million versus a $0.027 million credit. The allowance was $10.4 million, or 1.52% of loans, down from $11.1 million, or 1.70%, at year-end.
- Non-performing assets were $10.8 million, or 1.05% of assets, versus $12.7 million, or 1.22%, at year-end. Non-accrual loans were $8.3 million, or 1.21% of loans, versus $10.7 million, or 1.65%. Loans 90 days past due and still accruing were $0.226 million.
- Core deposits totaled $771.4 million, 96% of deposits. FHLB borrowings remained $50.0 million; repurchase-agreement funding was $47.2 million, and junior subordinated debentures were $20.6 million. The debentures carry a floating rate of three-month LIBOR plus 163 basis points.
- The Bank’s liquidity ratio was 28.36%, above its 10% policy minimum. It had $28.8 million of remaining FHLB borrowing availability and $59.5 million of potential overnight federal-funds borrowing capacity. Unfunded loan commitments were $180.1 million; standby letters of credit were $3.8 million.
- The Bank was considered well capitalized. At September 30, the Company’s common equity Tier 1, Tier 1, total risk-based capital and Tier 1 leverage ratios were 12.55%, 15.11%, 16.39% and 11.38%, respectively.
Material Changes, Outlook and Risks
- Gross loans rose $32.9 million from year-end, led by growth in non-real-estate commercial, residential mortgage and commercial real-estate lending. Deposits fell $8.1 million; core deposits nevertheless increased to $771.4 million from $755.8 million.
- Management said local economic conditions showed signs of improvement but remained uncertain, citing unemployment above historical norms and home prices below pre-crisis levels. It described historically low interest rates as a continuing negative for net interest income. No quantified earnings or revenue guidance is provided.
- On August 31, 2015, the FDIC and North Carolina banking regulator issued a consent order concerning Bank Secrecy Act compliance. The Bank must strengthen oversight, policies, controls, training, staffing, testing, customer due diligence and reporting, and arrange independent review of past account activity. The order restricts acquisitions, new branches and allocation of funds to the stock repurchase plan while in effect. Management expected to complete required actions within the specified period and said related expenses were not expected to be material.
- A lawsuit over overdraft fees was dismissed with prejudice on summary judgment in the Bank’s favor in June 2015; the plaintiff appealed. The Bank intends to defend the appeal, with a decision not expected before Q2 2016. Management reported no material subsequent events.
- Other stated risks include competition, interest-rate changes, economic and credit-quality deterioration, and legislative, regulatory, accounting or tax changes. The filing also notes that real-estate collateral values and borrower repayment capacity are key credit risks. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor Verification Priorities
- Track implementation, regulatory review and duration of the BSA consent order, including any limits on growth or capital returns and actual compliance costs.
- Review loan growth and mix, delinquency and non-accrual trends, impaired and restructured loans, charge-offs, and whether the allowance remains adequate.
- Assess deposit trends, the decline in cash, available borrowing capacity and the ability to fund $180.1 million of credit commitments.
- Monitor net interest yield and sensitivity to interest-rate changes, given management’s warning about prolonged low rates and the loan portfolio’s variable-rate exposure.
- Follow the overdraft-fee litigation appeal and any developments affecting the repurchase program; the filing reports $1.7 million repurchased under the program through September 30, 2015.