Peoples Bancorp of North Carolina, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited except the December 31, 2017 balance sheet. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
The company is a North Carolina bank holding company whose principal business is gathering deposits and lending to consumers and businesses, with operations concentrated in North Carolina. Its loan portfolio is substantially secured by real estate.
Financial performance and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable / prior period |
|---|---|---|
| Interest income | $10.759 million | $10.064 million, Q1 2017 |
| Net interest income | $10.292 million | $9.466 million, Q1 2017 |
| Noninterest income | $3.736 million | $3.442 million, Q1 2017 |
| Noninterest expense | $10.042 million | $10.361 million, Q1 2017 |
| Provision for loan losses | $31,000 expense | $236,000 credit, Q1 2017 |
| Net earnings | $3.303 million; $0.55 basic and diluted EPS | $2.205 million; $0.37 basic and $0.36 diluted EPS |
| Return on average assets / equity | 1.24% / 11.49% annualized | 0.82% / 8.25%, Q1 2017 |
| Net interest spread / yield on earning assets | 4.20% / 4.29% | 4.02% / 4.11%, Q1 2017 |
| Total assets | $1,093.2 million | $1,092.2 million at December 31, 2017 |
| Loans, gross | $765.8 million | $759.8 million at December 31, 2017 |
| Deposits | $907.6 million | $907.0 million at December 31, 2017 |
| Cash and cash equivalents | $67.8 million | $57.3 million at December 31, 2017 |
| Shareholders’ equity | $116.5 million; 10.65% of assets | $116.0 million; 10.62% at December 31, 2017 |
Cash flow: Operating activities provided $3.8 million and investing activities provided $6.3 million; financing activities provided $0.4 million. Cash and cash equivalents increased $10.5 million during the quarter. Q1 2017 operating cash flow was $6.7 million, investing cash flow used $9.9 million, and financing cash flow provided $20.6 million.
Funding and capital: The company had $38.3 million of repurchase-agreement funding and $20.6 million of junior subordinated debentures; it reported no FHLB borrowings. Core deposits were $889.0 million, or 97.94% of deposits. The bank’s liquidity ratio was 20.07%, above its 10% policy minimum. Company Tier 1 and total risk-based capital ratios were 15.52% and 16.25%; the bank was considered well capitalized.
Credit quality: The allowance for loan losses was $6.4 million, or 0.83% of loans, versus 0.84% at year-end. Nonperforming assets were $3.7 million, or 0.34% of assets, compared with $3.8 million and 0.35% at year-end. Past-due loans totaled $8.1 million, down from $9.1 million. The portfolio includes notable commercial real estate (about 34% of loans), single-family residential (about 37%), and construction and land development (about 11%) exposures.
Changes versus comparable periods
- Net earnings increased approximately 50% year over year. Management attributed the improvement mainly to higher net interest income and noninterest income, lower noninterest expense, and a smaller loss on other real estate, partly offset by the higher loan-loss provision.
- Net interest income rose $826,000. Average loans increased $36.2 million and their average yield rose to 4.80% from 4.60%; lower average FHLB borrowings and certificates of deposit helped reduce interest expense.
- Noninterest expense declined $319,000, including lower salaries and benefits and other expenses; occupancy expense increased $243,000.
- The effective tax rate fell to 16% from 21%, primarily following the Tax Cuts and Jobs Act reduction in the federal corporate rate to 21%.
- Available-for-sale securities declined to $213.3 million from $229.3 million at year-end. The quarter recorded a $2.0 million after-tax loss in other comprehensive income on securities, versus $604,000 of other comprehensive income in Q1 2017; management attributed the unrealized losses to interest-rate changes and considered them temporary.
Outlook, risks, and notable items
- Management said Federal Reserve rate increases had benefited 2017 earnings and should continue to support net interest income, while noting that actual results depend on interest rates, competition, economic conditions, credit quality, regulation, and tax or accounting changes. No quantified earnings guidance was provided.
- Management described local business activity as stabilizing, with businesses growing and investing, but said uncertainty in local, national, and international markets continued to constrain activity. Its stated priorities include liquidity, interest-rate exposure management, asset-quality monitoring, and growth in local or nearby markets.
- Unfunded commitments to extend credit were $234.7 million and standby letters of credit were $3.5 million. Actual funding needs may be lower because customers may not draw all commitments.
- Management identified real-estate collateral values, construction costs and delays, commercial borrowers’ operating performance, and borrowers’ ability to refinance or repay balloon maturities as credit risks. It cautioned that adverse economic or other changes could require additional loan-loss reserves.
- The company adopted the new customer-revenue standard in Q1 2018 without a material retained-earnings adjustment. It was evaluating the lease standard, with $4.8 million of future minimum lease payments reported at December 31, 2017. It expected the new credit-loss standard to have no material impact on the loan allowance, but had not completed its evaluation.
- No material subsequent events or material pending legal proceedings were reported. The company reported no material changes to previously disclosed risk factors or market-risk disclosures, and management stated disclosure controls were effective.
Important facts for investors to verify
- Whether loan and deposit growth, loan yields, and funding costs continue to support net interest income as market rates change.
- Credit performance within commercial real estate, construction, and the former Banco stated-income residential portfolio, including nonperforming and impaired loans.
- The adequacy of the $6.4 million allowance as the loan portfolio grows and economic conditions evolve.
- The effect of unrealized securities losses and further rate movements on accumulated other comprehensive income and capital.
- Liquidity and potential funding needs if a portion of the $234.7 million in loan commitments is drawn, and the eventual balance-sheet effect of lease-accounting adoption.