Peoples Bancorp of North Carolina, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited except the December 31, 2018 balance sheet. The company is a North Carolina community bank holding company operating through Peoples Bank and related subsidiaries.
Financial performance and position
- Q3 earnings: Net earnings were $3.62 million, up 4.4% from $3.47 million a year earlier. Diluted EPS was $0.61 versus $0.57. Dividends declared were $0.14 per share versus $0.13.
- Nine-month earnings: Net earnings were $11.10 million, up 11.6% from $9.95 million. Diluted EPS was $1.86 versus $1.65; dividends declared were $0.42 per share versus $0.39.
- Net interest income: Q3 was $11.44 million, up from $11.05 million; nine-month income was $34.46 million, up from $31.89 million. For the nine months, interest income rose to $36.99 million from $33.43 million, while interest expense increased to $2.53 million from $1.54 million.
- Margins and returns: Tax-equivalent net yield on interest-earning assets was 4.41% in Q3 versus 4.43%; for the nine months it was 4.56% versus 4.34%. Annualized ROA was 1.26% in Q3 and 1.32% year to date, compared with 1.25% and 1.21%. Annualized ROE was 10.89% in Q3 and 11.24% year to date, versus 11.49% and 10.97%.
- Noninterest items: Q3 noninterest income was $4.71 million versus $3.92 million, and noninterest expense was $11.27 million versus $10.70 million. Nine-month figures were $13.21 million versus $11.67 million and $33.43 million versus $31.30 million, respectively. Appraisal-management volume drove much of the increases in both income and associated expense.
- Balance sheet at September 30: Total assets were $1.223 billion, up from $1.093 billion at year-end 2018. Loans were $845.6 million versus $804.0 million; deposits were $961.6 million versus $877.2 million. Shareholders’ equity was $132.7 million versus $123.6 million.
- Liquidity and funding: Cash and cash equivalents were $129.6 million, up from $43.4 million. The bank’s liquidity ratio was 25.91%, above its 10% policy minimum and up from 16.09% at year-end. FHLB borrowings were $70.0 million, compared with none at year-end; repurchase-agreement funding declined to $21.9 million from $58.1 million. Junior subordinated debentures were $20.6 million.
- Cash flows, nine months: Operating activities provided $9.1 million, compared with $12.1 million; investing activities used $35.5 million versus $14.5 million; financing activities provided $112.6 million versus $2.2 million. Cash increased $86.2 million, primarily reflecting deposit growth and FHLB borrowing, partly offset by loan growth and lower repurchase funding.
- Capital: The company’s Tier 1, total risk-based, common equity Tier 1 and leverage ratios were 15.70%, 16.40%, 13.58% and 13.07%, respectively. The Bank was reported as well capitalized.
Changes versus comparable periods
- Loan growth and higher average loan yields supported higher interest income. However, rising deposit costs lifted Q3 interest expense to $994,000 from $557,000 and nine-month expense to $2.53 million from $1.54 million.
- Average loans rose $58.9 million year over year in Q3; average investment securities declined $28.8 million. The average yield on loans improved to 5.19% from 5.03% in Q3, while the yield on securities declined to 3.29% from 3.52%.
- The provision for loan losses increased to $422,000 from $110,000 in Q3 and to $677,000 from $372,000 for the nine months. Management attributed the increase principally to loan growth and higher net charge-offs.
- Nonperforming assets were $3.3 million, or 0.27% of assets, versus $3.3 million, or 0.31%, at year-end. Nonaccrual loans were $3.26 million versus $3.31 million; past-due loans totaled $4.59 million versus $10.81 million.
- Available-for-sale securities were $186.3 million versus $194.6 million at year-end. Accumulated other comprehensive income rose to $4.34 million from $986,000, reflecting improved unrealized securities values.
Outlook, risks and notable items
- Management described local economic conditions as stable enough to support reasonable growth and emphasized community-focused organic growth. No quantified earnings or financial guidance was provided.
- The Federal Funds rate was reduced twice by 0.25% during Q3, to 2.00%. Management expected the rate cuts to negatively affect future net interest income.
- Credit risk includes substantial real-estate collateral exposure. Construction and land development, single-family residential and commercial real-estate loans represented approximately 11%, 36% and 33% of loans, respectively. Management cautioned that weaker economic or property-market conditions could impair loan performance and require additional reserves.
- The allowance for loan losses was $6.58 million, or 0.78% of loans, versus $6.45 million, or 0.80%, at year-end. Management considered it adequate, but noted that future economic or other changes could require additional provisions.
- The company reported $278.2 million of unfunded loan commitments and $2.8 million of standby letters of credit. It also disclosed $4.0 million of commitments to purchase available-for-sale securities.
- A North Carolina tax audit proposed approximately $1.4 million of adjustments for 2014–2016. The Bank paid $1.2 million in taxes and interest while contesting the matter; management believed a related guaranty agreement limited exposure to approximately $125,000.
- In October 2019, the board approved redemption of $5 million of outstanding trust preferred securities in December 2019.
- The company repurchased $2.49 million of stock under its $5 million repurchase authorization through September 30, 2019. The quarterly dividend was $0.14 per share.
- CECL implementation remained under evaluation. The company said a proposed delay for smaller reporting companies would make the effective date January 1, 2023, pending a final accounting update.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing’s forward-looking statements identify competition, interest rates, economic conditions, regulation and tax or accounting changes as risks.
Important facts for investors to verify
- Track net interest income and deposit pricing after the Q3 rate cuts, including the effect of the 0.83% FHLB advance and its convertible terms.
- Review loan growth, charge-offs, delinquency trends, risk grades and the adequacy of reserves, particularly across real-estate exposures.
- Reconcile the filing’s two different September 30 core-deposit figures: $889.8 million in one passage and $928.3 million (96.54% of deposits) in another.
- Monitor the outcome and final exposure in the North Carolina tax-credit dispute, including the guaranty’s coverage.
- Confirm completion and funding impact of the planned $5 million trust-preferred redemption and any remaining share-repurchase authorization.
- Assess the cash-flow-driven increase in liquidity alongside continued loan growth and the company’s reliance on wholesale funding.