Peoples Bancorp of North Carolina, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018 unless otherwise noted. The company is a North Carolina bank holding company focused on community banking, with operations concentrated in North Carolina. Dollar amounts below are in millions unless stated otherwise.
Financial performance
- Earnings: Net earnings were $3.667 million, up from $3.303 million in Q1 2018. Basic and diluted EPS were $0.61, versus $0.55. Annualized return on average assets was 1.36% (1.24% prior year); return on average equity was 11.86% (11.49%).
- Interest income and margins: Interest income was $12.183 million versus $10.759 million; interest expense rose to $0.757 million from $0.467 million. GAAP net interest income increased to $11.426 million from $10.292 million. Tax-equivalent net interest margin was 4.66%, up from 4.29%; net interest spread was 4.50%, up from 4.20%.
- Noninterest income and expense: Noninterest income was $4.120 million, compared with $3.736 million, including a $0.231 million gain on securities sales. Noninterest expense rose to $10.916 million from $10.042 million, mainly reflecting higher salaries and benefits. Provision for loan losses was $0.178 million versus $0.031 million. Income-tax expense was $0.785 million; the effective tax rate was 17.63%, compared with 16.49%.
- Cash flow: Operating activities provided $4.431 million; investing activities used $9.027 million; financing activities provided $12.440 million. Cash and cash equivalents increased $7.844 million to $51.214 million.
Financial position, liquidity, and credit
- Assets and lending: Total assets were $1,111.1 million, up from $1,093.3 million. Loans were $823.6 million, up from $804.0 million; net loans were $817.0 million. Available-for-sale securities were $184.4 million, down from $194.6 million.
- Deposits and funding: Deposits increased to $908.1 million from $877.2 million. Core deposits were $887.6 million, or 97.74% of deposits. Repurchase-agreement funding declined to $41.2 million from $58.1 million. No FHLB or Federal Reserve borrowings were outstanding at quarter-end. Junior subordinated debentures were $20.6 million; the filing describes them as floating-rate obligations tied to three-month LIBOR.
- Liquidity: The Bank’s liquidity ratio was 15.48%, above its 10% policy minimum, versus 16.09% at year-end. Remaining FHLB line availability was $91.6 million; the Bank also had capacity to purchase up to $82.5 million of overnight federal funds. Unfunded commitments to extend credit were $270.1 million, with $3.3 million of standby letters of credit.
- Credit quality: The allowance for loan losses was $6.561 million, or 0.80% of loans, versus $6.445 million and 0.80% at year-end. Nonperforming assets were $2.8 million (0.25% of assets), down from $3.3 million (0.31%); nonaccrual loans were 0.34% of loans versus 0.41%. There were no loans 90 or more days past due and still accruing. Management attributed the higher year-over-year provision principally to loan growth.
- Capital: Shareholders’ equity was $126.6 million, or 11.39% of assets. Company Tier 1, total risk-based, common equity Tier 1, and Tier 1 leverage ratios were 15.63%, 16.33%, 13.47%, and 13.27%, respectively. The Bank was reported as well capitalized.
Material changes and notable items
- Loans grew $19.5 million and deposits grew $30.9 million from year-end, while available-for-sale securities declined $10.2 million.
- Year-over-year net interest income benefited from higher average loan balances and yields; average loans rose $49.5 million and their average yield increased to 5.28% from 4.80%. Higher funding costs partly offset the benefit: the average rate on interest-bearing liabilities rose to 0.47% from 0.28%.
- The company adopted lease accounting on January 1, 2019, recording right-of-use assets and lease liabilities of approximately $4.4 million at adoption. Quarter-end balances were $4.2 million each; management reported no material impact on results or financial position.
- The Board authorized a $5 million share repurchase program in February. Approximately $152,000, or 5,518 shares, had been repurchased under the program by March 31. The company also declared $0.14 per share in dividends, versus $0.13 in Q1 2018.
Outlook, risks, and contingencies
- No specific earnings, revenue, or growth guidance is provided. Management described local economic conditions as stable enough for reasonable growth, cited a continued community-banking focus, and said prior Federal Funds rate increases had benefited net interest income and should continue to do so. These statements are forward-looking and not assurances of future results.
- Key stated risks include competition, interest-rate changes, weaker local or broader economic conditions and resulting credit deterioration, and legislative, regulatory, tax, or accounting changes. The loan portfolio has substantial real-estate exposure; management highlighted sensitivity to property values, borrower income, construction costs, and refinancing conditions.
- Tax matter: North Carolina’s Department of Revenue proposed approximately $1.4 million of tax, penalties, and interest relating to disputed credits for 2014–2016. The Bank intends to challenge the proposed adjustments. Management believes a guaranty agreement limits its exposure to approximately $150,000.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. It was still evaluating the expected effect of the upcoming CECL credit-loss standard, effective January 1, 2020.
Important facts for investors to verify
- Whether loan growth and improved net interest margin persist as deposit and other funding costs change.
- Credit performance in real-estate and Banco de la Gente nontraditional mortgage loans, and the adequacy of the allowance as CECL implementation approaches.
- The outcome and ultimate exposure of the North Carolina tax-credit dispute and related guaranty.
- Liquidity and capital ratios, including the effect of loan growth, off-balance-sheet commitments, dividends, and further share repurchases.
- The sustainability of Q1 earnings contributions from the securities-sale gain and the increase in noninterest expenses.