Peoples Bancorp of North Carolina, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company is a North Carolina community bank holding company; its principal business is gathering deposits and making commercial, real estate, construction, and consumer loans. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $9.00 | $8.32 | $18.10 | $17.00 |
| Noninterest income | $3.57 | $3.30 | $6.90 | $6.54 |
| Net earnings | $2.96 | $2.62 | $5.42 | $4.95 |
| Diluted earnings per share | $0.53 | $0.47 | $0.97 | $0.88 |
| Noninterest expense | $9.11 | $8.34 | $18.60 | $17.09 |
| Net yield on interest-earning assets, tax-equivalent | 3.99% | 3.77% | 4.00% | 3.87% |
- Net earnings rose about 13% year over year in Q2 and 9% for the first half. Management attributed the improvement mainly to higher net interest income, larger credits to the loan-loss provision, and higher noninterest income.
- Q2 net interest income increased about 8%, supported by loan growth and lower interest expense. Average loan yield was 4.63% in Q2 versus 4.46% a year earlier; the average rate on interest-bearing liabilities declined to 0.47% from 0.49%.
- The provision was a credit of $0.53 million in Q2 and $0.75 million for the first half, versus credits of $0.21 million and $0.04 million, respectively, in 2015. Management cited lower historical loss rates in the allowance model.
Financial position, cash flow, and liquidity
- At June 30, total assets were $1,070.3 million, up from $1,038.5 million at December 31, 2015. Loans were $702.0 million, up from $689.1 million; deposits were $841.4 million, up from $832.2 million.
- Cash and cash equivalents were $64.7 million, compared with $39.8 million at year-end. For the first half, operating cash flow was $8.9 million; investing activities used $7.1 million and financing activities provided $23.1 million.
- Allowance for loan losses was $8.54 million, or 1.22% of loans, versus $9.59 million, or 1.39%, at year-end. Nonperforming assets were $6.2 million (0.58% of assets), down from $9.2 million (0.88%); nonaccrual loans were $6.0 million, or 0.85% of loans. No loans were 90 days past due and still accruing.
- Shareholders’ equity was $111.8 million, or 10.4% of assets. Company capital ratios included a 15.38% Tier 1 risk-based ratio, 16.45% total risk-based ratio, 12.89% common equity Tier 1 ratio, and 11.68% Tier 1 leverage ratio. The Bank was reported as well capitalized.
- Borrowings included $43.5 million of FHLB advances, $42.7 million under repurchase agreements, and $20.6 million of junior subordinated debentures. FHLB advances mature in 2018; the debentures bear a floating rate and mature in 2036.
- Core deposits were $810.5 million, or 96% of deposits. The Bank’s liquidity ratio was 28.70%, against a 10% policy minimum; remaining FHLB line availability was $42.6 million. Unfunded credit commitments were $185.7 million and standby letters of credit were $3.9 million.
Material changes, outlook, and risks
- Noninterest income benefited from a $0.32 million securities-sale gain in Q2, with no comparable gain in 2015. The six-month increase also reflected higher mortgage banking income.
- Noninterest expense increased 9% in Q2 and 9% for the first half. Drivers included staffing, occupancy and platform upgrades, and professional fees; first-half consulting costs included approximately $1.0 million associated with the regulatory order. Q2 expense also included a $0.28 million legal-fee reimbursement from the insurer.
- The Bank remains subject to an August 2015 FDIC and North Carolina regulator Consent Order concerning Bank Secrecy Act compliance. It requires corrective measures and regulatory review. The order limits acquisitions, new branches, and allocation of funds to stock repurchases while in effect; the Bank said it was making progress and expected to meet required timelines.
- The Bank’s loan book has material real-estate exposure: commercial real estate was about 33% of loans, single-family residential about 39%, and construction and land development about 9%. Management identified property values, borrower repayment capacity, local economic conditions, interest rates, competition, and regulatory changes as risks.
- The overdraft-fee lawsuit was affirmed dismissed by the North Carolina Court of Appeals, and the trial court dissolved the appellate stay in June 2016. Management reported no material subsequent events.
- No formal earnings or financial guidance is provided. Management described local businesses as growing and investing, while noting that economic uncertainty and persistently low interest rates continued to constrain markets and net interest margin.
- The company authorized a new $2 million stock repurchase program in Q2 but reported no purchases under that program by June 30. Separately, it repurchased 1,795 shares for its deferred compensation plan using participant contributions.
Important facts for investors to verify
- Progress, costs, and any restrictions arising from the Bank Secrecy Act Consent Order.
- Whether the unusually large provision credits and lower allowance remain appropriate as loans grow and portfolio conditions change.
- Credit performance in commercial real estate, construction, and Banco stated-income residential lending, including collateral values and delinquencies.
- Repeatability of earnings excluding the securities gain and insurance reimbursement, and the trajectory of operating expenses.
- Current liquidity and funding mix, including growth in repurchase-agreement funding and the availability of FHLB capacity.
- Interest-rate sensitivity: management said prolonged low rates pressure margins, and the company had $293.1 million in prime-indexed variable-rate loans and $186.4 million with rate floors.