Peoples Bancorp of North Carolina, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Figures are consolidated; dollar amounts are in millions unless stated otherwise.
Business context
The company is a North Carolina community bank holding company. Peoples Bank attracts deposits and lends primarily in North Carolina, with a substantial real-estate-secured loan portfolio. Banco de la Gente serves Latino customers through banking offices and loan production offices.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $9.154 | $9.073 | $27.253 | $26.071 |
| Provision for loan losses | $(0.360) credit | $0.235 expense | $(1.108) credit | $0.193 expense |
| Non-interest income | $3.414 | $3.266 | $10.309 | $9.808 |
| Non-interest expense | $9.598 | $8.669 | $28.198 | $25.754 |
| Net earnings | $2.458 | $2.493 | $7.875 | $7.445 |
| Diluted EPS | $0.44 | $0.45 | $1.42 | $1.32 |
- Q3 return on average assets was 0.90% and return on average equity was 8.68%; year-to-date figures were 0.99% and 9.29%, respectively.
- Net interest spread was 3.77% in Q3 versus 3.90% a year earlier; net yield on interest-earning assets was 3.89% versus 4.02%. Year-to-date net yield was 3.97% versus 3.92%.
- At September 30, total assets were $1,097.6; loans were $713.0, net loans $705.0, and available-for-sale securities $262.4. Total deposits were $861.9 and shareholders’ equity was $110.6.
- Cash and cash equivalents were $82.8, up from $39.8 at year-end 2015. For the first nine months, operating cash flow was $12.4, investing cash flow $(18.6), and financing cash flow $49.3.
- Borrowings included $43.5 of FHLB advances, $50.9 under repurchase agreements, and $20.6 of junior subordinated debentures. FHLB advances mature in 2018; the debentures accrue at three-month LIBOR plus 163 basis points and mature in 2036.
- The Bank’s liquidity ratio was 29.27%, above its 10% policy minimum. Core deposits were $828.1, or 96% of deposits; available FHLB line capacity was $42.5. Unfunded credit commitments were $189.6 and standby letters of credit were $3.8.
- The Bank was considered well capitalized. Company ratios included 15.05% Tier 1 capital, 16.04% total risk-based capital, 12.62% common equity Tier 1, and 11.38% Tier 1 leverage.
Changes versus comparable periods
- Year-to-date net earnings rose to $7.9 from $7.4, primarily reflecting higher net interest and non-interest income and a loan-loss provision credit; higher operating expenses partly offset the improvement. Q3 net earnings declined slightly from $2.493 to $2.458.
- Year-to-date net interest income increased $1.182, supported by loan growth and lower interest expense. Average loan balances increased, but Q3 loan yield fell to 4.59% from 4.75%, and overall Q3 net yield on earning assets declined.
- Year-to-date non-interest expense rose $2.444, including a $1.0 increase in professional fees, mainly consulting costs associated with the regulatory Order. Non-interest income increased, including $0.324 of securities-sale gains and higher mortgage banking income.
- Loans increased $23.9 from December 31, 2015; deposits rose $29.8. Non-accrual loans decreased to $4.8 from $8.4, and nonperforming assets fell to $4.8 (0.44% of assets) from $9.2 (0.88%). The allowance declined to $8.0, or 1.13% of loans, from $9.6, or 1.39%.
- Repurchase-agreement funding increased $23.0 from year-end. The company repurchased 92,738 shares for approximately $2.0 million under its 2016 repurchase program through September 30.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management described local businesses as growing and investing, while noting that uncertainty in local, national and international markets continued to limit activity. It emphasized liquidity, interest-rate exposure management, and active asset-quality monitoring.
- An FDIC and North Carolina banking regulator Consent Order issued August 31, 2015 requires corrective actions related to Bank Secrecy Act compliance. The Bank reported progress and expected to meet required timelines, but continuing compliance costs are expected. The Order restricts acquisitions, new branches, and stock repurchases until modified, terminated, suspended, or set aside.
- Credit risks include real-estate concentration, construction and commercial property exposure, borrower and collateral risk, and economic conditions. The company notes that future economic or portfolio changes could require additional loan-loss provisions. A substantial share of loans is secured by real estate; commercial real estate represented approximately 34% of loans.
- Management highlighted prolonged low rates and competition for creditworthy borrowers as pressures on loan yields and margins; deposit costs have limited room to fall. The company had no interest-rate derivatives outstanding at quarter-end.
- The company identified interest-rate, competition, economic, regulatory, legal, and tax changes as forward-looking risks. Management reported disclosure controls effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, regulator feedback, remaining requirements, costs, and business restrictions under the BSA Consent Order.
- Whether the loan-loss allowance remains adequate as loans grow, and trends in non-accruals, watch/substandard credits, and real-estate collateral values.
- Drivers of higher operating expenses, particularly consulting and professional fees, and the sustainability of the year-to-date provision credit.
- Deposit mix, repurchase-agreement funding, available borrowing capacity, and liquidity under changing funding conditions.
- Interest-rate sensitivity and the effect of rate changes on asset yields, funding costs, and net interest margin.
- Capital and dividend capacity, and the status of the 2016 repurchase program; the filing reports approximately $16,180 of remaining authorization at September 30.