Peoples Bancorp of North Carolina, Inc. — Q3 2017 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2017. The company operates Peoples Bank, a North Carolina community bank focused on deposits and commercial, real estate, construction and consumer lending. Financial statements are unaudited except the December 31, 2016 balance sheet.
Financial and operating results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Interest income | $10.7m | $10.0m | $31.2m | $29.7m |
| Net interest income | $10.0m | $9.2m | $29.4m | $27.3m |
| Non-interest income | $3.5m | $3.4m | $9.7m | $10.3m |
| Non-interest expense | $9.4m | $9.6m | $28.5m | $28.2m |
| Net earnings | $3.2m | $2.5m | $8.3m | $7.9m |
| Diluted earnings per share | $0.58 | $0.44 | $1.49 | $1.42 |
| Net yield on interest-earning assets | 4.20% | 3.89% | 4.15% | 3.97% |
Q3 return on average assets was 1.17% (0.90% prior year) and return on average equity was 11.14% (8.68%). For the nine months, these measures were 1.01% (0.99%) and 9.59% (9.29%), respectively. Cash dividends declared per share were $0.12 for Q3 and $0.36 year to date, versus $0.10 and $0.28 in 2016.
At September 30, 2017, total assets were $1.122bn, loans $747.4m, net loans $740.6m, available-for-sale securities $235.7m and deposits $901.6m. Compared with December 31, 2016, loans increased $23.6m, deposits $8.7m and total assets $33.6m; securities declined $14.2m. Cash and cash equivalents were $93.3m, up $23.2m since year-end.
Shareholders’ equity was $116.2m, or 10.4% of assets, versus $107.4m, or 9.9%, at year-end. Company capital ratios were 15.44% Tier 1, 16.24% total risk-based, 13.09% common equity Tier 1 and 11.93% Tier 1 leverage. The Bank was reported as well capitalized.
For the first nine months, operating cash flow was $14.3m, investing cash flow was negative $14.7m and financing cash flow was $23.6m. Cash increased $23.2m to $93.3m. The allowance for loan losses was $6.8m, or 0.92% of loans, compared with $7.6m, or 1.04%, at year-end.
Material changes and management commentary
- Q3 net interest income rose $0.9m year over year, reflecting loan growth and higher loan yields, alongside lower interest expense as average FHLB borrowings and time deposits declined. The average yield on earning assets rose to 4.45% from 4.23%; the average rate on interest-bearing liabilities fell to 0.37% from 0.46%.
- Year-to-date net interest income increased $2.1m. Non-interest income decreased $0.6m, principally because 2016 included a $0.3m securities gain and because service charges and mortgage banking income were lower. Non-interest expense increased $0.3m, with higher compensation and advertising partly offset by lower professional fees and occupancy costs.
- The provision for loan losses was a credit of $0.2m in Q3 and $0.4m year to date, compared with credits of $0.4m and $1.1m in the prior-year periods. Management attributed the smaller credits primarily to loan growth.
- Loans were up $2.4m during Q3. The quarter included an $8.5m payoff of a syndicated participation; the Bank held no syndicated loan participations at quarter-end. Unfunded construction commitments rose to $44.2m from $31.0m at June 30, 2017.
- Management said local businesses were growing and investing, but uncertainty in local, national and international markets continued to limit activity. It highlighted interest-rate changes, economic conditions, competition and credit quality as factors affecting results. No quantified earnings or growth guidance was provided.
Risks, contingencies and unusual items
- Non-accrual loans increased to $4.9m, or 0.66% of loans, from $3.8m, or 0.53%, at year-end. Non-performing assets were $4.9m, or 0.44% of assets, versus $4.1m, or 0.38%. Past-due loans totaled $6.2m; no loans were 90 days past due and still accruing. Real estate is a substantial share of the portfolio, including commercial real estate at approximately 33% of loans and construction and land development at approximately 10%.
- The Bank’s Consent Order concerning Bank Secrecy Act compliance was terminated effective August 30, 2017. The Bank had consented to the order without admitting or denying violations or unsafe practices.
- On October 26, 2017, the Bank repaid its remaining $20.0m of FHLB borrowings. The company expects a $508,000 prepayment penalty in Q4 2017, partly offset by approximately $150,000 of lower Q4 interest expense.
- Core deposits were $879.6m, 98% of deposits. The liquidity ratio was 26.46%, against a 10% policy minimum. Off-balance-sheet commitments included $218.3m to extend credit and $3.3m of standby letters of credit; actual funding needs may be lower because commitments may not be drawn.
- The company identified no material pending legal proceedings other than routine matters. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Management was assessing new accounting standards, including revenue recognition, leases and expected credit losses. It anticipated no material revenue-recognition policy change but expected additional disclosures; the lease standard could add right-of-use assets and lease liabilities, and the credit-loss standard’s ultimate effect remained under evaluation.
Important facts for investors to verify
- Whether rising non-accrual loans and past-due balances lead to higher charge-offs, provisions or allowance needs.
- Q4 impact of the FHLB repayment penalty and associated interest-expense savings.
- Loan and construction-commitment growth, including the quality and concentration of real-estate exposures.
- Whether net interest margin holds up as market rates and deposit costs change.
- Ongoing BSA compliance following termination of the Consent Order, and the company’s implementation plans for new accounting standards.