Peoples Bancorp of North Carolina, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Community bank holding company serving North Carolina markets, with lending concentrated in real estate, commercial and consumer loans. This unaudited quarterly report covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016.
Key financial metrics
- Earnings: Net interest income was $9.47 million, up from $9.10 million year over year. Net earnings were $2.21 million versus $2.45 million; diluted EPS was $0.40 versus $0.44. Annualized return on assets was 0.82% and return on equity was 8.25%.
- Interest performance: Net interest margin was 4.11%, compared with 4.02%; net interest spread was 4.02%, compared with 3.88%. Interest expense fell to $598,000 from $809,000.
- Other income and expenses: Non-interest income declined to $2.88 million from $3.32 million. Non-interest expense increased to $9.80 million from $9.49 million.
- Cash flow: Operating cash flow was $6.67 million versus $6.41 million. Investing activities used $9.88 million, principally reflecting $12.10 million of net loan growth and $2.65 million of premises and equipment purchases. Financing provided $20.57 million. Cash and cash equivalents rose $17.36 million to $87.45 million.
- Balance sheet and funding: Total assets were $1.11 billion, up from $1.09 billion; loans were $735.9 million, up from $723.8 million; deposits were $908.4 million, up from $892.9 million. Shareholders’ equity was $110.1 million, or 9.9% of assets.
- Debt and liquidity: FHLB borrowings were $20.0 million, repurchase-agreement funding was $42.2 million, and junior subordinated debentures were $20.6 million. Core deposits totaled $883.4 million, or 97% of deposits. The bank’s liquidity ratio was 27.14%, versus 24.78% at year-end; reported minimum policy level was 10%.
- Credit quality and capital: The allowance for loan losses was $7.26 million, or 0.99% of loans, versus $7.55 million, or 1.04%. Nonperforming assets were $3.6 million, or 0.32% of assets, compared with $4.1 million, or 0.38%, at year-end. The bank was reported as well capitalized; its total risk-based capital ratio was 16.03%.
Material changes versus comparable periods
- Net earnings fell about 10% year over year, as lower non-interest income and higher operating expenses more than offset higher net interest income and a larger credit to the loan-loss provision.
- Non-interest income declined mainly because of a $283,000 loss/write-down on other real estate and lower service charges and fees. Non-interest expense rose primarily from salaries and benefits and other expenses; lower professional fees partly offset the increases.
- Loan growth was $12.1 million from year-end, while total deposits grew $15.5 million. Available-for-sale securities declined to $244.9 million from $249.9 million.
- Non-accrual loans decreased to $3.58 million from $3.83 million. Other real estate fell to zero from $283,000 at year-end.
Outlook, commentary, risks and unusual items
- No numerical earnings or operating guidance is provided. Management said local businesses were growing and investing, while uncertainty in local, national and international markets continued to limit activity. It noted that low interest rates constrained loan yields and that deposit costs had limited room to fall; recent Federal Reserve rate increases were viewed as helpful.
- The bank remains subject to a 2015 FDIC and North Carolina banking regulator Consent Order concerning Bank Secrecy Act compliance. Management reported progress and expected to complete required actions on schedule. Corrective-action costs were not expected to materially affect results or financial position, but the Order restricts acquisitions, new branches and stock repurchases until modified or terminated.
- Credit risks include the concentration of lending in real estate, including construction and commercial real estate, and the distinct risks of the former Banco stated-income residential mortgage portfolio. Management said the allowance was adequate, but noted that weaker economic or other conditions could require future additions.
- Off-balance-sheet commitments included $195.9 million to extend credit and $3.7 million of standby letters of credit; actual funding needs may be lower. No interest-rate derivatives were outstanding at March 31, 2017.
- The company reported effective disclosure controls and no material change in internal control over financial reporting. Management reported no material subsequent events.
Important facts for investors to verify
- Progress toward satisfying the BSA Consent Order, associated costs, and the effect of its restrictions on growth and capital returns.
- Whether loan growth and credit performance remain sound, especially in commercial real estate, construction, and Banco stated-income loans; monitor delinquencies, non-accruals and allowance coverage.
- Whether core deposit growth, liquidity and funding costs remain adequate as rates and competition change.
- Drivers of the decline in earnings, including personnel and other expenses, fee income, and recurring versus unusual real-estate charges.
- Capital ratios and the remaining capacity under the stock repurchase program; the filing reports approximately $16,180 of authorization remaining.