Peoples Bancorp of North Carolina, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Consolidated figures are unaudited unless otherwise noted; dollar amounts are in millions except per-share data. The company is a North Carolina community bank holding company operating Peoples Bank, including four Banco de la Gente offices.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $8.316 | $8.491 | $16.999 | $16.925 |
| Provision for loan losses | $(0.214) credit | $0.067 expense | $(0.041) credit | $(0.282) credit |
| Non-interest income | $3.297 | $3.110 | $6.542 | $5.952 |
| Non-interest expense | $8.337 | $8.067 | $17.085 | $16.191 |
| Net earnings | $2.624 | $2.551 | $4.952 | $5.130 |
| Diluted EPS | $0.47 | $0.45 | $0.88 | $0.91 |
Q2 earnings rose 3% year over year, helped by the loan-loss provision credit and higher non-interest income, partly offset by lower net interest income and higher expenses. First-half earnings declined 3%; the smaller provision credit and higher expenses more than offset higher non-interest income and slightly higher net interest income. Cash dividends declared were $0.06 per share for Q2 and $0.12 for the first half, versus $0.04 and $0.08, respectively, in 2014.
Q2 net interest spread was 3.65% versus 3.75%, and net yield on interest-earning assets was 3.77% versus 3.88%. First-half spread was 3.74% versus 3.75%, and net yield was 3.87% versus 3.88%. Average loan yields declined year over year: 4.46% versus 4.85% in Q2 and 4.58% versus 4.86% for the first half. Lower funding costs partly offset lower asset yields.
Financial condition, cash flow and capital
- At June 30, total assets were $1,037.2 million, down from $1,040.5 million at year-end 2014. Loans increased to $666.8 million from $651.9 million; deposits declined to $808.8 million from $814.7 million. Available-for-sale securities fell to $273.5 million from $281.1 million.
- Cash and cash equivalents were $55.7 million, down $13.4 million from year-end. First-half operating cash flow was $8.2 million; investing activities used $13.5 million and financing activities used $8.1 million.
- Funding included $50.0 million of FHLB borrowings, $48.3 million of repurchase agreements and $20.6 million of junior subordinated debentures. FHLB borrowings were unchanged from year-end; the debentures bear a floating rate and are due in 2036.
- Shareholders’ equity was $100.4 million, or 9.7% of assets. Company Tier 1, total risk-based, common equity Tier 1 and leverage ratios were 15.03%, 16.33%, 12.45% and 11.19%, respectively. The Bank was reported as well capitalized.
- Core deposits were $768.3 million, 95% of total deposits. The Bank’s liquidity ratio was 29.26%, above its 10% policy minimum; remaining FHLB line availability was $26.4 million. Wholesale funding was 5.56% of assets.
Material changes and asset quality
- Non-accrual loans declined to $7.6 million from $10.7 million at December 31, 2014; non-performing assets fell to $11.1 million, or 1.07% of assets, from $12.7 million, or 1.22%. The allowance was $10.4 million, 1.56% of loans, versus $11.1 million and 1.70% at year-end.
- Other real estate increased to $3.4 million from $2.0 million. Loans 90 days or more past due and still accruing were $0.1 million; there were none at year-end.
- Loan growth was concentrated partly in commercial loans not secured by real estate and commercial real estate. Real estate collateral supports a substantial share of the portfolio; commercial real estate was approximately 35% of loans, and construction and land development approximately 9%. Banco de la Gente stated-income residential loans were approximately 7%.
- First-half non-interest expense increased $0.9 million, principally from higher salaries and benefits and other costs including foreclosed-property expense, marketing and legal fees. Non-interest income benefited from mortgage banking and gains on other real estate.
- Unrealized losses on available-for-sale securities increased to $0.9 million from $0.4 million at year-end. Management attributed debt-security losses to interest-rate movements and considered them temporary. Other comprehensive income was negative $1.2 million after tax for the first half.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management described 2015 economic conditions as improving but still uncertain, citing unemployment above historical norms and home prices below pre-crisis levels. It noted that prolonged low interest rates pressure net interest income; the Federal Funds Rate had remained at 0.25% since December 2008. Management emphasized liquidity, interest-rate exposure management and active asset-quality monitoring.
Risks include competition, interest-rate changes, local and national economic conditions, credit deterioration, regulatory and legislative changes, and monetary and fiscal policy. Off-balance-sheet commitments included $177.3 million to extend credit and $4.2 million in standby letters of credit; actual funding needs may be lower because not all commitments will be drawn. A lawsuit over overdraft fees was dismissed with prejudice on summary judgment in June 2015; the plaintiff appealed, and the Bank said it would vigorously defend the case. No material subsequent events were reported.
The company repurchased $1.34 million of stock under its $2 million repurchase authorization through June 30, 2015. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track whether loan growth continues alongside non-accrual loans, past-due balances, charge-offs and the adequacy of the allowance.
- Assess the impact of lower loan yields and low interest rates on net interest income and margins, as well as the pace of deposit and funding-cost changes.
- Monitor the increase in other real estate and the size and performance of commercial real estate, construction and Banco de la Gente stated-income exposures.
- Review liquidity and cash trends, the availability and terms of funding sources, and potential draws on the $181.5 million of credit and standby commitments.
- Follow the overdraft-fee lawsuit appeal and any developments affecting the company’s capital, repurchases or dividends.
- Reconcile the filing’s conflicting Q2 return-on-equity disclosures: the results summary states 10.30%, while the capital-resources discussion states 9.32% for the quarter.