Peoples Bancorp of North Carolina, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2013. Amounts are in U.S. dollars unless otherwise noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $8.491 million | $7.537 million | $16.925 million | $15.178 million |
| Provision for loan losses | $67,000 | $773,000 | $(282,000) credit | $1.827 million expense |
| Non-interest income | $3.110 million | $3.309 million | $5.952 million | $6.736 million |
| Non-interest expense | $8.067 million | $7.979 million | $16.191 million | $15.717 million |
| Net earnings | $2.551 million | $1.633 million | $5.130 million | $3.391 million |
| Net earnings per common share | $0.45 | $0.26 | $0.91 | $0.55 |
Q2 net earnings increased about 56% year over year; first-half earnings rose about 51%. Management attributed the improvement mainly to higher net interest income and lower loan-loss provision, partly offset by lower non-interest income and higher expenses. Tax-equivalent net interest margin was 3.88% in Q2, compared with 3.40% a year earlier. Annualized return on average assets/equity was 1.00%/11.08% for Q2 and 1.01%/11.33% for the first half.
Financial position, cash flow, and liquidity
- At June 30, total assets were $1.048 billion, up from $1.035 billion at year-end. Loans were $633.3 million versus $621.0 million; deposits were $811.5 million versus $799.4 million.
- Cash and cash equivalents were $75.1 million, compared with $76.8 million at year-end. First-half operating cash flow was $7.2 million; investing activities used $9.5 million and financing activities provided $0.5 million. Cash declined $1.7 million during the period.
- Shareholders’ equity was $93.0 million, or 8.9% of assets, compared with $83.7 million, or 8.1%, at year-end. The increase reflected retained earnings and higher unrealized gains on securities.
- Debt and funding included $65.0 million of FHLB borrowings, $46.8 million in repurchase agreements, and $20.6 million of junior subordinated debentures. FHLB borrowings were unchanged from year-end.
- Core deposits were $699.1 million, or 86% of deposits. The Bank’s liquidity ratio was 35.55%, above its 10% policy minimum; remaining FHLB line availability was $23.4 million. Wholesale funding was 7.29% of assets.
- Company capital ratios were 14.80% Tier 1 risk-based, 16.11% total risk-based, and 10.69% Tier 1 leverage. The Bank was reported as well capitalized.
Material changes and credit quality
- Net loans grew, while the allowance for loan losses declined to $12.7 million from $13.5 million; allowance coverage was 2.00% of loans versus 2.17% at year-end. Non-accrual loans fell to $10.9 million from $13.8 million, and non-performing assets declined to $14.8 million from $16.4 million.
- Past-due loans totaled $13.7 million at June 30, down from $29.6 million at year-end. However, other real estate increased to $3.5 million from $1.7 million.
- Total troubled debt restructurings fell to $11.7 million from $21.9 million at year-end. The loan portfolio remains concentrated in real estate, including construction and land development loans of $59.8 million; management identifies real-estate values and local economic conditions as key credit exposures.
- The remaining 12,524 Series A preferred shares were redeemed on January 17, 2014 for approximately $12.5 million, reflected in first-half financing cash flows. The company reported no preferred dividends or accretion in 2014, versus $156,000 for Q2 2013 and $313,000 for first-half 2013.
Outlook, risks, and contingencies
- No specific earnings or financial guidance was provided. Management described 2014 economic trends as improving but said slow housing and employment recoveries and above-normal local unemployment continued to constrain the business. Management noted that prolonged low interest rates pressure earnings.
- Key disclosed risks include competition, interest-rate changes, deterioration in local economic conditions and loan collectibility, and legislative, regulatory, accounting, and tax changes. A substantial portion of loans is secured by real estate.
- Unfunded commitments to extend credit were $165.3 million; standby letters of credit were $3.5 million. Management said actual funding needs are likely to be materially below stated commitments.
- A putative class action alleges improper overdraft-fee assessment and collection, among other claims, and seeks refunds, treble damages, fees, and injunctive relief. In April 2014, the court denied the Bank’s motion for judgment on the pleadings; the case proceeded to further stages, including discovery and consideration of class certification. The Bank disputes the allegations and intends to defend the case.
- Management reported no material subsequent events, effective disclosure controls, and no material quarter changes in internal control over financial reporting. Newly issued accounting standards discussed were not expected to have a material impact.
Important facts for investors to verify
- Whether improvement in earnings is sustainable if credit-loss provisions normalize, given the first-half provision credit.
- Credit trends in construction and real estate lending, non-accrual loans, other real estate, and troubled debt restructurings.
- How interest-rate changes could affect net interest margin, deposit costs, and loan yields.
- Potential financial or operational effects of the overdraft-fee lawsuit, including any class-certification developments.
- Capacity to fund loan commitments while maintaining liquidity and capital levels.