Peoples Bancorp of North Carolina, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are compared with December 31, 2012. The consolidated interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income | $7.64 million | $8.14 million in Q1 2012 |
| Provision for loan losses | $1.05 million | $2.05 million in Q1 2012 |
| Net earnings | $1.76 million | $1.66 million in Q1 2012 |
| Net earnings available to common shareholders; diluted EPS | $1.60 million; $0.29 | $1.31 million; $0.24 in Q1 2012 |
| Non-interest income / expense | $3.43 million / $7.74 million | $3.38 million / $7.27 million in Q1 2012 |
| Net interest margin | 3.52% tax-equivalent; net interest spread 3.35% | 3.44% tax-equivalent; spread 3.23% in Q1 2012 |
| Total assets | $1.018 billion | $1.014 billion at Dec. 31, 2012 |
| Loans, gross | $610.0 million | $620.0 million at Dec. 31, 2012 |
| Deposits | $783.8 million | $781.5 million at Dec. 31, 2012 |
| Cash and cash equivalents | $72.4 million | $48.8 million at Dec. 31, 2012 |
| Shareholders’ equity | $98.3 million | $97.7 million at Dec. 31, 2012 |
Q1 operating cash flow was $8.0 million; investing activities provided $10.7 million and financing activities provided $4.8 million. Cash and cash equivalents increased $23.5 million during the quarter.
Reported funding included $70.0 million of FHLB borrowings, $20.6 million of junior subordinated debentures, and $37.4 million of securities sold under repurchase agreements. The Bank’s liquidity ratio was 32.82%, above its 10% policy minimum; core deposits were $656.0 million, or 84% of deposits. The Bank’s total risk-based capital ratio was 17.60%, and it was classified as well capitalized.
Material changes and asset quality
- Common earnings and diluted EPS improved year over year, chiefly because the loan-loss provision fell. Lower net interest income and higher operating expenses partly offset that benefit.
- Interest income declined 12% year over year, reflecting lower average loan and securities balances and a lower earning-asset yield. Interest expense fell 34% as funding costs and certificates of deposit declined. Management noted that persistently low interest rates continued to pressure earnings.
- Non-performing assets fell to $24.3 million, or 2.39% of assets, from $26.3 million, or 2.60%, at year-end. However, non-accrual loans increased to $19.7 million from $17.6 million, and rose to 3.22% of loans from 2.84%.
- The allowance for loan losses was $14.4 million, equal to 2.36% of loans, compared with 2.33% at year-end. Troubled debt restructurings were $21.7 million, down from $23.9 million.
- Accumulated other comprehensive income declined by $0.9 million during the quarter, primarily reflecting unrealized losses on available-for-sale securities. Management characterized debt-security losses as temporary, attributing them to interest-rate changes.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said economic conditions showed some signs of improvement but remained difficult, citing elevated unemployment, depressed real-estate prices, and higher-than-normal loan defaults in its markets. It expects low interest rates to continue to weigh on net interest income. Risks highlighted include credit quality and real-estate collateral values, interest-rate changes, competition, economic conditions, and regulatory and legislative changes. The company also noted uncertainty over the implementation and effects of the Dodd-Frank Act.
As of March 31, 2013, unfunded commitments to extend credit were $131.2 million and standby letters of credit were $3.4 million. On April 2, 2013, the Bank received notice of a proposed class-action lawsuit alleging improper assessment and collection of overdraft fees. The suit seeks fee refunds, treble damages, attorneys’ fees, and injunctive relief. The Bank disputes the allegations and intends to defend the case.
Management reported effective disclosure controls and no material subsequent events through issuance of the financial statements. It said there were no immediate plans to repurchase the remaining Series A preferred shares.
Important facts for investors to verify
- Whether non-accrual loans and credit-quality trends improve, particularly in construction and land development and the Banco de la Gente stated-income mortgage portfolio.
- Whether lower loan-loss provisions remain sustainable given the increase in non-accrual loans and the level of restructured loans.
- How deposit pricing, low rates, and loan and securities balances affect net interest income and margin in subsequent quarters.
- Potential financial or operational effects of the overdraft-fee class action and any material developments in the case.
- Ongoing liquidity and capital strength, including the Bank’s reliance on wholesale funding and available borrowing capacity.