Peoples Bancorp of North Carolina, Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Community bank holding company operating Peoples Bank in North Carolina. This unaudited quarterly report covers the three months ended March 31, 2015; balance-sheet comparisons are against audited December 31, 2014 balances, and earnings and cash flows are compared with Q1 2014. Amounts below are in U.S. dollars.
Financial results and condition
- Earnings: Net earnings were $2.328 million, down 9.7% from $2.578 million; diluted EPS was $0.41 versus $0.46. Annualized return on average assets was 0.91% (1.03% in Q1 2014); return on average equity was 9.32% (11.92%).
- Interest income and margins: Net interest income increased 3.0% to $8.683 million from $8.434 million. Tax-equivalent net yield on average earning assets rose to 3.97% from 3.88%; net interest spread rose to 3.84% from 3.75%. Average earning-asset yield edged down to 4.34% from 4.36%, while average cost of interest-bearing liabilities declined to 0.50% from 0.61%.
- Other income and expenses: Non-interest income was $3.245 million, up from $2.841 million; non-interest expense was $8.748 million, up from $8.123 million. Salaries and benefits increased $525,000. The effective tax rate was 23%, compared with 26%.
- Credit costs and asset quality: Loan-loss provision was $173,000, versus a $349,000 provision credit in Q1 2014. The allowance was $10.843 million, 1.64% of loans, versus $11.082 million, or 1.70%, at year-end. Nonperforming assets were $12.4 million, or 1.18% of assets, compared with $12.7 million, or 1.22%, at year-end. Non-accrual loans declined to $8.9 million from $10.7 million; other real estate increased to $3.4 million from $2.0 million. No loans 90 days past due were still accruing.
- Loans and deposits: Loans were $660.5 million, up $8.6 million from year-end; management attributed growth primarily to commercial loans not secured by real estate. Deposits rose to $830.0 million from $814.7 million. Core deposits were $786.2 million, or 95% of deposits. Total assets were $1.049 billion and shareholders’ equity was $101.5 million, or 9.7% of assets.
- Debt and liquidity: FHLB borrowings were $50.0 million, repurchase-agreement funding was $38.7 million (down from $48.4 million), and junior subordinated debentures were $20.6 million. Cash and cash equivalents were $67.5 million, versus $69.1 million at year-end. The Bank’s liquidity ratio was 32.05%, above its 10% policy minimum; remaining FHLB line availability was $25.1 million. Wholesale funding was 5.52% of assets.
- Cash flow: Operating activities provided $4.7 million, compared with $7.2 million used in Q1 2014. Investing activities used $11.5 million, while financing activities provided $5.2 million. Cash and cash equivalents declined $1.6 million during the quarter.
- Capital: The Bank was considered well capitalized. Company common equity Tier 1, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 12.45%, 15.07%, 16.36%, and 11.12%, respectively.
Material changes versus the prior comparable period
- Net interest income improved as average loan balances grew and funding costs fell, but net earnings decreased due to higher credit provision and operating expenses.
- Average loans increased $37.2 million year over year to $654.7 million; average available-for-sale securities decreased $26.9 million to $272.1 million. Average certificates of deposit declined $33.1 million.
- Non-interest income benefited from higher mortgage banking income and a swing in other-real-estate results: an $87,000 gain in Q1 2015 versus $162,000 in losses and write-downs in Q1 2014.
- Net charge-offs increased $238,000 year over year, according to management. Past-due loans fell to $14.6 million from $23.8 million at year-end, and troubled debt restructurings declined to $5.5 million from $15.0 million.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or financial guidance was provided. Management described 2015 economic conditions as showing signs of improvement, but characterized local business conditions as uncertain given unemployment above historical norms and home prices below pre-crisis levels. The company expects growth in its local and nearby markets.
- Management said the Federal Funds Rate had remained at 0.25% since December 2008 and that historically low rates continued to weigh on earnings and could pressure future net interest income.
- Credit exposure is concentrated in North Carolina markets and real-estate-secured lending. Management highlighted sensitivity to property values, borrower income and business performance; construction and land development represented about 9% of loans, single-family residential about 38%, and commercial real estate about 34%.
- Management considered the allowance adequate, but noted that adverse economic or other changes could require future additions and reduce earnings. The allowance estimate depends on judgment, collateral values, economic conditions and loan performance.
- Unfunded commitments to extend credit were $170.9 million and standby letters of credit were $4.1 million; actual cash needs may be lower if commitments are not drawn.
- A putative class-action lawsuit alleges improper overdraft-fee practices and seeks refunds, treble damages, fees and injunctive relief. The court had not ruled on the Bank’s summary-judgment motion or class-certification request. The Bank disputes the claims and intends to defend them.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material subsequent events through issuance of the statements.
Most important facts for investors to verify
- Whether loan growth, delinquencies, non-accrual loans and charge-offs continue to support the current allowance level.
- Whether lower funding costs can continue to offset pressure on asset yields and the low-rate environment.
- Drivers and persistence of the rise in compensation and other operating expenses, and of gains from other real estate.
- Deposit mix, wholesale-funding access, liquidity availability and the potential drawdown of off-balance-sheet commitments.
- Developments in the overdraft-fee litigation, including any rulings on summary judgment or class certification.
- Capital ratios and dividend or repurchase capacity as Basel III requirements phase in.