Peoples Bancorp of North Carolina, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. The company is a North Carolina community bank holding company. This unaudited quarterly report covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless otherwise noted.
Key financial metrics
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $8.434 | $7.640 in Q1 2013 |
| Net earnings | $2.578; common EPS $0.46 | $1.758 net earnings; common EPS $0.29 in Q1 2013 |
| Net interest margin | 3.88% tax-equivalent net yield on average interest-earning assets | 3.52% in Q1 2013 |
| Net interest spread | 3.75% | 3.35% in Q1 2013 |
| Net cash from operating activities | $(7.219) | $8.021 in Q1 2013 |
| Cash and cash equivalents | $78.912 | $76.773 at December 31, 2013 |
| Total assets | $1,038.764 | $1,034.684 at December 31, 2013 |
| Loans, net of allowance | $605.062; gross loans $618.040 | $607.459 net; gross loans $620.960 at December 31, 2013 |
| Allowance for loan losses | $12.978, or 2.10% of gross loans | $13.501, or 2.17% at December 31, 2013 |
| Deposits | $810.535 | $799.361 at December 31, 2013 |
| Borrowings | $65.000 FHLB; $43.319 repurchase agreements; $20.619 junior subordinated debentures | $65.000; $45.396; and $20.619, respectively, at December 31, 2013 |
| Shareholders’ equity | $88.411, or 8.5% of assets | $83.719 at December 31, 2013 |
| Capital ratios, company | Tier 1 risk-based 15.09%; total risk-based 16.40%; Tier 1 leverage 10.52% | 14.83%; 16.14%; and 10.08%, respectively, at December 31, 2013 |
Material changes versus the prior comparable period
- Net earnings rose to $2.578 million from $1.758 million. Management attributed the improvement mainly to higher net interest income and a lower loan-loss provision, partly offset by lower non-interest income and higher operating expense.
- Net interest income increased 10% to $8.434 million. Interest income rose 5%, while interest expense declined 24%, reflecting lower funding costs and reduced average certificates of deposit.
- The loan-loss provision was a $349,000 credit, compared with $1.053 million of expense in Q1 2013. Net charge-offs were $174,000 versus $1.068 million.
- Non-interest income declined to $2.841 million from $3.427 million, notably because mortgage banking income and securities-sale gains were lower. Non-interest expense increased to $8.123 million from $7.738 million.
- Non-accrual loans fell to $11.568 million from $13.836 million at year-end; non-performing assets were $14.9 million, or 1.44% of assets, versus $16.4 million, or 1.58%. Other real estate increased to $3.282 million from $1.679 million.
- Other comprehensive income was $2.341 million, driven by an increase in the after-tax unrealized gain on available-for-sale securities; Q1 2013 had a $902,000 loss.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific earnings or financial guidance. Management described local economic conditions as improving but still challenging, citing unemployment above historical norms and home prices below pre-crisis levels. Management said persistently low interest rates continue to pressure earnings.
- Credit and concentration risks: A substantial share of loans is real-estate collateralized. Construction and land development loans were $61.2 million; commercial real estate loans were about 34% of the loan portfolio. Management said the Q1 provision credit reflected improving credit indicators and declining construction lending, but cautioned that adverse economic changes or regulatory review could require future allowance increases.
- Liquidity and commitments: Core deposits were $694.2 million, or 86% of deposits. The liquidity ratio was 36.45%, against a 10% policy minimum; remaining FHLB line availability was $24.6 million. Unfunded credit commitments were $152.4 million and standby letters of credit were $3.6 million; actual draws may be lower. Wholesale funding was 7.51% of assets. Large-denomination deposits may be more rate-sensitive, and brokered funding access could be restricted if the Bank ceased to be well capitalized.
- Capital and debt: The Bank was reported well capitalized, and management said current capital levels exceeded Basel III requirements effective January 1, 2015. FHLB advances mature from 2014 to 2019; junior subordinated debentures mature in 2036 and pay a floating rate tied to three-month LIBOR.
- Unusual balance-sheet/cash-flow item: The remaining Series A preferred shares were redeemed on January 17, 2014. The $12.6 million payment had been accrued at year-end; the filing’s cash-flow statement reports operating cash use of $7.2 million, including a $9.7 million decrease in other liabilities.
- Legal contingency: A lawsuit alleges improper overdraft-fee assessment and collection and seeks class certification, refunds, treble damages, fees and injunctive relief. On April 15, 2014, the court denied the Bank’s motion for judgment on the pleadings; the case may proceed to discovery and consideration of class certification. The Bank disputes the claims and intends to defend them.
- Interest-rate and securities risks: The company had no interest-rate derivatives outstanding at quarter-end. Available-for-sale debt securities had $3.5 million of unrealized losses, which management considered temporary and primarily related to interest-rate changes. The filing identifies competition, economic conditions, interest rates, regulation and tax-law changes as risks to results.
Most important facts for investors to verify
- Whether the improvement in net interest income and credit quality persists, and whether the $349,000 provision credit is sustainable.
- Trends in non-accrual loans, past-due loans, troubled debt restructurings, other real estate and construction/real-estate concentrations.
- The drivers and timing of operating cash outflows, including the preferred-stock redemption payment and changes in other liabilities.
- Deposit retention and pricing, wholesale-funding access, and the company’s capacity to meet unfunded commitments.
- Developments in the overdraft-fee lawsuit, particularly any class-certification decision or change in the company’s assessment of exposure.