Peoples Bancorp of North Carolina, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited except the December 31, 2012 balance sheet. Unless noted, dollar amounts are in millions.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Interest income | $8.91 | $9.84 | $18.01 | $20.20 |
| Net interest income | $7.54 | $7.85 | $15.18 | $15.99 |
| Provision for loan losses | $0.77 | $1.60 | $1.83 | $3.65 |
| Non-interest income | $3.31 | $3.59 | $6.74 | $6.97 |
| Non-interest expense | $7.98 | $7.84 | $15.72 | $15.11 |
| Net earnings | $1.63 | $1.51 | $3.39 | $3.17 |
| Net earnings available to common shareholders | $1.48 | $1.16 | $3.08 | $2.47 |
| Basic and diluted EPS for common shareholders | $0.26 | $0.21 | $0.55 | $0.45 |
- Margins and returns: Net yield on average interest-earning assets was 3.40% in Q2 2013, unchanged year over year; six-month net yield was 3.46% versus 3.42%. Annualized return on average assets was 0.64% for Q2 and 0.68% for the six months; return on average equity was 6.55% and 6.80%, respectively.
- Balance sheet at June 30: Total assets were $1,028.0; loans $608.1; deposits $788.4; shareholders’ equity $95.4. Cash and cash equivalents were $80.7 and available-for-sale securities were $293.2.
- Cash flow: Six-month operating cash flow was $10.8, investing cash flow $3.4, and financing cash flow $17.7, producing a $31.9 increase in cash and cash equivalents to $80.7. Operating cash flow was $23.2 in the first half of 2012.
- Credit quality: The allowance for loan losses was $14.0, or 2.31% of loans, versus $14.4, or 2.33%, at year-end 2012. Non-accrual loans were $16.1 (2.65% of loans), and total nonperforming assets were $23.4 (2.27% of assets). Nonperforming assets were $26.3 at year-end 2012.
- Debt and liquidity: FHLB borrowings were $70.0, junior subordinated debentures $20.6, and repurchase-agreement funding $46.0. Core deposits were $665.4, or 84% of deposits. The Bank’s liquidity ratio was 37.34%, against a 10% policy minimum; remaining FHLB line availability was $24.4.
- Capital: Company Tier 1 and total risk-based capital ratios were 16.52% and 17.83%; the Bank’s were 16.12% and 17.43%. The Bank was classified as well capitalized. Management said current capital levels exceed the Basel III requirements scheduled to take effect January 1, 2015.
Material changes versus comparable periods
- Common earnings per share rose to $0.26 in Q2 from $0.21 and to $0.55 for the first half from $0.45. Management attributed improved earnings primarily to lower loan-loss provisions.
- Net interest income declined 4% in Q2 and 5% year to date. Lower loan balances and asset yields reduced interest income; lower funding costs and fewer certificates of deposit partly offset the decline. Average earning-asset yield fell to 3.97% from 4.22% in Q2 and to 4.06% from 4.28% year to date.
- Provision expense fell year over year, reflecting lower net charge-offs and fewer non-accrual loans compared with June 2012. Loans outstanding declined $11.9 from December 2012 to $608.1, while deposits increased $6.9 to $788.4.
- Shareholders’ equity decreased $2.4 from year-end, principally because accumulated other comprehensive income fell as unrealized securities gains reversed. Six-month other comprehensive loss, net of tax, was $5.1, versus income of $1.6 in 2012; available-for-sale securities had $4.0 of gross unrealized debt-security losses at June 30, which the Company considered temporary.
- Non-interest expense rose, primarily from salary increases, accrued bonuses, and mortgage and appraisal sales commissions. Non-interest income declined, mainly because gains on securities sales were lower.
Outlook, commentary, and risks
- No quantified earnings or operating guidance is provided. Management said persistently low interest rates continue to pressure earnings and net interest income; it also noted some signs of economic improvement but continued high unemployment, depressed real estate prices, and elevated loan defaults in its markets.
- Credit exposure is concentrated in real estate-secured lending: construction and land development loans were about 12% of the portfolio, single-family residential loans about 40%, and commercial real estate loans about 31%. Management cautioned that economic or collateral-value deterioration could require additional reserves; allowance estimates involve judgment and may change.
- Restructured troubled debt (TDR) loans totaled $19.9 at June 30, down from $23.9 at year-end 2012. The filing reports $134.9 in unfunded commitments to extend credit and $3.1 in standby letters of credit.
- The Bank faces a proposed class-action lawsuit concerning overdraft-fee assessment and collection, alleging contract and consumer-protection violations and seeking refunds, treble damages, fees, and injunctive relief. The Bank disputes the allegations and intends to defend the case; the filing does not quantify potential exposure.
- Other stated risks include competition, interest-rate changes, local and broader economic conditions, credit quality, and legal, regulatory, accounting, and tax changes. The Company had no interest-rate derivatives outstanding at June 30.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material subsequent events through issuance of the statements.
Important facts for investors to verify
- Whether reductions in non-accrual loans, charge-offs, and TDR balances persist, and whether the allowance remains adequate as real estate and local economic conditions evolve.
- How lower asset yields and loan balances affect net interest income, and how deposit pricing, funding mix, and interest-rate changes affect margins.
- The impact of securities-market valuation changes on accumulated other comprehensive income, equity, and capital.
- Funding and liquidity capacity, including large-denomination deposits, the FHLB line, and the $138.0 in disclosed credit and standby-letter commitments.
- Developments in the overdraft-fee lawsuit and any resulting financial or operational exposure.
- The status and terms of the remaining Series A preferred stock: $12.5 million remained outstanding, with its dividend rate scheduled to rise from 5% to 9% after December 23, 2013; the Company reported no immediate repurchase plans.