Peoples Bancorp of North Carolina, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The unaudited consolidated filing covers the quarter and six months ended June 30, 2011; balance-sheet comparisons are with December 31, 2010. Peoples Bancorp is a North Carolina bank holding company whose principal business is deposit-taking and lending, with a substantial real-estate-secured loan portfolio.
Key financial metrics
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q2 / June 30, 2011 | Comparable period / prior date |
|---|---|---|
| Net interest income | $8.6 | $8.2 in Q2 2010 |
| Net income | $0.629 | $0.864 in Q2 2010 |
| Net earnings available to common shareholders; diluted EPS | $0.281; $0.05 | $0.515; $0.09 in Q2 2010 |
| Six-month net income; common diluted EPS | $1.990; $0.23 | $1.739; $0.19 in first half 2010 |
| Net interest income after loan-loss provision | $5.245 in Q2; $10.808 for six months | $5.018; $10.741, respectively, in 2010 |
| Total assets | $1,073 | $1,068 at December 31, 2010 |
| Loans; allowance for loan losses | $692.8; $16.0 | $726.2; $15.5 at December 31, 2010 |
| Deposits | $830.4 | $838.7 at December 31, 2010 |
| Cash and cash equivalents | $41.6 | $24.0 at December 31, 2010 |
| Non-performing assets | $39.2, or 3.66% of assets | $46.9, or 4.40%, at December 31, 2010 |
- Revenue, expenses and returns: Q2 interest income was $11.4 million and non-interest income $2.7 million; non-interest expense was $7.4 million. Q2 annualized ROA was 0.24% and ROE 2.52%, versus 0.32% and 3.42% a year earlier. For the first half, annualized ROA was 0.38% and ROE 4.08%, versus 0.33% and 3.46% in first-half 2010. The filing does not provide a clear net interest margin value.
- Cash flow: First-half operating cash flow was $12.6 million, investing cash flow $4.1 million and financing cash flow $0.9 million; cash increased $17.7 million. First-half 2010 figures were $10.2 million, negative $23.6 million and $35.8 million, respectively.
- Funding and capital: June 30 liabilities included $44.5 million of repurchase-agreement funding, $70.0 million of FHLB borrowings, $20.6 million of junior subordinated debentures and $1.3 million payable to the U.S. Treasury. Shareholders’ equity was $100.5 million. Company Tier 1, total risk-based and leverage ratios were 15.03%, 16.30% and 11.00%; the Bank was reported as well capitalized, with corresponding ratios of 12.67%, 13.95% and 9.27%.
- Liquidity: Core deposits were $615.1 million, or 74% of deposits; brokered deposits were $64.3 million. The Bank’s liquidity ratio was 28.82%, above its stated 10% policy minimum. Remaining FHLB availability was $47.5 million. Unfunded credit commitments were $131.1 million and standby letters of credit $3.0 million.
Material changes versus prior periods
- Q2 common earnings fell to $0.281 million from $0.515 million, despite higher net interest income. Management attributed the decline to higher loan-loss provision and non-interest expense and lower non-interest income. First-half common earnings rose to $1.293 million from $1.042 million.
- Q2 net interest income increased 5% year over year as interest expense fell 24%, more than offsetting lower interest income. Average earning-asset yield declined to 4.70% from 4.92%. For the first half, interest income declined 3% and interest expense declined 22%.
- Loans declined $33.4 million from year-end, while available-for-sale securities rose to $297.6 million from $272.4 million. Deposits fell $8.3 million; core deposits increased $22.4 million, while deposits of $100,000 or more decreased $28.9 million.
- Non-accrual loans declined to $31.0 million from $40.1 million at year-end; total past-due loans also declined. However, the first-half provision rose to $6.3 million from $5.6 million, and net charge-offs increased, including $3.1 million on acquisition, development and construction loans.
- Q2 non-interest income fell to $2.7 million from $3.1 million, partly reflecting foreclosed-property losses and write-downs. First-half non-interest income increased to $6.3 million from $5.7 million, mainly due to $1.256 million of securities-sale gains, versus $0.268 million a year earlier.
Outlook, risks and unusual items
- Management described ongoing pressure from weak economic conditions, elevated local unemployment and real-estate weakness. It expected real-estate-market stabilization not to occur within the next 18 to 24 months and anticipated increased loan losses in the short run.
- Management said repayment of the $25.1 million Treasury Capital Purchase Program preferred investment would wait until economic conditions improve and earnings increase. The preferred stock carries a 5% annual dividend for its first five years, rising to 9% thereafter; $157,000 of cumulative dividends was undeclared at June 30, 2011. Redemption requires primary-regulator approval.
- Interest-rate risk remains material: the company described itself as asset-sensitive, and the historically low federal funds rate was said to weigh on future net interest income. No interest-rate derivatives were outstanding at quarter-end.
- Other risks include real-estate collateral values, borrower defaults, competition, interest-rate changes and evolving Dodd-Frank requirements. Management stated that the full regulatory impact was unclear. Allowance estimates depend on judgment and could require future additions.
- The filing reported no material pending legal proceedings outside routine matters and no material subsequent events. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether credit quality continues to improve: monitor non-accrual and TDR loans, foreclosed real estate, charge-offs and the adequacy of the $16.0 million allowance.
- Whether earnings can recover without reliance on securities gains, given shrinking loans, lower asset yields and continuing operating costs.
- The sustainability and availability of funding, including brokered deposits, repurchase agreements and FHLB capacity, and the effect of deposit runoff or changing rates.
- The timing and feasibility of repaying Treasury preferred capital, including dividend obligations and regulatory approval requirements.
- How real-estate conditions, regulatory changes and the $131.1 million of unfunded lending commitments affect capital, liquidity and future losses.