Peoples Bancorp of North Carolina, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Peoples Bancorp is a bank holding company whose principal subsidiary, Peoples Bank, serves North Carolina markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $7.9 | $7.8 | $23.1 | $23.8 |
| Provision for loan losses | $0.3 | $0.8 | $2.2 | $4.4 |
| Non-interest income | $3.1 | $2.9 | $9.8 | $9.9 |
| Non-interest expense | $7.9 | $8.2 | $23.6 | $23.3 |
| Net earnings | $1.9 | $1.4 | $5.3 | $4.6 |
| Net earnings available to common shareholders | $1.8 | $1.3 | $4.8 | $3.7 |
| Basic and diluted earnings per common share | $0.31 | $0.23 | $0.86 | $0.67 |
- Q3 improvement reflected lower loan-loss provision and operating expense, plus higher non-interest income and net interest income. Nine-month earnings rose mainly because of the lower provision, partly offset by lower net interest income and higher expenses.
- Net interest margin, expressed as net yield on interest-earning assets, was 3.54% in Q3 versus 3.45% a year earlier; nine-month net yield was 3.48% versus 3.43%. Q3 average earning-asset yield fell to 4.08% from 4.22%, while the average cost of interest-bearing liabilities declined to 0.68% from 0.97%.
- Annualized return on average assets was 0.74% for Q3 and 0.70% for the nine months, versus 0.55% and 0.59%, respectively, in the comparable 2012 periods.
- Q3 effective tax rate was 31%, including $0.2 million of expense from an adjustment to deferred taxes following North Carolina tax-rate reductions. The nine-month rate was 26%, compared with 23% in 2012.
Financial position, liquidity and capital
- At September 30, total assets were $1,042.7, up from $1,013.5 at December 31, 2012. Loans were $617.1, down from $620.0; available-for-sale securities were $301.8, up from $297.8.
- Deposits were $798.3, up from $781.5. Core deposits were $678.0, or 85% of deposits. Securities sold under repurchase agreements increased to $48.2 from $34.6; FHLB borrowings remained $70.0, and junior subordinated debentures were $20.6.
- Cash and cash equivalents were $81.0, compared with $48.8 at year-end. For the nine months, operating activities provided $19.6, investing activities used $16.9, and financing activities provided $29.4; cash increased $32.1.
- Shareholders’ equity was $95.7, down from $97.7, principally reflecting a $6.4 after-tax decline in accumulated other comprehensive income from securities valuation changes, partly offset by retained earnings growth.
- Company Tier 1 and total risk-based capital ratios were 16.41% and 17.73%; the Bank’s were 15.97% and 17.28%. The Bank met the filing’s “well capitalized” criteria. The Bank’s liquidity ratio was 37.63%, versus a stated 10% minimum.
- Unfunded credit commitments were $142.7 and standby letters of credit were $4.2. Remaining FHLB line availability was $20.4; the Bank also had access to up to $62.5 of overnight federal funds from correspondent institutions.
Material changes and credit quality
- Non-performing assets declined to $19.1, or 1.83% of assets, from $26.3, or 2.60%, at year-end. Non-accrual loans fell to $14.1 from $17.6; other real estate declined to $2.8 from $6.3.
- Past-due loans totaled $23.2 at September 30, versus $32.8 at year-end. The allowance for loan losses was $13.9, or 2.25% of loans, compared with $14.4, or 2.33%.
- Restructured loans were $17.1, down from $23.9 at year-end; only $0.3 was identified as performing current-year TDR loans. Management reported no new TDR modifications in Q3.
- Average loans were lower year over year, and management attributed weaker interest income to lower average loan balances and earning-asset yields. Deposit costs fell as certificates of deposit declined and higher-cost maturities rolled off.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said economic conditions showed some improvement but remained difficult, citing elevated local unemployment, depressed real estate values and above-normal defaults. Management expects historically low interest rates to continue weighing on net interest income.
- Credit exposure is concentrated in real estate-secured lending: construction and land development represented about 11% of loans, single-family residential about 39%, and commercial real estate about 33%. Management cautioned that further deterioration in economic conditions, collateral values or borrower performance could require additional loan-loss provisions.
- A North Carolina lawsuit filed in April alleges improper overdraft-fee assessment and collection, seeks class certification, refunds, treble damages, fees and injunctive relief. The Bank disputes the claims; its motion for judgment on the pleadings had not been decided as of November 4, 2013.
- The Q3 tax charge included the deferred-tax adjustment noted above. Available-for-sale securities had $5.8 of unrealized debt-security losses, which management considered temporary and attributed to interest-rate changes.
- Management reported no material subsequent events. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.
Investor verification priorities
- Track non-accrual loans, past dues, TDRs, charge-offs and allowance coverage, particularly construction, commercial real estate and Banco de la Gente stated-income loans.
- Assess whether deposit growth and lower funding costs can offset pressure from declining loan balances and asset yields; monitor repurchase-agreement funding and large-deposit sensitivity.
- Review the overdraft-fee lawsuit’s class-certification and motion outcomes, and any related financial exposure.
- Monitor the value and duration risk of the securities portfolio and the impact of interest-rate changes on accumulated other comprehensive income and capital.
- Confirm the ongoing status of capital and liquidity ratios, including the effect of the remaining preferred stock and off-balance-sheet commitments.