Peoples Bancorp of North Carolina, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011; unaudited consolidated results. Comparisons are with the corresponding 2010 periods unless otherwise noted. Amounts below are in millions of dollars, except per-share data and ratios.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $8.62 | $8.48 | $25.74 | $24.78 |
| Provision for loan losses | $3.38 | $4.66 | $9.70 | $10.22 |
| Non-interest income | $3.72 | $3.86 | $10.03 | $9.60 |
| Non-interest expense | $7.16 | $7.18 | $21.94 | $21.43 |
| Net earnings | $1.39 | $0.54 | $3.38 | $2.28 |
| Net earnings available to common shareholders | $1.04 | $0.19 | $2.34 | $1.23 |
| Basic and diluted EPS available to common shareholders | $0.19 | $0.03 | $0.42 | $0.22 |
Q3 annualized return on average assets was 0.51% versus 0.20%, and return on average equity was 5.31% versus 2.09%. For the first nine months, those measures were 0.46% versus 0.28% and 4.49% versus 2.98%, respectively. Tax-equivalent net yield on interest-earning assets was 3.53% in Q3 versus 3.48%; year to date it was 3.57% versus 3.46%.
Operating cash flow was $19.00 million for the nine months, compared with $14.56 million in 2010. Investing activities used $12.27 million, financing activities provided $14.17 million, and cash and cash equivalents increased $20.90 million to $44.87 million.
Financial position, credit and liquidity
- Total assets were $1.090 billion at September 30, 2011, compared with $1.068 billion at December 31, 2010. Total loans fell $48.5 million to $677.7 million; available-for-sale securities rose $53.3 million to $325.7 million.
- Deposits were $841.0 million, up slightly from $838.7 million. Core deposits rose to $623.8 million, while deposits of $100,000 or more declined to $215.6 million. Brokered deposits were $66.3 million.
- Borrowings included $70.0 million of FHLB advances, $47.7 million of repurchase agreements, and $20.6 million of junior subordinated debentures. Shareholders’ equity was $103.0 million.
- Cash and cash equivalents were $44.9 million. The Bank’s liquidity ratio was 33.30%, above its 10% policy minimum; FHLB remaining borrowing availability was $22.7 million. Unfunded credit commitments were $131.8 million and standby letters of credit were $3.1 million.
- The allowance for loan losses was $16.3 million, or 2.41% of loans, versus $15.5 million, or 2.13%, at year-end. Non-accrual loans declined to $27.5 million from $40.1 million; non-performing assets were $34.9 million, or 3.20% of assets, versus $46.9 million, or 4.40%.
- Troubled debt restructurings totaled $48.5 million, including $16.0 million performing, down from $56.7 million at year-end. Other real estate owned was $6.0 million.
- The Company reported Tier 1, total risk-based, and leverage capital ratios of 15.90%, 17.15%, and 11.03%, respectively. The Bank was reported as well capitalized.
Changes, outlook and risks
- Year-to-date earnings improved as lower funding costs lifted net interest income, the loan-loss provision declined, and securities-sale gains increased. These gains and reduced provisions also contributed to Q3’s higher earnings; Q3 non-interest income fell year over year, largely because of lower securities-sale gains.
- Interest income declined as average loans and earning-asset yields fell; lower deposit rates reduced interest expense and partly offset that pressure. Management noted that the Federal Funds Rate had remained at 0.25% since December 2008 and that low rates could continue to weigh on net interest income.
- Management anticipated increased loan losses in the short run and did not expect real estate markets to stabilize within 18–24 months. It stated that TARP Capital Purchase Program funds would not be repaid until economic conditions improved and earnings were higher; repayment was expected from future earnings and existing capital, without additional equity.
- Credit exposure is concentrated in the company’s North Carolina markets and includes substantial real-estate-secured lending. Continued weakness in employment, property values, borrower performance, or the local economy could increase losses and provisions.
- Other material risks cited include competition, interest-rate changes, economic conditions, regulatory and legislative changes, and uncertainty around implementation of the Dodd-Frank Act. The company said it was still assessing the law’s effects.
- The company had no interest-rate derivatives outstanding at quarter-end; a swap expired in June 2011. Management reported no material subsequent events and no material pending legal proceedings beyond routine matters.
Important facts to verify
- Whether the decline in non-accrual loans and TDR balances continues, and whether charge-offs or new problem credits reverse the improvement.
- The adequacy of the $16.3 million loan-loss allowance given collateral valuations, real-estate exposure, and management’s expectation of near-term losses.
- The sustainability of earnings growth, including dependence on lower funding costs and securities-sale gains amid declining loan balances and low rates.
- The quality and stability of deposits, including the $66.3 million in brokered deposits, and continued access to wholesale funding and FHLB liquidity.
- The timing and feasibility of repaying the $25.1 million TARP preferred investment, which carries a 5% dividend for its first five years and 9% thereafter, subject to applicable restrictions and regulatory approval.