PEOPLES BANCORP OF NORTH CAROLINA INC quarterly report, Q3 FY2014

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Peoples Bancorp of North Carolina, Inc. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014. The company is a North Carolina bank holding company whose principal business is community banking through Peoples Bank. Financial statement amounts below are in U.S. dollars; monetary figures are shown in millions unless noted. Interim statements are unaudited.

Financial performance

  • Third-quarter earnings: Net earnings were $2.44 million, versus $1.92 million in Q3 2013. Basic and diluted earnings per common share were $0.43, versus $0.31. Annualized return on average assets was 0.93% (0.74% prior year); return on average equity was 10.09% (8.02%).
  • Nine-month earnings: Net earnings were $7.57 million, versus $5.31 million. Earnings available to common shareholders were $7.57 million, versus $4.84 million, reflecting preferred dividends and accretion in the 2013 period. Basic and diluted EPS were $1.35 and $1.34, respectively, versus $0.86 for both measures. Annualized return on average assets was 0.98% (0.70% prior year); return on average equity was 10.71% (7.11%).
  • Net interest income and margins: Q3 net interest income rose to $8.51 million from $7.90 million; nine-month net interest income rose to $25.43 million from $23.08 million. Net yield on interest-earning assets was 3.78% for Q3 (3.54% prior year) and 3.85% for the first nine months (3.48% prior year). Management attributed the improvement to higher investment-securities yields, loan growth, and lower funding costs.
  • Credit costs and other income: Q3 provision for loan losses was $256,000, versus $337,000. For the first nine months, the company recorded a $27,000 provision credit, versus a $2.16 million expense in 2013. Noninterest income was $3.21 million for Q3, versus $3.11 million, and $9.16 million year to date, versus $9.85 million. The year-to-date decline reflected lower securities-sale gains and mortgage banking income, partly offset by higher service charges.
  • Expenses and taxes: Noninterest expense was $8.54 million for Q3, versus $7.89 million, and $24.73 million year to date, versus $23.61 million. Q3 income tax expense was $475,000, compared with $870,000; the effective tax rate was 16%, versus 31%. The nine-month effective tax rate was 23%, versus 26%. Management attributed the lower 2014 tax rates to purchased North Carolina income tax credits; related amortization added $218,000 to expense during the nine-month period.
  • Cash flow: For the first nine months, operating activities provided $12.46 million, investing activities used $9.60 million, and financing activities provided $5.89 million. Cash and cash equivalents increased $8.75 million to $85.52 million.

Financial position, funding, and capital

  • Assets and loans: Total assets were $1.054 billion at September 30, 2014, versus $1.035 billion at December 31, 2013. Loans were $650.6 million, up from $621.0 million; management cited growth in commercial real estate and commercial loans. Available-for-sale securities were $279.8 million, down from $297.9 million.
  • Deposits and borrowings: Deposits were $816.8 million, versus $799.4 million; core deposits were $707.2 million, or 87% of deposits. FHLB borrowings remained $65.0 million; securities sold under repurchase agreements were $47.0 million, versus $45.4 million. Junior subordinated debentures were $20.6 million. The debentures bear a floating rate of three-month LIBOR plus 163 basis points and mature in 2036.
  • Liquidity: The Bank’s liquidity ratio was 32.46%, down from 35.65% at year-end and above its 10% policy minimum. It had $25.4 million of remaining FHLB line availability and access to up to $54.5 million in overnight federal funds. Unfunded commitments to extend credit were $168.1 million; standby letters of credit were $3.3 million.
  • Capital: Shareholders’ equity was $96.2 million, or 9.1% of assets, versus $83.7 million, or 8.1%, at year-end. The company’s Tier 1 and total risk-based capital ratios were 15.13% and 16.43%; the Bank was reported as well capitalized. The Bank’s Tier 1 leverage ratio was 10.23%.

Material changes and credit quality

  • Non-accrual loans declined to $10.6 million from $13.8 million at year-end; nonperforming assets fell to $12.6 million, or 1.19% of assets, from $16.4 million, or 1.58%. Loans 90 days past due and still accruing were $120,000, versus $882,000.
  • The allowance for loan losses declined to $12.34 million, or 1.90% of loans, from $13.50 million, or 2.17%. Management cited improved loss indicators, lower net charge-offs, and fewer non-accrual loans as reasons for the lower reserve and year-to-date provision credit. It cautioned that future economic or portfolio deterioration could require additional provision.
  • Troubled debt restructurings totaled $10.2 million, down from $21.9 million at year-end. The loan portfolio remains substantially secured by real estate; commercial real estate was approximately 35% of loans, single-family residential loans approximately 39%, and construction and land development approximately 9%.
  • Accumulated other comprehensive income rose to $4.39 million from a $1.17 million loss, largely reflecting higher unrealized gains on available-for-sale securities. Management considered the securities’ unrealized debt losses temporary and primarily related to interest-rate changes.
  • The remaining Series A preferred shares were repurchased and redeemed on January 17, 2014 for $12.524 million, following regulatory approval; the payment had been reflected as a year-end liability. In September, the board authorized a common-stock repurchase program of up to $2 million; no shares had been repurchased under that program by quarter-end.

Outlook, risks, and contingencies

  • The filing provides no specific earnings or financial guidance. Management described economic conditions as improving but still challenging, citing persistent weakness in housing and employment in its markets. It said the Federal Funds Rate had remained at 0.25% since December 2008 and that low rates would continue to pressure future net interest income.
  • Principal risks include competition, interest-rate changes, local and national economic conditions, deterioration in credit quality, real-estate collateral values, and changes in laws, regulation, and accounting standards. A substantial portion of lending is real-estate-secured, and borrower repayment may be affected by property values, business performance, or refinancing conditions.
  • The Bank is defending a lawsuit alleging improper assessment and collection of overdraft fees. The plaintiff seeks class certification, fee refunds, treble damages, attorneys’ fees, and injunctive relief. The court denied the Bank’s motion for judgment on the pleadings; discovery was underway. The Bank considers the claims without merit and intends to defend them. The filing does not provide a clear estimate of potential exposure.
  • Management reported no material subsequent events and stated that disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether the decline in non-accrual loans and other credit indicators continues, and whether the $12.34 million allowance remains adequate as loan balances grow.
  • How the real-estate concentration, including construction and commercial property lending, performs under changes in local economic conditions and collateral values.
  • The sustainability of net interest income and margins if market rates remain low or change, given the company’s funding mix and variable-rate assets.
  • The earnings and cash-flow effects of the purchased state tax credits, including the timing of related amortization and tax benefits.
  • Developments in the overdraft-fee lawsuit, including any class-certification ruling or quantified exposure, and any activity under the authorized $2 million stock repurchase program.