Peoples Bancorp of North Carolina, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Income and cash-flow comparisons are to the corresponding 2011 periods; balance-sheet comparisons are to December 31, 2011. Amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $7.8 | $8.6 | $23.8 | $25.7 |
| Provision for loan losses | $0.8 | $3.4 | $4.4 | $9.7 |
| Non-interest income | $2.9 | $3.7 | $9.9 | $10.0 |
| Non-interest expense | $8.2 | $7.2 | $23.3 | $21.9 |
| Net earnings | $1.4 | $1.4 | $4.6 | $3.4 |
| Net earnings available to common shareholders | $1.3 | $1.0 | $3.7 | $2.3 |
| Diluted earnings per common share | $0.23 | $0.19 | $0.67 | $0.42 |
- Net interest margin, on a tax-equivalent basis, was 3.45% in Q3 2012 versus 3.53% a year earlier; year-to-date it was 3.43% versus 3.57%. Average earning-asset yield declined, while lower funding costs partly offset reduced interest income.
- Q3 net earnings were nearly flat year over year; common earnings and EPS improved, partly because preferred-stock dividends and accretion were lower. Nine-month earnings growth primarily reflected lower loan-loss provisions.
- Annualized return on average assets and equity was 0.55% and 5.80% for Q3, respectively, and 0.59% and 5.86% year to date.
- Cash from operations was $15.4 million for the nine months. Investing activities provided $79.5 million, primarily reflecting loan reductions and securities proceeds; financing used $68.3 million, including deposit outflows and preferred-stock repurchase. Cash and cash equivalents increased $26.7 million to $55.9 million.
Financial position, credit, and liquidity
- Total assets were $1.007 billion, down from $1.067 billion at year-end 2011. Loans were $625.8 million, down $44.7 million; available-for-sale securities were $281.8 million, down $39.6 million.
- Deposits declined $58.6 million to $768.5 million. Core deposits were $624.5 million, or 80% of deposits; deposits of $100,000 or more fell to $143.2 million. Brokered deposits declined to $21.8 million from $47.0 million.
- At September 30, debt and funding included $70.0 million of FHLB borrowings, $43.1 million of repurchase-agreement funding, and $20.6 million of junior subordinated debentures. FHLB borrowings were unchanged from year-end.
- Nonperforming assets were $27.8 million, or 2.77% of assets, versus $32.1 million, or 3.01%, at year-end. Nonaccrual loans fell to $18.8 million from $21.8 million; other real estate fell to $6.6 million from $7.6 million. The allowance was $16.6 million, or 2.64% of loans, versus 2.48% at year-end.
- Total troubled debt restructurings were $21.8 million, including $1.8 million in performing TDRs. The filing notes a change in the reported basis for performing TDR balances effective March 31, 2012, so comparisons with previously reported TDR totals are not directly comparable.
- The Bank’s liquidity ratio was 32.82%, above its 10% policy minimum. FHLB borrowing availability was $23.0 million, and access to federal funds from correspondent banks was up to $47.5 million. Unfunded credit commitments were $134.6 million and standby letters of credit were $3.4 million.
- The Bank was considered well capitalized. Its Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 15.32%, 16.63%, and 10.57%, respectively. The filing also reports holding-company ratios of 15.89%, 17.19%, and 10.98%.
Material changes, outlook, and risks
- Interest income declined year over year as average loan balances and asset yields fell. Lower deposit costs and reduced interest-bearing liabilities reduced interest expense, but did not fully offset that decline.
- Loan-loss provision decreased substantially, which management attributed chiefly to lower net charge-offs and an $8.7 million year-over-year reduction in nonaccrual loans. Management considered the allowance adequate, while warning that adverse economic or credit developments could require additional provision.
- Non-interest expense rose, including higher compensation and benefits, bonuses, and mortgage and appraisal commissions. The quarter included $62,000 of expenses related to repurchasing TARP securities and the warrant; the nine-month amount was $230,000.
- In July, the Company repurchased and retired 12,530 preferred shares from the U.S. Treasury for approximately $11.8 million, including accrued dividends. In August, it repurchased the Treasury warrant for $425,000. Remaining preferred shares are redeemable at par; management said there were no immediate plans for further repurchases.
- Management cited persistent low interest rates, high unemployment and weak real-estate conditions in its markets. Risks include local economic and collateral deterioration, competition, interest-rate changes, regulatory and legislative changes, and evolving Dodd-Frank requirements. The filing provides no specific earnings or financial guidance.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material subsequent events and no material pending legal proceedings other than routine matters.
Important facts for investors to verify
- Whether loan growth, credit quality, and the decline in nonperforming assets continue; review construction and land-development exposure and TDR performance.
- Whether falling loan yields and balances continue to pressure net interest income and margins, and how funding costs respond to interest-rate changes.
- The sustainability of lower provision expense relative to charge-offs and the adequacy of the allowance under changing economic conditions.
- The effects of deposit outflows, large-denomination deposits, and preferred-stock obligations on liquidity and capital, including any future redemption plans.
- How securities sales, unrealized gains and losses, and available funding capacity affect earnings and liquidity; management described the $0.5 million of debt-security unrealized losses as temporary.