Peoples Bancorp of North Carolina, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company is a North Carolina community bank holding company; its banking operations and appraisal-management subsidiary, CBRES, are its reportable segments. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance and position
- Third-quarter earnings: Net earnings were $4.1 million, or $0.74 per diluted share, versus $5.3 million, or $0.93, a year earlier. Net interest income was $13.3 million, down from $13.8 million. Provision for credit losses was $562,000; noninterest income was $6.8 million; noninterest expense was $14.3 million.
- Nine-month earnings: Net earnings were $12.1 million, or $2.15 per diluted share, compared with $12.0 million, or $2.11, in 2022. Net interest income rose to $41.4 million from $35.8 million; provision for credit losses was $1.2 million.
- Interest and margins: Third-quarter interest income increased to $18.3 million from $14.6 million, while interest expense rose to $5.0 million from $818,000. The tax-equivalent net interest spread was 2.73%, down from 3.26%; the filing reports net yield on interest-earning assets of 3.39% in both periods. Nine-month average earning-asset yield increased to 4.54% from 3.20%, while the average rate paid on interest-bearing liabilities rose to 1.53% from 0.29%.
- Cash flow: For the first nine months, operating cash flow was $17.1 million, investing cash flow was positive $12.8 million, and financing cash flow was negative $24.8 million. Cash and cash equivalents ended at $76.6 million, up from $71.6 million at year-end 2022.
- Balance sheet: Total assets were $1.607 billion, down from $1.621 billion at December 31, 2022. Loans were $1.078 billion, up from $1.033 billion; net loans were $1.068 billion. Available-for-sale securities were $378.8 million, down from $445.4 million. Total deposits were $1.381 billion, down from $1.435 billion. Shareholders’ equity was $107.4 million, or 6.68% of assets.
- Credit quality: The allowance for credit losses on loans was $10.3 million; the separate allowance for unfunded commitments was $2.1 million. Nonperforming assets were $3.7 million, or 0.23% of assets. Nonaccrual loans were $3.6 million, or 0.34% of loans; $99,000 of loans were 90 or more days past due and still accruing.
- Liquidity and funding: The Bank’s liquidity ratio was 24.38%, above its 10% policy minimum. Core deposits were $1.2 billion, or 90.03% of deposits, versus $1.4 billion, or 97.84%, at year-end. Estimated uninsured deposits were $376.6 million, or 27.27% of deposits. Repurchase-agreement funding was $83.0 million; junior subordinated debentures were $15.5 million. There were no FHLB or Federal Reserve borrowings outstanding.
- Capital: The company reported Tier 1, total risk-based, common equity Tier 1, and Tier 1 leverage ratios of 13.66%, 14.64%, 12.48%, and 10.52%, respectively. The Bank was considered well capitalized under regulatory standards.
Changes versus comparable periods
- Third-quarter net earnings declined 22% year over year. Higher loan and securities income was more than offset by sharply higher deposit and other funding costs, higher credit-loss provision, and increased operating expense.
- Nine-month net earnings edged higher as increased net interest income more than offset lower noninterest income and higher expenses and provision. Noninterest income fell to $16.8 million from $21.2 million, principally reflecting a $2.5 million securities-sale loss and lower CBRES appraisal-management revenue.
- Deposit mix shifted: noninterest-bearing and interest-bearing demand balances declined, while time deposits increased substantially. Management attributed the rise in time deposits to promotional rates. Repurchase-agreement funding also increased.
- The available-for-sale portfolio had $66.3 million of gross unrealized losses at September 30, 2023, versus $62.3 million at year-end 2022. Accumulated other comprehensive loss was $51.0 million. Management attributed securities losses to interest-rate changes and reported no credit-loss allowance on the portfolio.
- The company adopted CECL on January 1, 2023, reducing opening retained earnings by $838,000, net of tax. The filing states the adoption did not materially affect results or financial position apart from the reported transition adjustment.
Outlook, commentary, risks and unusual items
- No quantitative earnings or financial guidance is provided. Management describes a focus on independent community banking, local-market growth, liquidity, interest-rate risk management, and active asset-quality monitoring.
- Management noted the Federal Reserve had raised the target federal funds rate by 500 basis points since March 2022, to 5.25%–5.50% by September 30, 2023. Higher rates and competition for deposits are reflected in rapidly rising funding costs; changes in rates, economic conditions, credit quality, and local real-estate markets could affect future results.
- Loans are substantially collateralized by real estate. Construction, commercial real-estate, and borrower-business performance present credit risks. The company’s credit-loss estimate depends on forecasts and qualitative judgments, and management cautions that actual outcomes could require additional provisions.
- In January and February 2023, the Bank sold securities to reduce portfolio risk and improve flexibility for loan growth and funding; the sales produced a $2.5 million net loss recorded in nine-month noninterest income. The filing says no securities were sold in the third quarter.
- A North Carolina tax-credit dispute remains unresolved. The Bank paid $1.2 million in 2019 while contesting proposed adjustments; a related guaranty agreement is expected by management to limit exposure to approximately $125,000. A 2023 Business Court decision in related cases favored the taxpayer position, but an appeal by the state is considered likely.
- In March 2023, the Board authorized up to $2.0 million of share repurchases; approximately $1.7 million had been repurchased by September 30. The filing also reports adoption of an executive compensation clawback policy on October 19 and related employment-agreement amendments on November 1, 2023.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material subsequent events in the financial-statement note and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit pricing and migration into time deposits continue to pressure net interest income and margins.
- The trend in loan delinquencies, nonaccruals, commercial real-estate exposure, and the adequacy of CECL allowances.
- Liquidity and funding capacity if deposits decline further, including the availability and terms of contingent borrowing sources.
- Whether unrealized securities losses, reported as rate-related, persist or require realization, and how they affect capital and flexibility.
- The final outcome and potential exposure in the North Carolina tax-credit dispute, including any appeal of the related court decisions.