Peoples Bancorp of North Carolina, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless noted otherwise, financial amounts are in millions of dollars. The company is a North Carolina bank holding company operating through Peoples Bank, serving communities in North Carolina.
Financial performance and condition
- Q2 earnings: Net earnings were $3.2 million, or $0.57 per diluted share, versus $4.6 million, or $0.80, in Q2 2021. Pretax earnings were $4.0 million versus $5.8 million.
- First-half earnings: Net earnings were $6.7 million, or $1.18 per diluted share, versus $8.7 million, or $1.51, in the first half of 2021.
- Income and expenses: Q2 net interest income was $11.3 million, down from $11.7 million; noninterest income rose to $7.3 million from $6.0 million, while noninterest expense increased to $14.2 million from $12.1 million. For the first half, net interest income was $22.0 million versus $22.8 million; noninterest income was $14.4 million versus $11.9 million; and noninterest expense was $27.6 million versus $24.4 million.
- Margins and returns: Tax-equivalent net interest margin was 2.87% in Q2 versus 3.20% a year earlier, and 2.83% for the first half versus 3.26%. Annualized return on average assets was 0.77% for Q2 and 0.81% for the first half; return on average equity was 11.02% and 10.39%, respectively.
- Balance sheet: Total assets were $1.677 billion at June 30, up from $1.624 billion at year-end 2021. Loans were $959.5 million versus $884.9 million; deposits were $1.494 billion versus $1.413 billion. Cash and cash equivalents were $223.7 million, down from $277.5 million.
- Credit and provision: The company recorded a $410,000 Q2 provision for loan losses, compared with a $226,000 recovery in Q2 2021. First-half provision was $481,000 versus a $681,000 recovery. The allowance was $9.8 million. Nonperforming assets were $3.6 million, or 0.21% of assets, compared with $3.2 million, or 0.20%, at year-end; nonaccrual loans were 0.37% of loans.
- Cash flow: First-half operating cash flow was $8.9 million, compared with $16.4 million in 2021. Investing activities used $140.4 million, mainly reflecting securities purchases and loan growth; financing activities provided $77.8 million, including $81.2 million of net deposit growth. Cash and cash equivalents decreased $53.8 million during the period.
- Capital, debt and liquidity: Shareholders’ equity was $112.4 million, or 6.70% of assets, down from $142.4 million, or 8.77%, at year-end, principally due to securities valuation losses. Company Tier 1 and total risk-based capital ratios were 13.79% and 14.63%; the Bank was described as well capitalized. Debt included $15.5 million of junior subordinated debentures and $37.1 million of repurchase-agreement funding; there were no FHLB borrowings. The Bank’s liquidity ratio was 38.50%, against a 10% policy minimum.
Material changes and notable items
- Q2 earnings fell year over year as lower loan interest and PPP fee income, higher loan-loss provision and increased expenses outweighed stronger noninterest income.
- Appraisal management fee income increased with appraisal volume, and service-charge income benefited from fee changes implemented in March 2022. Mortgage banking income declined as loan volume fell and more mortgages were retained in the portfolio.
- Available-for-sale securities had $43.6 million of gross unrealized losses at June 30, compared with $5.5 million at year-end. Management attributed the losses to interest-rate changes and considered them temporary. The resulting first-half after-tax other comprehensive loss was $33.2 million, and accumulated other comprehensive loss reached $33.1 million.
- The Federal Reserve raised its target rate by 225 basis points during 2022 through July 31, to 2.25%–2.50%. Management noted the potential effect of changing rates, inflation, supply-chain disruption and COVID-19-related economic uncertainty. The company had $175.7 million of variable-rate loans indexed to prime and no interest-rate derivatives at quarter-end.
- The company repurchased approximately $594,000 of stock under a program authorized for up to $2.0 million. It declared dividends of $0.18 per share in Q2; first-half dividends declared were $0.51 per share.
Outlook, risks and contingencies
The filing provides no quantified earnings or financial guidance. Management describes a community-bank strategy focused on local-market growth and maintaining liquidity, managing interest-rate exposure and monitoring asset quality. Risks discussed include competition, interest-rate movements, economic deterioration and possible credit losses, real-estate collateral exposure, regulatory and accounting changes, and continued effects of COVID-19. The bank had $359.0 million of unfunded lending commitments and $4.9 million of standby letters of credit. A disputed North Carolina tax-credit assessment was largely paid while contested; management cited a guaranty it believes limits remaining exposure to approximately $125,000. No material subsequent events were reported, and management reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether net interest margin and earnings stabilize as rates rise and PPP-related fees decline.
- The composition, duration and valuation sensitivity of the securities portfolio, including the substantial unrealized losses and their effect on equity.
- Loan growth, commercial real-estate concentrations, criticized loan trends and the adequacy of the allowance.
- Deposit stability, liquidity sources and the potential cash demands from unfunded commitments.
- Resolution and remaining exposure, if any, from the North Carolina tax-credit dispute; also monitor the floating-rate trust-preferred debt and LIBOR transition.