Peoples Bancorp of North Carolina, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company operates community banking businesses in North Carolina and CBRES, an appraisal-management services subsidiary. Dollar amounts below are in millions unless noted.
Financial results and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $17.6 | $12.0 | $34.4 | $23.3 |
| Net interest income | $13.8 | $11.3 | $28.1 | $22.0 |
| Provision for credit losses | $0.4 | $0.4 | $0.6 | $0.5 |
| Non-interest income | $6.4 | $7.3 | $10.0 | $14.4 |
| Non-interest expense | $13.6 | $14.2 | $27.3 | $27.6 |
| Net earnings | $4.8 | $3.2 | $8.0 | $6.7 |
| Diluted earnings per share | $0.85 | $0.57 | $1.41 | $1.18 |
- Margins: Tax-equivalent net yield on interest-earning assets was 3.56% in Q2 (2.87% prior year) and 3.67% for the first half (2.83% prior year). Q2 average loan yield rose to 5.19% from 4.34%; average rate paid on interest-bearing liabilities increased to 1.56% from 0.26%.
- Balance sheet at June 30: Assets were $1.612 billion; loans were $1.058 billion and net loans $1.048 billion; deposits were $1.370 billion; shareholders’ equity was $112.4 million, or 6.97% of assets. Total assets were $1.621 billion and deposits $1.435 billion at December 31, 2022.
- Cash flow, first half: Operating activities provided $12.9 million and investing activities provided $28.6 million; financing activities used $24.0 million. Cash and cash equivalents increased $17.4 million to $89.0 million. Deposit outflows of $65.7 million were partly offset by a $45.5 million increase in repurchase-agreement funding.
- Debt and liquidity: Repurchase agreements were $93.2 million, up from $47.7 million at year-end; junior subordinated debentures were $15.5 million. There were no FHLB or Federal Reserve borrowings. The reported liquidity ratio was 26.98%, above the company’s 10% policy minimum. Remaining stated availability was $119.7 million at the FHLB, $445.7 million at the Federal Reserve, and $90.5 million in overnight federal funds lines.
- Capital and credit: The Bank was reported well capitalized. Company ratios at June 30 were 13.80% Tier 1 risk-based, 14.77% total risk-based, 12.59% common equity Tier 1 and 10.41% Tier 1 leverage. Non-performing assets were $3.6 million (0.22% of assets); non-accrual loans were 0.34% of total loans, with no loans 90 days past due and still accruing.
Material changes versus comparable periods
- Earnings improved year over year in Q2 and the first half, primarily as higher net interest income and lower non-interest expense outweighed weaker non-interest income. Higher asset yields reflected loan growth, Federal Reserve rate increases and yields on securities purchased after June 2022.
- Funding costs rose sharply: first-half interest expense increased to $6.3 million from $1.3 million. Higher deposit rates and more certificates of deposit contributed; average first-half certificates of deposit increased to $162.5 million from $101.0 million.
- First-half non-interest income fell to $10.0 million, including a $2.5 million net loss on securities sales and lower appraisal-management fees. The company said it sold securities in January and February to reduce portfolio risk and increase flexibility to support lending and reduce other borrowing needs.
- Loans grew to $1.058 billion from $1.033 billion at year-end, while deposits declined to $1.370 billion from $1.435 billion. Large-denomination time deposits rose, which management attributed primarily to promotional rates. Estimated uninsured deposits were $361.8 million, or 26.42% of deposits, down from $439.8 million, or 30.64%.
- Available-for-sale securities fell to $394.1 million from $445.4 million. Their $56.9 million gross unrealized loss at June 30 was attributed by management to interest rates and considered temporary; the filing reports no credit-loss allowance on this portfolio.
Outlook, risks and unusual items
- The filing provides no quantified earnings, growth or margin guidance. Management describes a focus on remaining an independent, well-capitalized community institution and pursuing growth in local and nearby markets.
- Interest-rate and funding risk are material: deposit costs increased, and the company identifies changes in rates, competition, economic conditions and monetary policy as factors that could affect earnings. The $176.0 million of prime-indexed variable-rate loans reprice with rate changes; the company had no interest-rate derivatives outstanding.
- Credit risk includes substantial real-estate collateral exposure. Management’s CECL estimate relies on forecasts and qualitative adjustments; actual credit outcomes could require additional provision. Adoption of CECL on January 1, 2023 reduced retained earnings by $0.838 million, net of tax, and increased the allowance for unfunded commitments while reducing the loan allowance.
- Unfunded commitments to extend credit were $390.5 million, with $4.3 million in standby letters of credit. These are potential liquidity and credit exposures if funded.
- A North Carolina tax-credit dispute remains unresolved. The Bank paid $1.2 million in tax and interest while contesting proposed adjustments; management says a guaranty agreement limits its estimated exposure to approximately $125,000. A state business-court ruling in related cases favored the taxpayer position, but an appeal was considered likely.
- The $15.5 million junior subordinated debentures were tied to three-month LIBOR; the filing says the rate will transition to three-month SOFR plus 189 basis points effective September 15, 2023.
- The company repurchased $833,000 of its stock under a $2.0 million program authorized in March 2023. The Q2 comprehensive loss of $0.5 million reflected $5.3 million of after-tax other comprehensive loss, mainly from securities valuation changes, despite net earnings.
Important facts for investors to verify
- Whether deposit pricing and funding mix continue to pressure net interest margin as rates and competition change.
- Credit quality, collateral values and allowance adequacy, particularly in commercial real estate and construction lending.
- The size and liquidity implications of uninsured deposits, repurchase funding and unfunded lending commitments.
- How the securities portfolio’s unrealized losses, any further sales and the LIBOR-to-SOFR transition affect reported results and funding costs.
- Developments in the tax-credit litigation, including any appeal and recovery under the guaranty agreement.
- Capital ratios and the pace of dividends and repurchases relative to earnings and balance-sheet needs.