Business context and reporting period
Peoples Bancorp of North Carolina, Inc. is a community bank holding company focused on deposit-taking and commercial, real estate, construction, and consumer lending in North Carolina. This unaudited Form 10-Q covers the quarter ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted.
Financial performance and position
Amounts are in millions of dollars unless stated otherwise.
- Earnings: Net interest income was $11.21 million, down 1.9%; provision for loan losses was $1.52 million versus $0.18 million; noninterest income was $4.60 million, up 11.5%; and noninterest expense was $11.45 million, up 4.9%. Net earnings fell to $2.37 million from $3.67 million (35%); diluted EPS was $0.40 versus $0.61. Cash dividends declared were $0.30 per share versus $0.24.
- Interest performance: Tax-equivalent net interest margin was 4.14%, down from 4.66%; net interest spread was 3.93%, versus 4.50%. Average earning-asset yield declined to 4.52% from 4.97%, while the average rate on interest-bearing liabilities increased to 0.59% from 0.47%.
- Cash flow: Operating cash flow was $1.89 million versus $4.22 million. Investing used $37.63 million versus $9.03 million, largely reflecting loan growth; financing provided $86.88 million versus $12.65 million. Cash and cash equivalents rose to $103.52 million from $52.39 million at year-end.
- Balance sheet: Total assets were $1.245 billion, up from $1.155 billion at December 31, 2019. Loans were $880.56 million, up from $849.87 million; deposits were $983.96 million, up from $966.52 million. Available-for-sale securities totaled $201.51 million.
- Credit quality: The allowance for loan losses rose to $8.11 million, or 0.92% of loans, from $6.68 million, or 0.79%, at year-end. Nonaccrual loans were $3.97 million (0.45% of loans), up from $3.55 million (0.42%). Total past-due loans were $15.58 million versus $10.48 million at year-end.
- Debt, liquidity and capital: FHLB borrowings were $70 million, compared with none at year-end; repurchase-agreement funding was $28.54 million. Junior subordinated debentures were $15.46 million. The bank’s liquidity ratio was 24.83%, above its 10% policy minimum; remaining FHLB line availability was $58.6 million. The Bank was reported well capitalized: its total risk-based capital ratio was 14.48% and common equity Tier 1 ratio 13.67%.
Material changes and notable items
- COVID-19-related economic uncertainty drove a higher loan-loss provision, reflecting increased qualitative reserves and loan growth. At March 31, $57.4 million of loans had payment modifications, generally interest-only for three to six months.
- After quarter-end, modified loans reached $108.1 million by April 30. The Bank originated $90.4 million of Paycheck Protection Program loans by that date and expected approximately $3.6 million in SBA fees.
- Noninterest income benefited from appraisal management fees, which increased to $1.35 million from $0.86 million; related expense also increased, to $1.03 million from $0.66 million. Mortgage banking income rose to $0.32 million from $0.15 million.
- The Company repurchased 126,800 shares for approximately $3.0 million under a January 2020 program. A new $70 million FHLB advance was executed in February at a stated rate of 0.58% under a ten-year convertible advance program.
- Unfunded commitments to extend credit were $289.6 million; standby letters of credit were $4.1 million. These are potential liquidity and credit exposures, though not all are expected to be drawn.
Outlook, risks and contingencies
Management provided no quantified earnings or margin guidance. It warned that the pandemic, business restrictions, unemployment, and historically low interest rates could weaken borrowers’ repayment capacity, collateral values, net interest income, and noninterest income. Hotel, restaurant, and retail borrowers, and commercial real estate tied to those sectors, were identified as areas of concern. The duration and full financial impact were described as uncertain.
The Bank remained open with drive-up and appointment-only service, remote-work and continuity measures, and customer loan-modification support. Management said it considered the allowance adequate, but noted future economic deterioration could require additional reserves. The Bank’s PPP participation carries risks of customer litigation and possible SBA denial or recovery of loan guarantees if origination, funding, or servicing requirements are not met.
A North Carolina tax-credit dispute involved approximately $1.4 million of proposed adjustments. The Bank paid $1.2 million in tax and interest in 2019 while contesting the matter; management believed a guaranty agreement limited its exposure to approximately $125,000. COVID-19-related qualified loan modifications were treated as exempt from TDR classification under the CARES Act provisions described in the filing.
Important facts for investors to verify
- Reconcile the filing’s return-on-equity disclosures: the results discussion reports 7.09% for Q1 2020, while a later capital section labels 10.75% as annualized return on average equity; 10.75% is also the reported period-end equity-to-assets ratio.
- Track modified-loan balances, borrower performance after modification periods, and subsequent credit-loss provisions, particularly in exposed commercial and real estate portfolios.
- Verify the realized PPP fee income, SBA guarantee status, and any litigation or compliance developments; the $3.6 million fee figure was an expectation as of April 30.
- Monitor funding costs and interest-rate sensitivity following rate cuts and the new FHLB borrowing, along with liquidity and regulatory capital ratios.
- Follow the status and final exposure of the North Carolina tax-credit dispute and guaranty recovery.