Peoples Bancorp of North Carolina, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company is a bank holding company whose principal business is conducted through Peoples Bank, a North Carolina community bank.
Business context and financial position
- The Bank operated 20 branches and loan production offices in Charlotte, Denver and Durham, North Carolina. It serves individuals and small and midsize businesses, primarily in the Catawba Valley and surrounding communities.
- At year-end, the Company reported total assets of approximately $1.2 billion, net loans of $843.2 million, deposits of $966.5 million, securities of $200.0 million and shareholders’ equity of $134.1 million.
- Loan concentrations included commercial real estate (about 34% of loans), commercial loans (12%), construction and land development (11%) and single-family residential loans (35%). The residential figure includes Banco nontraditional mortgage loans, approximately 4% of total loans.
Results, capital and liquidity
- The supplied filing text does not provide clear values for FY 2019 revenue, net income, earnings per share, net interest margin, cash flows, or their changes versus 2018. The Form 10-K incorporates the financial statements and MD&A from the attached Annual Report, but those details are not included in the supplied text.
- At December 31, 2019, the Bank’s capital ratios were 11.61% Tier 1 leverage, 15.09% common equity Tier 1, 15.09% Tier 1 risk-based and 15.79% total risk-based. The Company’s respective ratios were 11.91%, 13.79%, 15.37% and 16.08%. Both exceeded applicable capital requirements.
- The Bank’s five largest funding relationships totaled $121.9 million, or 12.30% of deposits and repurchase-agreement funding combined. Their deposits were $107.7 million (11.14% of deposits); their repurchase agreements were $14.2 million (58.76% of that funding category). Management cautioned that losing these relationships could adversely affect liquidity.
- The Company redeemed $5.0 million of outstanding trust preferred securities in December 2019. The remaining balance is not stated clearly in the supplied text; the securities carry a floating rate of three-month LIBOR plus 163 basis points and are mandatorily redeemable at maturity in 2036.
Changes, outlook, risks and unusual items
- FDIC insurance expense was approximately $119,000 in 2019, compared with $328,000 in 2018 and $347,000 in 2017. The reduction reflected assessment credits; the Company expected to use the remaining credits by the end of Q1 2020 and anticipated higher FDIC expense in 2020.
- The Bank paid the North Carolina Department of Revenue $1.2 million in taxes and interest in Q2 2019 while contesting proposed tax-credit adjustments for 2014–2016. The NCDOR’s draft audit proposed approximately $1.4 million in adjustments, including tax, penalties and interest; penalties were waived. Management believes a related guaranty limits exposure to approximately $125,000, but recovery is not assured.
- The Company reported launching PB Insurance Agency in 2019 as part of Community Bank Real Estate Solutions. The filing also says it redeemed $5.0 million of trust preferred securities during the year.
- Management identified interest-rate changes, local economic and real-estate conditions, credit quality, competition, regulation and compliance costs, cybersecurity and third-party service providers as material risks. The Bank’s geographic concentration makes it particularly exposed to deterioration in its local market.
- The Company expected to implement the current expected credit losses (CECL) standard beginning January 1, 2023, and noted that it could increase and make loan-loss allowances more volatile. It did not provide specific earnings or balance-sheet guidance in the supplied text.
- The CFO announced plans to retire in June 2020, creating a key-personnel and succession risk. Management reported effective disclosure controls and internal control over financial reporting as of year-end, with no material quarterly changes to internal control.
Investor verification priorities
- Review the incorporated Annual Report’s financial statements and MD&A for earnings, net interest margin, credit-loss provision, nonperforming assets, charge-offs and operating cash flows; these values are not clear in the supplied filing text.
- Confirm deposit trends, liquidity sources and the concentration and stability of the five largest funding relationships.
- Track resolution of the NCDOR tax-credit dispute, guarantor performance and the ultimate amount of any unrecovered payment.
- Assess loan quality and real-estate concentration, interest-rate sensitivity, and the projected effect of CECL adoption.
- Verify the post-redemption trust preferred balance, associated interest cost and capital treatment, and the planned CFO succession.