PEOPLES BANCORP OF NORTH CAROLINA INC quarterly report, Q1 FY2021

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Peoples Bancorp of North Carolina, Inc. — Q1 2021 Form 10-Q

Business context and reporting period

The filing reports the unaudited three months ended March 31, 2021, with balance-sheet comparisons to audited December 31, 2020. The company is a North Carolina community bank holding company whose principal activities are taking deposits and making commercial, real estate, and consumer loans. Unless noted otherwise, financial amounts below are in millions of dollars.

Financial performance and condition

  • Earnings: Net earnings were $4.12 million, versus $2.37 million in Q1 2020. Basic and diluted EPS were $0.73 and $0.71, compared with $0.41 and $0.40.
  • Interest income and margin: Interest income was $11.92 million, down from $12.25 million; interest expense fell to $0.82 million from $1.04 million. Net interest income was $11.11 million, versus $11.21 million. Net interest spread was 3.15% versus 3.93%; net yield on interest-earning assets was 3.31% versus 4.14%.
  • Other income and costs: Noninterest income increased to $5.87 million from $4.60 million, notably from higher mortgage banking and appraisal management income. Noninterest expense rose to $12.27 million from $11.45 million, including higher appraisal management costs and employee compensation. Income before taxes was $5.17 million versus $2.83 million; effective tax rate was 20.24% versus 16.48%.
  • Returns: Annualized return on average assets was 1.14%, compared with 0.79%; annualized return on average equity was 11.99%, compared with 7.09%.
  • Assets and loans: Total assets were $1.54 billion, up from $1.42 billion at year-end. Loans were $946.5 million, slightly below $948.6 million; available-for-sale securities increased to $325.5 million from $245.2 million. The allowance for loan losses was $9.5 million, or 1.01% of loans, versus $9.9 million, or 1.04%.
  • Credit quality: Nonperforming assets were $3.7 million, or 0.24% of assets, versus $3.8 million, or 0.27% at year-end. Nonaccrual loans were $3.6 million, 0.38% of loans; there were no loans 90 days past due and still accruing. The loan-loss provision was a $455,000 credit, compared with $1.52 million expense in Q1 2020.
  • Deposits, debt, and liquidity: Deposits grew to $1.33 billion from $1.22 billion; 97.89% were core deposits. Cash and cash equivalents were $209.0 million, up from $161.6 million. The company had $31.9 million of repurchase-agreement funding and $15.5 million of junior subordinated debentures; it had no FHLB borrowings. The Bank’s liquidity ratio was 35.38%, above its 10% policy minimum. Available borrowing capacity included $106.3 million under its FHLB line and $341.9 million under its Federal Reserve line.
  • Cash flow and capital: Operating cash flow was $11.7 million, versus $1.9 million in Q1 2020; investing cash outflow was $82.5 million, primarily reflecting $90.5 million of securities purchases; financing cash inflow was $118.2 million, mainly reflecting deposit growth. Shareholders’ equity was $140.0 million, or 9.12% of assets. The company’s total risk-based capital ratio was 16.10%; the Bank was described as well capitalized.

Material changes versus the prior comparable period

  • Net earnings rose primarily because of the lower loan-loss provision and higher noninterest income, partly offset by lower net interest income and higher operating expense.
  • Lower market rates reduced asset yields: average loan yield was 4.57% versus 4.99%, and average investment-security yield was 1.96% versus 3.15%. Lower deposit costs and no average FHLB borrowings partly offset this pressure.
  • Noninterest income increased $1.28 million, driven mainly by mortgage banking and appraisal management. Noninterest expense increased $819,000, principally from salaries and appraisal management costs.
  • Other comprehensive income swung to a $3.10 million loss from $2.09 million of income, largely reflecting unrealized securities losses; accumulated other comprehensive income declined to $2.3 million from $5.4 million.
  • Cash dividends declared were $0.16 per share, versus $0.30 in Q1 2020. Cash dividends paid were $930,000, versus $1.78 million.

Outlook, risks, contingencies, and unusual items

  • Outlook: The filing provides no quantified earnings or financial guidance. Management expects the COVID-19 pandemic and related economic disruption to remain uncertain and potentially adversely affect future results. It highlights borrower and collateral risks, particularly in hotel, restaurant, retail, and related commercial real estate exposures.
  • COVID-19 and PPP: Existing COVID-related loan modifications were $1.9 million at March 31, down from $18.3 million at year-end; $114.8 million of loans were currently or previously modified, including loans returned to original terms. Management cautions that stimulus effects and future borrower performance remain uncertain. PPP loans outstanding were $78.2 million at quarter-end; the Bank had recognized $2.4 million of PPP fees to date, including $999,000 in Q1. April 30 PPP balances were $65.5 million, primarily following SBA forgiveness.
  • Credit and concentration risks: Loans are concentrated in North Carolina and substantially collateralized by real estate. Commercial real estate represented about 36% of loans; commercial loans included $78.2 million of PPP loans. Management warns that economic weakness, unemployment, property values, and borrower repayment capacity could increase credit losses.
  • Tax-credit dispute: The North Carolina Department of Revenue is challenging tax credits claimed for 2014–2016. The Bank paid $1.2 million in taxes and interest while contesting the proposed adjustments; management believes a guaranty limits remaining exposure to approximately $125,000. The dispute remains unresolved.
  • Accounting correction: The company identified and corrected presentation errors related to its nonqualified deferred compensation plan after issuing its 2020 Form 10-K. The correction increased certain December 2020 balance-sheet assets and liabilities by $1.3 million and adjusted Q1 2020 basic EPS from $0.40 to $0.41; the company said the effects were not material.
  • Capital allocation: In February 2021, the Board authorized a $4.0 million stock repurchase program; no shares had been repurchased under that program by March 31. The 2,457 shares shown as purchased in Q1 were acquired for the deferred compensation plan with participant contributions.
  • Other considerations: The company was preparing for CECL adoption, then scheduled for January 1, 2023, and was still evaluating its financial-statement impact. Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to previously disclosed market risks or risk factors.

Important facts for investors to verify

  • Whether the lower provision for credit losses is sustainable and how credit quality evolves as pandemic support and loan modifications unwind.
  • PPP forgiveness, remaining fee recognition, and the resulting effect on loan balances and future earnings.
  • Net interest margin sensitivity to interest rates, deposit mix and costs, and continued growth in low-yielding cash and securities.
  • Commercial real estate and other borrower concentrations, collateral values, and trends in watch-grade, impaired, and nonaccrual loans.
  • Resolution and ultimate cost of the North Carolina tax-credit dispute, including the claimed guaranty protection.
  • CECL implementation assumptions and impact, and the distinction between employee-plan share purchases and any future repurchases under the $4.0 million authorization.