Peoples Bancorp of North Carolina, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The company is a North Carolina bank holding company operating primarily through Peoples Bank. This unaudited quarterly report covers the three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Dollar figures below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $10.56 | $10.93 | $33.34 | $32.86 |
| Provision for loan losses | $(0.18) recovery | $0.52 expense | $(0.86) recovery | $3.46 expense |
| Non-interest income | $6.04 | $7.13 | $17.95 | $16.97 |
| Non-interest expense | $12.57 | $11.91 | $36.97 | $34.82 |
| Net earnings | $3.39 | $4.51 | $12.13 | $9.44 |
| Diluted earnings per share | $0.59 | $0.78 | $2.10 | $1.62 |
| Net interest margin, tax-equivalent | 2.76% | 3.28% | 3.08% | 3.60% |
Quarterly net earnings fell 25%, principally reflecting lower net interest income and non-interest income and higher operating expenses, partly offset by a lower loan-loss provision. The prior-year quarter included $1.69 million of securities-sale gains; none were recorded in Q3 2021. Nine-month earnings rose about 29%, supported by lower credit-loss provisions and higher non-interest income, including PPP fees. Nine-month PPP loan fee income was $3.0 million versus $0.36 million.
- Balance sheet: Total assets were $1.616 billion, up from $1.416 billion at year-end 2020. Deposits rose to $1.410 billion from $1.221 billion; cash and cash equivalents increased to $263.3 million from $161.6 million.
- Loans and securities: Loans were $891.0 million, down from $948.6 million, largely due to PPP forgiveness and commercial loan payoffs. Available-for-sale securities increased to $402.9 million from $245.2 million.
- Credit quality: Allowance for loan losses was $9.0 million, down from $9.9 million. Nonperforming assets were $2.7 million, or 0.17% of assets, versus $3.9 million, or 0.27%, at year-end. Nonaccrual loans were 0.30% of loans; no loans 90 days past due were still accruing.
- Cash flow: Nine-month operating cash flow was $17.3 million, investing cash outflow $104.1 million, and financing cash inflow $188.6 million. Cash and cash equivalents increased $101.7 million.
- Debt and liquidity: No FHLB borrowings were outstanding. Repurchase-agreement funding was $32.3 million; junior subordinated debentures were $15.5 million. The bank’s liquidity ratio was 42.42%, compared with a 10% policy minimum. Core deposits represented 98.13% of deposits.
- Capital: Shareholders’ equity was $143.5 million. Company Tier 1, total risk-based, common equity Tier 1, and leverage ratios were 15.30%, 16.19%, 13.82%, and 9.61%, respectively. The Bank was reported as well capitalized.
Material changes, outlook, and risks
- Management provided no specific earnings or financial guidance. It describes a community-bank strategy focused on local-market growth and maintaining liquidity, managing interest-rate exposure, and monitoring asset quality.
- COVID-19 remains an uncertain risk. All COVID-modified loans had returned to original terms, but $100.9 million of loans had been modified at some point; management cautioned that stimulus effects and potential future losses remain uncertain. Hotel, restaurant, retail, commercial real estate, labor shortages, and collateral values were highlighted as areas of concern.
- Interest-rate sensitivity is material: the company reported $203.1 million of variable-rate loans indexed to prime and $126.9 million of loans with rate floors. It had no interest-rate derivatives at quarter-end. The $15.5 million trust-preferred-related debt references three-month LIBOR, which is scheduled to cease publication after June 2023.
- CECL adoption is planned for January 1, 2023. The company was developing model assumptions and running parallel calculations; the adoption impact was not yet determined.
- The company repurchased $3.6 million of shares, or 127,597 shares, under its 2021 repurchase program by quarter-end. A tax-credit dispute with North Carolina’s Department of Revenue involved proposed adjustments of about $1.4 million; the bank had paid $1.2 million and says a guaranty limits its estimated exposure to about $125,000.
- The filing reports a correction of an immaterial prior-period deferred-compensation accounting error, including restatement of 2020 EPS presentation. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan balances, PPP forgiveness, and mix changes stabilize, and how much PPP fee income remains to be recognized.
- Whether previously modified borrowers remain current as temporary stimulus effects fade, particularly in exposed commercial real estate sectors.
- How deposit growth and the large cash and securities balances affect future net interest margin and asset yields.
- The eventual CECL allowance impact and any updates to the North Carolina tax-credit dispute.
- Capital and liquidity levels alongside planned dividends and any further share repurchases.