Business context and reporting period
Peoples Bancorp of North Carolina, Inc. is a bank holding company whose subsidiary, Peoples Bank, operates primarily in North Carolina. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in millions of dollars unless noted.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $11.675 | $10.726 | $22.782 | $21.935 |
| Provision for (recovery of) loan losses | $(0.226) | $1.417 | $(0.681) | $2.938 |
| Non-interest income | $6.040 | $5.239 | $11.913 | $9.834 |
| Non-interest expense | $12.132 | $11.452 | $24.400 | $22.901 |
| Net earnings | $4.615 | $2.561 | $8.736 | $4.928 |
| Diluted EPS | $0.80 | $0.44 | $1.51 | $0.84 |
- Q2 return on average assets was 1.18% versus 0.76%; return on average equity was 13.11% versus 7.64%. For the first half, return on average equity was 12.36% versus 7.30%.
- Net yield on interest-earning assets, on a tax-equivalent basis, was 3.20% in Q2 versus 3.48%, and 3.26% for the first half versus 3.79%.
- At June 30, assets were $1,599.6; deposits $1,392.1; loans $888.4; net loans $879.1; and shareholders’ equity $145.4. Since year-end, assets rose from $1,416.2 and deposits from $1,221.1, while loans declined from $948.6.
- Cash and cash equivalents were $287.3, up from $161.6 at year-end. First-half operating cash flow was $16.4 versus $6.0; investing cash outflow was $64.8 versus $128.3; financing cash inflow was $174.2 versus $259.6. Cash increased $125.7.
- No FHLB borrowings were outstanding. Repurchase-agreement balances were $31.2 and junior subordinated debentures were $15.5. The Bank’s liquidity ratio was 42.71%, above its 10% policy minimum; it reported $95.1 of remaining FHLB line availability and $337.1 of FRB availability.
- The allowance for loan losses was $9.3, down from $9.9 at year-end; non-accrual loans were $3.4, or 0.38% of loans. The Bank reported no loans 90 days past due and accruing.
- The Bank was considered well capitalized. Company total risk-based capital was 16.56%, common equity Tier 1 was 14.13%, and Tier 1 leverage was 10.01%.
Material changes versus comparable periods
- Q2 net earnings rose to $4.6 from $2.6, supported by higher net interest income and non-interest income and a loan-loss recovery rather than a provision; higher operating expenses partly offset these gains. First-half net earnings increased to $8.7 from $4.9.
- PPP loan fees contributed materially to loan interest income: $1.5 in Q2 and $2.5 for the first half. The loan portfolio contracted mainly through PPP forgiveness and commercial loan payoffs; securities grew as excess cash was invested.
- Non-interest income growth reflected higher mortgage banking, appraisal management, debit-card activity and SBIC investment income. Appraisal management expense and employee-related costs also increased.
- Deposits and securities expanded substantially, while the balance of cash also rose. Average earning-asset yields and net yield declined year over year despite lower funding costs.
Outlook, commentary, risks and unusual items
- No numerical earnings or financial guidance was provided. Management described uncertainty around the pandemic, new variants, local economic conditions, interest rates, borrower repayment capacity and collateral values. It noted particular potential strain among hotel, restaurant and retail borrowers and related commercial real estate.
- COVID-related loan modifications still outstanding were $0.283 at June 30, down from $18.3 at December 31, 2020; $108.2 of modified loans had returned to original terms. Management cautioned that stimulus effects and potential future losses remained uncertain.
- Loans are concentrated in real estate: commercial real estate loans were approximately 38% of total loans. PPP loans were excluded from the allowance because they are SBA-guaranteed.
- The Company is preparing for CECL, scheduled for adoption January 1, 2023, and was developing model assumptions and parallel calculations. Interest-rate sensitivity and LIBOR transition are also relevant; the floating-rate trust preferred obligation is tied to three-month LIBOR.
- The filing corrects prior deferred-compensation-plan accounting and presentation. It increased certain December 2020 asset and liability balances by $1.3 and revised reported 2020 basic EPS to $0.46 for Q2 and $0.87 for the first half; management said the underlying changes were not material.
- A North Carolina tax-credit dispute remains contested. The Bank paid $1.2 in tax and interest; management believes a guaranty limits exposure to approximately $0.125.
- The West Lincoln branch closed June 11; its property was sold July 1, after quarter-end, for a reported net gain of $0.107 expected to be recognized in Q3. A $4.0 share-repurchase authorization had no program repurchases through June 30; shares bought in Q2 were for the deferred-compensation plan.
Important facts for investors to verify
- Reconcile PPP balances: the filing gives $35.7 outstanding at June 30 in the financial-statement notes and loan discussion, but one MD&A passage states $37.5.
- Assess whether PPP fee income and loan-loss recoveries are repeatable, and monitor the effect of PPP forgiveness and loan payoffs on future interest income and loan growth.
- Track credit quality, especially real-estate exposure, COVID-modified or formerly modified borrowers, and the adequacy of reserves as economic support changes.
- Review deposit growth, liquidity deployment into securities, interest-rate sensitivity and the potential effect of changing rates on asset yields and funding costs.
- Follow the tax-credit challenge, CECL implementation, LIBOR transition and the post-quarter branch-property gain.