Peoples Bancorp of North Carolina, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Comparisons are with Q1 2021 for earnings and cash flows, and with December 31, 2021 for balance-sheet amounts. Dollar amounts are in millions unless otherwise noted.
Business context
The company is a North Carolina bank holding company whose subsidiary, Peoples Bank, primarily gathers deposits and makes commercial, real estate, construction and consumer loans in North Carolina. Results are influenced by interest rates, local economic conditions, credit quality and competition.
Financial performance and condition
- Earnings: Net interest income was $10.7 million, down 4.0% from $11.1 million. Net earnings were $3.45 million, down 16.2% from $4.12 million. Diluted EPS was $0.61 versus $0.71; cash dividends declared were $0.33 per share versus $0.16.
- Revenue and expenses: Interest income was $11.3 million versus $11.9 million; interest expense declined to $0.66 million from $0.82 million. Non-interest income rose to $7.05 million from $5.87 million, while non-interest expense increased to $13.34 million from $12.27 million. Higher appraisal management fees drove much of both increases. Mortgage banking income fell to $0.20 million from $0.87 million.
- Margins and returns: Net yield on interest-earning assets was 2.79%, down from 3.31%; average earning-asset yield was 2.96% versus 3.55%. Annualized return on assets was 0.85% versus 1.14%, and return on equity was 10.10% versus 11.99%.
- Loans and credit: Loans totaled $889.8 million, up from $884.9 million at year-end. The allowance for loan losses was $9.43 million, or approximately 1.06% of loans. The company recorded a $71,000 provision, compared with a $455,000 provision recovery a year earlier. Non-accrual loans were $3.31 million, or 0.37% of loans; nonperforming assets were 0.20% of assets. Past-due and non-accrual TDR loans rose to $3.3 million from $2.2 million.
- Cash flow and liquidity: Operating cash flow was $7.16 million, down from $11.78 million. Cash and cash equivalents increased $27.6 million during the quarter to $305.1 million. Deposits grew to $1.469 billion from $1.413 billion. The bank’s liquidity ratio was 43.65%, well above its stated 10% policy minimum. Unfunded commitments to extend credit were $317.9 million; standby letters of credit were $4.9 million.
- Debt and capital: Repurchase agreements were $34.8 million, junior subordinated debentures $15.5 million, and lease liabilities $6.3 million; no FHLB borrowings were outstanding. The company’s total risk-based capital ratio was 15.79%, common equity Tier 1 ratio 13.50%, and Tier 1 leverage ratio 9.62%. The bank was reported as well capitalized.
Material changes and unusual items
- Available-for-sale securities had $25.2 million of gross unrealized losses at quarter-end, attributed by management to changing interest rates and considered temporary. After-tax other comprehensive loss was $18.3 million; accumulated other comprehensive loss moved to $18.2 million from $0.1 million of income at year-end. Shareholders’ equity declined to $125.4 million from $142.4 million, primarily because of this securities valuation change.
- Average loans fell $62.0 million year over year, including a $63.3 million decrease in average PPP loans. PPP loan fee income declined to $0.60 million from $1.00 million.
- The company’s board authorized a $2.0 million share repurchase program in February 2022. It repurchased $199,000, or 7,000 shares, under the program through March 31; additional shares were purchased for the deferred compensation plan.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management says the future effects of COVID-19 remain uncertain, and the reserve includes a separate pool of previously modified pandemic-related loans totaling $82.2 million. Management cautions that additional losses may not yet be identified. Key risks include interest-rate changes, economic weakness and credit deterioration, especially given the concentration of lending in real estate; commercial real estate loans were approximately 40% of the portfolio. Rate changes also affect the substantial available-for-sale securities portfolio and reported equity.
The bank is contesting proposed North Carolina tax-credit adjustments for 2014–2016. It paid $1.2 million in taxes and interest while disputing the adjustments; management believes a guaranty limits its remaining exposure to approximately $125,000. Management reported no material subsequent events and no material changes to previously disclosed risk factors. Disclosure controls were considered effective.
Important facts for investors to verify
- How rising rates affect securities values, accumulated other comprehensive loss, capital and future net interest income.
- Whether credit quality or reserves deteriorate in real-estate exposures and the $82.2 million pool of previously pandemic-modified loans.
- Whether appraisal management fee growth and related expenses persist, and whether mortgage banking income remains under pressure.
- The outcome and ultimate exposure from the North Carolina tax-credit dispute, and progress under the share repurchase program.