Peoples Bancorp of North Carolina, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. The company is a North Carolina bank holding company whose principal business is community banking; it also operates appraisal-management subsidiary CBRES.
Financial results and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $14.3 million | $10.7 million in Q1 2022 |
| Net earnings | $3.2 million; diluted EPS $0.56 | $3.5 million; diluted EPS $0.61 in Q1 2022 |
| Net interest margin, tax-equivalent | 3.77% | 2.79% in Q1 2022 |
| Return on average assets / equity | 0.81% / 11.78% | 0.85% / 10.10% in Q1 2022 |
| Total assets | $1.603 billion | $1.621 billion at December 31, 2022 |
| Total loans / net loans | $1.051 billion / $1.041 billion | $1.033 billion / $1.022 billion at December 31, 2022 |
| Total deposits | $1.413 billion | $1.435 billion at December 31, 2022 |
| Cash and cash equivalents | $83.0 million | $71.6 million at December 31, 2022 |
| Shareholders’ equity | $114.8 million; 7.16% of assets | $105.2 million; 6.49% of assets at December 31, 2022 |
| Credit-loss allowance on loans | $9.6 million | $10.5 million at December 31, 2022 |
Cash flows were $8.0 million provided by operations, $35.2 million provided by investing activities and $31.9 million used in financing activities. Cash and cash equivalents increased by $11.4 million during the quarter. The company declared dividends of $0.34 per share.
Interest expense was $2.5 million, versus $0.7 million in Q1 2022. The company reported $39.5 million of securities sold under repurchase agreements and $15.5 million of junior subordinated debentures; it had no FHLB or Federal Reserve borrowings outstanding. Its Q1 2023 total risk-based capital ratio was 14.27%, common equity Tier 1 ratio 12.15%, and Tier 1 leverage ratio 10.27%. The Bank was considered well capitalized under regulatory guidelines.
Material changes versus Q1 2022 and prior year-end
- Net interest income rose $3.7 million, as higher loan and securities yields and higher interest income on bank deposits more than offset sharply increased funding costs. Average earning-asset yield rose to 4.41% from 2.96%; average rate paid on interest-bearing liabilities rose to 1.05% from 0.28%.
- Net earnings declined $0.3 million. Non-interest income fell to $3.6 million from $7.0 million, including a $2.5 million net securities-sale loss and lower CBRES appraisal-management fees. Non-interest expense increased to $13.7 million from $13.3 million, and provision for credit losses rose to $224,000 from $71,000.
- Loans increased $18.3 million and deposits declined $21.8 million from year-end. Securities available for sale fell to $399.1 million from $445.4 million, partly reflecting sales and maturities.
- Accumulated other comprehensive loss improved to $38.4 million from $47.6 million, primarily because of securities valuation changes; this contributed to higher reported shareholders’ equity.
- Nonperforming assets were $3.6 million, or 0.23% of assets, compared with $3.7 million, or 0.23%, at year-end. Nonaccrual loans were 0.35% of loans; no loans were 90 days past due and still accruing.
Outlook, risks, contingencies and unusual items
- The filing gives no specific earnings, revenue, margin or growth guidance. Management describes a community-bank strategy focused on local-market growth, liquidity, interest-rate exposure and asset quality.
- In January and February 2023, the company sold $53.5 million of available-for-sale securities, recording a $2.5 million net loss. Management said the transactions reduced investment-portfolio risk, provided flexibility to support loan growth and reduced the need for other borrowings. At quarter-end, the portfolio had $50.7 million of gross unrealized losses, which management attributed to interest-rate changes and considered temporary; no credit-loss allowance was recorded for these securities.
- Estimated uninsured deposits were $407.8 million, or 28.85% of deposits, down from $439.8 million, or 30.64%, at year-end. The Bank’s liquidity ratio was 28.23%, above its 10% policy minimum. Available borrowing capacity included $124.4 million under the FHLB line and $449.2 million under the Federal Reserve line; the Bank had also completed steps to access the Bank Term Funding Program but had pledged no collateral to it.
- Unfunded loan commitments were $376.9 million and standby letters of credit were $4.4 million. Core deposits were reported as 96.33% of total deposits. The loan portfolio is substantially secured by real estate, exposing the Bank to local property-market and borrower-income conditions.
- The company adopted CECL on January 1, 2023. Adoption reduced retained earnings by $838,000 after tax and increased the allowance for credit losses by approximately $1.1 million, including a $2.3 million increase for unfunded commitments and a $1.2 million decrease for loans. The allowance for unfunded commitments is reported in other liabilities; the filing’s loan allowance balance is $9.6 million.
- A North Carolina tax-credit dispute remains pending. The Bank paid $1.2 million in 2019 while contesting proposed adjustments; management believes a guaranty agreement limits its exposure to approximately $125,000. On April 3, 2023, the North Carolina Business Court ruled against the same tax-credit rationale used by the state against the Bank; an appeal was considered likely. The company said that if the rulings are upheld, it believes the state will apply them to the Bank’s credits.
- The company authorized a common-stock repurchase program of up to $2.0 million in March, expiring in March 2024; no shares had been repurchased under that program by quarter-end. A separate 1,997-share purchase was made by the deferred-compensation rabbi trust.
- The $15.5 million floating-rate trust-preferred debentures were tied to three-month LIBOR. Management was working with the trustee on required updates before the rate’s scheduled cessation after June 30, 2023. Management reported no material subsequent events, no material changes to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Track deposit retention, deposit pricing and the mix of uninsured and time deposits, together with use of wholesale funding and available contingent borrowing sources.
- Assess whether loan growth, real-estate concentrations and local economic conditions change delinquencies, nonaccruals, charge-offs or CECL reserve needs.
- Monitor the effect of interest-rate movements on funding costs, net interest margin and the fair value or saleability of the securities portfolio.
- Follow appraisal-management volumes and expenses, which contributed materially to the year-over-year decline in non-interest income.
- Check the outcome of the North Carolina tax-credit litigation and the LIBOR transition for the trust-preferred debentures.