Peoples Bancorp of North Carolina, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; filed November 4, 2020. The interim financial statements are unaudited. The company is a North Carolina community bank holding company whose principal business is taking deposits and making commercial, real estate, construction and consumer loans.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $10.9 million | $11.4 million | $32.9 million | $34.5 million |
| Provision for loan losses | $0.5 million | $0.4 million | $3.5 million | $0.7 million |
| Non-interest income | $7.1 million | $4.7 million | $17.0 million | $13.2 million |
| Non-interest expense | $11.9 million | $11.3 million | $34.8 million | $33.4 million |
| Net earnings | $4.5 million | $3.6 million | $9.4 million | $11.1 million |
| Diluted earnings per share | $0.78 | $0.61 | $1.62 | $1.86 |
- Q3 net earnings rose year over year, primarily as higher non-interest income—especially a $1.7 million gain on securities sales—more than offset lower net interest income, higher credit provision and higher expenses. The nine-month earnings decline reflects the larger loan-loss provision and weaker net interest income.
- Net interest income fell 4% in Q3 and 5% year to date. Management attributed the decline mainly to lower loan yields after the March 2020 Prime Rate reductions. Tax-equivalent net yield on interest-earning assets was 3.28% in Q3 versus 4.41% a year earlier, and 3.60% year to date versus 4.56%.
- Q3 return on average assets was 1.25% versus 1.26%; return on average equity was 12.81% versus 10.89%. Nine-month return on average equity was 8.99% versus 11.24%.
- Service charges declined amid pandemic-related fee concessions. Mortgage banking income and appraisal-management revenue increased with higher activity; appraisal-management expense also increased.
Financial position, cash flow and capital
- At September 30, 2020, total assets were $1.46 billion, up from $1.15 billion at year-end 2019. Loans were $970.2 million, up from $849.9 million; available-for-sale securities were $223.0 million, up from $195.7 million.
- Deposits increased to $1.19 billion from $966.5 million. Cash and cash equivalents were $204.2 million, versus $52.4 million at year-end. The Bank reported a 30.5% liquidity ratio, above its 10% policy minimum; core deposits were 97.92% of deposits.
- Nine-month cash flow: operating activities provided $8.1 million; investing activities used $149.4 million, largely reflecting loan growth and securities purchases; financing activities provided $293.2 million, principally from deposit growth and FHLB borrowing. Cash increased $151.8 million.
- FHLB borrowings were $70.0 million, compared with none at year-end; the advance was executed in February at a stated 0.58% rate under a ten-year convertible program. Repurchase-agreement balances were $34.2 million, and junior subordinated debentures were $15.5 million. Shareholders’ equity was $139.5 million, or 9.54% of assets.
- The company reported Tier 1, total risk-based, common equity Tier 1 and leverage capital ratios of 14.53%, 15.49%, 13.06% and 10.38%, respectively. The Bank was considered well capitalized under regulatory guidelines.
- Cash dividends declared were $0.15 per share in Q3 and $0.60 per share year to date. The company repurchased approximately $3.0 million, or 126,800 shares, under its 2020 program through September.
Changes, outlook and risks
- The allowance for loan losses rose to $9.9 million, or 1.02% of loans, from $6.7 million, or 0.79%, at year-end. The nine-month provision increased to $3.5 million from $0.7 million, reflecting pandemic-related economic uncertainty and loan growth.
- At quarter-end, $119.7 million of loans had COVID-19 payment modifications, primarily interest-only arrangements. Reserves associated with these modified loans were $1.6 million. About 12% of modified loans had received secondary modifications. The company cautioned that borrowers’ ability to resume original terms remained uncertain.
- The Bank originated approximately $98.8 million of Paycheck Protection Program loans and had received $4.0 million in SBA fees, of which $361,000 had been recognized as income. PPP loans are fully SBA-guaranteed, subject to risks if the SBA identifies origination, funding or servicing deficiencies.
- Non-performing assets were $3.7 million, or 0.25% of assets. Non-accrual loans were $3.5 million, or 0.36% of loans; $84,000 of loans were at least 90 days past due and still accruing. Management noted concentrated exposure to real estate and potential distress among hotel, restaurant and retail borrowers.
- Management gave no quantified earnings or financial guidance. It described the pandemic’s future effects as highly uncertain and said deterioration could adversely affect credit quality, earnings, capital and liquidity. Other stated risks include interest-rate changes, local economic conditions, competition, regulatory changes and operational/vendor disruptions.
- Unusual items and contingencies include the securities-sale gain, a related-party matter involving two branch facilities leased from a company in which a director had an interest (the Bank purchased the facilities in September), and a disputed North Carolina tax-credit assessment. The Bank paid $1.2 million in taxes and interest while contesting the assessment; management believes a guaranty limits exposure to approximately $125,000.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material subsequent events through issuance of the statements.
Important facts for investors to verify
- How pandemic-related payment modifications perform, particularly the $119.7 million modified balance and secondary modifications.
- Whether the allowance and provision adequately reflect credit risk, especially in commercial real estate and COVID-affected industries.
- The sustainability of earnings excluding the $1.7 million Q3 securities-sale gain, and the effects of low interest rates on net interest income and margins.
- PPP loan forgiveness, SBA fee recognition and any potential SBA guarantee or litigation exposure.
- The terms, repricing features and liquidity implications of the $70 million FHLB advance, alongside deposit growth and available borrowing capacity.
- The outcome of the North Carolina tax-credit dispute and the support for management’s estimated $125,000 residual exposure.