Peoples Bancorp Inc. (PEBO) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Peoples Bancorp is an Ohio-based regional financial holding company offering banking, insurance, trust and investment services, with lending operations across several states and nationwide premium finance lending.
Financial performance and position
- Earnings: Net income was $15.5 million, or $0.79 per diluted share, versus a net loss of $0.8 million, or $0.04 per diluted share, in Q1 2020. Net income was down from $20.6 million in Q4 2020. Q1 2021 results included a $4.7 million recovery of credit losses.
- Net interest and other income: Net interest income was $35.6 million, up 3% year over year; net interest margin was 3.26%, down from 3.51% in Q1 2020. Non-interest income was $16.9 million, up 7% year over year; it included a $336,000 net securities loss. PPP fee accretion contributed $4.7 million to Q1 net interest income.
- Expenses and profitability: Non-interest expense rose 11% year over year to $38.0 million, including $1.9 million in acquisition-related expenses, a $500,000 foundation contribution and $292,000 in COVID-related expenses. The reported efficiency ratio was 70.37%; excluding specified non-core items, it was 65.19%. Return on average assets was 1.28%.
- Assets, loans and deposits: Total assets were $5.14 billion, up 8% from year-end 2020. Loans were $3.41 billion, nearly unchanged from year-end; this included $349.9 million of PPP loans. Deposits rose 10% from year-end to $4.30 billion, partly reflecting stimulus payments, PPP proceeds and seasonal government deposits.
- Credit quality: The allowance for credit losses was $44.9 million, or 1.32% of loans, down from $50.4 million, or 1.48%, at year-end. Nonperforming loans were 0.76% of loans; annualized net charge-offs were 0.13% of average loans. Management attributed the allowance reduction chiefly to improved economic forecasts, while also noting higher specific reserves for five commercial relationships.
- Cash, debt and liquidity: Cash and cash equivalents were $200.4 million. Operating cash flow was $18.3 million; investing activities used $350.3 million, largely reflecting securities purchases and the NSL acquisition payment; financing activities provided $380.2 million, mainly from deposit growth. Borrowings totaled $178.2 million, down from $183.8 million at year-end. Management reported $179.6 million of liquid assets and a further $207.5 million of unpledged investment securities.
- Capital: Stockholders’ equity was $578.9 million. The CET1 ratio was 12.42%, and management said capital remained substantially above regulatory well-capitalized minimums. Tangible book value per share was $20.12.
Material changes and notable items
- Versus Q1 2020, results improved from a loss to a profit, with lower funding costs and PPP and premium finance income contributing to net interest income. The prior-year quarter included a $17.0 million provision for credit losses; Q1 2021 instead recorded a $4.7 million recovery.
- Compared with Q4 2020, net income fell from $20.6 million to $15.5 million as the credit-loss recovery was smaller and expenses increased. Q1 expenses included customary seasonal employee costs as well as acquisition and other non-core items.
- Peoples Bank acquired North Star Leasing’s equipment finance business for approximately $116.6 million, plus a potential earnout of up to $3.1 million. The transaction closed after business on March 31, with operations beginning April 1.
- Peoples signed an all-stock merger agreement to acquire Premier Financial Bancorp in a transaction valued at approximately $292.3 million. Closing was expected in Q3 2021, subject to approvals and other customary conditions.
- The Board authorized a new $30 million share repurchase program in January; the filing reports no repurchases under the program during the quarter. A quarterly dividend of $0.36 per share was declared in April, payable in May.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described the balance sheet as positioned to benefit from rising interest rates, but noted that actual results depend on rate movements, deposit repricing, loan and securities prepayments, and other assumptions. Peoples expected elevated pandemic-related uncertainty and deposit balances associated with stimulus and PPP activity to change over time; it also expected commercial line-of-credit utilization to move toward historical levels.
Key risks include the pandemic’s effects on borrowers and local economies, credit losses and CECL model assumptions, interest-rate and liquidity changes, cybersecurity and third-party technology risks, and the integration and execution of the NSL acquisition and proposed Premier merger. Management disclosed that a proposed increase in the federal corporate tax rate could adversely affect future results if enacted. Management did not expect pending legal proceedings to have a material adverse effect based on its current assessment. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit quality and criticized or classified loan trends remain stable, and whether the reduced allowance remains appropriate as pandemic-related conditions evolve.
- How quickly PPP loans are forgiven and deferred fees are recognized, and the resulting effect on future net interest income and margin.
- Whether deposit growth persists or reverses as stimulus and PPP funds are spent, and the effect on liquidity and funding costs.
- Premier merger approvals, closing timing, share issuance and dilution, integration costs, and realization of anticipated benefits; separately, NSL integration and earnout exposure.
- The sustainability of earnings after the unusually large credit-loss recovery and Q1 seasonal insurance commissions, and the trajectory of acquisition and other non-core expenses.