Peoples Bancorp Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Peoples Bancorp is an Ohio-based regional banking and financial services company operating in Ohio, Kentucky and West Virginia. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless noted.
Financial performance and condition
- Q2 earnings: Net income was $4.7 million, or $0.23 diluted EPS, versus $9.6 million, or $0.46, a year earlier. Six-month net income was $4.0 million, or $0.19 diluted EPS, versus $24.0 million, or $1.19.
- Revenue and margin: Q2 net interest income was $34.9 million, down 3%; net interest margin was 3.19%, versus 3.77% a year earlier and 3.51% in Q1 2020. Non-interest income was $14.7 million, down 4%. For the first half, net interest income was $69.5 million, down 1%, and non-interest income was $30.4 million, down 1%.
- Credit costs: Q2 provision for credit losses was $11.8 million versus $0.6 million; first-half provision was $28.8 million versus $0.4 million. The allowance reached $54.4 million, or 1.62% of loans, compared with $21.6 million, or 0.75%, at year-end 2019.
- Expenses and efficiency: Q2 non-interest expense was $31.8 million, down 18% year over year, partly reflecting lower prior-year acquisition costs. The reported efficiency ratio improved to 62.34% from 73.24%; adjusted for non-core items, it was 59.94% versus 60.21%.
- Balance sheet and liquidity: Total assets were $4.99 billion at June 30, up 15% from year-end. Loans were $3.36 billion, including $457.7 million of PPP loans; deposits were $4.02 billion, up $733.5 million from year-end. Cash and cash equivalents were $219.3 million. Six-month operating cash flow was $30.0 million; investing activities used $515.2 million and financing activities provided $589.2 million.
- Debt and capital: Borrowings totaled $290.4 million at quarter-end, down from $400.1 million at year-end. The CET1 ratio was 13.30%, total risk-based capital was 14.80%, and the Tier 1 leverage ratio was 8.97%. Stockholders’ equity was $569.2 million, down from $594.4 million.
- Credit quality: Nonperforming loans were $26.9 million, or 0.80% of loans; nonperforming assets were 0.54% of assets. Criticized loans were $105.5 million, or 3.14% of loans. Management reported 99.0% of loans current; COVID-related modifications were not included in past-due totals under applicable guidance.
Material changes and notable items
- Q2 loan growth was largely driven by PPP originations. Peoples funded $488.1 million through June 30; PPP loans are SBA-guaranteed, and $13.6 million of net deferred origination fees remained to be recognized as income.
- Management attributed the large credit provision and reserve increase mainly to COVID-19-related economic forecasts under the newly adopted CECL model. At adoption on January 1, CECL reduced retained earnings by $3.7 million net of tax and increased the loan allowance by $5.8 million.
- Q2 net recoveries were $369,000, including a $750,000 recovery on a previously charged-off commercial loan. Management also made qualitative adjustments to the CECL estimate, believing model results exceeded expected losses given customer relief and government support.
- Deposits rose sharply amid PPP proceeds, fiscal stimulus and changed customer behavior. Management expected these balances to decline as funds were used, partly offset by PPP forgiveness reimbursements.
- On July 1, 2020, Peoples completed its acquisition of Triumph Premium Finance, adding approximately $86.5 million of loans. The filing recorded $96.1 million in other assets at June 30 related to the transaction.
- Q2 included $918,000 of COVID-19 expenses and $151,000 of pension settlement charges. Peoples repurchased $20.0 million of shares in the first half and declared $0.34 per share in Q2 dividends.
Outlook, risks and contingencies
The filing provides no quantitative earnings guidance. Management said low interest rates and faster investment-security prepayments were pressuring margins, while lower deposit and borrowing costs were expected to provide some benefit over the next one to two quarters. The outlook remains highly uncertain given COVID-19’s duration and economic effects. Key risks include borrower defaults and collateral deterioration, the effects of loan deferrals and PPP forgiveness, further margin compression, deposit outflows and liquidity needs, and operational and cybersecurity risks related to remote work and third-party providers. Management reported liquidity above its policy minimum and capital ratios above required levels; it also said it was monitoring both closely. Ordinary-course legal proceedings were not expected by management to materially affect financial position, results or liquidity.
Important facts for investors to verify
- How PPP loan forgiveness, fee amortization and potential deposit outflows affect future loan balances, earnings and funding.
- Whether actual credit performance supports the $54.4 million allowance and management’s qualitative CECL adjustments as relief programs expire and economic forecasts change.
- Progress in commercial payment modifications: as of July 17, $486 million had been approved, with $42 million of additional extension requests; lodging borrowers represented nearly 60% of those requests.
- Post-quarter integration and financial contribution of Triumph Premium Finance, and the effect of share repurchases, dividends and credit costs on capital.