Peoples Bancorp Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Peoples is a diversified financial services holding company providing banking, trust and investment, insurance, premium finance and equipment leasing services.
Business context and material transaction
Peoples completed its acquisition of Limestone Bancorp on April 30, 2023. The transaction added approximately $1.1 billion of loans, $1.2 billion of deposits and 20 Kentucky branches. Peoples issued 6.83 million common shares as consideration, valued at $177.9 million, and recorded preliminary goodwill of $63.4 million and core deposit intangibles of $27.7 million. Purchase accounting remains preliminary and may be adjusted for up to one year after closing.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net interest income | $84.9 | $61.5 | $157.7 | $115.8 |
| Provision for (recovery of) credit losses | $8.0 | $(0.8) | $9.8 | $(7.6) |
| Non-interest income | $21.0 | $19.4 | $40.1 | $39.4 |
| Non-interest expense | $70.6 | $49.9 | $127.1 | $101.5 |
| Net income | $21.1 | $24.9 | $47.7 | $48.5 |
| Diluted earnings per share | $0.64 | $0.88 | $1.56 | $1.72 |
| Net interest margin, fully taxable-equivalent | 4.54% | 3.84% | 4.53% | 3.63% |
Q2 net interest income increased 38% year over year, reflecting higher market rates, organic growth and Limestone. Higher loan and investment yields were partly offset by rising deposit and borrowing costs. Q2 net income declined 15% year over year: higher net interest income was more than offset by acquisition-related costs, higher operating expenses and credit-loss provision. The Q2 efficiency ratio was 62.7%, versus 58.8% a year earlier; management reported 53.3% when adjusted for non-core items.
For the first half, net income was nearly flat year over year despite substantially higher net interest income. The provision shifted from a $7.6 million recovery in first-half 2022 to a $9.8 million expense in 2023. First-half diluted EPS also reflects the larger share count following the Limestone issuance.
Financial condition, liquidity and credit
- Balance sheet at June 30: Total assets were $8.79 billion, loans and leases were $5.97 billion, deposits were $6.96 billion and stockholders’ equity was $998.9 million. Asset and balance-sheet growth principally reflects Limestone; the filing also reports organic loan growth.
- Funding: Deposits increased from $5.72 billion at year-end 2022, including deposits acquired from Limestone. Peoples reported $2.0 billion of uninsured deposits; pledged securities covered more than $749.9 million of that amount. Brokered CDs were $560.0 million, up from $125.6 million at year-end. Short- and long-term borrowings totaled $693.5 million.
- Liquidity: Cash and cash equivalents were $148.5 million. Peoples Bank reported $264 million of liquid assets, equal to 2.7% of total assets and unfunded loan commitments, plus $237 million of unpledged investment securities. Six-month operating cash flow was $63.2 million; investing and financing activities used $51.2 million and $17.6 million, respectively. Cash declined $5.5 million over the period.
- Asset quality: The allowance for credit losses was $61.2 million, or 1.02% of loans, versus $53.2 million, or 1.13%, at year-end. Q2 net charge-offs were $1.2 million, or 0.09% of average loans annualized. Nonperforming assets were $41.9 million, or 0.48% of assets; criticized loans rose to $219.9 million, primarily due to Limestone-acquired loans. Management said 99.0% of loans were current.
- Capital: The CET1 ratio was 11.36%, total risk-based capital ratio 12.92% and tier 1 leverage ratio 9.64%. Peoples reported a 4.92% capital conservation buffer and capital levels above minimum well-capitalized requirements. Tangible book value per share was $16.56, down from $17.37 at March 31, primarily reflecting shares issued in the merger.
Unusual items, outlook and risks
- Q2 included $10.7 million of Limestone-related acquisition expenses; first-half acquisition-related expenses were $11.3 million. Management reported these items reduced diluted EPS by $0.28 in Q2 and $0.37 in the first half.
- Q2 included a $1.6 million write-down of an other-real-estate-owned property. First-half results also included a $2.0 million pretax loss on sales of available-for-sale securities in Q1; management said the securities-sale loss was previously reflected in accumulated other comprehensive loss and was projected to be earned back during 2023.
- Management provided no specific earnings or financial guidance in the supplied filing text. It cited potential further rate changes, inflation and borrower repayment pressure, deposit competition and outflows, liquidity and funding needs, credit quality, real estate and other loan concentrations, and successful Limestone integration as material uncertainties. The filing states that the balance sheet was positioned to benefit from rising rates under management’s analysis, but that modeled rate scenarios can also reduce net interest income or economic value of equity.
- Management said pending legal matters were not expected to have a material adverse effect. 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 Limestone integration delivers expected cost savings and revenue synergies, and how final purchase accounting changes acquired asset values, goodwill and intangible amortization.
- Deposit stability and funding costs, especially uninsured deposits, brokered CDs, non-interest-bearing deposit trends and reliance on borrowings.
- Credit trends in acquired loans and commercial real estate, including criticized/classified balances, delinquencies, charge-offs and the adequacy of the allowance.
- Exposure to unrealized investment-security losses and the effect of interest rates, potential deposit outflows or any need to sell securities.
- Whether core expense growth moderates after merger-related costs, and how the enlarged share count affects per-share earnings and tangible book value.
- Capital and liquidity resilience under changing rate, economic and regulatory conditions.