Business context and reporting period
Peoples Bancorp Inc. (Nasdaq: PEBO) is an Ohio-based financial holding company focused on community banking, with insurance, trust and investment, premium-finance and equipment-leasing businesses. This Form 10-K covers the fiscal year ended December 31, 2021; it is an annual report, not a standalone fourth-quarter report.
Peoples completed its all-stock acquisition of Premier Financial Bancorp on September 17, 2021, issuing shares valued at $261.9 million and acquiring approximately $1.1 billion of loans and $1.8 billion of deposits. It also acquired North Star Leasing in April 2021. The separate Vantage Financial acquisition closed on March 7, 2022, after year-end.
Financial performance and position
| Metric | FY 2021 / Dec. 31, 2021 | Comparable period |
|---|---|---|
| Net interest income | $172.6 million | $138.9 million in 2020 |
| Net interest margin | 3.40% | 3.24% in 2020 |
| Total non-interest income | $68.9 million | $63.7 million in 2020 |
| Net income / diluted EPS | $47.6 million / $2.15 | $34.8 million / $1.73 in 2020 |
| Provision for credit losses | $0.7 million | $26.3 million in 2020 |
| Total assets | $7.06 billion | $4.76 billion in 2020 |
| Total loans and leases, net of deferred fees and costs | $4.48 billion | $3.40 billion in 2020 |
| Total deposits | $5.86 billion | $3.91 billion in 2020 |
| Stockholders’ equity | $845.0 million | $575.7 million in 2020 |
| Borrowed funds | $266.0 million | $183.8 million in 2020 |
| Cash and cash equivalents | $415.7 million | $152.1 million in 2020 |
| Operating cash flow | $156.4 million | $85.5 million in 2020 |
Net interest income rose 24%, reflecting acquisitions, core loan growth, PPP forgiveness-related fee accretion and lower funding costs. Net income improved primarily because the provision for credit losses fell substantially as economic forecasts improved; this was partly offset by higher expenses. Total non-interest expense rose to $183.7 million from $133.7 million, including $21.4 million of acquisition-related expense. The reported efficiency ratio was 73.6%, versus 63.9% in 2020; adjusted for non-core items, it was 63.5%, versus 61.9%.
Year-end regulatory capital ratios remained above well-capitalized thresholds: common equity tier 1 was 12.52%, tier 1 was 12.81%, and total capital was 14.06%. Tangible book value per share was $19.58, compared with $19.99 in 2020. The allowance for credit losses was $64.0 million, or 1.43% of loans, compared with $50.4 million, or 1.48%, a year earlier. Nonperforming assets rose to $48.0 million from $28.7 million, largely reflecting acquired Premier assets.
Cash from operating and financing activities was $156.4 million and $181.6 million, respectively; investing activities used $74.4 million. Cash and cash equivalents increased $263.6 million during the year. These cash flows include the effects of acquisitions and portfolio activity.
Material changes versus prior period
- Premier’s acquisition drove much of the growth in assets, loans, deposits, equity and staffing; the company’s full-year results include Premier only from the September closing date.
- Net charge-offs increased to $4.7 million, or 0.13% of average loans, from $1.8 million, or 0.05%, in 2020. Management noted that the 2020 comparison benefited from a $2.5 million recovery on one commercial relationship.
- Nonperforming loans rose to $38.5 million from $28.5 million, and nonperforming assets to $48.0 million from $28.7 million. Management attributed much of the increase to Premier.
- Available-for-sale securities had net unrealized losses of $7.7 million at year-end, versus net unrealized gains of $18.5 million in 2020; accumulated other comprehensive income turned to a loss of $11.6 million.
- PPP loans outstanding declined substantially as forgiveness proceeds were received; Peoples reported $87.1 million of PPP principal outstanding at year-end.
Outlook, risks and unusual items
Management’s 2022 outlook calls for net interest margin of 3.50%–3.60%, excluding potential Federal Funds Target Rate increases; loan growth of 6%–8%, excluding PPP payoffs; and 14%–16% growth in non-interest income excluding net gains and losses. It anticipates gross charge-offs of 25–40 basis points and an efficiency ratio in the high-50% range. Management expects little deposit growth, ongoing excess liquidity for part of 2022, and higher expenses from acquired businesses, partly offset by data-processing savings. These are forward-looking estimates, not guarantees.
Significant risks include credit deterioration, particularly in commercial real estate and the acquired leasing portfolio; the adequacy of CECL estimates; interest-rate and liquidity changes; integration and execution of acquisitions; cybersecurity and reliance on key third-party providers; and COVID-19-related economic effects. Peoples also disclosed a material weakness in internal control over financial reporting related to accounting for Premier-acquired purchased-credit-deteriorated loans. Management recorded adjustments that reduced 2021 net income by approximately $1.5 million and described remediation work planned for 2022. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control effectiveness.
Other notable items include $21.4 million of acquisition-related expenses and a $0.85 per diluted share negative impact from non-core items. The filing also reports that the $20 million U.S. Bank revolving credit facility matured March 31, 2022; at filing, Peoples said it was seeking renewal and expected renewal before maturity.
Important facts for investors to verify
- Progress and independent validation of remediation for the acquired-loan accounting material weakness, and whether the control issues affect future reporting.
- Final purchase-accounting values for Premier and North Star Leasing, including goodwill, loan marks and credit-loss assumptions.
- Whether reported asset-quality deterioration reflects acquisition mix or emerging credit stress, and how leasing charge-offs develop.
- Delivery of 2022 margin, loan-growth, fee-growth and efficiency targets, including the effects of rates, excess liquidity and PPP runoff.
- Renewal terms and availability of the U.S. Bank credit facility, and continued regulatory capital and liquidity headroom.