Peoples Bancorp Inc. — Q3 2021 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2021. Peoples is a diversified financial services holding company providing banking, insurance, trust, premium-finance and equipment-leasing services. Results include Premier Financial Bancorp only from its September 17, 2021 merger close; the acquisition therefore contributed a partial quarter.
Financial performance and position
- Quarterly earnings: Net loss was $5.8 million, or $0.28 per diluted share, versus net income of $10.2 million, or $0.51 per diluted share, in Q3 2020. The quarter included $16.2 million of acquisition-related expenses and $1.9 million of core-systems contract negotiation expense; management said non-core items reduced diluted EPS by $0.71.
- Nine-month earnings: Net income was $19.8 million, or $0.99 per diluted share, compared with $14.2 million, or $0.70, in the first nine months of 2020. Management attributed the improvement primarily to lower credit-loss provision year over year; non-core items reduced nine-month diluted EPS by $0.98.
- Revenue and margins: Q3 net interest income rose 21% year over year to $42.6 million; net interest margin was 3.50%, up from 3.14%. Nine-month net interest income increased 13% to $117.8 million and margin was 3.41%, versus 3.27%. Lower funding costs, acquired and growing loan and lease balances, and PPP fee accretion supported results; excess low-yield cash and the low-rate environment weighed on returns.
- Credit provision and asset quality: Q3 provision for credit losses was $9.0 million versus $4.7 million a year earlier; nine-month provision declined to $7.3 million from $33.5 million. Q3 included an $11.0 million provision/liability for acquired non-PCD loans and unfunded commitments, plus a $22.3 million allowance established for Premier purchased-credit-deteriorated loans. The allowance was $77.4 million, or 1.72% of loans. Nonperforming loans were $41.4 million (0.92% of loans) and nonperforming assets were $52.7 million; increases largely reflected Premier-acquired problem assets. Net charge-offs were 0.18% of average loans, annualized, in Q3.
- Balance sheet and liquidity: Total assets were $7.06 billion, loans $4.49 billion, deposits $5.83 billion and cash and cash equivalents $499.7 million at quarter-end. Compared with December 31, 2020, assets grew 48%, largely from Premier, NSL and organic growth. Nine-month operating cash flow was $66.7 million; cash increased $347.6 million. Management reported $607.8 million of liquid assets and another $246.5 million of unpledged investment securities.
- Funding, debt and capital: Total borrowings were $284.1 million, including $184.7 million short-term and $99.4 million long-term. Stockholders’ equity was $831.9 million. Regulatory CET1, Tier 1 and total risk-based capital ratios were 12.30%, 12.58% and 13.83%, respectively; tangible equity to tangible assets was 7.93%.
Material changes and unusual items
- Premier merger: Closed September 17 for $261.9 million in stock consideration, issuing 8.59 million Peoples shares. Premier added approximately $1.1 billion of loans and $1.8 billion of deposits; preliminary goodwill was $71.0 million. Purchase accounting valuations remained preliminary and could be adjusted for up to one year after closing.
- Other acquisitions: Peoples acquired NSL’s equipment-finance business effective April 1, 2021, and acquired a Kentucky insurance agency in May. NSL leases grew to $111.4 million by September 30. Acquisitions contributed to higher ongoing compensation, intangible amortization and operating costs.
- Expense and efficiency: Total non-interest expense rose to $57.9 million in Q3 from $34.3 million in Q3 2020. The reported efficiency ratio was 94.7%; adjusted for non-core items it was 63.9%, compared with 61.8% a year earlier. Nine-month reported and adjusted ratios were 78.4% and 64.3%, respectively.
- PPP and securities: PPP balances continued to run off, with $139.8 million of principal outstanding at September 30, 2021; nine-month PPP fee accretion was $11.2 million. Peoples sold and reinvested securities into higher-yielding investments, recording a $0.7 million net securities loss for the first nine months. Available-for-sale securities had $11.7 million of gross unrealized losses, which management attributed primarily to market rates and spreads, not credit losses.
Outlook, commentary and risks
The filing gives no quantified earnings or financial guidance. Management said the balance sheet was positioned to benefit from rising rates: a parallel 100-basis-point increase was estimated to raise net interest income by 4.1%, while a 100-basis-point decrease was estimated to reduce it by 4.7%. These modeled results depend on assumptions, including deposit repricing and security prepayments. Management expects pandemic-related deposit balances to decline over time, with PPP forgiveness proceeds partly offsetting outflows, and expects commercial line utilization to move toward historical levels.
Key disclosed risks include COVID-19 and economic uncertainty, interest-rate and liquidity changes, credit deterioration or loan concentrations, PPP-related effects, regulatory and technology/cybersecurity risks, and execution, integration, cost and synergy risks from Premier and NSL. The filing says ordinary-course legal proceedings are not expected to have a material adverse effect, based on current knowledge. Disclosure controls were assessed as effective, with no material internal-control changes reported for the quarter.
Important facts for investors to verify
- Whether Premier integration proceeds as planned and preliminary acquisition fair values, goodwill and expected synergies change.
- Whether elevated nonperforming, criticized and classified loans acquired from Premier lead to further losses or provision increases.
- How much of Q3 and year-to-date expense is non-recurring, and whether the adjusted expense and efficiency trends are sustainable.
- Whether deposit balances remain stable as stimulus and PPP-related funds run off, and whether reported liquidity and capital remain adequate.
- Whether PPP fee accretion, loan growth, interest-rate movements and securities reinvestment support future net interest income and margin as modeled.