Peoples Bancorp Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Peoples is an Ohio-based regional bank and financial services company operating in Ohio, Kentucky and West Virginia, with nationwide insurance-premium financing. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2020 | Comparable period | Nine months 2020 | Comparable period |
|---|---|---|---|---|
| Net interest income | $35.1 | $35.8 in Q3 2019 | $104.6 | $105.7 in 9M 2019 |
| Net interest margin | 3.14% | 3.66% in Q3 2019 | 3.27% | 3.74% in 9M 2019 |
| Provision for credit losses | $4.7 | $1.0 in Q3 2019 | $33.5 | $1.4 in 9M 2019 |
| Non-interest income | $16.8 | $16.4 in Q3 2019 | $47.2 | $47.1 in 9M 2019 |
| Non-interest expense | $34.3 | $33.0 in Q3 2019 | $100.4 | $103.7 in 9M 2019 |
| Net income | $10.2; diluted EPS $0.51 | $14.9; $0.72 | $14.2; diluted EPS $0.70 | $38.8; $1.91 |
Q3 net income fell about 31% year over year; nine-month net income fell about 63%. The principal driver was increased credit-loss provisioning under the new CECL model amid COVID-19 uncertainty. Q3 provision was below Q2 2020’s $11.8 million as management’s economic forecast improved. Q3 net interest income rose 1% sequentially, helped by PPP and premium-finance income and lower deposit costs, but remained below the prior year as low rates reduced asset yields and increased securities premium amortization. Q3 mortgage banking benefited from refinancing activity; insurance income included a one-time $591,000 revenue-recognition adjustment.
The Q3 efficiency ratio was 64.1% (61.8% excluding items management classifies as non-core), compared with 61.1% in Q3 2019. Q3 return on average assets was 0.83%, versus 1.37%. Q3 net charge-offs were $735,000, or 0.08% of average loans annualized; the nine-month period included recoveries on a previously charged-off commercial loan.
Financial position, liquidity and capital
- At September 30, total assets were $4.91 billion, up 13% from year-end 2019. Loans were $3.47 billion, up $598.6 million; growth was driven mainly by PPP lending and the July premium-finance acquisition. Deposits were $3.95 billion, up $660.6 million from year-end, though down $72.9 million from June 30.
- The allowance for credit losses was $58.1 million, or 1.67% of loans, versus $21.6 million, or 0.75%, at December 31, 2019. The comparison spans the January 2020 CECL adoption and is not fully like-for-like.
- Cash and cash equivalents were $161.3 million. Nine-month operating cash flow was $56.0 million; investing cash outflow was $517.7 million and financing cash inflow was $507.8 million. Total borrowings were $293.4 million at quarter-end, down from $400.1 million at year-end 2019.
- Management reported $116.7 million in liquid assets and a further $102.2 million of unpledged securities. It stated available liquidity and funding sources were expected to meet anticipated obligations. PPP Liquidity Facility borrowings were zero at quarter-end.
- Regulatory capital ratios remained above required levels: CET1 12.83%, Tier 1 13.07%, and total risk-based capital 14.33%. The capital conservation buffer was 6.33%. Stockholders’ equity was $566.9 million; the company repurchased $25.0 million of shares and declared $1.02 per share in dividends during the first nine months.
Material changes and unusual items
- Peoples adopted CECL on January 1, 2020, recording a $5.8 million increase to the loan allowance, a $1.5 million unfunded-commitment liability and a $3.7 million after-tax reduction to retained earnings. The CECL model uses economic forecasts and may increase volatility in future provisions.
- PPP loans were $472.0 million in principal at September 30; the filing separately reports $460.4 million amortized cost in the loan note. Net deferred origination fees were $11.6 million, recognized in interest income over time or upon SBA forgiveness. PPP loans are SBA-guaranteed and had no allowance at quarter-end.
- Effective July 1, Peoples acquired Triumph Premium Finance for a stated purchase price of $94.5 million. It acquired $84.8 million of loans at acquisition-date fair value and recorded preliminary goodwill of $5.5 million and customer-relationship intangibles of $4.2 million. Premium-finance loans reached $104.1 million by September 30.
- Q3 included $531,000 in pension settlement charges, $192,000 in severance expense and $148,000 in COVID-related expenses. The nine-month period included $1.1 million in pension settlement charges and $3.0 million in total non-core expenses, as defined by management.
- Nonperforming loans were $29.3 million, or 0.84% of loans. Criticized loans rose to $123.2 million; COVID-related downgrades during Q3 included $17.5 million of criticized loans and $9.3 million of classified loans. Delinquencies remained relatively low, with 99.2% of loans current.
Outlook, risks and contingencies
The filing gives no earnings or revenue guidance. Management noted that the Federal Reserve’s 0%–0.25% target-rate range, lower LIBOR and elevated mortgage-security prepayments were compressing margins. It expected lower repricing costs on maturing deposits and borrowings to provide some benefit over the next one to two quarters, while anticipating that pandemic-related deposit inflows and reduced commercial-line utilization could unwind over time.
COVID-19 remains the central uncertainty, with risks to borrower repayment, collateral values, loan demand, liquidity, operations and credit-loss estimates. About $13.6 million of borrower payment deferrals remained at quarter-end; lodging borrowers accounted for nearly 60% of additional deferments requested. Management noted the lodging sector’s weak travel outlook and highlighted potential CECL forecast/model uncertainty. Other risks include interest-rate changes, funding access, concentration exposure, cybersecurity and third-party service disruptions, and acquisition integration. Management said ordinary-course legal proceedings were not expected to materially affect the company. Loan commitments totaled $735.0 million and standby letters of credit $13.2 million; management did not expect current off-balance-sheet activities to have a material impact.
Key facts for investors to verify
- Reconcile the reported $472.0 million of PPP principal with the $460.4 million amortized-cost balance and assess fee recognition and SBA forgiveness timing.
- Track credit quality, especially COVID-affected commercial borrowers, lodging exposure, criticized/classified loans, nonperforming loans and subsequent deferrals or charge-offs.
- Assess whether CECL assumptions and management’s qualitative adjustments remain appropriate as economic forecasts and borrower support programs change.
- Monitor margin trends, deposit retention and mix, liquidity sources, and the effect of low rates and securities prepayments.
- Review the premium-finance acquisition’s loan performance, purchase-accounting estimates and contribution to earnings; also consider capital and tangible-book-value effects of dividends and repurchases.