Peoples Bancorp Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Dollar amounts below are in millions unless noted. Peoples is a diversified financial services company with banking, insurance, trust, premium finance and equipment leasing businesses. The period includes the March 2022 Vantage acquisition and the effects of the 2021 Premier merger and North Star Leasing acquisition.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $61.5 | $39.7 | $115.8 | $75.2 |
| Non-interest income | $19.4 | $15.8 | $39.4 | $32.7 |
| Non-interest expense | $49.9 | $39.9 | $101.5 | $77.9 |
| Net income | $24.9 | $10.1 | $48.5 | $25.6 |
| Diluted EPS | $0.88 | $0.51 | $1.72 | $1.31 |
| Net interest margin (fully tax-equivalent) | 3.84% | 3.45% | 3.63% | 3.36% |
- Q2 provision for credit losses was a recovery of $0.8 million, versus a $3.1 million provision in Q2 2021. First-half recovery was $7.6 million. Management attributed releases chiefly to improved economic forecasts and loss drivers, loan payoffs, and lower specific reserves.
- Q2 efficiency ratio was 58.8% (58.0% adjusted for non-core items), compared with 68.6% a year earlier. Return on average assets was 1.40% for Q2 and 1.38% for the first half.
- Net charge-offs were $1.5 million, or 0.14% of average loans annualized, in Q2; first-half net charge-offs were $3.5 million, or 0.15% annualized.
Financial condition, cash flow and capital
- At June 30, total assets were $7.28 billion; loans were $4.58 billion, deposits $5.93 billion, and cash and cash equivalents $398.4 million. Compared with December 31, 2021, loans increased $94.3 million and deposits $66.7 million.
- Borrowings totaled $450.1 million, up from $266.0 million at year-end, including $326.4 million short-term and $123.7 million long-term. The increase in short-term borrowings from March was mainly associated with a large customer deposit and retail repurchase agreements.
- For the first half, operating cash flow was $62.7 million, investing cash outflow was $196.0 million, and financing cash inflow was $116.0 million. Cash and equivalents decreased $17.3 million to $398.4 million.
- The allowance for credit losses was $52.3 million, or 1.14% of loans, versus $64.0 million, or 1.43%, at year-end. Nonaccrual loans were $24.7 million; nonperforming assets were $46.9 million, or 0.64% of total assets. Management reported 98.8% of loans current.
- Peoples reported a CET1 ratio of 11.62%, total risk-based capital ratio of 12.81%, and capital conservation buffer of 4.81%. Management said capital remained substantially above minimum well-capitalized requirements.
- Accumulated other comprehensive loss widened to $93.4 million from $11.6 million at year-end, principally reflecting interest-rate-driven unrealized losses on available-for-sale securities. Those securities had a $122.0 million net unrealized loss at quarter-end; management said losses were market-related, not credit-related, and it did not expect to be required to sell the securities before recovery.
- Peoples Bank reported $383.4 million of liquid assets and a further $248.0 million of unpledged investment securities. These amounts are not a substitute for a full assessment of funding needs and availability.
Material changes and management commentary
- Q2 net income rose year over year, supported by higher net interest income, improved margin, acquisitions and higher market rates. Management cited acquisition-related purchase-accounting accretion of $3.9 million in Q2, adding 25 basis points to net interest margin.
- Expense growth reflected the larger business following acquisitions, including higher salaries, occupancy, intangible amortization and FDIC premiums. First-half non-interest expense increased 30% year over year.
- Vantage, acquired March 7, added $157.5 million of leases at acquisition and $74.6 million of non-recourse debt at June 30. Peoples also acquired an insurance agency in April for $3.8 million. Acquisition accounting, including Vantage valuations and goodwill, remained preliminary.
- The Federal Reserve raised its target rate during the quarter. Peoples described its balance sheet as positioned to benefit from rising rates; its parallel-shock model estimated net interest income increases of 3.6%, 7.3% and 11.1% under +100, +200 and +300 basis-point scenarios, respectively. Actual results depend on repricing, deposit behavior, prepayments and other assumptions.
- The filing provides no specific company earnings or full-year financial guidance. Management cautioned that actual results may differ from forward-looking statements, citing inflation and rising rates, borrower repayment capacity, credit performance, competition, integration of acquisitions, liquidity and funding, regulatory changes, cybersecurity and vendor risks, and economic uncertainty.
Contingencies and unusual items
- Control weakness: Disclosure controls were deemed ineffective at June 30 because of a previously identified material weakness in controls over acquired purchased-credit-deteriorated loan accounting and the related allowance. Remediation controls were being implemented. Management nevertheless stated the financial statements fairly present the company’s position and results in all material respects.
- Acquisition-related expenses were $0.6 million in Q2 and $2.0 million for the first half. Q2 bank-owned life insurance income included a $248,000 one-time death benefit; Peoples also invested $30.0 million in policies during the quarter.
- Management said pending and threatened legal proceedings were not expected to have a material adverse effect, based on its current knowledge and consultation with counsel.
Most important facts for investors to verify
- Whether the material weakness remediation is completed and independently tested, and whether future filings report effective controls.
- How net interest margin and funding costs respond to further rate changes, including deposit repricing and the increased use of short-term borrowings.
- Whether acquisition-related growth, purchase-accounting accretion and Vantage integration translate into sustainable earnings after integration costs and intangible amortization.
- Whether credit quality and the allowance remain appropriate as economic conditions change; review lease delinquencies, criticized and classified loans, and charge-offs alongside reserve releases.
- The sensitivity of tangible equity and book value to further securities valuation changes, and the company’s liquidity if deposits or borrowing access change.