Peoples Bancorp Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Peoples is an Ohio-based regional banking and financial services company operating in Ohio, Kentucky and West Virginia, with insurance, premium-finance and equipment-leasing businesses. This filing covers the quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 / June 30, 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $39.7 million | Up 14% from Q2 2020; up 11% from Q1 2021 |
| Net interest margin | 3.45% | 3.19% in Q2 2020; 3.26% in Q1 2021 |
| Net income; diluted EPS | $10.1 million; $0.51 | $4.7 million; $0.23 in Q2 2020. Q1 2021 was $15.5 million; $0.79 |
| Six-month net income; diluted EPS | $25.6 million; $1.31 | $4.0 million; $0.19 in H1 2020 |
| Non-interest income; expense | $15.8 million; $39.9 million | Income up 8%; expense up 25% from Q2 2020 |
| Efficiency ratio | 68.64%; 63.97% adjusted for non-core items | 62.34%; 59.94% adjusted in Q2 2020 |
| Total assets; loans | $5.07 billion; $3.37 billion | Assets up 6% from Dec. 31, 2020; loans down $30.7 million |
| Deposits; borrowings | $4.23 billion; $161.6 million | Deposits up $322.2 million from year-end; borrowings down from $183.8 million |
| Allowance for credit losses | $47.9 million; 1.42% of loans | $50.4 million; 1.48% at Dec. 31, 2020 |
| Capital | CET1 11.34%; total risk-based 12.75%; leverage 7.87% | Management said capital remained above well-capitalized thresholds |
| Liquidity | $246.1 million cash and cash equivalents | H1 cash increased $94.0 million; operating cash flow was $38.7 million |
Material changes and management commentary
- Q2 earnings rose year over year, mainly reflecting lower credit-loss provisioning than in pandemic-affected 2020 and growth in net interest income. Earnings fell from Q1 2021, when Peoples recorded a $4.7 million recovery of credit losses; Q2 2021 instead included a $3.1 million provision.
- Net interest income and margin benefited from NSL equipment leases, PPP loan forgiveness and lower funding costs. PPP fee accretion contributed $3.4 million to Q2 interest income. Management noted that excess cash balances reduced Q2 margin by 13 basis points.
- Non-interest expense increased, reflecting NSL and Premium Finance operating costs, higher incentive compensation and acquisition costs. Q2 included $2.4 million of acquisition expenses and $210,000 of COVID-related expenses. The six-month acquisition-related expense total was $4.3 million.
- NSL’s equipment-finance business was acquired effective April 1. At June 30, leases were $95.6 million; goodwill and other intangible assets increased to $221.6 million. The acquisition also contributed to the increase in nonperforming assets, which were $27.1 million, or 0.53% of assets.
- Loan balances reflected $186.4 million of PPP forgiveness proceeds in Q2, partly offset by NSL leases and growth in commercial real estate and consumer indirect lending. Management reported that 99.1% of the loan portfolio was current at June 30.
- Deposits grew from year-end, including non-interest-bearing and governmental balances. Management attributed deposit growth partly to stimulus funds and PPP proceeds and expects these balances to decline as funds are used; PPP forgiveness proceeds may partly offset outflows. Brokered deposits were $166.7 million.
- H1 investing cash outflow was $230.0 million, including substantial securities purchases and $116.6 million of net cash used for acquisitions. Financing cash inflow was $285.3 million, principally from deposit growth.
Outlook, risks and contingencies
- No formal earnings or financial guidance is provided. Management described the balance sheet as positioned to benefit from rising rates, while emphasizing sensitivity to deposit repricing, securities prepayments and changing yield-curve conditions. Model scenarios and assumptions may not predict actual results.
- The proposed all-stock Premier Financial Bancorp merger, valued at approximately $292.3 million, was expected to close in Q3 2021, subject to customary conditions. Both companies’ shareholders and specified regulators had approved it by the filing date. Management cautioned that integration, synergies, costs and possible shareholder dilution are uncertain.
- Key risks include COVID-19 effects on borrowers and the economy, interest-rate and liquidity changes, credit losses and CECL model assumptions, acquisitions and integration, competition, regulation, cybersecurity and third-party technology risks, and the transition from LIBOR. Management stated that legal proceedings were not expected to materially affect financial position, results or liquidity.
- The filing identifies a proposed federal corporate tax-rate increase from 21% to 28%; if enacted, management said it could adversely affect future results. The proposal was at an early legislative stage.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Premier merger closed as expected, and its final terms, integration costs, capital impact and realized synergies.
- NSL lease performance, acquired-lease delinquencies and charge-offs, and the eventual earnout payment; the filing recorded preliminary contingent consideration of $2.3 million.
- Whether PPP fee income and stimulus-related deposit balances normalize, and the resulting effect on recurring net interest income, margin and funding costs.
- Trends in criticized and nonperforming loans, credit-loss reserves and charge-offs, particularly given the acquired leases and continuing pandemic uncertainty.
- Capital and tangible book value after acquisition-related goodwill and intangibles; tangible book value per share was $18.51, down from $20.12 at March 31, 2021.