PEOPLES BANCORP INC quarterly report, Q1 FY2020

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Peoples Bancorp Inc. — Q1 2020 Form 10-Q

Business context and reporting period. Peoples Bancorp is an Ohio-based regional financial holding company offering banking, insurance, trust and investment services across Ohio, Kentucky and West Virginia. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions.

Financial performance and condition

  • Earnings: Net loss was $0.8 million, or $0.04 per diluted share, versus net income of $14.4 million, or $0.73 per diluted share, in Q1 2019. The principal driver was a $17.0 million credit-loss provision. Pretax loss was $0.9 million; income tax benefit was $0.2 million.
  • Revenue and costs: Net interest income was $34.6 million, up 2% year over year; non-interest income was $15.7 million, up 2%. Non-interest expense rose 8% to $34.3 million. The filing’s non-GAAP pre-provision net revenue was $15.8 million, down from $17.6 million.
  • Margins and returns: Net interest margin was 3.51%, versus 3.80% a year earlier and 3.56% in Q4 2019. The efficiency ratio was 66.64%, versus 62.71% a year earlier. Annualized return on average assets was negative 0.07%.
  • Cash flow: Operating activities provided $18.2 million; investing activities used $51.1 million; financing activities provided $81.3 million. Cash and cash equivalents increased $48.5 million to $163.7 million.
  • Balance sheet and liquidity: Total assets were $4.47 billion. Loans were $2.91 billion, up $37.9 million from year-end; deposits were $3.40 billion, up $107.0 million. Peoples reported $249.8 million of liquid assets, above its policy minimum by $150.4 million, plus $106.8 million of unpledged investment securities. Management said it had funding sources available to meet anticipated obligations.
  • Credit quality: The allowance for credit losses was $42.8 million, or 1.47% of loans, versus $21.6 million, or 0.75%, at year-end. Nonperforming loans were $27.0 million, or 0.93% of loans, compared with $21.7 million and 0.75% at year-end. Net charge-offs were $0.5 million, or 0.07% of average loans annualized.
  • Debt and capital: Total borrowings were $392.5 million, down from $400.1 million at year-end; long-term borrowings increased to $132.8 million after a $50 million FHLB advance. The CET1 ratio was 13.91%, total risk-based capital was 15.38%, and the capital conservation buffer was 7.38%. Stockholders’ equity was $583.7 million.

Material changes versus comparable periods

  • The Q1 2020 loss contrasted with Q1 2019 net income of $14.4 million, chiefly because of the pandemic-related credit provision and the adoption of CECL. The provision was a $0.3 million recovery in Q1 2019.
  • CECL adoption on January 1, 2020 reduced retained earnings by $3.7 million, net of tax; added $5.8 million to the loan allowance, $7,000 to the held-to-maturity securities allowance, and $1.5 million to the unfunded-commitment liability; and established a $2.6 million allowance for purchased credit-deteriorated loans. Prior-period credit-loss figures use the former incurred-loss method.
  • Management attributed most of the post-adoption allowance increase to revised economic forecasts reflecting higher unemployment and lower Ohio GDP; approximately 72% of the increase from January 1 to March 31 was attributed to the forecast change. Management also made qualitative adjustments because it considered modeled losses higher than appropriate in light of borrower relief, CARES Act support and PPP.
  • Loans and deposits were higher year over year, partly reflecting the April 2019 First Prestonsburg acquisition. The investment portfolio’s fair value increased, largely with falling market rates. The company repurchased $10.2 million of shares in Q1 and declared a $0.34-per-share dividend, versus $0.30 in Q1 2019.

Outlook, commentary, risks and unusual items

  • No numerical earnings or financial guidance is provided. Management said lower rates and faster securities prepayments were likely to pressure margins; lower deposit and borrowing costs were expected to begin helping over the following one to two quarters. Future credit provisioning will depend on economic assumptions and credit indicators.
  • COVID-19 was the central uncertainty. The filing identifies potential effects on borrower repayment, collateral values, loan demand, funding and liquidity, operations, employees, third-party providers, cybersecurity and interest-rate exposure. Management warned that the pandemic’s duration and ultimate effects could not be predicted.
  • As of May 1, 2020, Peoples had authorized approximately $480 million of PPP loans. It had approved commercial modifications totaling $534 million and approved consumer relief for 1,137 customers with $39 million in balances; more than 819 consumer customers, with nearly $22 million in balances, had executed relief arrangements.
  • Other notable items included $368,000 of pension settlement charges, $140,000 of COVID-related expenses, and a $182,000 mortgage-servicing-rights write-down. First-quarter non-interest income also included $319,000 of realized securities gains.
  • On April 20, 2020, Peoples signed an agreement to acquire Triumph Premium Finance, subject to regulatory approval and other conditions, with closing expected in Q3 2020. The board also declared a $0.34 dividend payable May 18, 2020.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. It said pending or threatened legal matters were not expected to materially affect financial position, results or liquidity.

Important facts for investors to verify

  1. How credit quality, delinquencies, loan modifications and charge-offs evolve as COVID-related relief ends, particularly in exposed commercial industries.
  2. Whether the $42.8 million CECL allowance and management’s qualitative adjustments remain adequate under subsequent economic conditions and updated forecasts.
  3. PPP loan volumes, forgiveness, servicing economics and any effect on liquidity, loan yields or credit risk.
  4. Whether margin compression, deposit costs and securities prepayments develop as management anticipated, and how interest-rate sensitivity changes.
  5. Capital and liquidity after dividends, repurchases, credit losses and any future acquisition; verify regulatory capital treatment of the CECL transition.
  6. Completion, purchase terms and integration risks for Triumph Premium Finance, and the effects of the company’s share repurchases and dividend policy.