Peoples Bancorp Inc. — Q3 2022 Form 10-Q
Business context and period. Peoples Bancorp is an Ohio-based financial services holding company offering banking, trust and investment, insurance, premium finance and equipment leasing. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with 2021 and, where noted, the prior quarter. Amounts below are in U.S. dollars.
Financial performance and condition
- Earnings: Q3 net income was $26.0 million, or $0.92 diluted EPS, versus a $5.8 million net loss, or $(0.28) per diluted share, in Q3 2021. Nine-month net income was $74.4 million, or $2.65 per diluted share, versus $19.8 million, or $0.99, in 2021.
- Net interest income and margin: Q3 net interest income was $67.1 million, up 57% year over year; fully tax-equivalent net interest margin was 4.17%, up from 3.50%. Nine-month net interest income rose 55% to $182.8 million and margin increased to 3.81% from 3.41%. Management attributed improvement to acquisitions, organic growth and rising rates.
- Non-interest income and expenses: Q3 non-interest income was $20.4 million, compared with $16.3 million; non-interest expense was $52.3 million, down from $57.9 million. The prior-year quarter included $16.2 million of acquisition-related expenses. Nine-month non-interest expense increased 13% to $153.8 million, mainly due to growth and acquisitions. The reported Q3 efficiency ratio was 57.2%; adjusted for non-core items, it was 56.6%.
- Credit: Q3 provision for credit losses was $1.8 million, versus $9.0 million in Q3 2021; the first nine months recorded a $5.8 million recovery, compared with a $7.3 million provision in 2021. The September 30 allowance for loan and lease losses was $52.9 million, or 1.15% of loans. Q3 net charge-offs were $1.7 million, or 0.15% annualized.
- Balance sheet and liquidity: Total assets were $7.01 billion, down from $7.06 billion at year-end 2021. Loans and leases were $4.61 billion, up $129.6 million from year-end, primarily reflecting acquired Vantage leases and indirect consumer lending, partly offset by commercial real estate payoffs. Deposits were $5.87 billion, little changed from year-end but down $63.6 million from June 30. Cash and cash equivalents fell to $145.2 million from $415.7 million at year-end. Management reported $171.2 million of liquid assets and an additional $231.0 million of unpledged investment securities.
- Debt and capital: Borrowings totaled $237.8 million at September 30, including $133.6 million short-term and $104.2 million long-term. The bank remained above regulatory “well-capitalized” minimums; the reported CET1 ratio was 11.80%, and the capital conservation buffer was 4.98%. Stockholders’ equity was $760.5 million.
- Cash flow: For the first nine months, operating activities provided $102.5 million; investing activities used $201.6 million and financing activities used $171.5 million. Cash and cash equivalents declined by $270.5 million over the period.
Material changes and unusual items
- The March 2022 Vantage acquisition added equipment leases and non-recourse debt; Peoples recorded preliminary goodwill of $27.2 million. The April acquisition of Elite Agency had $3.8 million consideration. Prior-period comparisons also reflect the September 2021 Premier merger and 2021 North Star Leasing acquisition.
- Rising rates materially reduced the reported value of available-for-sale securities: fair value was $1.170 billion against $1.350 billion amortized cost at September 30. Nine-month other comprehensive loss was $123.3 million, primarily from securities valuation changes. Management said unrealized losses were primarily rate- and spread-related, not credit-related, and it did not expect to sell the securities before recovery.
- Peoples entered into a definitive agreement to acquire Limestone Bancorp in an all-stock transaction valued at approximately $208.2 million. The companies expected closing in Q2 2023, subject to customary conditions, regulatory approvals and shareholder approvals.
- Cash dividends declared were $0.38 per common share for Q3. The board declared another $0.38 dividend on October 24, 2022, payable November 21, 2022.
Outlook, risks and controls
- No specific earnings or financial guidance is provided. At the filing date, management said the Federal Reserve anticipated further rate increases during 2022; Peoples’ modeling indicated higher parallel rates would increase net interest income, but outcomes depend on deposit repricing, yield-curve movements, prepayments and other assumptions.
- Management cited risks including inflation and higher rates affecting borrowers’ repayment capacity, economic and market volatility, credit quality, deposit growth and funding, acquisition integration and execution, competition, regulation, cybersecurity and reliance on third-party technology providers.
- Disclosure controls and procedures were concluded to be ineffective as of September 30, 2022 because a previously identified material weakness in controls over acquired purchased-credit-deteriorated loan accounting and the related allowance for credit losses remained under remediation. Management nevertheless stated the financial statements fairly present the company’s financial position and results in all material respects.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing added a risk factor concerning global economic and geopolitical instability and financial-market volatility.
Important facts for investors to verify
- Whether loan growth, credit performance and the allowance remain adequate as economic conditions and interest rates change.
- How deposit balances, funding costs and liquidity develop, particularly as cash reserves declined and rates rose.
- The extent and duration of securities-related accumulated other comprehensive losses and their effect on tangible equity and book value.
- Progress on remediation of the material weakness and whether controls over acquired-loan accounting become effective.
- Final Vantage purchase accounting and integration results, and whether the Limestone transaction closes on expected terms and timing.
- Whether reported earnings and margins are sustainable as acquisition-related accretion, PPP fee income and other unusual or non-core items change.