Peoples Bancorp Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Peoples is a diversified financial services holding company providing banking, trust and investment, insurance, premium finance and equipment leasing services.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net interest income | $54.3 million | $35.6 million |
| Net interest margin | 3.41% | 3.26% |
| Non-interest income | $20.1 million | $16.9 million |
| Non-interest expense | $51.6 million | $38.0 million |
| Recovery of credit losses | $6.8 million | $4.7 million |
| Net income | $23.6 million | $15.5 million |
| Diluted EPS | $0.84 | $0.79 |
| Operating cash flow | $15.7 million | $18.3 million |
Management attributed the year-over-year rise in net interest income mainly to the Premier merger and equipment-leasing acquisitions, organic growth and lower funding costs. The leasing portfolio contributed to margin expansion. Higher salaries, occupancy, intangible amortization and FDIC premiums—largely associated with acquisitions—lifted expenses. The reported efficiency ratio was 66.8%, versus 70.4%; adjusted for non-core items, it was 64.8%, versus 65.2%.
Financial condition and material changes
- Assets and lending: Total assets were $7.24 billion, up 2% from December 31, 2021. Loans were $4.55 billion, up $65.6 million over the quarter; Vantage added approximately $140.2 million of leases at acquisition. Management also cited elevated payoffs and amortization of previously acquired loans.
- Deposits and borrowings: Deposits were $6.00 billion, up 2% from year-end and 39% from March 2021. The quarterly increase reflected seasonal governmental deposits and growth in some consumer deposit categories. Total borrowings were $345.9 million, versus $266.0 million at year-end; the Vantage acquisition added $102.4 million of non-recourse long-term debt.
- Cash and liquidity: Cash and cash equivalents were $405.7 million, down $10.0 million during the quarter. Peoples reported $582.5 million of liquid assets and an additional $238.4 million of unpledged investment securities. Management said available liquidity and funding sources should cover anticipated cash needs and commitments.
- Credit quality: The allowance for credit losses declined to $54.8 million, or 1.20% of loans, from $64.0 million, or 1.43%, at year-end. Management cited improved economic forecasts and loan payoffs. Net charge-offs were $1.9 million, or 0.17% of average loans annualized, compared with $1.1 million and 0.13% a year earlier. Nonperforming assets were 0.65% of assets, down from 0.68% at year-end.
- Capital and securities: Stockholders’ equity declined $36.7 million from year-end to $808.3 million, principally reflecting $51.0 million of other comprehensive loss, including the effect of higher interest rates on securities, and dividends. Available-for-sale securities had $79.4 million of net unrealized losses at quarter-end. Peoples stated it did not intend, and was not more likely than not required, to sell securities in unrealized-loss positions before recovery. The CET1 ratio was 11.51%; the capital conservation buffer was 4.78%. Tangible book value per share was $16.39, versus $19.58 at year-end.
Outlook, commentary and risks
Peoples provided no specific company earnings or financial guidance in the supplied filing text. Management reported that the Federal Reserve raised its target rate range in March and anticipated further increases during 2022. Its interest-rate modeling estimated that a parallel 100-basis-point increase would raise net interest income by 3.1%; actual outcomes may differ because of deposit repricing, prepayments and other assumptions. Management also noted excess liquidity and low-yielding cash reserves had weighed on net interest income and margin.
Recent transactions included the March 7 Vantage acquisition, with $82.9 million of total consideration and preliminary goodwill of $40.4 million; the September 2021 Premier merger; and the 2021 North Star Leasing acquisition. Vantage purchase accounting remained preliminary. Peoples also reported acquiring an insurance agency on April 1, 2022, for $3.8 million. A quarterly dividend of $0.38 per share was declared for the second quarter.
Key stated risks include integration and realization of acquisition synergies, credit losses and loan concentrations, interest-rate and liquidity changes, deposit growth, economic and pandemic impacts, cyber and third-party operational risks, and regulatory or accounting changes. The filing added risks related to the war in Ukraine, including potential market volatility, supply-chain disruption and cyberattacks. Management said pending legal matters were not expected to have a material adverse effect, based on its current knowledge.
Control issue: Disclosure controls were deemed ineffective at March 31, 2022 because of a previously disclosed material weakness in controls supporting acquired purchased-credit-deteriorated loan accounting and related credit-loss allowances. Remediation controls had been designed and were being implemented. Management nevertheless stated the financial statements fairly presented the company’s position and results in accordance with U.S. GAAP.
Important facts for investors to verify
- Whether Vantage, Premier and North Star integration proceeds as planned and produces expected growth, cost savings and synergies; Vantage valuations remain preliminary.
- Whether the allowance reduction and credit-loss recovery remain supportable as loan performance evolves, particularly in commercial real estate and acquired portfolios.
- How rising rates affect deposit costs, securities values, net interest margin and capital; the filing’s sensitivity estimates depend on modeling assumptions.
- Whether deposit balances remain stable as pandemic-era funds are spent, and how the Vantage debt affects funding costs and leverage.
- Progress in remediating the material weakness and whether disclosure and financial-reporting controls become effective.