Peoples Bancorp Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2018. Peoples is a regional financial services company operating in Ohio, West Virginia and Kentucky. Results include American Savings Bank (ASB), acquired April 13, 2018; this affects comparisons with prior periods.
Financial results and condition
| Metric | Q3 2018 | Comparable period / context |
|---|---|---|
| Net interest income | $33.3 million | Up 14% from Q3 2017; net interest margin was 3.68%, versus 3.67%. |
| Non-interest income | $14.4 million | $14.4 million in Q3 2017; prior-year results included a $1.9 million securities gain. |
| Non-interest expense | $30.8 million | Up 16% from Q3 2017, mainly reflecting ASB-related costs and ongoing operating expenses. |
| Net income / diluted EPS | $12.7 million / $0.65 | Versus $10.9 million / $0.60 in Q3 2017. |
| Provision for loan losses | $1.3 million | Versus $1.1 million in Q3 2017. |
For the first nine months, net income was $32.4 million and diluted EPS was $1.69, compared with $29.5 million and $1.61 in 2017. Net interest income rose 13% to $95.5 million and net interest margin increased to 3.69% from 3.61%. The nine-month provision increased to $4.5 million from $2.7 million.
Q3 pretax income declined to $15.5 million from $16.0 million a year earlier, while net income increased, principally reflecting lower income tax expense. The nine-month effective tax rate was 16.1%, compared with 31.2% in 2017, reflecting the lower federal tax rate under the Tax Cuts and Jobs Act and a $0.8 million tax valuation allowance release in Q2.
Balance sheet at September 30, 2018: Assets were $4.00 billion, loans were $2.71 billion, deposits were $3.04 billion, and stockholders’ equity was $504.3 million. Since year-end 2017, assets increased 12%, loans increased $350.6 million and deposits increased $310.8 million, with ASB contributing materially to the growth. Cash and cash equivalents were $95.2 million.
Cash flow and funding: For the first nine months, operating cash flow was $50.3 million, investing cash outflow was $121.7 million, and financing cash inflow was $94.4 million. Cash increased $23.0 million. Total borrowings were $407.9 million, up from $353.5 million at December 31, 2017. Peoples reported $169.1 million of liquid assets, plus $74.7 million of unpledged investment securities. Average loans to average deposits were 90.47% in Q3, versus 86.69% a year earlier.
Capital and credit: The CET1 ratio was 13.31%, total risk-based capital ratio 14.30%, and leverage ratio 9.71%; management said capital remained above applicable well-capitalized requirements. Nonperforming loans were 0.67% of loans, compared with 0.85% a year earlier. The allowance was $19.9 million, or 0.73% of loans, versus 0.82% a year earlier. Management attributed the lower allowance ratio in part to acquired loans recorded at fair value without an initial allowance.
Material changes, outlook and risks
- ASB added approximately $239.2 million in net loans and $198.6 million in deposits at acquisition. Nine-month 2018 acquisition-related expense was $6.9 million and reduced diluted EPS by approximately $0.28; Q3 included $675,000 of acquisition-related expense and a $176,000 pension settlement charge.
- Management targeted a Q4 2018 efficiency ratio of 60%–62%, excluding acquisition-related and other non-core expenses. The reported nine-month ratio was 66.5%; adjusted for non-core items it was 61.4%. This is a management target, not a full-year earnings forecast.
- Peoples signed an agreement on October 29, 2018 to acquire First Prestonsburg Bancshares, with closing expected in Q2 2019, subject to approvals and other conditions. The proposed transaction’s stated combined value was $45.4 million.
- Management said the balance sheet was positioned to benefit in net interest income from rising rates, but warned that deposit-rate competition was increasing and non-parallel rate movements could offset potential benefits. Interest-rate models estimate net interest income would rise 2.4% under a 100-basis-point parallel increase and fall 6.3% under a 100-basis-point decrease.
- Available-for-sale securities had $26.1 million of net unrealized losses at quarter-end, up from $2.5 million at year-end, largely attributed to interest-rate and spread movements. Management concluded no individual securities were other-than-temporarily impaired.
- Peoples expected adoption of the CECL credit-loss standard in 2020 to increase its allowance, but had not determined the amount. Management also cited acquisition integration, credit quality, deposit funding, interest rates, regulatory changes, technology and cybersecurity among risks.
Important facts for investors to verify
- How much of loan, deposit and earnings growth reflects ASB versus organic growth, and whether anticipated integration benefits materialize.
- Whether deposit costs continue to rise faster than asset yields, and how interest-rate sensitivity changes with actual deposit repricing and market-rate movements.
- Credit trends in acquired and commercial loans, consumer indirect lending charge-offs, criticized loans, and the adequacy of the allowance, particularly ahead of CECL adoption.
- The remaining costs and timing of ASB integration, and whether the Q4 adjusted efficiency-ratio target is achieved.
- Potential dilution, funding needs and execution risks associated with the pending First Prestonsburg transaction.
- Whether unrealized securities losses remain temporary and whether the company’s liquidity and capital remain adequate as lending and funding needs evolve.