Peoples Bancorp Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with FY 2018. Peoples is an Ohio-based financial holding company operating principally through Peoples Bank, with community banking as its sole reportable segment. Figures below are in U.S. dollars; “million” and “billion” amounts are converted from the filing’s thousands unless stated otherwise.
Financial performance and condition
| Metric | FY 2019 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $140.8 million | $129.6 million in 2018; up 9% |
| Net interest margin | 3.69% | 3.71% in 2018 |
| Non-interest income | $64.3 million | $56.8 million in 2018 |
| Non-interest expense | $137.3 million | $126.0 million in 2018 |
| Provision for loan losses | $2.5 million | $5.4 million in 2018 |
| Net income | $53.7 million | $46.3 million in 2018; up 16% |
| Diluted earnings per share | $2.63 | $2.41 in 2018 |
| Return on average assets | 1.27% | 1.19% in 2018 |
| Efficiency ratio | 64.74% | 65.33% in 2018 |
Interest income rose with loan growth and higher loan yields, while deposit and borrowing costs increased. The margin edged down as funding costs rose and investment-security yields fell, including accelerated premium amortization. Non-interest income growth reflected electronic banking, deposit service charges, commercial loan swap fees and mortgage banking. Expenses increased 9%, mainly from compensation, acquired locations, technology and transaction volumes.
Net cash from operating activities was $67.2 million; investing activities provided $1.1 million and financing activities used $30.6 million. Cash and cash equivalents increased $37.6 million to $115.2 million at year-end.
At December 31, total assets were $4.35 billion, loans were $2.87 billion, and investment securities were $1.01 billion. Deposits totaled $3.29 billion and borrowed funds $400.1 million. The year-end loan-to-deposit ratio was 87.50%, down from 92.51%. Shareholders’ equity was $594.4 million. Peoples’ regulatory capital ratios included a 14.59% common equity tier 1 ratio, 14.84% tier 1 risk-based ratio, 15.58% total risk-based ratio and 10.41% tier 1 leverage ratio; management reported capital above “well-capitalized” requirements.
Credit indicators were mixed: nonperforming loans were 0.75% of loans versus 0.71% in 2018; criticized loans fell to 3.37% from 4.18%, while classified loans rose to 2.30% from 1.61%. The allowance was $21.6 million, or 0.75% of loans, and equaled 99.28% of nonperforming loans. FY 2019 net charge-offs were $1.1 million, including a $1.8 million recovery on a previously charged-off commercial loan.
Material changes and notable items
- Peoples acquired First Prestonsburg on April 12, 2019. The transaction added nine Kentucky branches, $129.4 million of loans and $257.2 million of deposits at acquisition, and was funded with $32.4 million in Peoples shares plus a pre-merger $11.3 million cash distribution. Acquisition-related costs were $7.3 million, with an additional $243,000 loss on asset disposals and other transactions.
- Year-end assets increased 9%, loans 5%, deposits 11%, and equity 14% versus 2018. Loan growth included $117.8 million of originated loans; acquired First Prestonsburg loans also contributed.
- Non-interest income included a $787,000 gain from sale of restricted Visa Class B stock and $482,000 of tax-free BOLI death-benefit income. Acquisitions contributed $4.9 million of net accretion income to net interest margin, about 12 basis points.
- Dividends declared rose to $1.32 per share from $1.12. Peoples repurchased 26,427 shares for $805,000 during 2019. In February 2020, the Board authorized a new repurchase program of up to $40 million.
- Fourth-quarter 2019 net income was $14.9 million and diluted EPS was $0.72, compared with $13.9 million and $0.71 in fourth-quarter 2018.
Outlook, risks and contingencies
Management’s outlook, stated in the filing before subsequent 2020 developments were known, projected 2020 net interest margin of 3.50%–3.65%, mid-single-digit growth in non-interest income excluding gains and losses, low-single-digit growth in non-interest expense adjusted for non-core items, and an efficiency ratio of 60%–62%. It expected point-to-point loan growth of 5%–7% and net charge-offs nearer its long-term historical range of 0.20%–0.30% of average loans. These are expectations, not guarantees.
Management warned that early-2020 public-health concerns had disrupted markets, lowered rates and inverted the yield curve, creating downside risk to margin, fee income and borrowers’ performance. Other principal risks include commercial-credit and real-estate exposure, interest-rate and liquidity sensitivity, LIBOR transition, cybersecurity and reliance on a core-banking vendor, regulatory requirements, acquisition integration, and the uncertainty of CECL implementation.
CECL became effective for Peoples on January 1, 2020. Preliminary estimates indicated total allowance for credit losses of $30.0–$32.5 million, including purchased credit-deteriorated loans, and a net-of-tax reduction to retained earnings of approximately $5.1–$6.7 million. The company said estimates remained subject to change and it did not then expect to use the optional three-year regulatory-capital phase-in. Its $20 million U.S. Bank revolving facility was due April 2, 2020; Peoples was seeking renewal and expected renewal before expiration. No material adverse effect from ordinary-course legal proceedings was anticipated based on management’s then-current knowledge. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Review the final CECL transition adjustment and subsequent allowance, credit-loss expense and capital effects against the preliminary estimates.
- Track criticized/classified loans, nonperforming loans, charge-offs and commercial real-estate exposures, particularly as economic conditions evolve.
- Compare actual 2020 margin, loan growth, fee income, expenses and efficiency ratio with management’s outlook; assess interest-rate and yield-curve effects.
- Confirm renewal and terms of the U.S. Bank credit facility, and monitor deposit costs, brokered funding and liquidity measures.
- Assess First Prestonsburg integration, realization of expected operating benefits, and the use of the newly authorized share-repurchase capacity.