Business context and reporting period
Peoples Bancorp Inc. is an Ohio-based regional financial services company operating through Peoples Bank and Peoples Insurance in Ohio, West Virginia and Kentucky. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Third-quarter net income was $10.9 million ($0.60 diluted EPS), up from $7.8 million ($0.43) a year earlier. Nine-month net income was $29.5 million ($1.61 diluted EPS), versus $23.7 million ($1.31).
- Revenue and margins: Third-quarter net interest income was $29.2 million, up 12% year over year; net interest margin was 3.67%, versus 3.54%. Nine-month net interest income was $84.3 million, up from $78.2 million, and margin was 3.61%, versus 3.55%. Nine-month non-interest income rose to $41.8 million from $38.8 million.
- Expenses and returns: Nine-month non-interest expense was $80.6 million, up 1%. The efficiency ratio improved to 62.24% from 64.56%. Nine-month return on average assets was 1.13% (0.96% prior year); return on average equity was 8.80% (7.36%).
- Assets and lending: Total assets were $3.55 billion, up $120.1 million from year-end. Loans were $2.327 billion, up $102.1 million (6% annualized); indirect consumer loans grew $83.0 million. Investment securities totaled $877.6 million.
- Credit quality: Allowance for loan losses was $19.0 million, or 0.82% of loans. Nonperforming loans were 0.85% of loans, down from 1.08% a year earlier; nonperforming assets were 0.56% of assets, versus 0.72%. Nine-month net charge-offs increased to $2.1 million from $1.4 million; the annualized ratio was 0.12%, versus 0.09%.
- Deposits, debt and liquidity: Deposits were $2.665 billion, up $155.0 million from year-end. Total borrowings were $389.6 million, down from $450.8 million; long-term borrowings rose to $195.9 million while short-term borrowings fell to $193.7 million. Cash and cash equivalents were $70.0 million. Management reported $173.5 million of liquid assets and a $94.6 million surplus over its policy minimum, plus $71.6 million of unpledged investment securities.
- Cash flow: For the first nine months, operating activities provided $45.7 million, investing activities used $124.2 million and financing activities provided $82.4 million. Cash and cash equivalents increased $3.9 million.
- Capital and dividends: Stockholders’ equity was $457.4 million. CET1, Tier 1 and total risk-based capital ratios were 13.31%, 13.60% and 14.49%, respectively. Nine-month dividends declared were $0.62 per share, versus $0.47.
Material changes versus comparable periods
- Higher loan balances and yields supported net interest income and margin, while funding costs also increased.
- Third-quarter securities gains were $1.9 million, including $1.8 million from sales of appreciated bank equity securities. Management said such sales were not a normal occurrence; the gain added approximately $0.07 to quarterly diluted EPS.
- Third-quarter NIM also benefited by eight basis points from $611,000 received on a security for which an other-than-temporary impairment had previously been recorded. Acquisition-related accretion, net of amortization, was $816,000 for the quarter.
- Deposit account service-charge income declined by $869,000 for the nine-month period, largely due to lower overdraft fees. Mortgage banking, trust and investment, and bank-owned life insurance income increased.
- Growth in salaries and benefits, including incentive compensation and health costs, was partly offset by lower professional, communication and other expenses. Data processing and software expense increased with the move to a primarily outsourced core-processing solution.
- Loan delinquencies and classified loans improved from year-end, but net charge-offs increased, primarily in residential real estate and deposit account overdrafts.
Outlook, commentary and risks
- Management targeted a full-year 2017 efficiency ratio of 61%–63%, absent acquisition-related costs and other non-core charges, and estimated a 31%–32% effective tax rate for 2017.
- Management described the balance sheet as positioned for rising rates. Its September 30 parallel-rate analysis estimated net interest income increases of 2.2%, 3.3% and 4.0% under +100, +200 and +300 basis-point shocks, respectively. Such outcomes depend on assumptions, and non-parallel rate movements could alter the effects.
- On October 23, 2017, Peoples agreed to acquire ASB Financial Corp.; the transaction was expected to close in the second quarter of 2018, subject to approvals and other customary conditions. ASB had approximately $293.6 million in assets, $241.5 million in net loans and $210.4 million in deposits at June 30, 2017. Consideration allows ASB shareholders to elect stock or cash, with cash capped at 15% of total merger consideration.
- Four branches closed in March 2017, and two additional closures were planned for the fourth quarter. New consumer checking products were being introduced, with some non-interest-bearing accounts migrating to interest-bearing accounts.
- Management expects the forthcoming CECL credit-loss standard, effective for Peoples in 2020, to materially change allowance measurement and potentially require a significant allowance increase; the impact has not been quantified. Other stated risks include credit deterioration, interest-rate and liquidity changes, regulatory developments, technology and cybersecurity, and acquisition integration.
- Management said pending and threatened legal proceedings were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth persists after excluding the unusual securities gain and the benefit from the previously impaired security proceeds?
- Whether loan growth, particularly indirect consumer lending, continues without weakening credit quality or increasing charge-offs materially.
- How deposit pricing, brokered funding, and borrowing costs affect margins as rates change and customer accounts migrate to new products.
- Final ASB merger terms, approvals, expected closing timing, integration costs and any resulting dilution.
- The eventual CECL allowance impact, and whether liquidity and capital remain adequate under changing market conditions.