Peoples Bancorp Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Peoples is an Ohio-based bank holding company serving Ohio, West Virginia and Kentucky. Year-over-year comparisons include the effect of the April 2018 ASB acquisition.
Financial performance and position
- Revenue and earnings: Net interest income was $33.9 million, up 16% from $29.4 million a year earlier. Non-interest income was $15.4 million versus $15.0 million. Net income was $14.4 million, up 22% from $11.7 million; diluted EPS was $0.73 versus $0.64.
- Interest margin and costs: Net interest margin was 3.80%, compared with 3.66% in Q1 2018 and 3.77% in Q4 2018. Interest expense rose to $6.7 million from $3.9 million a year earlier, mainly reflecting higher deposit costs. The efficiency ratio increased to 62.7% from 61.8%.
- Cash flow: Operating cash flow was $6.3 million, down from $11.7 million in Q1 2018. Cash and cash equivalents increased $4.5 million during the quarter to $82.1 million.
- Balance sheet and funding: Total assets were $4.02 billion, up 1% from year-end 2018. Loans were $2.74 billion, up $8.8 million from year-end; deposits were $3.14 billion, up $181.9 million. Total borrowings fell $168.5 million from year-end to $297.4 million.
- Credit and capital: The allowance for loan losses was $20.9 million, or 0.76% of loans. Nonperforming loans were 0.66% of loans; criticized loans were 3.28%, down from 4.18% at year-end, while classified loans rose to 1.73% from 1.61%. Common equity tier 1 capital was 13.96%; the leverage ratio was 10.31%.
- Liquidity: Peoples Bank reported $186.6 million of liquid assets, equal to 4.2% of total assets and unfunded loan commitments, exceeding its policy minimum by $97.9 million. It also had $72.7 million of unpledged investment securities.
Changes, unusual items and outlook
- Q1 results included a $1.8 million recovery on a previously charged-off commercial loan, contributing approximately $0.07 per diluted share, and a $787,000 gain from selling restricted Visa Class B stock, contributing approximately $0.03 per share. Acquisition-related costs of $253,000 reduced EPS by approximately $0.01.
- Loan-loss recovery was $263,000, versus a $2.0 million provision in Q1 2018. Net recoveries were $1.0 million, largely due to the commercial-loan recovery. Management said delinquencies remained stable; 98.6% of loans were current at quarter-end.
- Non-interest expense rose 13% year over year to $31.9 million, driven principally by compensation and costs associated with ASB’s expanded footprint. Management attributed the higher efficiency ratio to expense growth outpacing revenue growth.
- Management targeted a full-year 2019 efficiency ratio of 59%–61%, excluding acquisition-related and other non-core expenses. It reported that no further Federal Reserve rate increases were anticipated in 2019 at the time of filing; this was not earnings guidance.
- On April 12, 2019, after quarter-end, Peoples completed its First Prestonsburg acquisition. The acquired company reported $297.1 million of assets, including $137.1 million of loans, and $252.1 million of deposits at March 31. Consideration was $43.7 million, including 1,005,478 Peoples shares; sellers also received an $11.3 million special cash distribution before closing.
- Risks and contingencies: Peoples expected the CECL standard, effective for it January 1, 2020, to materially affect allowance measurement; it had not determined the adoption impact and warned that allowance increases could be significant. Interest-rate, credit, deposit-funding, acquisition-integration, economic, regulatory, technology and cybersecurity risks were also identified. Management said pending legal matters were not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- How much of earnings growth is recurring versus the one-time loan recovery and Visa stock gain, and whether credit costs normalize.
- Whether deposit growth is sustainable and whether increased deposit costs pressure net interest margin.
- Progress integrating First Prestonsburg and the eventual contribution of its loans, deposits, branches and operating costs.
- The CECL adoption estimate and its effects on the allowance, earnings and capital when quantified.
- Credit trends, particularly classified loans, commercial real estate exposures and the concentration of the quarter’s loan recoveries.
- Performance against the 59%–61% full-year efficiency-ratio target and the sensitivity of results to changing interest rates.