Peoples Bancorp Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Peoples is an Ohio-based financial holding company operating principally through Peoples Bank, with community banking as its sole reportable segment. It provides banking, insurance, trust, investment and related services in Ohio, West Virginia and Kentucky.
Financial performance and condition
Amounts are in millions unless noted.
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $129.6 | $113.4 |
| Total non-interest income | $56.8 | $55.6 |
| Net income | $46.3 | $38.5 |
| Diluted earnings per share | $2.41 | $2.10 |
| Net interest margin | 3.71% | 3.62% |
| Efficiency ratio | 65.33% | 62.20% |
| Assets at year-end | $3,991.5 | $3,581.7 |
| Total loans at year-end | $2,728.8 | $2,357.1 |
| Total deposits at year-end | $2,955.5 | $2,730.3 |
| Total borrowed funds at year-end | $465.8 | $353.5 |
| Stockholders’ equity at year-end | $520.1 | $458.6 |
- Revenue growth reflected 14% higher net interest income, driven by loan growth, the ASB acquisition and higher asset yields. Funding costs also rose.
- Income before taxes declined to $54.9 million from $57.2 million, while net income rose because income tax expense fell to $8.7 million from $18.7 million. The effective tax rate was 15.9%, versus 32.7%.
- Non-interest expense rose 17%, to $126.0 million, including $7.3 million of acquisition-related expense. The reported efficiency ratio worsened, while the ratio adjusted for non-core items improved to 61.32% from 61.85%.
- Operating cash flow was $75.2 million; investing activities used $130.2 million and financing activities provided $60.3 million. Cash and cash equivalents ended at $77.6 million.
- Deposits grew 8%, including $198.6 million acquired with ASB. Brokered CDs increased to $263.9 million from $159.6 million. Borrowed funds rose, largely reflecting short-term FHLB advances.
- Credit quality indicators were mixed: nonperforming loans were 0.71% of loans versus 0.73%; criticized loans increased to 4.18% from 3.84%. Net charge-offs were $4.0 million, or 0.15% of average loans, unchanged as a ratio. The allowance was $20.2 million, or 0.74% of loans, versus 0.80%.
- Capital remained strong: common equity tier 1 ratio was 13.61%, total risk-based capital ratio 14.60%, and leverage ratio 9.99%. Tangible equity to tangible assets was 9.35%.
- Fourth-quarter net income was $13.9 million and diluted EPS was $0.71, compared with $9.0 million and $0.49 in fourth-quarter 2017.
Material changes and significant events
- Peoples completed the ASB Financial Corp. acquisition on April 13, 2018, for $41.5 million in total consideration. ASB contributed $236.6 million of loans and $198.6 million of deposits at acquisition-date fair value; Peoples recorded $18.1 million of goodwill.
- Peoples agreed to acquire First Prestonsburg Bancshares, parent of First Commonwealth Bank, with nine eastern Kentucky branches. The transaction was expected to close in the second quarter of 2019, subject to customary conditions. First Prestonsburg reported approximately $308.5 million of assets, $140.1 million of loans and $236.6 million of deposits at year-end 2018. Consideration includes Peoples shares and a special cash distribution by the target.
- The 2018 federal corporate tax rate reduction to 21% was the principal reason for lower tax expense. Additional 2018 tax benefits included a $0.8 million valuation-allowance release and a $0.7 million final deferred-tax remeasurement adjustment.
- Available-for-sale securities had net unrealized losses of $12.8 million at year-end, compared with $2.5 million a year earlier, primarily reflecting market-rate and spread changes. Management reported no other-than-temporary impairment.
Outlook, commentary and risks
- Management’s 2019 outlook, excluding the pending First Prestonsburg transaction, calls for net interest margin of about 3.75%; period-end loan growth of 6%–8%; non-interest income growth of 7%–9%; and non-interest expense growth in the mid-single digits. It expects an efficiency ratio of 59%–61%, an effective tax rate of 19.0%–19.5%, and positive operating leverage.
- Management expects approximately $8.5–$9.0 million of one-time First Prestonsburg acquisition costs in 2019, mostly in the second quarter. It expects a slow start to loan growth due to anticipated first-quarter payoffs and forecasts a 2019 net charge-off rate closer to its historical 0.20%–0.30% range.
- Management said the balance sheet was positioned to benefit from rising rates, but warned that a flattening yield curve could pressure margins. Loan growth and the ability to attract and retain deposits remain key drivers.
- Key risks include commercial real estate and commercial lending exposures, consumer indirect-loan growth, economic and interest-rate uncertainty, deposit competition and wholesale-funding dependence, acquisition integration and execution, cybersecurity and reliance on third-party technology providers. Peoples also identified LIBOR transition risk and uncertainty about future regulation.
- The $15 million revolving credit facility with Raymond James Bank matured March 3, 2019; the company said it was seeking renewal and expected renewal before expiration. Peoples reported compliance with its covenants at year-end.
- CECL adoption was scheduled for January 1, 2020. Management had not determined the size of the transition adjustment and warned that the new expected-loss model could materially affect the allowance and capital. The new lease standard took effect January 1, 2019, with an approximately $5.2 million right-of-use asset and $5.3 million lease liability recorded.
- Management reported ordinary-course legal proceedings were not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Progress on First Prestonsburg approvals, closing, integration costs, expected synergies and potential share dilution.
- Whether projected 2019 loan and fee-income growth is achieved, and whether expenses and the efficiency ratio meet guidance after acquisition costs.
- Loan performance, especially criticized commercial credits and indirect consumer lending, and the adequacy of the allowance as loan growth continues.
- Deposit mix, brokered-CD reliance, borrowing levels and renewal of the Raymond James credit facility.
- Interest-rate sensitivity under changing yield-curve conditions, including LIBOR-linked contracts and hedges.
- The eventual CECL impact on reserves, retained earnings and regulatory capital.