Peoples Bancorp Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Peoples is a regional bank and financial-services company operating in Ohio, West Virginia and Kentucky.
Financial performance and condition
- Earnings: Net income was $11.7 million, or $0.64 per diluted share, versus $8.8 million and $0.48 a year earlier. Pretax income rose to $14.1 million from $12.7 million.
- Revenue and margin: Net interest income increased 9% to $29.4 million; net interest margin was 3.66%, up from 3.55%. Noninterest income rose 9% to $15.0 million. Total noninterest expense increased 3% to $28.2 million. The efficiency ratio improved to 61.75% from 64.89%.
- Taxes: Income tax expense fell to $2.4 million from $3.9 million, and the effective tax rate declined to 16.9% from 30.4%, primarily reflecting the lower federal corporate tax rate. A $290,000 tax benefit from stock awards also reduced the quarter’s tax expense.
- Balance sheet and lending: Total assets were $3.63 billion, up $53.2 million from year-end. Loans were $2.40 billion, up $45.2 million; deposits were $2.81 billion, up $82.9 million. Deposit growth included a seasonal increase in governmental balances.
- Credit: The loan-loss provision was $2.0 million, compared with $0.6 million in Q1 2017. Net charge-offs increased to $2.0 million from $0.6 million, including an $827,000 charge-off tied to one acquired commercial relationship and higher indirect consumer charge-offs. Nonperforming loans were 0.72% of loans, down from 0.95% a year earlier; the allowance was 0.78% of loans.
- Cash flow: Operating activities provided $11.7 million; investing activities used $61.5 million, including $46.4 million of net loan growth; financing activities provided $50.2 million. Cash and cash equivalents ended at $72.6 million, little changed from year-end.
- Debt and liquidity: Short- and long-term borrowings totaled $327.0 million, down $26.6 million from year-end. Peoples reported $165.2 million of liquid assets and another $78.3 million of unpledged investment securities. Management said available liquidity and funding sources were sufficient for anticipated needs.
- Capital and securities: The CET1 ratio was 13.28%, total risk-based capital was 14.31%, and the leverage ratio was 9.86%. Stockholders’ equity declined $1.8 million to $456.8 million, largely due to a decline in investment-security market values; accumulated other comprehensive loss was $16.1 million.
Material changes and notable items
- Year-over-year earnings growth reflected higher net interest income and noninterest income and lower tax expense, partly offset by the larger loan-loss provision.
- Q1 noninterest income included a $460,000 gain from fair-value changes in equity securities under newly adopted accounting guidance and $313,000 of SBA loan-sale-related income. Adoption of the revenue-recognition standard increased reported insurance income by $391,000 in the quarter; prior-year amounts were not restated.
- Available-for-sale securities had a $17.8 million net unrealized loss at March 31, compared with a $2.5 million net unrealized loss at year-end. Management attributed most unrealized losses to interest-rate and spread changes and concluded no individual securities were other-than-temporarily impaired.
- On April 13, 2018, after quarter-end, Peoples completed its acquisition of ASB Financial Corp. for $41.5 million in cash and/or Peoples shares. ASB had approximately $288.3 million of assets, $247.2 million of net loans and $203.2 million of deposits at December 31, 2017; Peoples issued 1,152,711 common shares in connection with the transaction.
Outlook, risks and contingencies
- Management targeted a full-year 2018 efficiency ratio of 61%–63%, excluding acquisition-related costs and other non-core charges. It estimated a full-year effective tax rate of approximately 18.5%–19.5%, excluding discrete items. No specific earnings or revenue guidance was provided.
- Management described the balance sheet as positioned to benefit from rising rates in its parallel-shock analysis: a 100-basis-point increase was estimated to raise net interest income 1.7%, while reducing economic value of equity 4.6%. Actual outcomes may differ, including if longer-term rates move differently from short-term rates.
- Key risks include loan-credit deterioration and higher charge-offs, interest-rate and deposit-pricing changes, acquisition integration and execution, competition, regulatory and economic developments, cybersecurity and third-party vendor risks, and maintaining funding, liquidity and capital.
- Peoples expects adoption of the expected-credit-loss (CECL) standard in 2020 to materially affect allowance measurement and potentially increase the allowance; the amount of the impact was not yet determined. The filing also notes uncertainty in completing accounting for certain Tax Cuts and Jobs Act effects.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Derivative counterparties held $6.0 million of collateral; the filing identifies possible settlement exposure if specified agreement provisions were breached.
Important facts for investors to verify
- Whether loan growth and deposit funding—particularly seasonal and brokered deposits—remain sustainable as funding costs rise.
- Whether the elevated provision and indirect consumer charge-offs are isolated or indicate broader credit deterioration; monitor criticized loans, delinquencies and allowance coverage.
- How interest-rate changes affect net interest margin, deposit betas, securities values and the economic value of equity.
- The realized effects of the ASB acquisition, including integration costs, acquired asset quality, funding and share dilution.
- Progress on CECL implementation and remaining tax-accounting estimates, and whether the stated efficiency-ratio and tax-rate targets remain achievable.