PEOPLES BANCORP INC quarterly report, Q2 FY2019

Peoples Bancorp Inc. — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Figures are unaudited; dollar amounts are in millions unless stated otherwise.

Business context and key financial results

Peoples is an Ohio-based regional banking and financial services company operating in Ohio, West Virginia and Kentucky. On April 12, 2019, it completed its acquisition of First Prestonsburg, adding nine branches in Kentucky.

Metric	Q2 2019	Comparable period
Net interest income	$36.0	$32.8 in Q2 2018; up 10%
Non-interest income	$15.3	$13.3 in Q2 2018
Net income	$9.6	$7.9 in Q2 2018
Diluted EPS	$0.46	$0.41 in Q2 2018
Net interest margin	3.77%	3.74% in Q2 2018; 3.80% in Q1 2019

For the first six months, net interest income was $70.0 million versus $62.2 million, and net income was $24.0 million versus $19.6 million. Diluted EPS was $1.19 versus $1.04. Six-month net interest margin was 3.78%, up from 3.70%.

Financial condition, liquidity and capital

• At June 30, total assets were $4.28 billion, loans were $2.83 billion, deposits were $3.36 billion and stockholders’ equity was $579.0 million. Total assets increased 7% from December 31, primarily reflecting the First Prestonsburg acquisition.
• Total borrowings were $272.1 million, down from $465.8 million at year-end; short-term borrowings fell to $186.5 million from $356.2 million. Deposit growth, including acquired deposits, was the primary funding change.
• Six-month operating cash flow was $18.8 million; cash and cash equivalents increased $15.8 million to $93.4 million. Peoples reported $261.9 million of liquid assets and $115.0 million of additional unpledged securities. A new $20 million Federal Funds liquidity facility was undrawn at quarter-end.
• Capital ratios remained strong: common equity Tier 1 was 14.16%, total risk-based capital was 15.14%, and the leverage ratio was 10.26%. The reported capital conservation buffer was 7.14%.
• Cash dividends declared were $0.34 per share for Q2 and $0.64 per share for the first half.

Material changes and management commentary

• First Prestonsburg’s total purchase price was $43.7 million, including $32.4 million in Peoples shares and a pre-merger $11.3 million cash distribution. The acquisition added $130.4 million of loans and $257.2 million of deposits at acquisition, and $12.0 million of goodwill.
• Q2 non-interest expense rose to $38.9 million from $36.0 million a year earlier. Acquisition-related costs were $6.8 million in Q2 and $7.0 million in the first half, weighing on Q2 diluted EPS by $0.28 and first-half diluted EPS by $0.29. Management cited severance and change-in-control costs, contract termination fees and other integration expenses.
• Loan growth and higher loan yields supported net interest income, while higher deposit costs—driven by competition and acquired deposits—pressured margin. Acquisition-related accretion income was $1.2 million in Q2.
• Q2 provision for loan losses was $0.6 million, versus $1.2 million in Q2 2018; first-half provision was $0.4 million versus $3.2 million. First-half 2019 included a $1.8 million recovery on a previously charged-off commercial loan. The allowance was $21.4 million, or 0.75% of loans.
• Credit indicators were mixed: nonperforming loans were 0.71% of loans, while criticized loans were 3.42%, down from 4.18% at year-end. Classified loans increased to $63.0 million from $43.8 million at year-end, reflecting acquired loans and commercial relationship downgrades.

Outlook, risks and contingencies

• Management targeted a full-year 2019 efficiency ratio of 59%–61% after excluding acquisition-related and other non-core costs. The reported Q2 ratio was 73.24%; adjusted for non-core items, it was 60.21%.
• Management expected interest rates to remain relatively low through the rest of 2019 and said it was monitoring rate changes and their impact. Its rate-sensitivity analysis showed estimated net interest income rising 10.1% under a 300-basis-point increase and falling 9.0% under a 100-basis-point decrease; actual results may differ, including with non-parallel rate movements.
• Peoples expected CECL adoption on January 1, 2020 to materially affect allowance measurement and potentially increase the allowance, but had not determined the amount. Testing, model validation and implementation work were underway.
• Key stated risks include acquisition integration, deposit competition and funding, interest-rate and liquidity exposure, credit deterioration and loan concentrations, economic conditions, regulatory changes, cybersecurity and vendor dependence, and the transition away from LIBOR. Management said pending legal proceedings were not expected to materially affect financial position, results or liquidity.

Most important facts for investors to verify

• Whether First Prestonsburg integration delivers expected benefits and how much acquisition-related expense remains.
• Deposit mix, funding costs and the durability of net interest margin as competition and interest rates change.
• Trends in classified and nonperforming loans, charge-offs, recoveries and allowance adequacy.
• The eventual CECL transition adjustment and its effects on capital and earnings.
• Whether the adjusted efficiency-ratio target is achieved; the filing does not provide specific earnings or revenue guidance.