Peoples Bancorp Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Peoples is an Ohio-based regional financial services company offering banking, insurance, trust and investment services across Ohio, West Virginia and Kentucky. Figures below are in U.S. dollars; “m” means millions.
Financial results and key metrics
| Metric | Q2 2018 | Comparable period |
|---|---|---|
| Net interest income | $32.8m | $28.1m, Q2 2017 |
| Net interest margin | 3.74% | 3.62%, Q2 2017 |
| Net income | $7.9m | $9.8m, Q2 2017 |
| Diluted earnings per share | $0.41 | $0.53, Q2 2017 |
| Non-interest income | $13.3m | $13.7m, Q2 2017 |
| Non-interest expense | $36.0m | $26.7m, Q2 2017 |
| Provision for loan losses | $1.2m | $0.9m, Q2 2017 |
For the first half of 2018, net interest income was $62.2m and net income was $19.6m, compared with $55.0m and $18.6m, respectively, in the first half of 2017. Diluted EPS was $1.04 versus $1.02. First-half net interest margin was 3.70%, up from 3.58%.
At June 30, total assets were $3.97bn, loans were $2.69bn, deposits were $2.95bn and total borrowings were $473.8m. Since December 31, 2017, assets grew 11%, loans grew $329.4m and deposits grew $218.9m; the ASB acquisition contributed substantially to this growth. Shareholders’ equity was $499.3m. The allowance for loan losses was $19.3m, or 0.72% of loans, compared with 0.80% at year-end.
First-half operating cash flow was $27.5m; investing activities used $89.0m and financing activities provided $74.1m. Cash and cash equivalents increased $12.6m to $84.8m. Peoples reported $197.9m of liquid assets at the bank, exceeding its policy minimum by $86.8m, and an additional $78.5m of unpledged investment securities.
Regulatory capital ratios at June 30 were 13.00% common equity Tier 1, 13.26% Tier 1, 13.96% total risk-based capital and 9.75% leverage. Management said capital remained above applicable well-capitalized minimums.
Material changes and notable items
- Peoples completed its acquisition of ASB Financial Corp. on April 13, 2018, for approximately $41.5m in cash and stock. ASB added six full-service branches, approximately $239.6m of loans and $198.6m of deposits at acquisition-date values; preliminary purchase accounting recorded $18.3m of goodwill.
- Acquisition-related expenses were approximately $6.1m in Q2 and $6.2m for the first half, including contract termination and de-conversion fees, severance and other integration costs. These costs were a major factor in the year-over-year Q2 decline in earnings and increase in expenses.
- Q2 income tax expense included an $805,000 benefit from releasing a valuation allowance related to a historical tax-credit investment. The lower federal corporate tax rate also reduced 2018 tax expense versus 2017.
- Q2 non-interest income included lower performance-based insurance commissions than Q1, a $236,000 reduction from fair-value changes in equity securities, and higher mortgage banking income following the ASB acquisition. Q2 non-interest expense also included $207,000 of losses from an ATM-skimming incident; the company said it took steps to prevent recurrence.
- Asset quality indicators were mixed: nonperforming loans were 0.67% of loans, improved from 0.73% at year-end, and 99.0% of the portfolio was current. However, criticized loans rose to 4.50% of loans from 3.84% at year-end, and classified loans rose to 2.07% from 1.97%, largely reflecting acquired ASB loans. First-half provision was $3.2m versus $1.6m a year earlier, including the effect of a $827,000 acquired commercial-loan charge-off in Q1.
Outlook, risks and contingencies
Management targeted a 61%–63% efficiency ratio for the second half of 2018, excluding acquisition-related and other non-core expenses. The reported ratio was 75.0% in Q2; adjusted for non-core expenses, it was 62.0%. Management cited loan growth, higher loan yields and relatively low deposit costs as supporting net interest income and margin, while noting deposit pricing competition and changes in the yield curve could affect results. The filing does not provide earnings or revenue guidance.
Key risks include integrating ASB and achieving expected benefits; credit deterioration, particularly in acquired loans; deposit growth and funding costs; interest-rate and securities valuation changes; and operational, cybersecurity, vendor, regulatory and economic risks. The available-for-sale securities portfolio had a $20.3m net unrealized loss at June 30, largely attributed by management to interest-rate and spread movements; management said it did not intend, and was not more likely than not required, to sell the affected securities before recovery. The company expects the CECL credit-loss standard, effective for it in 2020, to materially change allowance measurement and potentially increase the allowance, but had not determined the impact. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether ASB integration costs and other non-core expenses decline as planned, and whether the stated second-half efficiency-ratio target is achieved.
- Credit performance of acquired and organically originated loans, including trends in criticized/classified loans, charge-offs and reserve coverage.
- Deposit retention, deposit pricing and reliance on short-term borrowings as loans grow.
- Changes in unrealized securities losses, interest-rate sensitivity and the eventual CECL adoption impact.
- The extent to which Q2 earnings depended on the tax valuation-allowance release and other unusual items.