Peoples Bancorp Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Peoples is an Ohio-based regional financial services company operating primarily in Ohio, West Virginia and Kentucky, with banking, insurance, trust and investment services.
Financial results and condition
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $40.6 million | $38.9 million in Q1 2016 |
| Net interest income | $26.9 million | $25.8 million in Q1 2016 |
| Net interest margin | 3.55% | 3.53% in Q1 2016 |
| Provision for loan losses | $0.6 million | $1.0 million in Q1 2016 |
| Non-interest income | $13.7 million | $13.1 million in Q1 2016 |
| Non-interest expense | $27.3 million | $26.3 million in Q1 2016 |
| Net income | $8.8 million | $8.0 million in Q1 2016 |
| Diluted earnings per share | $0.48 | $0.44 in Q1 2016 |
Revenue rose about 4% and net income about 10% year over year. Higher net interest income and non-interest income were partly offset by higher expenses. Net income also increased from $7.4 million in Q4 2016. The efficiency ratio was 64.89%, compared with 64.26% in Q1 2016 and 66.87% in Q4 2016.
- Balance sheet: Total assets were $3.46 billion at March 31, up $26.9 million from year-end. Loans were $2.25 billion, up $24.6 million from December 31 and 7% from a year earlier. Indirect consumer and commercial lending contributed to growth.
- Funding and liquidity: Deposits were $2.70 billion, up $192.4 million from year-end; short- and long-term borrowings totaled $280.3 million, down from $450.8 million. The filing attributes much of the deposit increase to seasonally higher governmental balances, brokered CDs and customer deposits. Cash and cash equivalents were $64.3 million. Management reported $128.3 million in liquid assets, above its $76.8 million policy minimum, plus $72.7 million of unpledged securities.
- Debt: Long-term borrowings were $174.5 million, including $127.6 million of FHLB advances, $40 million of national-market repurchase agreements and $7.0 million of junior subordinated debt. The company added $30 million of long-term FHLB advances during the quarter.
- Cash flow: Operating activities provided $13.4 million; investing activities used $33.3 million; financing activities provided $18.1 million. Cash and cash equivalents declined $1.8 million during the quarter.
- Credit quality: Nonperforming loans were $21.3 million, or 0.95% of loans, down from $25.1 million and 1.13% at year-end. The allowance for loan losses was $18.5 million; annualized net charge-offs were 0.11% of average loans. The filing says loan payoffs helped reduce nonperforming loans.
- Capital and shareholder returns: Stockholders’ equity was $443.0 million. The capital table reports CET1 of 13.05%, Tier 1 of 13.34% and total risk-based capital of 14.27%. Tangible equity to tangible assets was 8.98%; tangible book value per share was $16.28. The declared dividend was $0.20 per share, versus $0.15 a year earlier.
Material changes and notable items
- Indirect consumer loans increased $30.9 million during the quarter; the company said growth included recreational vehicles and motorcycles, in addition to automobiles.
- Non-interest income benefited from $1.3 million in performance-based insurance commissions, which are generally recognized in Q1, and higher bank-owned life insurance income. These commissions were $1.3 million versus $1.6 million a year earlier.
- Salary and benefit expense increased $1.2 million year over year, mainly due to incentive compensation, health insurance claims and stock-based compensation. Q4 2016 included $0.7 million of core banking system conversion costs; the system conversion was completed in November 2016.
- Peoples closed four branches on March 31, 2017. Its insurance subsidiary acquired an insurance administration company in January; the acquisition was described as immaterial to financial position, results and cash flows.
- Seven cash-flow hedge swaps had $60 million notional value and are scheduled to become effective in 2018. Management reported the balance sheet remained positioned for rising rates under its parallel rate-shock analysis, while cautioning that non-parallel rate movements could change the outcome.
Outlook, risks and contingencies
- Management targeted a full-year 2017 efficiency ratio of 62%–64%, excluding acquisition-related and other non-core charges. It estimated a 2017 effective tax rate of approximately 31%.
- The Federal Reserve raised its benchmark rate by 25 basis points in March 2017. Management was monitoring rate changes and related effects on margins, loan demand and interest-rate sensitivity; future rate increases were uncertain.
- Peoples expects the forthcoming CECL credit-loss standard, effective for the company in 2020, to materially affect how its allowance is determined and potentially require a significant increase. The impact had not yet been quantified.
- Key disclosed risks include credit deterioration, interest-rate and funding/liquidity changes, competition, regulatory and accounting changes, cyber and third-party technology risks, and successful execution of system upgrades and acquisitions. Management said pending legal proceedings were not expected to have a material adverse effect.
- Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth—especially indirect consumer growth—and the associated credit performance remain consistent with management’s risk appetite.
- Whether the Q1 deposit increase persists after seasonal governmental balances and the addition of brokered CDs, and how funding costs evolve.
- How the 62%–64% efficiency-ratio target and approximately 31% tax-rate estimate compare with subsequent reported results.
- The eventual CECL transition impact on the allowance, capital and earnings, and whether interest-rate swaps remain effective as planned.
- The filing’s MD&A prose describes some capital ratios inconsistently; verify against the capital table, which reports CET1 13.05%, Tier 1 13.34% and total capital 14.27%.