Peoples Bancorp (PEBO) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for Peoples Bancorp Inc. as of September 30, 2023, show a significant increase in total assets to $8.9 billion from $7.2 billion at year-end 2022, primarily driven by the Limestone Bancorp acquisition, with net income for the nine months ended September 30, 2023, at $79.5 million, up from $74.4 million in the prior-year period Consolidated Balance Sheets As of September 30, 2023, total assets grew to $8.94 billion, a 24% increase from $7.21 billion at December 31, 2022, primarily driven by a $1.37 billion increase in net loans and leases due to the Limestone acquisition, while total deposits rose to $7.04 billion and stockholders' equity increased to $993.2 million Consolidated Balance Sheet Highlights (Unaudited) | (Dollars in thousands) | September 30, 2023 | December 31, 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $8,942,534 | $7,207,300 | $1,735,234 | 24.1% | | Total cash and cash equivalents | $299,109 | $154,020 | $145,089 | 94.2% | | Net loans and leases | $6,021,466 | $4,653,980 | $1,367,486 | 29.4% | | Goodwill | $355,106 | $292,390 | $62,716 | 21.4% | | Total Liabilities | $7,949,315 | $6,421,970 | $1,527,345 | 23.8% | | Total deposits | $7,037,518 | $5,716,940 | $1,320,578 | 23.1% | | Total Stockholders' Equity | $993,219 | $785,320 | $207,899 | 26.5% | Consolidated Statements of Operations For the nine months ended September 30, 2023, net income increased to $79.5 million from $74.4 million year-over-year, driven by a 37% rise in net interest income to $251.0 million, despite a $13.9 million provision for credit losses and a 29% increase in non-interest expense due to acquisition costs Key Operating Results (Unaudited, Nine Months Ended September 30) | (Dollars in thousands, except per share data) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net interest income | $251,005 | $182,829 | 37.3% | | Provision for (recovery of) credit losses | $13,889 | $(5,811) | N/A | | Total non-interest income | $63,279 | $59,802 | 5.8% | | Total non-interest expense | $198,798 | $153,781 | 29.3% | | Net income | $79,538 | $74,443 | 6.8% | | Earnings per common share - diluted | $2.47 | $2.65 | (6.8%) | Key Operating Results (Unaudited, Three Months Ended September 30) | (Dollars in thousands, except per share data) | 2023 | 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Net interest income | $93,274 | $67,051 | 39.1% | | Provision for credit losses | $4,053 | $1,776 | 128.2% | | Net income | $31,882 | $25,978 | 22.7% | | Earnings per common share - diluted | $0.90 | $0.92 | (2.2%) | Notes to the Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, fair value measurements, investment and loan composition, credit quality, and acquisitions, highlighting the adoption of ASU 2022-02, significant goodwill from the Limestone Merger, increased uninsured deposits, and the termination of the defined benefit pension plan - Effective January 1, 2023, the company adopted ASU 2022-02, which eliminated the accounting guidance for Troubled Debt Restructurings (TDRs) and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty[25][26] - The company completed its merger with Limestone Bancorp, Inc. on April 30, 2023, resulting in preliminary goodwill of $62.1 million and core deposit intangibles of $27.7 million[127][131] - During the third quarter of 2023, the company terminated its defined benefit pension plan, settling the remaining obligation of $7.7 million and recording a settlement charge of $2.4 million[144] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes strong Q3 2023 performance to the Limestone Merger's full impact, boosting net interest income and margin, while provision for credit losses rose due to loan growth and macroeconomic outlook, and non-interest expenses increased from acquisition costs and a pension settlement charge, with the company maintaining a strong capital position Executive Summary Peoples reported Q3 2023 net income of $31.9 million ($0.90 per diluted share), an increase from $21.1 million in Q2 2023, significantly influenced by the Limestone Merger, which contributed to a 10% sequential increase in net interest income to $93.3 million and a net interest margin expansion to 4.70%, with total assets reaching $8.94 billion Q3 2023 Key Performance Metrics | Metric | Q3 2023 | Q2 2023 | Q3 2022 | | :--- | :--- | :--- | :--- | | Net Income | $31.9M | $21.1M | $26.0M | | Diluted EPS | $0.90 | $0.64 | $0.92 | | Net Interest Income | $93.3M | $84.9M | $67.1M | | Net Interest Margin | 4.70% | 4.54% | 4.17% | | Provision for Credit Losses | $4.1M | $8.0M | $1.8M | | Total Assets | $8.94B | $8.79B | $7.01B | - Non-core items, including acquisition expenses and a $2.4 million pension settlement charge, negatively impacted Q3 2023 diluted EPS by $0.16[201] - The increase in net interest margin was driven by a full quarter of accretion from the Limestone portfolio, including a $3.6 million true-up adjustment, and improved investment yields[202][203] Results of Operations Net interest income grew 39% year-over-year to $93.3 million in Q3 2023, with net interest margin expanding 53 basis points to 4.70%, driven by higher market rates and the Limestone Merger, while non-interest expense increased 37% to $71.7 million, including $4.4 million in acquisition costs and a $2.4 million pension settlement charge, resulting in an adjusted efficiency ratio of 52.5% - Accretion income from acquisitions added 49 basis points to net interest margin in Q3 2023, compared to 24 basis points in Q2 2023 and 16 basis points in Q3 2022[238] - Salaries and employee benefit costs were $36.6 million in Q3 2023, down from $38.0 million in Q2 2023 due to lower acquisition-related expenses, but up from $28.6 million in Q3 2022 due to the Limestone Merger and organic growth[257] Non-US GAAP Pre-Provision Net Revenue (PPNR) | (Dollars in thousands) | Q3 2023 | Q2 2023 | Q3 2022 | | :--- | :--- | :--- | :--- | | Income before income taxes | $40,729 | $27,262 | $33,388 | | Add: provision for credit losses | $4,053 | $7,983 | $1,776 | | Add/Less: Net (gains)/losses | $316 | $1,834 | $(14) | | Pre-provision net revenue | $45,096 | $37,076 | $35,178 | Financial Condition As of September 30, 2023, total assets were $8.9 billion, with total loans and leases at $6.1 billion, up 7% annualized, and deposits at $7.0 billion, while nonperforming assets remained stable at 0.48% of total assets, and capital levels remained strong, with a Common Equity Tier 1 ratio of 11.57% Loan Portfolio Composition (September 30, 2023) | Loan Category | Balance ($ in thousands) | % of Total | | :--- | :--- | :--- | | Commercial real estate | $2,563,997 | 42.1% | | Commercial and industrial | $1,128,809 | 18.6% | | Consumer | $782,531 | 13.2% | | Leases | $402,635 | 6.6% | | Construction | $374,016 | 6.1% | | Premium finance | $189,251 | 3.1% | | Total Loans & Leases | $6,084,390 | 100.0% | Asset Quality Ratios | Ratio | Sep 30, 2023 | Jun 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Nonperforming assets to total assets | 0.48% | 0.48% | 0.63% | | Allowance for credit losses to total loans | 1.03% | 1.02% | 1.13% | | Net charge-offs to average loans (annualized) | 0.15% | 0.09% | 0.18% | - The company's balance sheet is positioned to benefit from rising interest rates, with a +100 basis point parallel rate shock estimated to increase net interest income by 0.7% over 12 months, while a -100 basis point shock would decrease it by 1.3%[328][334] Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the information provided under the 'Interest Rate Sensitivity and Liquidity' section within Item 2, Management's Discussion and Analysis, with the key market risk being interest rate risk, managed by the Asset-Liability Committee (ALCO) through various strategies, including interest rate swaps - Information regarding market risk is incorporated by reference from the 'Interest Rate Sensitivity and Liquidity' section of the MD&A[342] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the third quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[343] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[344] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various litigation matters in the ordinary course of business, with management believing the outcomes will not have a material adverse effect on its consolidated financial position, results of operations, or liquidity - Peoples is engaged in various litigation matters from time to time, but management does not expect any material adverse effect on the company's financial condition or results[346] Risk Factors The company identified new risk factors, including potential inability to obtain needed liquidity exacerbated by bank failures, contagion risk from other financial institutions reducing customer confidence, and increasing sophistication of information security risks from external parties - A new risk factor highlights that an unexpected inability to obtain needed liquidity could adversely affect business, profitability, and viability, referencing the 2023 bank failures as an example of how quickly deposit outflows can accelerate[348] - The company notes the risk that failures of other large or similar-sized banks could reduce customer confidence, affect funding, and increase regulatory costs for the entire industry, including Peoples[349] - Increased information security risks from organized crime, hackers, and other external parties pose a threat, where a security breach could impair reputation, disrupt operations, and result in costly remediation[350] Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities During Q3 2023, no common shares were repurchased under the publicly announced program, though 9,374 shares were acquired for other purposes, including a Rabbi Trust and to satisfy tax obligations on vested restricted stock awards - No common shares were repurchased under the company's $30 million share repurchase program during the three months ended September 30, 2023, with approximately $22.6 million remaining available under the program[354] - A total of 9,374 shares were acquired by the company during the quarter, primarily consisting of shares withheld to satisfy income taxes on vested restricted stock (5,847 shares) and shares purchased for a Rabbi Trust (3,527 shares)[354][355][356] Exhibits This section lists the exhibits filed with the Form 10-Q, including merger agreements, articles of incorporation, new change in control agreements, CEO/CFO certifications, and XBRL data files