PEOPLES BANCORP INC annual report, FY2023

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Business context and reporting period

Peoples Bancorp Inc. is an Ohio-based financial holding company operating primarily through Peoples Bank. Its community banking business includes commercial and consumer banking, insurance, trust and investment services, premium finance and equipment leasing. This Form 10-K covers the fiscal year ended December 31, 2023; comparisons are primarily with 2022.

The April 30, 2023 Limestone Bancorp merger materially expanded the company: Peoples issued 6.83 million shares valued at $177.9 million and acquired approximately $1.08 billion of loans and $1.23 billion of deposits. The company recorded $68.8 million of goodwill and $27.7 million of core deposit intangibles.

Financial performance and condition

  • Earnings and revenue: Net income was $113.4 million, up from $101.3 million; diluted EPS was $3.44, down from $3.60, reflecting a larger weighted-average share count following acquisitions. Net interest income rose 34% to $339.4 million; total non-interest income was $87.4 million. Net interest margin improved to 4.56% from 3.97%.
  • Interest costs and expenses: Interest expense increased to $100.0 million from $16.1 million, mainly reflecting higher rates and a shift toward more costly deposits and borrowings. Non-interest expense increased 29% to $266.5 million, including $17.0 million of acquisition-related costs and a $2.4 million pension settlement charge. The reported efficiency ratio improved to 58.7% from 59.6%; adjusted for non-core items, it was 54.4% versus 58.6%.
  • Credit quality: Provision for credit losses was $15.2 million, versus a $3.5 million recovery in 2022. Net charge-offs were $8.5 million, or 0.15% of average loans, compared with $7.3 million, or 0.16%. The allowance was $62.0 million, 1.01% of loans, down from 1.13%. Nonperforming assets declined to $39.4 million, or 0.43% of assets, from $45.2 million, or 0.63%; criticized loans rose to $235.2 million from $191.4 million, primarily including loans acquired with Limestone.
  • Balance sheet: Total assets increased 27% to $9.16 billion, largely from Limestone. Loans and leases were $6.16 billion, up from $4.71 billion; excluding acquired Limestone loans, year-end loans and leases grew $472.2 million, or 10%. Deposits increased to $7.15 billion from $5.72 billion; excluding Limestone, deposits grew 11%, with growth in retail and brokered CDs offset by declines in non-interest-bearing, savings and interest-bearing demand deposits. Demand deposits fell to 38% of total deposits from 48%.
  • Liquidity, securities and borrowings: Cash and cash equivalents were $426.7 million, up from $154.0 million. Cash from operations was $143.6 million; cash increased $272.7 million during the year. Borrowings totaled $817.4 million, including $133.0 million under the Bank Term Funding Program (BTFP). Management reported $457.1 million of liquid assets and a 3.36x liquidity coverage ratio. Uninsured deposits were $2.0 billion. Available-for-sale securities had a $136.0 million net unrealized loss; held-to-maturity securities had a reported fair value of $612.0 million versus $683.7 million amortized cost.
  • Capital and shareholder returns: Stockholders’ equity was $1.05 billion, up from $785.3 million. The filing reports a 12.58% Tier 1 risk-based capital ratio and 13.38% total risk-based ratio; management stated the bank remained well capitalized. Dividends declared were $1.55 per share, compared with $1.50. Peoples repurchased $3.0 million of shares.

Material changes versus 2022

Higher market rates, improved investment yields and Limestone contributed to net interest income and margin growth, while sharply higher deposit and borrowing costs partly offset those gains. The merger also increased assets, loans, deposits, staffing and operating costs. Credit-loss expense shifted from a 2022 recovery to a 2023 provision, reflecting acquired non-PCD loans, loan growth and higher charge-offs. Securities portfolio repositioning included sales of lower-yielding securities at a pretax loss of $3.7 million; management said the first-quarter loss was earned back during 2023 and expected the fourth-quarter loss to be earned back within 14 months.

Outlook, risks and unusual items

  • 2024 outlook: Peoples expects net interest margin of 4.10%–4.30%, assuming 75–150 basis points of reductions in the Federal Funds effective rate. It projects loan growth of 6%–8%, deposit growth of approximately 2%, and high-single-digit to low-double-digit growth in non-interest income excluding gains and losses. Non-interest expense excluding acquisition costs is projected at $67–$69 million in each of the second, third and fourth quarters; first-quarter expense is expected to be higher. The 2024 efficiency ratio is projected at 55%–60%. Management expects provision expense to increase, with a charge-off rate of approximately 20 basis points.
  • Key risks: Management highlights rate and deposit competition, liquidity and funding access, commercial real estate and other credit exposures, inflation and economic weakness, cybersecurity and dependence on third-party providers, regulatory change, and integration and realization of Limestone synergies. A $30 million revolving credit facility with U.S. Bank was scheduled to mature March 31, 2024; the filing says renewal was in process and expected before expiration. Peoples reported compliance with its covenants at year-end.
  • Other items and contingencies: The pension plan was terminated in 2023, settling a $7.7 million obligation; management anticipated no further termination expense. Management believed pending legal proceedings would not have a material adverse effect, while noting outcomes cannot be predicted. The filing states that Peoples Bank was not subject to the FDIC’s special assessment for certain 2023 bank failures because its relevant uninsured deposits were below $5 billion.
  • Controls and audit: Management and Ernst & Young reported effective internal control over financial reporting as of December 31, 2023. The auditor issued an unqualified opinion on the consolidated financial statements and identified the allowance for credit losses and fair value of Limestone-acquired loans as critical audit matters.

Important facts for investors to verify

  1. Whether the U.S. Bank revolving facility was renewed before its March 31, 2024 maturity, and on what terms.
  2. Deposit retention, mix and pricing—particularly the decline in demand deposits, growth in CDs and brokered deposits, and $2.0 billion of uninsured deposits.
  3. Whether credit performance, criticized/classified loans and charge-offs remain consistent with management’s 2024 expectations, including in commercial real estate and acquired Limestone portfolios.
  4. Whether the projected 2024 rate environment, margin range and loan/deposit growth assumptions are realized.
  5. Progress on Limestone integration and expected synergies, alongside acquisition-related and recurring expense trends.
  6. How unrealized securities losses, borrowing needs and available liquidity evolve if rates or deposit flows differ from assumptions.