Peoples Bancorp Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Peoples is a diversified financial services company offering banking, insurance, trust and investment services, premium finance, and equipment leasing. Results include Limestone Bancorp, acquired April 30, 2023; the transaction added 20 Kentucky branches and materially increased the company’s loans, deposits, and scale.
Financial performance and condition
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $93.3 | $67.1 in Q3 2022 |
| Net interest margin, fully taxable-equivalent | 4.70% | 4.17% in Q3 2022 |
| Non-interest income | $23.2 | $20.4 in Q3 2022 |
| Provision for credit losses | $4.1 | $1.8 in Q3 2022 |
| Non-interest expense | $71.7 | $52.3 in Q3 2022 |
| Net income | $31.9 | $26.0 in Q3 2022 |
| Diluted earnings per share | $0.90 | $0.92 in Q3 2022 |
| Efficiency ratio | 58.4% | 57.2% in Q3 2022; 52.5% excluding non-core items in Q3 2023 |
- For the first nine months, net income was $79.5 million versus $74.4 million in 2022, while diluted EPS was $2.47 versus $2.65. The lower EPS despite higher net income reflects the larger share count following Limestone consideration shares.
- Year-to-date net interest income was $251.0 million versus $182.8 million; net interest margin was 4.60% versus 3.81%. The filing attributes the increase to higher market rates, Limestone, organic growth, and acquired-loan accretion.
- Q3 net interest income rose 10% from the linked quarter, and margin expanded from 4.54%. Acquisition accretion, including a $3.6 million true-up to preliminary Limestone accretion, contributed materially; acquisition accretion was $9.8 million for Q3.
- Interest expense increased sharply: $30.3 million in Q3 versus $3.8 million in Q3 2022, reflecting higher rates and a funding shift toward retail and brokered CDs and borrowings.
- Nine-month operating cash flow was $113.1 million; investing activities used $79.1 million and financing activities provided $111.1 million. Cash and cash equivalents ended at $299.1 million, up from $154.0 million at December 31, 2022.
- At September 30, total assets were $8.94 billion, loans and leases were $6.08 billion, deposits were $7.04 billion, and total borrowings were $758.7 million. Stockholders’ equity was $993.2 million.
- Liquidity included $357.6 million of liquid assets, equal to 3.6% of total assets and unfunded loan commitments, plus $219.1 million of unpledged investment securities. Uninsured deposits were estimated at $1.9 billion; pledged securities covered more than $812.7 million of uninsured governmental deposits.
- Credit indicators: allowance for credit losses was $62.9 million, or 1.03% of loans, versus 1.13% at year-end 2022. Nonperforming assets were $42.5 million, or 0.48% of assets; nonaccrual loans were 0.43% of loans. Criticized loans were $213.2 million and classified loans $124.8 million; classified loans increased from $111.0 million in the prior quarter.
- Capital ratios at September 30 included CET1 of 11.57%, Tier 1 of 12.31%, and total risk-based capital of 13.14%. Management reported a 5.14% capital conservation buffer and capital levels above well-capitalized minimums.
Material changes and notable items
- Limestone increased reported assets, loans, deposits, expenses, goodwill, and shares outstanding. Peoples issued 6.83 million shares as $177.9 million of merger consideration and recorded preliminary goodwill of $62.1 million and core-deposit intangibles of $27.7 million.
- Acquisition-related expense was $4.4 million in Q3 and $15.7 million year to date. Total Q3 expenses also included a $2.4 million pension settlement charge; Peoples said it did not anticipate further expenses from the termination.
- Net charge-offs were $2.3 million, or 0.15% of average loans annualized, in Q3, compared with $1.2 million (0.09%) in Q2. The Q3 credit provision reflected loan growth, higher net charge-offs, model input updates, and weaker macroeconomic conditions, partly offset by reserve releases on individually assessed loans.
- Available-for-sale securities had $193.2 million of net unrealized losses at quarter-end, largely attributed by management to interest rates and spreads rather than credit deterioration. The held-to-maturity portfolio had amortized cost of $675.6 million and disclosed fair value of $569.9 million. These valuation exposures and potential sale needs remain relevant to liquidity and capital.
- During Q1, Peoples sold $96.7 million of lower-yielding available-for-sale securities, recognizing a $2.0 million pretax loss, and used proceeds to repay overnight borrowings. Management projected the realized loss would be earned back by year-end 2023.
Outlook, risks, and other disclosures
- The filing provides no formal quantitative earnings or financial guidance. Management describes the balance sheet as positioned to benefit from rising rates for net interest income, while noting sensitivity to deposit pricing, funding mix, yield-curve movements, and modeling assumptions.
- Management expects potential Limestone synergies, but timing and realization are uncertain; acquisition fair values remained preliminary and subject to adjustment for up to one year after closing.
- Key disclosed risks include deposit outflows and liquidity access, higher funding costs and interest-rate changes, inflation and borrower repayment capacity, commercial real estate and other credit concentrations, integration execution and costs, securities values, regulatory and FDIC assessment changes, and cyber and third-party system risks.
- Management concluded disclosure controls were effective as of September 30, 2023, and reported no material quarter-period change in internal control over financial reporting. Management stated pending legal matters were not expected to have a material adverse effect, based on its current knowledge.
Important facts for investors to verify
- How much of reported earnings and margin depends on acquired-loan accretion, including the Limestone true-up, and how those benefits change over time.
- Whether deposit mix, uninsured deposit levels, brokered CD reliance, and borrowing costs affect liquidity or net interest margin.
- Trends in commercial real estate exposure, criticized and classified loans, lease delinquencies, charge-offs, and allowance adequacy.
- The effect of unrealized securities losses and the substantial fair-value discount on held-to-maturity securities under adverse liquidity scenarios.
- Whether Limestone integration delivers expected synergies and whether acquisition expenses, purchase accounting, and share dilution evolve as management anticipates.
- Capital ratios, tangible book value per share, dividend capacity, and rate-sensitivity assumptions as market and funding conditions change.