Peoples Bancorp Inc. Reports The Second Consecutive Quarter Of Record Quarterly Net Income

MARIETTA, Ohio, July 25, 2017 /PRNewswire/ -- Peoples Bancorp Inc. ("Peoples") (NASDAQ: PEBO) today announced results for the quarter ended June 30, 2017.  Net income totaled $9.8 million for the second quarter of 2017, representing earnings per diluted common share of $0.53.  In comparison, earnings per diluted common share were $0.48 for the first quarter of 2017 and $0.44 for the second quarter of 2016.

"We generated our second consecutive quarter of record quarterly net income.  Our efficiency ratio showed significant improvement, which illustrates the focus that has been given to generating positive operating leverage.  Annualized return on average assets improved to 1.12% for the quarter, and we had a 12% annualized improvement in our tangible book value per share during the second quarter of 2017," said Chuck Sulerzyski, President and Chief Executive Officer.  "We are pleased with our second quarter results, and intend to continue to build on the momentum of those results as we proceed into the second half of 2017.  We believe that our continued focus on our customers by our dedicated employees is paying dividends and is the foundation of our recent results."

Statement of Operations Highlights:

• Net interest income for the second quarter of 2017 increased 4% compared to the linked quarter and 7% compared to the second quarter of 2016.
• Net interest margin was 3.62% for the second quarter of 2017, compared to 3.55% for the linked quarter and 3.57% for the second quarter of 2016.
• Provision for loan losses was $0.9 million for the second quarter of 2017 and was impacted by the loan growth experienced during the quarter.
• Total fee-based income for the second quarter of 2017 grew 2% compared to the linked quarter and 10% compared to the second quarter of 2016.
• The growth during the second quarter of 2017 was muted by the reduction of $1.3 million in annual performance-based insurance commissions that, for the most part, are recognized in the first quarter of each year.
• Total non-interest expense was $26.7 million for the second quarter of 2017, a decrease of 2% compared to the linked quarter and up only 1% compared to the second quarter of 2016.
• The efficiency ratio was 61.2% for the second quarter of 2017, compared to 64.9% for the first quarter of 2017 and 65.1% in the second quarter of 2016.
• Generated positive operating leverage of 7% for the second quarter of 2017 compared to the second quarter of 2016.
• Total revenue, which is net interest income plus total fee-based income, grew 8% for the second quarter of 2017 compared to the second quarter of 2016, while total non-interest expense growth was only 1% for the same period, which resulted in positive operating leverage of 7%.

Balance Sheet Highlights:

• Period-end total loan balances at June 30, 2017 grew 8%, on an annualized basis, compared to March 31, 2017 and 8% compared to June 30, 2016.
• Indirect consumer loans at June 30, 2017 grew $22.4 million, or 32% annualized, compared to March 31, 2017.
• Commercial loan balances grew $31.8 million, or 10% annualized, at June 30, 2017 compared to March 31, 2017.
• Asset quality improved during the quarter.
• Nonperforming assets decreased to 0.88% of total loans and other real estate owned ("OREO") at June 30, 2017 compared to 0.98% at March 31, 2017.
• Nonaccrual loans at June 30, 2017 decreased $1.4 million, or 8%, compared to March 31, 2017.
• Net charge-offs as a percent of average gross loans were 0.11% annualized for the second quarter of 2017.
• Classified loans, which are those categorized as substandard or doubtful, decreased $3.5 million, or 6%, at June 30, 2017 compared to March 31, 2017.
• At June 30, 2017, allowance for loan losses of $18.8 million was up slightly compared to March 31, 2017, due primarily to loan growth experienced during the quarter.
• Period-end total deposit balances decreased $25 million, or 1%, at June 30, 2017 compared to March 31, 2017.
• Governmental deposit balances decreased $32.9 million, or 10%, during the second quarter of 2017 due primarily to seasonality.
• Non-interest-bearing deposits remained at 29% of total deposits as of June 30, 2017.

Net Interest Income:

Net interest income was $28.1 million for the second quarter of 2017, a 4% increase compared to the linked quarter and a 7% increase over the second quarter of 2016.  Net interest margin increased to 3.62% for the second quarter of 2017, compared to 3.55% for the first quarter of 2017 and 3.57% for the second quarter of 2016.  For the first six months of 2017, net interest income grew 6% compared to 2016, and net interest margin improved 3 basis points to 3.58%.  The increase in net interest income compared to all prior periods was due primarily to loan growth, with the increase in interest rates positively impacting the net interest margin as well.

The accretion income, net of amortization expense, from acquisitions was $0.7 million for the second quarter of 2017, compared to $0.8 million for the first quarter of 2017 and $0.9 million for the second quarter of 2016, which added 10 basis points, 11 basis points and 12 basis points, respectively, to the net interest margin.

Provision for Loan Losses:

The provision for loan losses was $0.9 million for the second quarter of 2017, compared to $0.6 million for the first quarter of 2017 and $0.7 million for the second quarter of 2016.  The higher provision for loan losses recorded during the second quarter of 2017 was reflective of the growth in loan balances during the quarter.  For the first six months of 2017, provision for loan losses was $1.6 million, compared to $1.7 million for the first six months of 2016.

Fee-based Income:

Total fee-based income increased $0.3 million, or 2%, compared to the linked quarter, and grew $1.2 million, or 10%, compared to the second quarter of 2016.  The increase compared to the first quarter of 2017 was muted by the decrease in insurance income, which was largely the result of a reduction of $1.3 million in annual performance-based insurance commissions that, for the most part, are recognized in the first quarter of each year.  Commercial loan swap fee income was $651,000 for the second quarter of 2017, which was over $380,000 more than the linked quarter and the second quarter of 2016.  Trust and investment income increased 11% compared to the linked quarter and 7% compared to the second quarter of 2016.  The increase in other income was impacted by the sale of the government guaranteed portion of a loan for $437,000 in the second quarter of 2017.  Bank owned life insurance income increased $243,000 compared to the second quarter of 2016 due to the $35 million of polices that were purchased late in the second quarter of 2016.  The increases compared to the second quarter of 2016 were partially offset by a decline in deposit account service charges, which was largely the result of a decrease in overdraft fees.

For the first six months of 2017, total fee-based income grew $1.5 million, or 6%, compared to 2016.  The increase compared to the first six months of 2016 was mainly the result of growth in a number of categories.  Bank owned life insurance income increased $569,000, trust and investment income increased $501,000, commercial loan swap fee income increased $491,000, and mortgage banking income increased $429,000.  The increases were partially offset by declines in deposit account service charges of 9% and insurance income of 4%.

Non-interest Expense:

Total non-interest expense for the second quarter of 2017 was $26.7 million, compared to $27.3 million for the first quarter of 2017 and $26.5 million for the second quarter of 2016, resulting in a decrease of 2% compared to the linked quarter and an increase of 1% compared to the second quarter of 2016.  The decline compared to the linked quarter was largely the result of decreased salaries and employee benefit costs, which were down $447,000, or 3%.  Salaries and employee benefit costs decreased mainly due to lower health insurance costs, lower base salaries and wages, and associated payroll taxes.  The decrease in health insurance costs was due to lower claims, while the decrease in base salaries and wages, and associated payroll taxes, was due to the continued focus on expense management.  The decreases were partially offset by an increase in incentive compensation, which is tied to business performance.  The increase compared to the second quarter of 2016 was primarily the result of an increase in incentive compensation, which was partially offset by a decrease in professional fees.

For the first six months of 2017, total non-interest expense increased $1.2 million, or 2%.  The increase was  primarily the result of an increase in incentive compensation.  The improved financial results of the company and increased production for the first six months of 2017 compared to the first six months of 2016 have resulted in higher incentive compensation.

The efficiency ratio for the second quarter of 2017 was 61.2%, compared to 64.9% for the linked quarter and 65.1% for the second quarter of 2016.  For the first six months of 2017, the efficiency ratio was 63.0%, compared to 64.7% for the first six months of 2016.

Loans:

Period-end total loan balances at June 30, 2017 increased $44.9 million, or 8% annualized, compared to March 31, 2017.  Indirect consumer lending continued to be a key component of loan growth, as balances increased $22.4 million, or 32% annualized, during the quarter.  The growth in indirect consumer lending included continued diversification in the portfolio beyond automobile loans, including loans for recreational vehicles and motorcycles.  Commercial loans grew $31.8 million, or 10% annualized, with commercial real estate loans growing $29.0 million, or 14% annualized, during the quarter.  From a bank regulatory perspective, non-owner-occupied commercial real estate loan balances as of June 30, 2017 remained well below the guidance from the regulators of financial institutions of 300% of total risk-based capital.  The ratio at June 30, 2017 of non-owner-occupied commercial real estate loans to total risk-based capital was 162%, compared to 152% as of March 31, 2017.

Compared to December 31, 2016, period-end loan balances at June 30, 2017 increased $69.4 million, or 6% annualized.   Indirect consumer loan balances increased $53.3 million, or 42% annualized.  Commercial real estate loans grew $31.6 million, or 8% annualized, for the first six months of 2017.

At June 30, 2017, period-end loan balances increased $165.6 million, or 8%, compared to June 30, 2016.  The increase was primarily the result of indirect consumer lending contributing loan growth of $99.0 million, or 48%, compared to June 30, 2016.  Commercial loan balances grew $107.6 million, or 9%, from June 30, 2016, with the growth almost evenly split between commercial real estate and commercial and industrial loan balances.  At June 30, 2017, indirect consumer loan balances comprised 13% of the total loan portfolio, compared to 13%, 11% and 10% at March 31, 2017, December 31, 2016 and June 30, 2016, respectively.

Quarterly average gross loan balances increased $27.4 million, or 5% annualized, compared to the linked quarter.  The quarterly average gross loan balances for both the three and six months ended June 30, 2017 grew 7% compared to the same periods in 2016.

Asset Quality:

Asset quality metrics improved during the second quarter of 2017.  Nonperforming assets as a percent of total loans and OREO decreased to 0.88% at June 30, 2017, compared to 0.98% at March 31, 2017 and 1.04% at June 30, 2016.

Annualized net charge-offs were 0.11% of average gross loans during the first and second quarter of 2017, compared to 0.03% in the second quarter of 2016.  For the first six months of 2017, annualized net charge-offs were 0.11%, compared to 0.06% for the first six months of 2016.

Classified loans, which are those categorized as substandard or doubtful, decreased $3.5 million, or 6%, compared to March 31, 2017 and increased $1.3 million, or 2%, compared to June 30, 2016.  As a percent of total loans, classified loans were 2.31% at June 30, 2017, compared to 2.51% at March 31, 2017 and 2.43% at June 30, 2016.  Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $10.2 million, or 10%, compared to March 31, 2017 and increased $4.9 million, or 5%, compared to June 30, 2016.  As a percent of total loans, criticized loans were 4.86% at June 30, 2017, compared to 4.50% at March 31, 2017 and 5.01% at June 30, 2016.  The increase in criticized loans at June 30, 2017, compared to March 31, 2017, was due primarily to two commercial loan relationships being downgraded to special mention status during the quarter.

At June 30, 2017, the allowance for loan losses increased to $18.8 million, compared to $18.5 million at March 31, 2017, and $17.8 million at June 30, 2016.  The ratio of the allowance for loan losses as a percent of total loans was 0.82% at both June 30, 2017 and March 31, 2017, compared to 0.84% at June 30, 2016.  The ratio includes total acquired loans of $463.7 million and allowance for acquired loan losses of $0.1 million.  The continued decline in the ratio was due to the continued improvement in asset quality metrics.

Deposits:

As of June 30, 2017, period-end deposits declined $25.0 million, or 1%, compared to March 31, 2017, and increased $167.4 million, or 7%, compared to December 31, 2016.  The decrease compared to March 31, 2017 was split almost evenly between non-interest-bearing and interest-bearing deposits.  The decline in non-interest-bearing deposits was due primarily to one commercial customer having a higher than normal balance in their account as of March 31, 2017, which was reduced during the second quarter of 2017.  The decline in interest-bearing deposits was driven by a reduction in governmental deposits of $32.9 million, which was partially offset by increases in interest-bearing demand accounts and money market deposits.  Balances in governmental deposits are seasonally higher in the first quarter of each year compared to the other quarters.

The increase in period-end deposit balances compared to December 31, 2016 was primarily due to an increase of $70.9 million in brokered certificates of deposit, $45.9 million in governmental deposits and $37.6 million in non-interest-bearing deposits.  The increase in brokered certificates of deposit was the result of adding relatively shorter term funding on the balance sheet. The increase in non-interest-bearing deposits was due primarily to two commercial customers maintaining higher than usual balances as of June 30, 2017.

Period-end deposits increased $144.2 million, or 6%, compared to June 30, 2016, with the increase split almost evenly between non-interest-bearing and interest-bearing deposits, with growth of $72.4 million and $71.8 million, respectively.  Almost 35% of the total increase in non-interest-bearing deposits was due to an increase for one commercial customer, with the remaining increase attributable to increases for both commercial and individual customers, with no significant change in any one deposit account.  The growth in interest-bearing deposits was due primarily to an increase of $73.3 million in brokered certificates of deposit and $51.4 million in interest-bearing demand accounts, which were partially offset by a decrease of $49.3 million in retail certificates of deposit.

Average deposits for the second quarter of 2017 increased $75.6 million, or 3%, compared to the linked quarter, with an increase of $64.6 million in interest-bearing deposits and $11.0 million in non-interest-bearing deposits.  The increase in interest-bearing deposits was due primarily to an increase in brokered certificates of deposit and governmental deposits.  Compared to the second quarter of 2016, average deposits increased $90.0 million, or 3%, with interest-bearing deposits increasing $46.7 million and non-interest-bearing deposits increasing $43.3 million.  The increase in interest-bearing deposits was due primarily to an increase in brokered certificates of deposit, which was largely offset by a decrease in retail certificates of deposit, and an increase in interest-bearing demand accounts.

For the first six months of 2017, average deposits increased $58.0 million, or 2%, compared to the first six months of 2016.  The increase was primarily due to an increase of $45.8 million, or 6%, in non-interest bearing deposits.

Non-interest-bearing deposits comprised 29% of total deposits at June 30, 2017, March 31, 2017 and December 31, 2016, compared to 28% at June 30, 2016.

Stockholders' Equity:

At June 30, 2017, the tier 1 risk-based capital ratio was 13.47%, compared to 13.34% at March 31, 2017 and 13.33% at June 30, 2016.  The total risk-based capital ratio was 14.40% at June 30, 2017, compared to 14.27% at March 31, 2017 and 14.23% at June 30, 2016.  The improvement in these capital ratios compared to the linked quarter was due mainly to increased earnings, which exceeded the dividends declared and paid during the quarter by $6.1 million.

Peoples Bancorp Inc. is a diversified financial services holding company with $3.5 billion in total assets, 75 locations, including 67 full-service bank branches, and 75 ATMs in Ohio, West Virginia and Kentucky.  Peoples makes available a complete line of banking, investment, insurance and trust solutions through its subsidiaries - Peoples Bank and Peoples Insurance Agency, LLC.  Peoples' common shares are traded on the NASDAQ Global Select Market® under the symbol "PEBO", and Peoples is a member of the Russell 3000 index of U.S. publicly-traded companies.  Learn more about Peoples at www.peoplesbancorp.com.

Conference Call to Discuss Earnings:

Peoples will conduct a facilitated conference call to discuss second quarter 2017 results of operations today at 11:00 a.m., Eastern Daylight Savings Time, with members of Peoples' executive management participating.  Analysts, media and individual investors are invited to participate in the conference call by calling (866) 890-9285.  A simultaneous webcast of the conference call audio will be available online via the "Investor Relations" section of Peoples' website, www.peoplesbancorp.com.  Participants are encouraged to call or sign in at least 15 minutes prior to the scheduled conference call time to ensure participation and, if required, to download and install the necessary software.  A replay of the call will be available on Peoples' website in the "Investor Relations" section for one year.

Use of Non-GAAP Financial Measures

This news release contains financial information and performance measures determined by methods other than in accordance with accounting principles generally accepted in the United States of America ("GAAP").  Management uses these "non-GAAP" financial measures in its analysis of Peoples' performance and the efficiency of its operations. Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods and peers. These disclosures should not be viewed as substitutes for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Below is a listing of the non-GAAP financial measures used in this news release:

• Core non-interest expenses are non-GAAP since they exclude the impact of costs associated with the system upgrade of Peoples' core banking system, acquisition-related costs, pension settlement charges, severance charges and legal settlement charges.
• Efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total fee-based income.  This measure is non-GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income.
• Tangible assets, tangible equity and tangible book value per common share measures are non-GAAP since they exclude the impact of goodwill and other intangible assets acquired through acquisitions on both total stockholders' equity and total assets.
• Pre-provision net revenue is defined as net interest income plus total fee-based income minus total non-interest expense.  This measure is non-GAAP since it excludes the provision for (recovery of) loan losses and all gains and/or losses included in earnings.
• Return on tangible stockholders' equity is calculated as net income (less after-tax impact of amortization of other intangible assets) divided by tangible stockholders' equity.  This measure is non-GAAP since it excludes the after-tax impact of amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included at the end of this news release under the caption of "Non-GAAP Financial Measures".

Safe Harbor Statement:

Certain statements made in this news release regarding Peoples' financial condition, results of operations, plans, objectives, future performance and business, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "would," "should," "could" and similar expressions.

These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations.  Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially.  These factors include, but are not limited to:

Peoples encourages readers of this news release to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance.  Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date of this news release or to reflect the occurrence of unanticipated events, except as required by applicable legal requirements.  Copies of documents filed with the SEC are available free of charge at the SEC's website at http://www.sec.gov and/or from Peoples' website.

As required by U.S. GAAP, Peoples is required to evaluate the impact of subsequent events through the issuance date of its June 30, 2017 consolidated financial statements as part of its Quarterly Report on Form 10-Q to be filed with the SEC.  Accordingly, subsequent events could occur that may cause Peoples to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.