Peoples Bancorp Inc. Announces 2nd Quarter 2014 Earnings

MARIETTA, Ohio, July 22, 2014 /PRNewswire/ --

Summary second quarter 2014 results:

• Diluted earnings per share were $0.32 for the quarter and $0.76 through six months of 2014.
  • Pension settlement charges of $536,000 were incurred during the quarter and totaled $1.0 million year-to-date.
  • Acquisition activities resulted in pre-tax expenses of $1.4 million for the quarter and $1.6 million year-to-date.
• Total revenue grew 15% and 16% compared to the prior year quarter and year-to-date, respectively.
  • Net interest income and margin improved due to continued loan growth and stabilization of asset yields.
  • Net interest margin expanded 26 basis points versus second quarter 2013, to 3.39% for the quarter.
  • Non-interest income growth was driven mostly by higher insurance income, which was 24% higher year-to-date.
• Higher operating expenses for the quarter were driven by acquisition costs.
  • Acquisition costs incurred in the second quarter of 2014 were 6% of total operating expenses.
  • Employee benefit costs for 2014 were impacted by timing of pension settlement charges and medical plan expenses.
  • Other operating expenses were relatively flat for the quarter compared to the linked quarter.
• Period-end total loan balances reflected 11% annualized organic growth for the quarter and year.
  • Commercial lending generated over 60% of the growth for the quarter and year-to-date.
  • Non-mortgage consumer balances grew at a 33% annualized rate for the quarter and 30% for the year.
  • Organic growth was supplemented by the Midwest acquisition, which included $59.7 million of loans.
  • Average loan balances for the quarter were up 25% compared to second quarter 2013, and 24% for the year.
• Provision for loan losses was driven by loan growth, which was partially offset by favorable asset quality trends.
  • Provision for loan losses was $0.6 million for the quarter, compared to a $1.5 million recovery a year ago.
  • Nonperforming assets were 0.93% of total loans and OREO at quarter-end, and 0.57% of total assets.
  • Second quarter net charge-offs were 0.02% of average loans on an annualized basis, and 0.04% for the year.
  • Allowance for loan losses decreased to 1.32% of gross loans at June 30, 2014, from 1.43% at year-end 2013.
• Retail deposit balances experienced growth as a result of the Midwest acquisition.
  • Peoples added $78.1 million of deposits during the second quarter due to the Midwest acquisition.
  • Organic balances declined 3% compared to the linked quarter due partially to normal seasonal variances.
  • Non-interest-bearing balances continued to comprise 26% of total deposits at June 30, 2014.
  • Quarterly average retail balances were up 2% from the linked quarter and 10% year-over-year. 

Peoples Bancorp Inc. ("Peoples") (NASDAQ: PEBO) today announced results for the three and six months ended June 30, 2014.  Net income totaled $3.5 million for the second quarter of 2014, representing earnings per diluted share of $0.32.  In comparison, net income was $4.8 million or $0.44 per diluted share for the first quarter of 2014, and $4.9 million or $0.46 per diluted share for the second quarter of 2013.  On a year-to-date basis, net income totaled $8.3 million, or $0.76 per diluted share, through June 30, 2014, versus $9.9 million, or $0.93 per diluted share, a year ago.

"Our revenue growth remained positive for the quarter.  Loan growth provided much of the momentum with 11% annualized organic growth," said Chuck Sulerzyski, President and Chief Executive Officer.  "We are pleased with our second quarter earnings, given the increase in costs incurred was largely a result of our strategic actions.  Our acquisition activity resulted in expenses during the quarter, and our continued loan growth resulted in increased provision for loan losses during the quarter, which we had not incurred since the third quarter of 2011."

Sulerzyski continued, "We made further progress on our plan to grow through acquisitions by closing on the Midwest acquisition during the quarter, and are excited about expanding our presence in Jackson County, Ohio by adding the two branches from the deal which will supplement our insurance acquisitions completed in 2013.  Our pending acquisitions of Ohio Heritage Bancorp, Inc. and North Akron Savings Bank remain on schedule, with closings expected to occur in the third and fourth quarters, respectively."

As previously announced, Peoples completed the acquisition of Midwest Bancshares, Inc. ("Midwest") as of the close of business on May 30, 2014.  This cash and stock transaction resulted in Peoples acquiring two full-service banking offices in Wellston and Jackson, Ohio, adding approximately $59.7 million of loans and $78.1 million of deposits after fair value adjustments.  The acquisition was accounted for as a business combination and the fair value adjustments are preliminary.

Second quarter net interest income was $16.0 million, up 4% compared to the linked quarter and 22% higher than the prior year's second quarter, while net interest margin for these periods was 3.39%, 3.35% and 3.13%, respectively.  These improvements were driven largely by growth in earning assets due to higher loan balances, stabilization in asset yields and the change in the asset mix.  The acquired balances and accretion income from the Midwest acquisition added approximately 3 basis points of net interest margin in the second quarter of 2014.

"During the quarter, we continued to make progress in improving our balance sheet structure by reducing the relative size of our investment portfolio.  Our investments accounted for 31% of our total assets at the end of the second quarter, compared to 33% at year-end and 35% a year ago," said Ed Sloane, Chief Financial Officer and Treasurer.  "We are pleased with this accomplishment, which was driven mostly by the strong loan growth over the last two quarters.  We will continue to look for opportunities to reduce the size of the investment portfolio.  Our net interest income also continued to benefit from the shift from higher-cost wholesale funding and deposits to low-cost core deposits."

Total non-interest income was up 5% in the second quarter and 9% for the first half of 2014, compared to the same periods in 2013, due largely to higher insurance income.  During the second quarter of 2014, insurance income benefited from increased property and casualty commissions resulting from higher customer retention rates and referrals from other lines of business.  In addition, deposit account service charges, and trust and investment income both grew 5% from the linked quarter and 9% from prior year.  Mortgage banking income continues to be pressured as refinancing activity has declined in response to the higher long-term interest rates, leading to a $54,000 decline compared to the second quarter of 2013 and a $545,000 decline year-to-date.  The slight increase compared to the linked quarter was due to the seasonality in the industry as home purchases typically increase during the spring and early summer.

Non-interest expenses were 6% higher than the linked quarter and 22% higher than the prior year second quarter.  The increase included $1.3 million of acquisition-related costs, consisting primarily of deconversion costs, and professional and legal fees, during the second quarter of 2014 compared to $150,000 in the linked quarter and $37,000 in the second quarter of 2013.  Salaries and employee benefit costs grew 4% over the linked quarter and 26% over the prior year quarter as employee medical benefit plan costs increased due to higher claim activity and pension settlement charges of $536,000 recognized in the second quarter of 2014.  Pension settlement charges during the first half of 2014 were $1.0 million, while there were no pension settlement charges recognized in the first half of 2013.  The efficiency ratio for the second quarter of 2014 was 75.58%, compared to 71.13%  for the first quarter of 2014.  The acquisition-related costs accounted for the increase in the ratio for the quarter.

"Positive operating leverage still remains a key priority for us during 2014, but will be challenging with the continued acquisition activity that will result in additional expenses in the second half of 2014," said Sulerzyski.  "We continue to seek acquisition opportunities in all lines of business in order to maintain our revenue diversity and growth.  Operating expenses during the year will continue to increase as we complete the two pending acquisitions later in the year."

For both the quarter and year-to-date 2014, period-end organic loan balances grew at an 11% annualized rate to $1.32 billion.  Peoples continued to experience strong growth in non-mortgage consumer loans during the second quarter, with period-end balances up $12.0 million or 33% on an annualized basis.  Commercial and industrial balances experienced an $18.0 million increase, or 31% annualized growth, during the quarter.  The Midwest acquisition complemented the organic loan growth by adding $59.7 million of loans, of which $47.0 million were residential real estate loans, which resulted in the 14% growth in that category of loans during the quarter.  The remaining $12.7 million of loans added from the Midwest acquisition included $7.3 million of non-mortgage consumer loans and $5.4 million of commercial loans.  The combination of organic growth and acquired balances resulted in an increase of $47.9 million in average loan balances for the quarter compared to the linked quarter.

"We are very pleased with our loan production, in both the commercial and consumer lending areas.  We are on pace to achieve, or potentially exceed, our goal of 8% to 10% point-to-point loan growth this year," said Sulerzyski.  "What is equally as exciting is that we have been able to maintain our strong asset quality, even with the loan growth we have experienced.  Our net charge-offs have remained historically low throughout the first half of 2014."

Peoples' asset quality remained favorable during the second quarter of 2014.  Net charge-offs remained lower than Peoples' long-term historical average during the quarter, totaling $69,000 or 2 basis points of average loans on an annualized basis.  Total nonperforming assets increased by $2.6 million during the quarter mainly because of the increase in loans 90 or more days past due.  The higher balances of loans 90 or more days past due at quarter-end was due largely to one relationship that is expected to pay-off in the third quarter of 2014, as well as the acquired Midwest loan balances.  As a percentage of total loans plus other real estate owned ("OREO"), total nonperforming assets were 0.93% at quarter-end versus 0.81% at year-end 2013 and 1.18% a year ago.  Nonperforming loans as a percent of total loans was 0.86% at quarter-end versus 0.73% at year-end 2013 and 1.17% a year ago.  The increase in loan balances led to an increase of Peoples' allowance for loan losses.  At quarter-end, the ratio of the allowance for loan losses to loans, net of deferred fees and costs, was 1.32%, compared to 1.43% at December 31, 2013 and 1.66% at June 30, 2013.

During the second quarter of 2014, Peoples' retail deposits grew $32.3 million, or 2%, as the Midwest acquisition added $78.1 million of deposits.  The organic decline of $45.8 million, or 3%, was mostly a result of lower certificates of deposits and money market balances due to management's ongoing funding strategy of reducing high-cost funding.  Also contributing to the decrease was the normal seasonal decline in governmental deposits.

"Overall, during the second quarter we made good progress with several of our 2014 strategic goals," summarized Sulerzyski.  "Our most notable accomplishments included meaningful loan growth, reducing the relative size of our investment portfolio and completing another acquisition.  We remain committed to growing our core revenue stream, improving operating efficiency and generating superior returns for our shareholders."

Peoples Bancorp Inc. is a diversified financial services holding company with $2.2 billion in total assets, 50 locations and 50 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, National Association 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 2014 results of operations today at 11:00 a.m., Eastern Daylight Saving Time, with members of Peoples' executive management participating.  Analysts, media and individual investors are invited to participate in the conference call by calling (800) 860-2442.  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" measures in its analysis of Peoples' performance and the efficiency of its operations. Management believes that these non-GAAP 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 types of non-GAAP measures used in this news release:

• Tangible assets and tangible equity measures are non-GAAP since they exclude the impact of intangible assets acquired through acquisitions on both total stockholders' equity and total assets and the related amortization from earnings.
• Pre-provision net revenue is defined as net interest income plus non-interest income minus non-interest expense.  This measure is non-GAAP since it excludes the provision for loan losses and all gains and/or losses included in earnings.

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", "could", "may", "feel", "expect", "believe", "plan", 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: (1) the success, impact, and timing of the implementation of Peoples' business strategies, including the successful integration of recently completed acquisitions and the expansion of consumer lending activity; (2) Peoples' ability to complete and, if completed, successfully integrate future acquisitions, including the pending mergers of Ohio Heritage Bancorp, Inc. and North Akron Savings Bank with and into Peoples; (3) competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures and Peoples' ability to attract, develop and retain qualified professionals; (4) changes in the interest rate environment due to economic conditions and/or the fiscal policies of the U.S. government and Board of Governors of the Federal Reserve System ("Federal Reserve Board"), which may adversely impact interest margins and interest rate sensitivity; (5) changes in prepayment speeds, loan originations and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated; (6) adverse changes in the economic conditions and/or activities, including, but not limited to, impacts from the implementation of the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, as well as continuing economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults; (7) legislative or regulatory changes or actions, including in particular the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the regulations promulgated and to be promulgated thereunder by the Office of the Comptroller of the Currency, the Federal Reserve Board and the Consumer Financial Protection Bureau, which may subject Peoples, its subsidiaries, or one or more acquired companies to a variety of new and more stringent legal and regulatory requirements which adversely affect their respective businesses; (8) deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses; (9) changes in accounting standards, policies, estimates or procedures which may adversely affect Peoples' reported financial condition or results of operations; (10) adverse changes in the conditions and trends in the financial markets, including political developments, which may adversely affect the fair value of securities within Peoples' investment portfolio, the interest rate sensitivity of Peoples' consolidated balance sheet, and the income generated by Peoples' trust and investment activities; (11) Peoples' ability to receive dividends from its subsidiaries; (12) Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity; (13) the impact of new minimum capital thresholds established as a part of the implementation of Basel III; (14) the impact of larger or similar sized financial institutions encountering problems, which may adversely affect the banking industry and/or Peoples' business generation and retention, funding and liquidity; (15) the costs and effects of regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations; (16) Peoples' ability to secure confidential information through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, may prove inadequate, which could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss; (17) the overall adequacy of Peoples' risk management program; and (18) other risk factors relating to the banking industry or Peoples as detailed from time to time in Peoples' reports filed with the Securities and Exchange Commission ("SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Peoples encourages readers of this news release to understand forward-looking statements are 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, 2014 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.

SOURCE Peoples Bancorp Inc.