MARIETTA — Peoples Bancorp Inc. announced results for the three and nine months ended September 30, 2015.
Peoples recorded net income of $4.1 million for the third quarter of 2015, representing earnings per diluted common share of $0.22, compared to $4.9 million, or $0.27 per diluted common share, for the second quarter of 2015, and $4.2 million, or $0.32 per diluted common share, for the third quarter of 2014. On a year-to-date basis, net income totaled $8.4 million, or $0.47 per diluted common share, through September 30, 2015, versus $12.4 million, or $1.08 per diluted common share, a year ago.
“The results for the quarter were mixed. The highlights of the quarter included significant period-end loan growth of almost $40 million, or 8 percent annualized, improvement in net interest income and margin, and effective expense management. However, areas that came in behind our expectations included our credit metrics and our fee-based revenue,” said Chuck Sulerzyski, President and Chief Executive Officer. “We were able to generate positive operating leverage during the quarter. Also, when adjusted for non-core charges of $192,000 included in non-interest expenses, which includes the acquisition-related costs and pension settlement charge, our efficiency ratio was 65.30 percent, which was in-line with the guidance we provided for the third quarter.”
Net interest income for the third quarter of 2015 was $25.5 million, up 3 percent compared to the linked quarter and 43 percent higher than the prior year’s third quarter, while net interest margin for these periods was 3.55 percent, 3.46 percent and 3.45 percent, respectively. Net interest margin, excluding net accretion income, improved 6 basis points compared to the linked quarter. Prepayment penalties received on investments and loans accounted for 4 basis points of the improvement. The remaining improvement was due to the strategies executed early in the quarter, which included the deployment of excess cash into the investment portfolio and the payoff of a $12.0 million term note. The accretion income, net of amortization expense, from the acquisitions added 18 basis points of net interest margin in the third quarter of 2015, compared to 15 basis points for the linked quarter and 13 basis points for the third quarter of 2014. On a year-to-date basis, net accretion income from the acquisitions added 17 basis points for the nine months of 2015 and 9 basis points for the nine months of 2014.
“Loan growth, and the actions we took early in the quarter to invest excess cash and payoff the term note, contributed to the improvement in our net interest income and margin,” said Ed Sloane, Chief Financial Officer and Treasurer. “We remain diligent in our efforts to maintain, and even grow, our net interest income and margin. However, we continue to look for opportunities to reduce the relative size of the investment portfolio as loan growth is sustained.”
For the third quarter of 2015, provision for loan losses was $5.8 million, which was driven primarily by an increase to the specific reserve for a large commercial loan relationship. The loan growth experienced during the quarter, coupled with the increase in criticized loans, accounted for a slight increase in the provision during the quarter, compared to the second quarter of 2015.
Total non-interest income was relatively flat compared to the linked quarter and up 21 percent compared to the prior year third quarter. The growth in other non-interest income, which was primarily gains from selling Small Business Administration loans, was largely offset by the decline in mortgage banking income compared to the linked quarter. The growth in total non-interest income compared to the prior year third quarter was due largely to increased trust and investment income, electronic banking income and deposit account service charges. On a year-to-date basis, all categories comprising total non-interest income were up compared to the first nine months of 2014, most notably electronic banking income, trust and investment income, and deposit account service charges, with growth of 36 percent, 25 percent and 19 percent, respectively.
“The five bank acquisitions completed in the last 24 months have changed our fee-based revenue to 32 percent of total revenue, compared to 41 percent during the third quarter of 2013. Our target range is 35 percent to 40 percent,” said Sulerzyski. “We continue to seek appropriate insurance and investment acquisition opportunities and are optimistic about our ability to complete these types of acquisitions and improve our revenue stream from fee-based businesses. Even with the flat performance in our fee-based businesses, we had positive operating leverage during the quarter, as we were able to effectively manage expenses.”
Non-interest expenses, adjusted for non-core charges, were down 6 percent compared to the linked quarter, with much of the decrease due to the timing of marketing campaigns, coupled with reductions in foreclosed real estate and other loan expenses, salaries and employee benefits, and various other categories. Year-to-date, non-interest expenses, adjusted for non-core charges, were up 36 percent compared to the first nine months of 2014, with the increase due largely to the NB&T Financial Group, Inc. (“NB&T”) acquisition, which closed March 6, 2015. Non-core charges included in non-interest expenses for the third quarter and year-to-date 2015 consisted of acquisition-related costs of $0.1 million and $9.9 million, respectively; pension settlement charges of $82,000 and $454,000, respectively; and other items totaling $385,000 year-to date. The efficiency ratio for the third quarter of 2015 was 65.81 percent, compared to 74.20 percent for the linked quarter and 77.82 percent for the third quarter of 2014. The improvement in the efficiency ratio for the quarter was the result of the decrease in noninterest expenses.
“We took some meaningful strides towards improving our efficiency ratio during the quarter, due largely to the reduction in expenses,” said Sloane. “We expect expenses in the fourth quarter to be relatively flat with the third quarter at about $26.5 million, but with the continuing challenges to grow fee-based revenue, we expect the efficiency ratio to be approximately 65 percent.”
Period-end loan balances, excluding the loans acquired from NB&T, increased $53.0 million compared to the June 30, 2015 period-end loan balances. The growth was driven equally by growth in commercial and consumer loan balances. Commercial loans, excluding loans acquired from NB&T, grew $26.0 million, or 12 percent annualized, with commercial and industrial loan growth of $32.0 million more than offsetting the decrease in commercial real estate loans for the quarter. Non-mortgage consumer loans grew $13.3 million, or 26 percent annualized, during the quarter, while mortgage consumer loans grew $13.6 million, or 10 percent annualized. The NB&T acquisition added $352.0 million of loans to the balances as of September 30, 2015, which was $14.7 million less than the reported balance at June 30, 2015. The decline in loans acquired from NB&T during the third quarter was due mainly to a decrease in the commercial real estate loans. The average net loan balances, inclusive of loans acquired from NB&T, for the quarter increased $27.3 million, or 1 percent, compared to the linked quarter.
“Consumer and commercial loan production have been strong during the quarter and are expected to remain so throughout the fourth quarter. Our stated loan growth goal, excluding NB&T loans, for 2015 is 7 percent to 9 percent growth. We expect our period-end loan growth for the year, excluding loans acquired from NB&T, to be towards the lower end of the range,” said Sulerzyski. “While we continue to work through potential exit strategies with regard to some problem credits, which may result in reductions to loan balances, we are confident that our loan pipeline and production will overcome the decreases to result in another quarter of significant loan growth in the fourth quarter. Although we have seen a slight decline in our asset quality metrics, we continue to maintain strong underwriting standards when originating loans.” Peoples’ asset quality experienced some negative developments during the quarter. Net charge-offs, while still below Peoples’ historical rate of 30 to 40 basis points, increased during the quarter as Peoples recorded net charge-offs of $750,000, resulting in an annualized net charge-off rate of 15 basis points. The increase in nonperforming assets was primarily due to the increase in loans 90+ days past due and accruing, which was mainly the result of two loans. Criticized assets, which are those classified as watch, substandard or doubtful, increased during the quarter largely due to four large commercial real estate loans being downgraded during the quarter. At quarter-end, the ratio of the allowance for loan losses as a percent of originated loans (which does not include acquired loan balances), net of deferred fees and costs, was 1.72 percent, up from the 1.42 percent reported for June 30, 2015 and the 1.48 percent reported for December 31, 2014.
Peoples’ retail deposits decreased $9.4 million during the quarter. All interest-bearing deposit types decreased, with the largest decreases in certificates of deposits and governmental deposits. The decline in governmental deposits was attributable to one customer moving its funds to a third-party investment advisor. Commercial non-interest-bearing checking accounts accounted for all of the increase in non-interest-bearing deposits due mainly to one large customer maintaining a higher than normal balance on September 30, 2015. Average retail deposits for the quarter compared to the linked quarter decreased $18.4 million, or 1 percent.
“The coming quarters will be challenging with respect to revenue growth, but we are confident in our ability to achieve our stated loan growth goal for 2015, and to effectively manage expenses. We remain committed to maintaining positive operating leverage and increasing fee-based income as a percentage of total revenue. We are confident that we will continue building momentum on many fronts in the fourth quarter, positioning us well for 2016,” summarized Sulerzyski.
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