Peoples Bancorp Inc. Announces 4th Quarter Earnings And Record Full Year Net Income For 2016

For the full year 2016, net interest income was $104.9 million, up 7% compared to 2015, while the net interest margin for those periods was 3.54% and 3.53%, respectively.  The loan growth and NB&T acquisition were the drivers of the increase in net interest income.

The accretion income, net of amortization expense, from acquisitions was $0.9 million for the fourth quarter of 2016, compared to $0.8 million in the third quarter of 2016 and $1.2 million for the fourth quarter of 2015, which added 11 basis points, 10 basis points and 16 basis points, respectively, to net interest margin.  For the full year of 2016, accretion income, net of amortization expense, from acquisitions was $3.5 million, compared to $4.8 million in 2015, or 11 basis points and 17 basis points, respectively.

Net interest margin, excluding the net accretion income, described above, declined 1 basis point compared to the linked quarter, and improved 3 basis points compared to the fourth quarter of 2015.  For the full year of 2016, net interest margin, excluding net accretion income, improved 7 basis points compared to 2015.  The changes in net interest margin were the result of the sustained shift in the mix of the balance sheet, for both assets and liabilities, coupled with the restructuring of certain borrowings during the second quarter of 2016.

Provision for Loan Losses:

For the fourth quarter of 2016, provision for loan losses was $0.7 million, compared to $1.1 million for the third quarter of 2016 and $7.2 million for the fourth quarter of 2015.  Recent loan growth was the main driver of the provision for loan losses recorded during the fourth quarter and the full year of 2016.  Provision for loan losses was $3.5 million for the full year of 2016, compared to $14.1 million for 2015.  The provision recorded in the fourth quarter of 2015, and most of the amount recorded for the full year of 2015, was the result of a charge-off associated with one large commercial loan relationship.

Non-interest Income:

Total non-interest income for the fourth quarter of 2016 decreased $1.4 million, or 11%, compared to the linked quarter, and was flat compared to the fourth quarter of 2015.  The decrease compared to the third quarter of 2016 was due primarily to decreases in commercial loan swap fee income, electronic banking income, insurance income and deposit account service charges.  Commercial loan swap fee income is dependent upon customers preference for fixed versus variable interest rate loans, and the ability of the customers seeking the swap product to satisfy the financially sophisticated criteria to be eligible, which leads to variability in this income stream.  Electronic banking income was impacted by third party annual volume incentive revenue that was received in the third quarter.  Insurance income is typically lower in the fourth quarter.  Deposit account service charges were impacted by the system upgrade as Peoples granted waivers of $85,000 related to account services charges in the month of the upgrade.

For the full year of 2016, total non-interest income increased $3.6 million, or 8%, compared to 2015.  The increase compared to 2015 was due to increases in electronic banking income, trust and investment income, bank owned life insurance income and commercial loan swap fee income, with a portion of the growth attributable to the NB&T acquisition.  The increase in electronic banking income was the result of the increased usage of debit cards by more customers.  The increase in trust and investment income was due largely to growth in assets under management and the full year effect of NB&T operations.  The increase in bank owned life insurance income was the result of the additional $35 million of bank owned life insurance policies that were purchased late in the second quarter of 2016.

Non-interest Expenses:

Non-interest expenses were up 2% for the fourth quarter of 2016 compared to the linked quarter and relatively flat compared to the fourth quarter of 2015.  The increase compared to the linked quarter was due primarily to an increase in costs associated with the upgrade of Peoples' core banking systems, which was executed on November 7, 2016.  Non-interest expenses, adjusted for non-core charges, were relatively flat compared to the linked quarter and up 2% compared to the fourth quarter of 2015.  The increase compared to the fourth quarter of 2015 was largely the result of increased sales-based and incentive compensation expense, partially offset by a reduction in Federal Deposit Insurance Corporation ("FDIC") insurance expense.  In the fourth quarter of 2016, Peoples incurred $746,000 of costs associated with the system upgrade, compared to $423,000 in the third quarter of 2016.  In the fourth quarter of 2015, Peoples incurred $1.3 million of non-core charges, primarily acquisition-related costs.

For the full year of 2016, non-interest expenses were down $8.2 million, or 7%, compared to 2015.  Non-interest expenses, adjusted for non-core charges, were up 2% compared to the full year of 2015.  The increase compared to 2015 was primarily due to the full year effect of operating expenses associated with the NB&T acquisition, and increased sales-based and incentive compensation earned under the corporate incentive plan.  Peoples' number of full-time equivalent employees declined to 782 at December 31, 2016, compared to 799 September 30, 2016 and 817 at December 30, 2015.

The efficiency ratio for the fourth quarter of 2016 was 66.9%, compared to 64.3% for the linked quarter and 67.9% for the fourth quarter of 2015.  The increase in the efficiency ratio for the quarter was largely the result of the increase of $323,000 in non-core, system upgrade costs.  The efficiency ratio, when adjusted for non-core items, was 64.8% for the fourth quarter of 2016, 63.3% for the linked quarter and 64.7% for the fourth quarter of 2015.  The higher adjusted efficiency ratio in the fourth quarter of 2016 compared to the linked quarter was primarily due to lower non-interest income.

For the full year of 2016, the efficiency ratio was 65.1% compared to 75.5% in 2015.  The decrease in the efficiency ratio in 2016 compared to 2015 was the result of non-core charges, which were $10.5 million higher in 2015 primarily due to the acquisition costs associated with the NB&T acquisition.  For the full year of 2016, the efficiency ratio, when adjusted for non-core items, was 64.3% compared to 67.5% in 2015. The decrease in the adjusted efficiency ratio in 2016 compared to 2015 was due primarily to 8% revenue growth between the full year of 2016 and the full year of 2015.

Loans:

Period-end total loan balances at December 31, 2016 increased $55.7 million, or 10% annualized, compared to the September 30, 2016 balances, primarily driven by growth in commercial loan balances.  Commercial loans grew $43.1 million, or 14% annualized, with commercial and industrial loan growth of $22.3 million, or 22% annualized, and commercial real estate loan growth of $20.8 million, or 10% annualized, during the fourth quarter of 2016.  Consumer loans grew $12.6 million, or 5% annualized, during the fourth quarter, due mainly to indirect loan growth of $22.5 million, or 39% annualized, which was partially offset by a decline of $9.2 million, or 7% annualized, in residential real estate loan balances.

For the year, period-end loan balances increased 7%, with growth of 8% in commercial loan balances and 7% in consumer loan balances.  Indirect lending experienced the largest growth across all loan categories for the year, increasing by $85.7 million, or 51%.  Commercial and industrial loan growth was $70.6 million, or 20%, for the year.

The average loan balances for the fourth quarter of 2016 increased $50.4 million, or 9% annualized, compared to the linked quarter, $124.1 million, or 6%, compared to the fourth quarter of 2015, and $180.9 million, or 9%, for the year.  The increase compared to the linked quarter was due to a $32.1 million increase in commercial loan balances and a $18.3 million increase in consumer loan balances.  Compared to the fourth quarter of 2015, consumer loan balances increased $63.5 million while commercial loan balances increased $60.6 million.  For the year, commercial loan balances increased $100.7 million and consumer loan balances increased $80.2 million.  The growth in commercial loan balances for all periods was driven by commercial and industrial loan balances, while the growth in consumer loan balances was driven by indirect loan balances.

Asset Quality:

Asset quality metrics remained relatively stable during the fourth quarter of 2016.  Annualized net charge-offs were 0.09% of average gross loans during the fourth quarter of 2016, compared to 0.14% in the third quarter of 2016 and 2.63% in the fourth quarter of 2015.  For the full year of 2016, net charge-offs were 0.09% of average gross loans compared to 0.78% in 2015.

Criticized loans, which are those categorized as watch, substandard or doubtful, decreased $0.1 million compared to September 30, 2016 and $23.0 million compared to December 31, 2015.  Classified loans, which are those categorized as substandard or doubtful, increased $4.0 million compared to September 30, 2016 and declined $2.6 million compared to December 31, 2015.  The increase in classified loans during the fourth quarter of 2016 was primarily related to one commercial loan relationship.  Criticized loans as a percentage of total loans was 4.46% at December 31, 2016, compared to 4.58% at September 30, 2016 and 5.89% at December 31, 2015.  Classified loans as a percentage of total loans was 2.59% at December 31, 2016, compared to 2.48% at September 30, 2016 and 2.91% at December 31, 2015.

Period-end nonperforming assets increased $1.5 million compared to September 30, 2016, due primarily to an increase of $2.0 million in nonaccrual loans, which was partially offset by a decrease of $0.4 million in loans 90+ days past due and accruing.  The increase in nonaccrual loans was related to a few small loans, not one specific credit.  Compared to December 31, 2015, nonperforming assets increased $5.5 million, due primarily to an increase in nonaccrual loans of $7.8 million, which was partially offset by a decrease in loans 90+ days past due and accruing of $2.2 million.  As a percent of total assets, nonperforming assets were 0.75% at December 31, 2016, compared to 0.72% at September 30, 2016 and 0.62% at December 31, 2015.

At December 31, 2016, the allowance for loan losses increased to $18.4 million, compared to $18.2 million at September 30, 2016, and $16.8 million at December 31, 2015.  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 1.08% at December 31, 2016, compared to 1.13% at September 30, 2016 and 1.19% at December 31, 2015.  The decline in this ratio compared to September 30, 2016 and December 31, 2015 was primarily due to the continued stabilization of the asset quality metrics.

Deposits:

Period-end deposits decreased $65.7 million, or 3%, during the quarter, with much of the decrease attributable to interest-bearing deposits, specifically governmental deposits and retail certificates of deposit.  Compared to December 31, 2015, period-end deposits decreased $26.2 million due primarily to a $64.1 million, or 14%, decrease in retail certificates of deposit.  Governmental deposits declined $25.0 million compared to December 31, 2016, and brokered certificates of deposits decreased $18.2 million, all of which was partially offset by increases in interest-bearing demand accounts of $29.0 million, savings accounts of $22.0 million, non-interests-bearing accounts of $16.5 million and money market accounts of $13.6 million.  The continued decline in retail certificates of deposit was mainly the result of the continued focus on growing low-cost deposits.  Non-interest-bearing deposits comprised 29% of total deposits at both December 31, 2016 and September 30, 2016, compared to 28% at December 31, 2015.

Average deposits for the fourth quarter of  2016 compared to the linked quarter decreased $6.4 million, as average interest-bearing deposits decreased $40.3 million, which was partially offset by an increase in average non-interest-bearing deposits of $33.9 million.  The decrease in interest-bearing deposits was due to a decrease in governmental deposits and certificates of deposit.  Average deposits for the fourth quarter of 2016 increased $16.0 million, or 1%, compared to the fourth quarter of 2015, and for the full year of 2016 increased $125.6 million, or 5%, compared to the full year of 2015.  The increase compared to the fourth quarter of 2015 was driven by a $27.1 million, or 4%, increase in non-interest-bearing deposits.  For the year, 53% of the growth in average deposits was due to interest-bearing deposits, while 47% was due to non-interest-bearing deposits.

Stockholders' Equity:

At December 31, 2016, the tier 1 risk-based capital ratio was 13.21%, compared to 13.34% at September 30, 2016 and 13.67% at December 31, 2015.  The total risk-based capital ratio was 14.11% at December 31, 2016, compared to 14.24% at September 30, 2016 and 14.54% at December 31, 2015.  These regulatory capital ratios were impacted by loan growth, partially offset by growth in retained earnings during the fourth quarter of 2016.  During the second, third and fourth quarters of 2016, no common shares were repurchased under the share repurchase program, compared to 279,770 shares repurchased in the first quarter of 2016.

Peoples' capital position remained strong at December 31, 2016, despite the slight decline from the third quarter.  The decline was mostly due to decreases in the market value of investment securities.  Book value per share was $23.92 at December 31, 2016, compared to $24.22 at September 30, 2016 and $22.81 at December 31, 2015.  Tangible book value per share was $15.89 at December 31, 2016, compared to $16.14 at September 30, 2016 and $14.68 at December 31, 2015.  The tangible equity to tangible assets ratio was 8.80% at December 31, 2016, compared to 9.13% at September 30, 2016 and 8.69% at December 31, 2015.

Peoples Bancorp Inc. is a diversified financial services holding company with $3.4 billion in total assets, 79 locations, including 71 full-service bank branches, and 78 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 fourth quarter and full year 2016 results of operations today at 10:00 a.m., Eastern Standard 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 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 measures used in this news release:

• Core non-interest income is non-GAAP since it excludes the impact of revenue waived related to the system upgrade.
• Core non-interest expenses are non-GAAP since they exclude the impact of costs associated with the system upgrade, 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 non-interest 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 and the related amortization from earnings.
• Pre-provision net revenue is defined as net interest income plus total non-interest income minus total non-interest expense. This measure is non-GAAP since it excludes 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", "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 December 31, 2016 consolidated financial statements as part of its Annual Report on Form 10-K 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.

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