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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission File Number: 000-16772

| | | | | | | | | | | | | | | | | | | | | | | |
PEOPLES BANCORP INC. |
(Exact name of Registrant as specified in its charter) |
Ohio | | | | 31-0987416 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
138 Putnam Street, | P.O. Box 738, | | | | |
Marietta, | Ohio | | | | 45750 |
(Address of principal executive offices) | | | | (Zip Code) |
Registrant’s telephone number, including area code: | | | | (740) | | 373-3155 |
| Not Applicable | |
| (Former name, former address and former fiscal year, if changed since last report) | |
Securities registered pursuant to Section 12(b) of the Act: |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Shares, without par value | PEBO | The Nasdaq Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 35,364,250 common shares, without par value, at October 31, 2023.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| September 30, 2023 | December 31, 2022 |
|
(Dollars in thousands) | (Unaudited) | |
Assets | | |
Cash and cash equivalents: | | |
Cash and balances due from banks | $ | 108,107 | | $ | 94,679 | |
Interest-bearing deposits in other banks | 191,002 | | 59,343 | |
Total cash and cash equivalents | 299,109 | | 154,022 | |
Available-for-sale investment securities, at fair value (amortized cost of $1,211,794 at September 30, 2023 and $1,300,719 at December 31, 2022) (a) | 1,018,581 | | 1,131,399 | |
Held-to-maturity investment securities, at amortized cost (fair value of $569,888 at September 30, 2023 and $478,509 at December 31, 2022) (a) | 675,409 | | 560,212 | |
Other investment securities | 66,332 | | 51,609 | |
Total investment securities (a) | 1,760,322 | | 1,743,220 | |
Loans and leases, net of deferred fees and costs (b) | 6,084,390 | | 4,707,150 | |
Allowance for credit losses | (62,924) | | (53,162) | |
Net loans and leases (c) | 6,021,466 | | 4,653,988 | |
Loans held for sale | 2,699 | | 2,140 | |
Bank premises and equipment, net of accumulated depreciation | 103,877 | | 82,934 | |
Bank owned life insurance | 139,554 | | 105,292 | |
Goodwill | 355,106 | | 292,397 | |
Other intangible assets | 53,388 | | 33,932 | |
Other assets | 207,013 | | 139,379 | |
Total assets | $ | 8,942,534 | | $ | 7,207,304 | |
Liabilities | | |
Deposits: | | |
Non-interest-bearing | $ | 1,569,095 | | $ | 1,589,402 | |
Interest-bearing | 5,468,423 | | 4,127,539 | |
Total deposits | 7,037,518 | | 5,716,941 | |
Short-term borrowings | 585,437 | | 500,138 | |
Long-term borrowings | 173,312 | | 101,093 | |
| | |
Accrued expenses and other liabilities | 153,048 | | 103,804 | |
Total liabilities | 7,949,315 | | 6,421,976 | |
Stockholders’ equity | | |
Preferred shares, no par value, 50,000 shares authorized, no shares issued at September 30, 2023 or at December 31, 2022 | — | | — | |
Common shares, no par value, 50,000,000 shares authorized, 36,723,893 shares issued at September 30, 2023 and 29,857,920 shares issued at December 31, 2022, including at each date shares held in treasury | 864,010 | | 686,450 | |
Retained earnings | 307,534 | | 265,936 | |
Accumulated other comprehensive loss, net of deferred income taxes | (143,796) | | (127,136) | |
Treasury stock, at cost, 1,412,650 shares at September 30, 2023 and 1,643,461 shares at December 31, 2022 | (34,529) | | (39,922) | |
Total stockholders’ equity | 993,219 | | 785,328 | |
Total liabilities and stockholders’ equity | $ | 8,942,534 | | $ | 7,207,304 | |
(a) Available-for-sale investment securities and held-to-maturity investment securities are presented net of allowance for credit losses of $0 and $238, respectively, at September 30, 2023, and $0 and $241, respectively, at December 31, 2022.
(b) Also referred to throughout this Quarterly Report on Form 10-Q as "total loans" and "loans held for investment."
(c) Also referred to throughout this Quarterly Report on Form 10-Q as "net loans."
See Notes to the Unaudited Condensed Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(Dollars in thousands, except per share data) | 2023 | 2022 | | 2023 | 2022 |
Interest income: | | | | | |
Interest and fees on loans and leases | $ | 109,024 | | $ | 61,370 | | | $ | 272,634 | | $ | 168,334 | |
Interest and dividends on taxable investment securities | 12,635 | | 7,559 | | | 36,409 | | 20,576 | |
Interest on tax-exempt investment securities | 1,133 | | 1,095 | | | 3,254 | | 3,136 | |
Other interest income | 801 | | 847 | | | 1,862 | | 1,306 | |
Total interest income | 123,593 | | 70,871 | | | 314,159 | | 193,352 | |
Interest expense: | | | | | |
Interest on deposits | 22,482 | | 2,316 | | | 42,546 | | 6,383 | |
Interest on short-term borrowings | 5,169 | | 393 | | | 14,940 | | 992 | |
Interest on long-term borrowings | 2,668 | | 1,111 | | | 5,668 | | 3,148 | |
| | | | | |
Total interest expense | 30,319 | | 3,820 | | | 63,154 | | 10,523 | |
Net interest income | 93,274 | | 67,051 | | | 251,005 | | 182,829 | |
Provision for (recovery of) credit losses | 4,053 | | 1,776 | | | 13,889 | | (5,811) | |
Net interest income after provision for (recovery of) credit losses | 89,221 | | 65,275 | | | 237,116 | | 188,640 | |
| | | | | |
| | | | | |
| | | | | |
Non-interest income: | | | | | |
Electronic banking income | 6,466 | | 5,261 | | | 18,375 | | 15,933 | |
Insurance income | 4,250 | | 3,618 | | | 13,679 | | 11,995 | |
Trust and investment income | 4,288 | | 3,954 | | | 12,786 | | 12,476 | |
Deposit account service charges | 4,516 | | 3,833 | | | 12,192 | | 10,817 | |
Lease (loss) income | (66) | | 1,725 | | | 2,730 | | 2,931 | |
Bank owned life insurance income | 1,375 | | 694 | | | 2,924 | | 1,922 | |
Mortgage banking income | 237 | | 328 | | | 740 | | 1,116 | |
Net loss on asset disposals and other transactions | (307) | | (35) | | | (2,218) | | (314) | |
Net (loss) gain on investment securities | (7) | | 21 | | | (2,108) | | 107 | |
Other non-interest income | 2,452 | | 967 | | | 4,179 | | 2,819 | |
Total non-interest income | 23,204 | | 20,366 | | | 63,279 | | 59,802 | |
Non-interest expense: | | | | | |
Salaries and employee benefit costs | 36,608 | | 28,618 | | | 106,661 | | 83,932 | |
Net occupancy and equipment expense | 5,501 | | 4,813 | | | 15,836 | | 14,669 | |
Professional fees | 3,456 | | 2,832 | | | 13,775 | | 8,784 | |
Data processing and software expense | 6,288 | | 3,279 | | | 15,578 | | 9,228 | |
Amortization of other intangible assets | 3,280 | | 2,023 | | | 7,951 | | 5,765 | |
Electronic banking expense | 1,836 | | 2,648 | | | 5,159 | | 8,134 | |
Marketing expense | 1,267 | | 1,136 | | | 3,554 | | 2,991 | |
Federal Deposit Insurance Corporation ("FDIC") insurance expense | 1,260 | | 709 | | | 3,525 | | 2,921 | |
Franchise tax expense | 772 | | 1,075 | | | 2,678 | | 2,941 | |
Communication expense | 752 | | 599 | | | 2,089 | | 1,873 | |
Other loan expenses | 856 | | 511 | | | 2,133 | | 1,788 | |
Other non-interest expense | 9,820 | | 4,010 | | | 19,859 | | 10,755 | |
Total non-interest expense | 71,696 | | 52,253 | | | 198,798 | | 153,781 | |
Income before income taxes | 40,729 | | 33,388 | | | 101,597 | | 94,661 | |
Income tax expense | 8,847 | | 7,410 | | | 22,059 | | 20,218 | |
Net income | $ | 31,882 | | $ | 25,978 | | | $ | 79,538 | | $ | 74,443 | |
| | | | | |
| | | | | |
Earnings per common share - basic | $ | 0.91 | | $ | 0.93 | | | $ | 2.49 | | $ | 2.65 | |
Earnings per common share - diluted | $ | 0.90 | | $ | 0.92 | | | $ | 2.47 | | $ | 2.65 | |
Weighted-average number of common shares outstanding - basic | 34,818,346 | | 27,865,416 | | | 31,771,061 | | 27,929,720 | |
Weighted-average number of common shares outstanding - diluted | 35,061,897 | | 27,973,255 | | | 31,977,486 | | 28,009,263 | |
Cash dividends declared | $ | 13,793 | | $ | 10,753 | | | $ | 37,940 | | $ | 31,686 | |
Cash dividends declared per common share | $ | 0.39 | | $ | 0.38 | | | $ | 1.16 | | $ | 1.12 | |
See Notes to the Unaudited Condensed Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
| | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | |
| September 30, | | September 30, | |
(Dollars in thousands) | 2023 | 2022 | | 2023 | 2022 | |
Net income | $ | 31,882 | | $ | 25,978 | | | $ | 79,538 | | $ | 74,443 | | |
Other comprehensive loss: | | | | | | |
Available-for-sale investment securities: | | | | | | |
Gross unrealized holding loss arising during the period | (34,330) | | (57,911) | | | (26,002) | | (172,195) | | |
Related tax benefit | 7,671 | | 13,484 | | | 6,178 | | 40,170 | | |
Reclassification adjustment for net loss (gain) included in net income | 7 | | (21) | | | 2,108 | | (107) | | |
Related tax benefit (expense) | 3 | | 5 | | | (492) | | 25 | | |
| | | | | | |
| | | | | | |
Net effect on other comprehensive loss | (26,649) | | (44,443) | | | (18,208) | | (132,107) | | |
Defined benefit plan: | | | | | | |
Net (loss) gain arising during the period | (244) | | 203 | | | (244) | | 264 | | |
Related tax benefit (expense) | 57 | | (48) | | | 57 | | (62) | | |
Amortization of unrecognized loss and service cost on benefit plans | — | | 23 | | | 9 | | 61 | | |
Related tax benefit | — | | (5) | | | (2) | | (14) | | |
Reclassification from accumulated other comprehensive income ("AOCI") | 2,424 | | 139 | | | 2,424 | | 139 | | |
Related tax benefit | (566) | | (32) | | | (566) | | (32) | | |
Net effect on other comprehensive loss | 1,671 | | 280 | | | 1,678 | | 356 | | |
Cash flow hedges: | | | | | | |
Net gain (loss) arising during the period | 118 | | 3,388 | | | (165) | | 10,948 | | |
Related tax (expense) benefit | (16) | | (789) | | | 35 | | (2,501) | | |
Net effect on other comprehensive loss | 102 | | 2,599 | | | (130) | | 8,447 | | |
Total other comprehensive loss, net of tax | (24,876) | | (41,564) | | | (16,660) | | (123,304) | | |
Total comprehensive income (loss) | $ | 7,006 | | $ | (15,586) | | | $ | 62,878 | | $ | (48,861) | | |
See Notes to the Unaudited Condensed Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | |
| | Common Shares | Retained Earnings | Treasury Stock | |
(Dollars in thousands) | | |
Balance, June 30, 2023 | | $ | 862,960 | | $ | 289,445 | | $ | (118,920) | | $ | (34,578) | | $ | 998,907 | | |
| | | | | | | |
Net income | | — | | 31,882 | | — | | — | | 31,882 | | |
Other comprehensive loss, excluding pension termination settlement, net of tax | | — | | — | | (26,734) | | — | | (26,734) | | |
Pension termination settlement, net of tax | | | | 1,858 | | | 1,858 | | |
| | | | | | | |
| | | | | | | |
Cash dividends declared | | — | | (13,793) | | | — | | (13,793) | | |
| | | | | | | |
Reissuance of treasury stock for common share awards | | (314) | | — | | — | | 314 | | — | | |
| | | | | | | |
| | | | | | | |
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors | | — | | — | | — | | (391) | | (391) | | |
| | | | | | | |
Common shares issued under dividend reinvestment plan | | 284 | | — | | — | | — | | 284 | | |
Common shares issued under compensation plan for Boards of Directors | | 6 | | — | | — | | 133 | | 139 | | |
| | | | | | | |
Common shares issued under employee stock purchase plan | | — | | — | | — | | (7) | | (7) | | |
Stock-based compensation | | 1,074 | | — | | — | | — | | 1,074 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance, September 30, 2023 | | $ | 864,010 | | $ | 307,534 | | $ | (143,796) | | $ | (34,529) | | $ | 993,219 | | |
| | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Common Shares | Retained Earnings | Treasury Stock |
(Dollars in thousands) | |
Balance, December 31, 2022 | | $ | 686,450 | | $ | 265,936 | | $ | (127,136) | | $ | (39,922) | | $ | 785,328 | |
| | | | | | |
Net income | | — | | 79,538 | | — | | — | | 79,538 | |
Other comprehensive loss excluding pension termination settlement, net of tax | | — | | — | | (18,518) | | — | | (18,518) | |
Pension termination settlement, net of tax | | | | 1,858 | | | 1,858 | |
| | | | | | |
| | | | | | |
Cash dividends declared | | — | | (37,940) | | — | | — | | (37,940) | |
| | | | | | |
Reissuance of treasury stock for common share awards | | (5,724) | | — | | — | | 5,724 | | — | |
| | | | | | |
Reissuance of treasury stock for deferred compensation plan for Boards of Directors | | — | | — | | — | | 115 | | 115 | |
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors | | — | | — | | — | | (1,445) | | (1,445) | |
| | | | | | |
Common shares issued under dividend reinvestment plan | | 1,036 | | — | | — | | — | | 1,036 | |
Common shares issued under compensation plan for Boards of Directors | | 25 | | — | | — | | 385 | | 410 | |
| | | | | | |
Common shares issued under employee stock purchase plan | | 61 | | — | | — | | 614 | | 675 | |
Stock-based compensation | | 4,233 | | — | | — | | — | | 4,233 | |
| | | | | | |
Issuance of common shares related to merger with Limestone Bancorp, Inc. | | 177,929 | | — | | — | | — | | 177,929 | |
| | | | | | |
Balance, September 30, 2023 | | $ | 864,010 | | $ | 307,534 | | $ | (143,796) | | $ | (34,529) | | $ | 993,219 | |
| | | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity | |
| | Common Shares | Retained Earnings | Treasury Stock | |
(Dollars in thousands) | | |
Balance, June 30, 2022 | | $ | 684,416 | | $ | 234,608 | | $ | (93,359) | | $ | (38,841) | | $ | 786,824 | | |
| | | | | | | |
Net income | | — | | 25,978 | | — | | — | | 25,978 | | |
Other comprehensive loss, net of tax | | — | | — | | (41,564) | | — | | (41,564) | | |
| | | | | | | |
| | | | | | | |
Cash dividends declared | | — | | (10,753) | | — | | — | | (10,753) | | |
| | | | | | | |
Reissuance of treasury stock for common share awards | | (219) | | — | | — | | 219 | | — | | |
| | | | | | | |
| | | | | | | |
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors | | — | | — | | — | | (235) | | (235) | | |
Common shares repurchased under share repurchase program then in effect | | — | | — | | — | | (1,168) | | (1,168) | | |
Common shares issued under dividend reinvestment plan | | 320 | | — | | — | | — | | 320 | | |
Common shares issued under compensation plan for Boards of Directors | | 20 | | — | | — | | 106 | | 126 | | |
| | | | | | | |
Common shares issued under employee stock purchase plan | | 34 | | — | | — | | 169 | | 203 | | |
Stock-based compensation | | 780 | | — | | — | | — | | 780 | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Balance, September 30, 2022 | | $ | 685,351 | | $ | 249,833 | | $ | (134,923) | | $ | (39,750) | | $ | 760,511 | | |
| | | | | | | | | | | | | | | | | | |
| | | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Common Shares | Retained Earnings | Treasury Stock |
(Dollars in thousands) | |
Balance, December 31, 2021 | | $ | 686,282 | | $ | 207,076 | | $ | (11,619) | | $ | (36,714) | | $ | 845,025 | |
| | | | | | |
Net income | | — | | 74,443 | | — | | — | | 74,443 | |
Other comprehensive loss, net of tax | | — | | — | | (123,304) | | — | | (123,304) | |
| | | | | | |
| | | | | | |
Cash dividends declared | | — | | (31,686) | | — | | — | | (31,686) | |
| | | | | | |
Reissuance of treasury stock for common share awards | | (4,944) | | — | | — | | 4,944 | | — | |
| | | | | | |
Reissuance of treasury stock for deferred compensation plan for Boards of Directors | | — | | — | | — | | 78 | | 78 | |
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors | | — | | — | | — | | (1,671) | | (1,671) | |
Common shares repurchased under share repurchase program then in effect | | — | | — | | — | | (7,155) | | (7,155) | |
Common shares issued under dividend reinvestment plan | | 921 | | — | | — | | — | | 921 | |
Common shares issued under compensation plan for Boards of Directors | | 64 | | — | | — | | 314 | | 378 | |
| | | | | | |
Common shares issued under employee stock purchase plan | | 95 | | — | | — | | 454 | | 549 | |
Stock-based compensation | | 2,933 | | — | | — | | — | | 2,933 | |
| | | | | | |
| | | | | | |
| | | | | | |
Balance, September 30, 2022 | | $ | 685,351 | | $ | 249,833 | | $ | (134,923) | | $ | (39,750) | | $ | 760,511 | |
See Notes to the Unaudited Condensed Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | |
| Nine Months Ended |
| September 30, |
(Dollars in thousands) | 2023 | 2022 |
Net cash provided by operating activities | $ | 113,085 | | $ | 102,500 | |
Investing activities: | | |
Available-for-sale investment securities: | | |
Purchases | (33,380) | | (237,930) | |
Proceeds from sales | 166,919 | | 8,730 | |
Proceeds from principal payments, calls and prepayments | 115,963 | | 155,070 | |
Held-to-maturity investment securities: | | |
Purchases | (187,487) | | (51,060) | |
Proceeds from principal payments | 72,396 | | 16,080 | |
Other investment securities: | | |
Purchases | (24,768) | | (11,110) | |
Proceeds from sales | 15,681 | | 5,885 | |
| | |
Net (increase) decrease in loans held for investment | (285,202) | | 36,158 | |
Net expenditures for premises and equipment | (10,620) | | (7,008) | |
Proceeds from sales of other real estate owned | 129 | | 572 | |
Purchase of bank owned life insurance | — | | (30,000) | |
Proceeds from bank owned life insurance contracts | — | | 689 | |
Business acquisitions, net of cash received (paid) | 92,952 | | (85,791) | |
Investment in limited partnership and tax credit funds | (1,699) | | (1,857) | |
Net cash used in investing activities | (79,116) | | (201,572) | |
Financing activities: | | |
Net decrease in non-interest-bearing deposits | (283,034) | | (5,469) | |
Net increase in interest-bearing deposits | 369,629 | | 8,919 | |
Net increase (decrease) in short-term borrowings | 25,299 | | (37,916) | |
Proceeds from long-term borrowings | 70,085 | | 19,001 | |
Payments on long-term borrowings | (32,515) | | (116,354) | |
| | |
| | |
Cash dividends paid | (37,899) | | (31,704) | |
Purchase of treasury stock under share repurchase program | — | | (7,155) | |
Purchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock | (1,445) | | (1,671) | |
Proceeds from issuance of common shares | 998 | | 878 | |
| | |
| | |
Net cash provided by (used in) financing activities | 111,118 | | (171,471) | |
Net increase (decrease) in cash and cash equivalents | 145,087 | | (270,543) | |
Cash and cash equivalents at beginning of period | 154,022 | | 415,727 | |
Cash and cash equivalents at end of period | $ | 299,109 | | $ | 145,184 | |
| | |
Supplemental cash flow information: | | |
Interest paid | $ | 57,033 | | $ | 11,006 | |
Income taxes paid | 29,636 | | 1,947 | |
Supplemental noncash disclosures: | | |
Transfers from total loans to other real estate owned | 31 | | 55 | |
Noncash recognition of new leases | 4,428 | | 27 | |
See Notes to the Unaudited Condensed Consolidated Financial Statements
PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies Basis of Presentation: The accompanying Unaudited Condensed Consolidated Financial Statements of Peoples Bancorp Inc. and its subsidiaries ("Peoples" refers to Peoples Bancorp Inc. and its consolidated subsidiaries collectively, except where the context indicates the reference relates solely to Peoples Bancorp Inc.) have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP") for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not contain all of the information and footnotes required by US GAAP for annual financial statements and should be read in conjunction with Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2022 ("Peoples' 2022 Form 10-K").
The accounting and reporting policies followed in the presentation of the accompanying Unaudited Condensed Consolidated Financial Statements are consistent with those described in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2022 Form 10-K, as updated by the information contained in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023 (this "Form 10-Q"). Management has evaluated all significant events and transactions that occurred after September 30, 2023 for potential recognition or disclosure in these Unaudited Condensed Consolidated Financial Statements. In the opinion of management, these Unaudited Condensed Consolidated Financial Statements reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. Such adjustments are normal and recurring in nature. Intercompany accounts and transactions have been eliminated. The Consolidated Balance Sheet at December 31, 2022, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2022 Form 10-K.
The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by Peoples as of the required effective dates. The following paragraphs related to new pronouncements should be read in conjunction with "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2022 Form 10-K. Unless otherwise discussed, management believes the impact of any recently issued standards, including those issued but not yet effective, will not have a material impact on Peoples' financial statements taken as a whole.
Accounting Standards Update ("ASU") 2020-04 - Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. This guidance was further updated by ASU 2021-01. This update was effective from March 12, 2020 through December 31, 2022. The FASB further updated the guidance with ASU 2022-06, which deferred the sunset date of ASC Topic 848, Reference Rate Reform (Topic 848) from December 31, 2022 to December 31, 2024. ASU 2020-04 was early adopted by Peoples as of September 30, 2021, which reduced the accounting burden of assessing contracts impacted by reference rate reform. Peoples established a working group, consisting of key stakeholders from throughout the company, to monitor developments relating to London Inter-Bank Offered Rate ("LIBOR") changes and to guide the transition. This team has worked to successfully ensure that technology systems are prepared for the transition, loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders have been apprised of the transition. Peoples ceased originating LIBOR-based products after December 31, 2021 and began originating SOFR-indexed products. Any LIBOR-based products originated prior to December 31, 2021, but maturing after June 30, 2023, have been amended to reference SOFR-indexed rates as of July 1, 2023. The transition did not have a material impact on Peoples' consolidated financial statements.
ASU 2022-02 - Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures. This ASU eliminates the accounting guidance on TDRs for creditors and amends the guidance on disclosures to include current-period gross charge-offs by year of origination. This ASU also updates the requirements related to accounting for credit losses under Accounting Standards Codification ("ASC") 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. For entities that have already adopted ASU 2016-13, as Peoples has, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
Effective January 1, 2023, Peoples adopted the amendments within ASU 2022-02, using the prospective transition method. The adoption of this guidance did not have a material impact on Peoples' consolidated financial statements.
Pursuant to the guidance in ASU 2022-02, when a loan is restructured, Peoples continues to measure the allowance for credit losses on the loan using a discounted cash flow approach that utilizes a prepayment-adjusted discount rate based on the loan’s restructured terms. Under the TDR accounting model, Peoples modeled a 12-month extension of the contractual terms for TDRs that were to mature within the next 12 months. As Peoples has elected a prospective transition, the extension on a loan that was previously restructured and accounted for as a TDR will continue to be measured as it had been historically in Peoples' allowance for credit losses until the loan is paid off, sold, liquidated or subsequently restructured. Refer to "Note 4 Loans and Leases" for additional information.
Note 2 Fair Value of Assets and Liabilities Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, Peoples measures, records and reports various types of assets and liabilities at fair value on either a recurring or a non-recurring basis in the Unaudited Condensed Consolidated Financial Statements. Those assets and liabilities are presented below in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis.”
Depending on the nature of the asset or the liability, Peoples uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under US GAAP uses a hierarchy, which is described in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2022 Form 10-K.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Recurring Fair Value Measurements at Reporting Date |
| | September 30, 2023 | | December 31, 2022 |
(Dollars in thousands) | | Level 1 | Level 2 | Level 3 | | Level 1 | Level 2 | Level 3 |
| |
Assets: | | | | | | | | |
Available-for-sale investment securities: | | | | | | | | |
Obligations of: | | | | | | | | |
U.S. Treasury and government agencies | | $ | 42,466 | | $ | — | | $ | — | | | $ | 152,422 | | $ | — | | $ | — | |
U.S. government sponsored agencies | | — | | 103,932 | | — | | | — | | 88,115 | | — | |
States and political subdivisions | | — | | 220,460 | | — | | | — | | 225,882 | | — | |
Residential mortgage-backed securities | | — | | 593,104 | | — | | | — | | 604,653 | | — | |
Commercial mortgage-backed securities | | — | | 50,840 | | — | | | — | | 50,049 | | — | |
Bank-issued trust preferred securities | | — | | 5,927 | | 1,852 | | | — | | 10,278 | | — | |
| | | | | | | | |
Total available-for-sale securities | | $ | 42,466 | | $ | 974,263 | | $ | 1,852 | | | $ | 152,422 | | $ | 978,977 | | $ | — | |
Equity investment securities (a) | | 155 | | 239 | | — | | | 147 | | 199 | | — | |
Derivative assets (b) | | — | | 34,709 | | — | | | — | | 34,123 | | — | |
Liabilities: | | | | | | | | |
Derivative liabilities (c) | | $ | — | | $ | 29,491 | | $ | — | | | $ | — | | $ | 28,529 | | $ | — | |
(a) Included in "Other investment securities" on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 3 Investment Securities" of the Notes to the Unaudited Condensed Consolidated Financial Statements.
(b) Included in "Other assets" on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 10 Derivative Financial Instruments" of the Notes to the Unaudited Condensed Consolidated Financial Statements.
(c) Included in "Accrued expenses and other liabilities" on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 10 Derivative Financial Instruments" of the Notes to the Unaudited Condensed Consolidated Financial Statements.
Available-for-Sale Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, SOFR (or other relevant) yield curves, credit spreads and prices from market makers and live trading systems (Level 2). As of September 30, 2023, Peoples had one
available-for-sale investment security for which quoted market prices or observable market data was unavailable. Therefore, a broker estimated market value based on the price an interested buyer would be willing to pay was used to estimate the fair value (Level 3). Management reviews the valuation methodology and quality controls utilized by the pricing services or broker in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
Equity Investment Securities: The fair values of Peoples' equity investment securities are obtained from quoted prices in active exchange markets for identical assets or liabilities (Level 1) or quoted prices in less active markets (Level 2).
Derivative Assets and Derivative Liabilities: Derivative assets and derivative liabilities are recognized on the Unaudited Consolidated Balance Sheets at their fair value within "Other assets" and "Accrued expenses and other liabilities", respectively. The fair value for derivative financial instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters (Level 2).
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured and reported at fair value on a non-recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy at September 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | |
| | | Non-Recurring Fair Value Measurements at Reporting Date |
| | | September 30, 2023 | | | December 31, 2022 |
(Dollars in thousands) | | | Level 2 | Level 3 | | | Level 2 | Level 3 |
| |
Assets: | | | | | | | | |
Collateral dependent loans | | | $ | — | | $ | 508 | | | | $ | — | | $ | 10,354 | |
Loans held for sale (a) | | | $ | 1,443 | | $ | — | | | | $ | 1,254 | | $ | — | |
Other real estate owned | | | $ | — | | $ | 32 | | | | $ | — | | $ | 55 | |
| | | | | | | | |
(a) Loans held for sale are presented gross of a valuation allowance of $237 and $105 at September 30, 2023 and at December 31, 2022, respectively.
Collateral Dependent Loans: Loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty, are considered collateral dependent. Peoples utilizes outside third-party appraisal services to value the underlying collateral, which Peoples then uses to report the loans at their fair value (Level 3).
Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally one-to-four family residential loans, are carried, in aggregate, at the lower of cost or estimated fair value. Peoples uses a valuation model using quoted market prices of similar instruments in arriving at the fair value (Level 2).
Other Real Estate Owned ("OREO"): OREO, included in "Other assets" on the Unaudited Consolidated Balance Sheets, is comprised primarily of commercial and residential real estate properties acquired by Peoples in satisfaction of a loan. OREO obtained in satisfaction of a loan is recorded at the lower of cost or estimated fair value, less estimated costs to sell the property. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches, including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available (Level 3).
Servicing Rights: Servicing rights are included in "Other intangible assets" on the Unaudited Consolidated Balance Sheets. The fair value of servicing rights is determined by using a discounted cash flow model, which estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates (Level 3). The carrying value of servicing rights is not re-measured to fair value on a recurring basis. Peoples assesses the carrying value of servicing rights quarterly for impairment.
Financial Instruments Not Required to be Measured or Reported at Fair Value
The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Unaudited Consolidated Balance Sheets.
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| | Fair Value Measurements of Other Financial Instruments |
(Dollars in thousands) | | Fair Value Hierarchy Level | September 30, 2023 | | December 31, 2022 |
| Carrying Amount | Fair Value | | Carrying Amount | Fair Value |
| |
Assets: | | | | | | | |
Cash and cash equivalents | | 1 | $ | 299,109 | | $ | 299,109 | | | $ | 154,022 | | $ | 154,022 | |
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Held-to-maturity investment securities: | | | | | | | |
Obligations of: | | | | | | | |
U.S. government sponsored agencies | | 2 | 174,699 | | 160,985 | | | 132,366 | | 123,020 | |
States and political subdivisions (a) | | 2 | 144,728 | | 104,810 | | | 145,263 | | 108,776 | |
Residential mortgage-backed securities | | 2 | 248,627 | | 218,970 | | | 176,215 | | 157,998 | |
Commercial mortgage-backed securities | | 2 | 102,845 | | 85,123 | | | 101,861 | | 85,354 | |
Commercial mortgage-backed securities | | 3 | 4,748 | | — | | | 4,748 | | 3,361 | |
Total held-to-maturity securities | | | 675,647 | | 569,888 | | | 560,453 | | 478,509 | |
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Other investment securities: | | | | | | | |
Other investment securities at cost: | | | | | | | |
Federal Home Loan Bank ("FHLB") stock | | N/A | 33,808 | | 33,808 | | | 26,605 | | 26,605 | |
Federal Reserve Bank ("FRB") stock | | N/A | 26,897 | | 26,897 | | | 21,231 | | 21,231 | |
Banker's Bank of Kentucky ("BBKY") stock | | N/A | 445 | | 445 | | | 355 | | 355 | |
Total other investment securities at cost | | | 61,150 | | 61,150 | | | 48,191 | | 48,191 | |
Other investment securities at fair value: | | | | | | | |
Nonqualified deferred compensation (b) | | 1 | 2,744 | | 2,744 | | | 2,048 | | 2,048 | |
Other investment securities (c) | | 2 | 2,044 | | 2,044 | | | 1,024 | | 1,024 | |
Total other investment securities | | | 65,938 | | 65,938 | | | 51,263 | | 51,263 | |
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Loans and leases, net of deferred fees and costs (d) | | 3 | 6,084,390 | | 5,808,484 | | | 4,707,150 | | 4,516,695 | |
Bank owned life insurance | | 2 | 139,554 | | 139,554 | | | 105,292 | | 105,292 | |
Liabilities: | | | | | | | |
Deposits | | 2 | $ | 7,037,518 | | $ | 5,992,880 | | | $ | 5,716,941 | | $ | 4,682,491 | |
Short-term borrowings | | 2 | 585,437 | | 595,045 | | | 500,138 | | 504,584 | |
Long-term borrowings | | 2 | 173,312 | | 176,156 | | | 101,093 | | 101,992 | |
(a) Held-to-maturity investment securities are presented gross of an allowance for credit losses of $238 and $241 at September 30, 2023 and December 31, 2022, respectively.
(b) Nonqualified deferred compensation includes mutual funds as part of the investment.
(c) "Other investment securities", as reported on the Unaudited Consolidated Balance Sheets, also included equity investment securities at September 30, 2023
and at December 31, 2022, which are reported in the Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
table above and not included in this table.
(d) Loans and leases, net of deferred fees and costs, are presented gross of an allowance for credit losses of $62.9 million and $53.2 million at September 30, 2023 and at December 31, 2022, respectively.
For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument. These financial instruments include cash and cash equivalents, and overnight borrowings. Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, balances due from other banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments with original maturities of ninety days or less. The carrying amount for cash and cash equivalents balances are a reasonable estimate of fair value (Level 1).
Held-to-Maturity Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, relevant yield curves, credit spreads and prices from market makers and live trading systems (Level 2). When observable market data is absent, the independent pricing service estimates prices based on
underlying cash flow characteristics and discount rates and compares them to similar securities (Level 3). Management reviews the valuation methodology and quality controls utilized by the pricing services in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
Other Investment Securities: Other investment securities at cost are not recorded at fair value as they are not marketable securities. Other investment securities at fair value are valued using quoted prices in an active market (Level 1) or quoted prices in less active markets (Level 2).
Loans and Leases, Net of Deferred Fees and Costs: The fair value of portfolio loans and leases assumes sale of the underlying notes to a third-party financial investor. Accordingly, this value is not necessarily the value to Peoples if the notes were held to maturity. Peoples considers interest rate, credit and market factors in estimating the fair value of loans and leases (Level 3). Fair values for loans and leases are estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans and leases with similar terms, the credit risk associated with the loans and leases and other market factors, including liquidity.
Bank Owned Life Insurance: Peoples' bank owned life insurance policies are recorded at their cash surrender value (Level 2). Peoples recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits.
Deposits: The fair value of fixed-maturity certificates of deposit ("CDs") is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities. Demand and other non-fixed-maturity deposits are estimated using a discounted cash flow calculation based on maturity, attrition and re-pricing assumptions (Level 2).
Short-term Borrowings: The fair value of short-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2).
Long-term Borrowings: The fair value of long-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2).
Certain financial assets and financial liabilities that are not required to be measured or reported at fair value can be subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These financial assets and financial liabilities include the following: customer relationships, the deposit base, and other information required to compute Peoples’ aggregate fair value, which are not