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EX-32 - EXHIBIT 32 - PEOPLES BANCORP INCexhibit32-331201510xq.htm
EX-10.1 - EXHIBIT 10.1 - PEOPLES BANCORP INCexhibit101-331201510xq.htm
EX-10.2 - EXHIBIT 10.2 - PEOPLES BANCORP INCexhibit102-331201510xq.htm
EX-31.1 - EXHIBIT 31.1 - PEOPLES BANCORP INCexhibit311-331201510xq.htm
EX-31.2 - EXHIBIT 31.2 - PEOPLES BANCORP INCexhibit312-331201510xq.htm
10-Q - PDF VERSION OF 10-Q - PEOPLES BANCORP INCpebo0331201510qfinal.pdf
EXCEL - IDEA: XBRL DOCUMENT - PEOPLES BANCORP INCFinancial_Report.xls




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)
  x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
            For the quarterly period ended March 31, 2015
                                                                                        
OR
  o
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: 0-16772
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)
 
 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated
filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No     x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,376,505 common shares, without par value, at April 30, 2015.




Table of Contents
 
 



2


PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
March 31,
2015
December 31,
2014
(Dollars in thousands)
Assets
 
 
Cash and due from banks
$
49,792

$
42,230

Interest-bearing deposits in other banks
116,610

19,224

Total cash and cash equivalents
166,402

61,454

Available-for-sale investment securities, at fair value (amortized cost of $748,622 at March 31, 2015 and $632,967 at December 31, 2014)
760,822

636,880

Held-to-maturity investment securities, at amortized cost (fair value of $48,774 at March 31, 2015 and $48,442 at December 31, 2014)
48,045

48,468

Other investment securities, at cost
36,251

28,311

Total investment securities
845,118

713,659

Loans, net of deferred fees and costs
1,996,296

1,620,898

Allowance for loan losses
(18,088
)
(17,881
)
Net loans
1,978,208

1,603,017

Loans held for sale
5,039

4,374

Bank premises and equipment, net
50,686

40,335

Goodwill
124,660

98,562

Other intangible assets
18,777

10,596

Other assets
58,141

35,772

Total assets
$
3,247,031

$
2,567,769

Liabilities
 
 
Non-interest-bearing deposits
$
695,131

$
493,162

Interest-bearing deposits
1,886,005

1,439,912

Total deposits
2,581,136

1,933,074

Short-term borrowings
91,101

88,277

Long-term borrowings
130,074

179,083

Accrued expenses and other liabilities
25,502

27,217

Total liabilities
2,827,813

2,227,651

Stockholders’ Equity
 
 
Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2015 and December 31, 2014


Common stock, no par value, 24,000,000 shares authorized, 18,918,525 shares issued at March 31, 2015 and 15,599,643 shares issued at December 31, 2014, including shares in treasury
342,484

265,742

Retained earnings
87,430

90,391

Accumulated other comprehensive income (loss), net of deferred income taxes
4,262

(1,301
)
Treasury stock, at cost, 599,738 shares at March 31, 2015 and 590,246 shares at December 31, 2014
(14,958
)
(14,714
)
Total stockholders’ equity
419,218

340,118

Total liabilities and stockholders’ equity
$
3,247,031

$
2,567,769


See Notes to the Unaudited Consolidated Financial Statements


3


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
    
 
Three Months Ended
 
March 31,
(Dollars in thousands, except per share data)
2015
2014
Interest Income:
 
 
Interest and fees on loans
$
19,160

$
13,373

Interest and dividends on taxable investment securities
4,363

4,340

Interest on tax-exempt investment securities
596

416

Other interest income
40

23

Total interest income
24,159

18,152

Interest Expense:
 
 
Interest on deposits
1,559

1,568

Interest on short-term borrowings
35

32

Interest on long-term borrowings
1,146

1,072

Total interest expense
2,740

2,672

Net interest income
21,419

15,480

Provision for loan losses
350

8

Net interest income after provision for loan losses
21,069

15,472

Other Income:
 
 
Insurance income
4,312

4,116

Deposit account service charges
2,295

2,111

Trust and investment income
2,047

1,847

Electronic banking income
1,980

1,539

Mortgage banking income
303

227

Net gain (loss) on investment securities
600

(30
)
Net (loss) gain on asset disposals and other transactions
(1,103
)
11

Other non-interest income
571

455

Total other income
11,005

10,276

Other Expenses:
 
 
Salaries and employee benefit costs
17,361

10,792

Professional fees
2,447

854

Net occupancy and equipment
2,295

1,816

Electronic banking expense
1,124

1,082

Data processing and software
735

570

Amortization of other intangible assets
673

263

Marketing expense
645

459

Franchise tax
548

385

Communication expense
502

359

FDIC insurance
424

260

Foreclosed real estate and other loan expenses
321

215

Other non-interest expense
5,839

1,762

Total other expenses
32,914

18,817

(Loss) income before income taxes
(840
)
6,931

Income tax (benefit) expense
(151
)
2,148

  Net (loss) income
$
(689
)
$
4,783

(Loss) earnings per common share - basic
$
(0.04
)
$
0.45

(Loss) earnings per common share - diluted
$
(0.04
)
$
0.44

Weighted-average number of common shares outstanding - basic
15,802,334

10,636,089

Weighted-average number of common shares outstanding - diluted
15,930,235

10,740,884

Cash dividends declared
$
2,272

$
1,623

Cash dividends declared per common share
$
0.15

$
0.15

See Notes to the Unaudited Consolidated Financial Statements


4


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Net (loss) income
$
(689
)
$
4,783

Other comprehensive income:
 
 
Available-for-sale investment securities:
 
 
Gross unrealized holding gain arising in the period
8,886

8,640

Related tax expense
(3,111
)
(3,024
)
Less: reclassification adjustment for net gain (loss) included in net income
600

(30
)
Related tax (expense) benefit
(210
)
11

Net effect on other comprehensive income
5,385

5,635

Defined benefit plans:
 
 
Net loss arising during the period
(26
)
(1,053
)
  Related tax benefit
9

370

Amortization of unrecognized loss and service cost on benefit plans
32

31

Related tax expense
(12
)
(11
)
Recognition of loss due to settlement and curtailment
269

486

Related tax expense
(94
)
(170
)
Net effect on other comprehensive income (loss)
178

(347
)
Total other comprehensive income, net of tax
5,563

5,288

Total comprehensive income
$
4,874

$
10,071




CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 
 
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders' Equity
 
Common Stock
Retained Earnings
Treasury Stock
(Dollars in thousands)
Balance, December 31, 2014
$
265,742

$
90,391

$
(1,301
)
$
(14,714
)
$
340,118

Net loss
 
(689
)
 
 
(689
)
Other comprehensive income, net of tax
 
 
5,563

 
5,563

Cash dividends declared
 
(2,272
)
 
 
(2,272
)
Reissuance of treasury stock for common stock option exercises
 
 
 


Tax benefit from exercise of stock options
63

 
 
 
63

Reissuance of treasury stock for deferred compensation plan for Boards of Directors
 
 
 
155

155

Purchase of treasury stock
 
 
 
(534
)
(534
)
Common shares issued under dividend reinvestment plan
99

 
 
 
99

Common shares issued under compensation plan for Board of Directors
(6
)
 
 
54

48

Common shares issued under employee stock purchase plan
(6
)
 
 
81

75

Stock-based compensation expense
565

 
 
 
565

Issuance of common shares related to acquisition of
 
 
 
 

NB&T Financial Group, Inc.
76,027

 
 
 
76,027

Balance, March 31, 2015
$
342,484

$
87,430

$
4,262

$
(14,958
)
$
419,218

 
See Notes to the Unaudited Consolidated Financial Statements


5


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Net cash (used in) provided by operating activities
$
(5,884
)
$
10,331

Investing activities:
 
 
Available-for-sale investment securities:
 
 
Purchases
(33,787
)
(33,014
)
Proceeds from sales
42,803

41,565

Proceeds from principal payments, calls and prepayments
21,646

15,642

Held-to-maturity investment securities:
 
 
Purchases


Proceeds from principal payments
316

312

Net decrease (increase) in loans
15,384

(29,981
)
Net expenditures for premises and equipment
(2,152
)
(1,674
)
Proceeds from sales of other real estate owned
55

138

Proceeds from bank owned life insurance contracts

3,067

Business acquisitions, net of cash received
103,597


Return of investment in limited partnership and tax credit funds

358

Net cash provided by (used in) investing activities
147,862

(3,587
)
Financing activities:
 
 
Net increase in non-interest-bearing deposits
76,533

7,738

Net (decrease) increase in interest-bearing deposits
(57,900
)
44,601

Net increase (decrease) in short-term borrowings
2,824

(44,813
)
Payments on long-term borrowings
(55,867
)
(1,668
)
Cash dividends paid
(2,149
)
(1,517
)
Purchase of treasury stock
(534
)
(266
)
Proceeds from issuance of common shares

2

Excess tax benefit from share-based payments
63

43

Net cash (used in) provided by financing activities
(37,030
)
4,120

Net increase in cash and cash equivalents
104,948

10,864

Cash and cash equivalents at beginning of period
61,454

53,820

Cash and cash equivalents at end of period
$
166,402

$
64,684

 

 See Notes to the Unaudited Consolidated Financial Statements



6


PEOPLES BANCORP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1.   Summary of Significant Accounting Policies 

Basis of Presentation: The accompanying Unaudited 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, 2014 (“2014 Form 10-K”).
The accounting and reporting policies followed in the presentation of the accompanying Unaudited Consolidated Financial Statements are consistent with those described in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples’ 2014 Form 10-K, as updated by the information contained in this Form 10-Q.  Management has evaluated all significant events and transactions that occurred after March 31, 2015, for potential recognition or disclosure in these consolidated financial statements.  In the opinion of management, these consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and dates indicated.  Such adjustments are normal and recurring in nature.  All significant intercompany accounts and transactions have been eliminated.  The Consolidated Balance Sheet at December 31, 2014, contained herein has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2014 Form 10-K. 
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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. Peoples’ insurance income includes performance-based insurance commissions that are recognized by Peoples when received, which typically occurs during the first quarter of each year. For the three months ended March 31, 2015 and 2014, the amount of performance-based insurance commissions recognized totaled $1.5 million and $1.2 million, respectively.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by FASB or other standard setting bodies that are adopted by Peoples as of the required effective dates. 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.




7


Note 2.  Fair Value of Financial Instruments 

Available-for-sale securities measured at fair value on a recurring basis comprised the following:
 
 
Fair Value Measurements at Reporting Date Using
(Dollars in thousands)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
Significant
Other
Observable
 Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Fair Value
March 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

U.S. government sponsored agencies
5,488


5,488


States and political subdivisions
118,447


118,447


Residential mortgage-backed securities
597,232

6,439

590,793


Commercial mortgage-backed securities
28,241


28,241


Bank-issued trust preferred securities
5,649


5,649


Equity securities
5,765

5,562

203


Total available-for-sale securities
$
760,822

$
12,001

$
748,821

$

December 31, 2014
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
1

$

$
1

$

U.S. government sponsored agencies
5,950


5,950


States and political subdivisions
64,743


64,743


Residential mortgage-backed securities
527,291


527,291


Commercial mortgage-backed securities
27,847


27,847


Bank-issued trust preferred securities
5,645


5,645


Equity securities
5,403

5,204

199


Total available-for-sale securities
$
636,880

$
5,204

$
631,676

$

Held-to-maturity securities reported at fair value comprised the following:
 
 
Fair Value at Reporting Date Using
(Dollars in thousands)
 
Quoted Prices in Active Markets for Identical Assets
Significant
Other
Observable
 Inputs
Significant Unobservable Inputs
Fair Value
(Level 1)
(Level 2)
(Level 3)
March 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,308

$

$
4,308

$

Residential mortgage-backed securities
36,835


36,835


Commercial mortgage-backed securities
7,631


7,631


Total held-to-maturity securities
$
48,774

$

$
48,774

$

December 31, 2014
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,282

$

$
4,282

$

Residential mortgage-backed securities
36,740


36,740


Commercial mortgage-backed securities
7,420


7,420


Total held-to-maturity securities
$
48,442

$

$
48,442

$

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 inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curves, credit spreads and prices from market makers and live trading systems (Level 2). Management reviews the valuation methodology and quality controls utilized by


8


the pricing services in their overall assessment of the reasonableness of the fair values provided, and challenges prices when they believe a material discrepancy in pricing exists.
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  Financial assets measured at fair value on a non-recurring basis included the following:
Impaired Loans: Impaired loans are measured and reported at fair value when the amounts to be received are less than the carrying value of the loans. One of the allowable methods for determining the amount of impairment is estimating fair value using the fair value of the collateral for collateral-dependent loans. Management’s determination of the fair value for these loans uses a market approach representing the estimated net proceeds to be received from the sale of the collateral based on observable market prices or market value provided by independent, licensed or certified appraisers (Level 2 inputs).  At March 31, 2015, impaired loans with an aggregate outstanding principal balance of $1.4 million were measured and reported at a fair value of $1.3 million.  For the three months ended March 31, 2015, Peoples recognized $135,000 of losses on impaired loans through the allowance for loan losses.
The following table presents the fair values of financial assets and liabilities carried on Peoples’ Consolidated Balance Sheets, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:
 
 
March 31, 2015
 
December 31, 2014
(Dollars in thousands)
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
166,402

$
166,402

 
$
61,454

$
61,454

Investment securities
845,118

845,847

 
713,659

713,633

Loans
1,983,247

1,950,086

 
1,607,391

1,581,813

Financial liabilities:
 
 
 
 
 
Deposits
$
2,581,136

$
2,586,216

 
$
1,933,074

$
1,938,021

Short-term borrowings
91,101

91,101

 
88,277

88,277

Long-term borrowings
130,074

135,516

 
179,083

183,878

The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.  For certain financial assets and liabilities, carrying value approximates fair value due to the nature of the financial instrument.  These instruments include cash and cash equivalents, demand and other non-maturity deposits, and overnight borrowings.  Peoples used the following methods and assumptions in estimating the fair value of the following financial instruments:
Loans: The fair value of portfolio loans assumes sale of the 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 considered interest rate, credit and market factors in estimating the fair value of loans (Level 3 inputs).  In the current whole loan market, financial investors are generally requiring a much higher rate of return than the return inherent in loans if held to maturity given the lack of market liquidity.  This divergence accounts for the majority of the difference in carrying amount over fair value. 
Deposits: The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities (Level 2 inputs).
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 inputs). 
Bank premises and equipment, customer relationships, deposit base, banking center networks, and other information required to compute Peoples’ aggregate fair value are not included in the above information.  Accordingly, the above fair values are not intended to represent the aggregate fair value of Peoples.


9


Note 3.  Investment Securities 

Available-for-sale
The following table summarizes Peoples’ available-for-sale investment securities:
(Dollars in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
March 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

U.S. government sponsored agencies
5,351

137


5,488

States and political subdivisions
114,775

3,734

(62
)
118,447

Residential mortgage-backed securities
592,904

8,965

(4,637
)
597,232

Commercial mortgage-backed securities
27,907

353

(19
)
28,241

Bank-issued trust preferred securities
6,137

5

(493
)
5,649

Equity securities
1,548

4,297

(80
)
5,765

Total available-for-sale securities
$
748,622

$
17,491

$
(5,291
)
$
760,822

December 31, 2014
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$
1

$

$

$
1

U.S. government sponsored agencies
5,836

114


5,950

States and political subdivisions
62,292

2,510

(59
)
64,743

Residential mortgage-backed securities
529,245

5,910

(7,864
)
527,291

Commercial mortgage-backed securities
28,021

112

(286
)
27,847

Bank-issued trust preferred securities
6,132

3

(490
)
5,645

Equity securities
1,440

4,044

(81
)
5,403

Total available-for-sale securities
$
632,967

$
12,693

$
(8,780
)
$
636,880

Peoples’ investment in equity securities was comprised largely of common stocks issued by various unrelated bank holding companies at both March 31, 2015 and December 31, 2014.  At March 31, 2015, there were no securities of a single issuer, other than U.S. Treasury and government agencies, and U.S. government sponsored agencies/enterprises, that exceeded 10% of stockholders' equity.
The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended March 31 were as follows:
 
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Gross gains realized
$
600

$
514

Gross losses realized

544

Net gain (loss) realized
$
600

$
(30
)
The cost of investment securities sold, and any resulting gain or loss, was based on the specific identification method and recognized as of the trade date.
 


10


The following table presents a summary of available-for-sale investment securities that had an unrealized loss:
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
March 31, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
5,706

$
54

10

 
$
214

$
8

1

 
$
5,920

$
62

Residential mortgage-backed securities
108,910

1,034

31

 
128,705

3,603

36

 
237,615

4,637

Commercial mortgage-backed securities
7,516

19

2

 



 
7,516

19

Bank-issued trust preferred securities



 
2,505

493

3

 
2,505

493

Equity securities
41

1

2

 
96

79

1

 
137

80

Total
$
122,173

$
1,108

45

 
$
131,520

$
4,183

41

 
$
253,693

$
5,291

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
2,602

$
12

4

 
$
5,788

$
47

8

 
$
8,390

$
59

Residential mortgage-backed securities
114,018

1,091

21

 
216,224

6,773

57

 
330,242

7,864

Commercial mortgage-backed securities



 
19,404

286

4

 
19,404

286

Bank-issued trust preferred securities



 
2,509

490

3

 
2,509

490

Equity securities
40

2

2

 
96

79

1

 
136

81

Total
$
116,660

$
1,105

27

 
$
244,021

$
7,675

73

 
$
360,681

$
8,780

Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair value on a quarterly basis. At March 31, 2015, management concluded no individual securities were other-than-temporarily impaired since Peoples did not have the intent to sell, nor was it more likely than not that Peoples would be required to sell any of the securities with an unrealized loss prior to recovery. Further, the unrealized losses at both March 31, 2015 and December 31, 2014, were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At March 31, 2015, approximately 99% of the mortgage-backed securities that had been at an unrealized loss position for twelve months or more were issued by U.S. government sponsored agencies. The remaining 1%, or three positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to 2004. Two of the three positions had a fair value less than 90% of their book value, with an aggregate book and fair value of $0.9 million and $0.6 million, respectively. Management has analyzed the underlying credit quality of these securities and concluded the unrealized losses were primarily attributable to the floating rate nature of these investments and the low number of loans remaining in these securities.
Furthermore, the three bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at March 31, 2015 were primarily attributable to the floating nature of those investments, the current interest rate environment and spreads within that sector.


11


The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at March 31, 2015.  The weighted-average yields are based on the amortized cost.  In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.  Rates are calculated on a fully tax-equivalent basis using a 35% federal income tax rate.
 
(Dollars in thousands)
Within 1 Year
1 to 5 Years
5 to 10 Years
Over 10 Years
Total
Amortized cost
 
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

$

U.S. government sponsored agencies

985


4,366

5,351

States and political subdivisions
275

6,432

31,498

76,570

114,775

Residential mortgage-backed securities

12,206

35,513

545,185

592,904

Commercial mortgage-backed securities


22,983

4,924

27,907

Bank-issued trust preferred securities



6,137

6,137

Equity securities
 
 
 
 
1,548

Total available-for-sale securities
$
275

$
19,623

$
89,994

$
637,182

$
748,622

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

$

U.S. government sponsored agencies

999


4,489

5,488

States and political subdivisions
280

6,718

32,558

78,891

118,447

Residential mortgage-backed securities

12,306

36,046

548,880

597,232

Commercial mortgage-backed securities


23,197

5,044

28,241

Bank-issued trust preferred securities



5,649

5,649

Equity securities
 
 
 
 
5,765

Total available-for-sale securities
$
280

$
20,023

$
91,801

$
642,953

$
760,822

Total weighted-average yield
4.61
%
3.29
%
2.88
%
2.74
%
2.79
%
Held-to-Maturity
The following table summarizes Peoples’ held-to-maturity investment securities:
(Dollars in thousands)
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
March 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,838

$
474

$
(4
)
$
4,308

Residential mortgage-backed securities
36,564

504

(233
)
36,835

Commercial mortgage-backed securities
7,643

10

(22
)
7,631

Total held-to-maturity securities
$
48,045

$
988

$
(259
)
$
48,774

December 31, 2014
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,841

$
448

$
(7
)
$
4,282

Residential mortgage-backed securities
36,945

189

(394
)
36,740

Commercial mortgage-backed securities
7,682

9

(271
)
7,420

Total held-to-maturity securities
$
48,468

$
646

$
(672
)
$
48,442

There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for the three months ended March 31, 2015 and 2014.


12


The following table presents a summary of held-to-maturity investment securities that had an unrealized loss:
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
No. of Securities
 
Fair
Value
Unrealized Loss
March 31, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$

$


 
$
324

$
4

1

 
$
324

$
4

Residential mortgage-backed securities
3,148

15

1

 
10,655

218

2

 
13,803

233

Commercial mortgage-backed securities



 
6,573

22

1

 
6,573

22

Total
$
3,148

$
15

1

 
$
17,552

$
244

4

 
$
20,700

$
259

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$

$


 
$
323

$
7

1

 
$
323

$
7

Residential mortgage-backed securities
$

$


 
$
18,242

$
394

5

 
$
18,242

$
394

Commercial mortgage-backed securities



 
6,356

271

1

 
6,356

271

Total
$

$


 
$
24,921

$
672

7

 
$
24,921

$
672

The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at March 31, 2015.  The weighted-average yields are based on the amortized cost.  In some cases, the issuers may have the right to call or prepay obligations without call or prepayment penalties prior to the contractual maturity date.  Rates are calculated on a fully tax-equivalent basis using a 35% federal income tax rate.
 
(Dollars in thousands)
Within 1 Year
1 to 5 Years
5 to 10 Years
Over 10 Years
Total
Amortized cost
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$

$

$
328

$
3,510

$
3,838

Residential mortgage-backed securities


503

36,061

36,564

Commercial mortgage-backed securities



7,643

7,643

Total held-to-maturity securities
$

$

$
831

$
47,214

$
48,045

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$

$

$
324

$
3,984

$
4,308

Residential mortgage-backed securities


508

36,327

36,835

Commercial mortgage-backed securities



7,631

7,631

Total held-to-maturity securities
$

$

$
832

$
47,942

$
48,774

Total weighted-average yield
%
%
2.61
%
2.78
%
2.78
%
Other Securities
Peoples' other investment securities on the Consolidated Balance Sheets consist largely of shares of the Federal Home Loan Bank of Cincinnati (the “FHLB”) and the Federal Reserve Bank of Cleveland (the "FRB").
Pledged Securities
Peoples had pledged available-for-sale investment securities with carrying values of $487.8 million and $352.8 million at March 31, 2015 and December 31, 2014, respectively, and held-to-maturity investment securities with carrying values of $22.8 million and $22.9 million at March 31, 2015 and December 31, 2014, respectively, to secure public and trust department deposits, and repurchase agreements in accordance with federal and state requirements.  Peoples also pledged available-for-sale investment securities with carrying values of $12.9 million and $13.5 million at March 31, 2015 and December 31, 2014, respectively, and held-to-maturity securities with carrying values of $24.2 million and $24.5 million at March 31, 2015 and December 31, 2014, respectively, to secure additional borrowing capacity at the FHLB and the FRB.


13


Note 4.  Loans

Peoples' loan portfolio has consisted of various types of loans originated primarily as a result of lending opportunities within Peoples' primary market areas of northeastern, central, southwestern and southeastern Ohio, west central West Virginia, and northeastern Kentucky. Acquired loans consist of loans purchased in 2012 or thereafter in a business combination. The major classifications of loan balances, excluding loans held for sale, were as follows:
(Dollars in thousands)
March 31,
2015
December 31, 2014
Originated loans:
 
 
Commercial real estate, construction
$
44,276

$
37,901

Commercial real estate, other
429,541

434,660

    Commercial real estate
473,817

472,561

Commercial and industrial
247,103

249,975

Residential real estate
256,551

254,169

Home equity lines of credit
63,491

62,463

Consumer
176,857

169,913

Deposit account overdrafts
3,146

2,933

Total originated loans
$
1,220,965

$
1,212,014

Acquired Loans:
 
 
Commercial real estate, construction
$
9,759

$
1,051

Commercial real estate, other
317,225

121,475

    Commercial real estate
326,984

122,526

Commercial and industrial
78,873

30,056

Residential real estate
317,529

225,274

Home equity lines of credit
38,222

18,232

Consumer
13,723

12,796

Deposit account overdrafts


Total acquired loans
$
775,331

$
408,884

Loans, net of deferred fees and costs
$
1,996,296

$
1,620,898

Peoples has acquired various loans through business combinations for which there was, at acquisition, evidence of deterioration of credit quality since origination, and for which it was probable that all contractually required payments would not be collected. The carrying amounts of these loans included in the loan balances above are summarized as follows:
(Dollars in thousands)
March 31,
2015
December 31,
2014
Commercial real estate
$
19,036

$
7,762

Commercial and industrial
3,722

1,041

Residential real estate
30,197

15,183

Consumer
304

306

Total outstanding balance
$
53,259

$
24,292

Net carrying amount
$
43,210

$
19,067

Changes in the accretable yield for the three months ended March 31, 2015 were as follows:
(Dollars in thousands)
Accretable Yield
Balance, December 31, 2014
$
3,172

Additions:
 
    Reclassification from nonaccretable to accretable
1,112

    NB&T Financial Group, Inc.
4,783

Accretion
(311
)
Balance, March 31, 2015
$
8,756

Peoples has pledged certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings from the FHLB. The amount of such pledged loans totaled $447.9 million and $457.1 million at March 31, 2015 and December 31, 2014, respectively. Peoples also had pledged commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $140.4 million and $150.7 million at March 31, 2015 and December 31, 2014, respectively.
Nonaccrual and Past Due Loans
A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on nonaccrual status regardless of whether or not such loan is considered past due.
The recorded investments in loans on nonaccrual status and loans delinquent for 90 days or more and accruing were as follows:
 
Nonaccrual Loans
 
Loans 90+ Days Past Due and Accruing
(Dollars in thousands)
March 31,
2015
December 31,
2014
 
March 31,
2015
December 31,
2014
Originated loans:
 
 
 
 
 
Commercial real estate, construction
$

$

 
$

$

Commercial real estate, other
2,128

2,575

 
394


    Commercial real estate
2,128

2,575

 
394


Commercial and industrial
1,277

1,286

 
125


Residential real estate
3,228

3,049

 
73

818

Home equity lines of credit
432

341

 
34

20

Consumer
14

19

 

2

Total originated loans
$
7,079

$
7,270

 
$
626

$
840

Acquired loans:
 
 
 
 
 
Commercial real estate, construction
$
96

$
96

 
$

$

Commercial real estate, other
37

9

 
1,752

567

    Commercial real estate
133

105

 
1,752

567

Commercial and industrial
451

708

 
283

301

Residential real estate
680

304

 
1,023

1,083

Home equity lines of credit
19

19

 
13


Consumer


 
3

8

Total acquired loans
$
1,283

$
1,136

 
$
3,074

$
1,959

Total loans
$
8,362

$
8,406

 
$
3,700

$
2,799

The following table presents the aging of the recorded investment in past due loans:
 
Loans Past Due
 
Current
Loans
Total
Loans
(Dollars in thousands)
30 - 59 days
60 - 89 days
90 + Days
Total
 
March 31, 2015
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$

$

 
$
44,276

$
44,276

Commercial real estate, other
2,926

49

1,395

4,370

 
425,171

429,541

    Commercial real estate
2,926

49

1,395

4,370

 
469,447

473,817

Commercial and industrial
757

14

1,367

2,138

 
244,965

247,103

Residential real estate
3,737

591

927

5,255

 
251,296

256,551

Home equity lines of credit
113

83

274

470

 
63,021

63,491

Consumer
685

118


803

 
176,054

176,857

Deposit account overdrafts
23



23

 
3,123

3,146

Total originated loans
$
8,241

$
855

$
3,963

$
13,059

 
$
1,207,906

$
1,220,965

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$
96

$
96

 
$
9,663

$
9,759

Commercial real estate, other
1,634

271

1,760

3,665

 
313,560

317,225

    Commercial real estate
1,634

271

1,856

3,761

 
323,223

326,984

Commercial and industrial
1,737

341

283

2,361

 
76,512

78,873

Residential real estate
5,341

805

1,267

7,413

 
310,116

317,529

Home equity lines of credit
27

19

13

59

 
38,163

38,222

Consumer
145

28

3

176

 
13,547

13,723

Deposit account overdrafts







Total acquired loans
$
8,884

$
1,464

$
3,422

$
13,770

 
$
761,561

$
775,331

Total loans
$
17,125

$
2,319

$
7,385

$
26,829

 
$
1,969,467

$
1,996,296

December 31, 2014
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$

$

 
$
37,901

$
37,901

Commercial real estate, other
565

285

1,220

2,070

 
432,590

434,660

    Commercial real estate
565

285

1,220

2,070

 
470,491

472,561

Commercial and industrial
17

18

1,245

1,280

 
248,695

249,975

Residential real estate
4,502

1,062

1,902

7,466

 
246,703

254,169

Home equity lines of credit
344

425

129

898

 
61,565

62,463

Consumer
1,136

157

2

1,295

 
168,618

169,913

Deposit account overdrafts
65



65

 
2,868

2,933

Total originated loans
$
6,629

$
1,947

$
4,498

$
13,074

 
$
1,198,940

$
1,212,014

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$
96

$
96

 
$
955

$
1,051

Commercial real estate, other
1,067

143

567

1,777

 
119,698

121,475

    Commercial real estate
1,067

143

663

1,873

 
120,653

122,526

Commercial and industrial
46

6

815

867

 
29,189

30,056

Residential real estate
4,026

1,331

1,179

6,536

 
218,738

225,274

Home equity lines of credit
9

19


28

 
18,204

18,232

Consumer
245

27

8

280

 
12,516

12,796

Deposit account overdrafts







Total acquired loans
$
5,393

$
1,526

$
2,665

$
9,584

 
$
399,300

$
408,884

Total loans
$
12,022

$
3,473

$
7,163

$
22,658

 
$
1,598,240

$
1,620,898

Credit Quality Indicators
As discussed in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples' 2014 Form 10-K, Peoples categorizes the majority of its loans into risk categories based upon an established risk grading matrix using a scale of 1 to 8. A description of the general characteristics of the risk grades used by Peoples is as follows:
“Pass” (grades 1 through 4): Loans in this risk category involve borrowers of acceptable-to-strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the loan if required, for any weakness that may exist.
“Watch” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and/or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the loan or in Peoples' credit position.
“Substandard” (grade 6): Loans in this risk grade are inadequately protected by the borrower's current financial condition and payment capability or of the collateral pledged, if any. Loans so classified have one or more well-defined weaknesses that jeopardize the orderly repayment of the loan. They are characterized by the distinct possibility that Peoples will sustain some loss if the deficiencies are not corrected.
“Doubtful” (grade 7): Loans in this risk grade have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined.
“Loss” (grade 8): Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this category.
Consumer loans and other smaller-balance loans are evaluated and categorized as “substandard”, “doubtful” or “loss” based upon the regulatory definition of these classes and consistent with regulatory requirements. All other loans not evaluated individually, nor meeting the regulatory conditions to be categorized as described above, would be considered as being “not rated”.
The following table summarizes the risk category of Peoples' loan portfolio based upon the most recent analysis performed:
 
Pass Rated
(Grades 1 - 4)
Watch
(Grade 5)
Substandard
(Grade 6)
Doubtful (Grade 7)
Not
Rated
Total
Loans
(Dollars in thousands)
March 31, 2015
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
44,011

$

$

$

$
265

$
44,276

Commercial real estate, other
401,076

12,014

16,451



429,541

    Commercial real estate
445,087

12,014

16,451


265

473,817

Commercial and industrial
220,201

8,961

17,096

1

844

247,103

Residential real estate
21,241

1,081

13,089

237

220,903

256,551

Home equity lines of credit
763


762


61,966

63,491

Consumer
68


6


176,783

176,857

Deposit account overdrafts




3,146

3,146

Total originated loans
$
687,360

$
22,056

$
47,404

$
238

$
463,907

$
1,220,965

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
9,759

$

$

$

$

$
9,759

Commercial real estate, other
282,216

18,045

16,461

503


317,225

    Commercial real estate
291,975

18,045

16,461

503


326,984

Commercial and industrial
69,323

4,396

4,812

342


78,873

Residential real estate
19,077

1,775

836


295,841

317,529

Home equity lines of credit
324




37,898

38,222

Consumer
336


1


13,386

13,723

Deposit account overdrafts






Total acquired loans
$
381,035

$
24,216

$
22,110

$
845

$
347,125

$
775,331

Total loans
$
1,068,395

$
46,272

$
69,514

$
1,083

$
811,032

$
1,996,296

December 31, 2014
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
37,637

$

$

$

$
264

$
37,901

Commercial real estate, other
405,224

12,316

17,120



434,660

    Commercial real estate
442,861

12,316

17,120


264

472,561

Commercial and industrial
239,168

8,122

2,684

1


249,975

Residential real estate
21,296

1,195

11,601

56

220,021

254,169

Home equity lines of credit
767


965


60,731

62,463

Consumer
60

1

8


169,844

169,913

Deposit account overdrafts




2,933

2,933

Total originated loans
$
704,152

$
21,634

$
32,378

$
57

$
453,793

$
1,212,014

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
955

$

$

$

$
96

$
1,051

Commercial real estate, other
106,115

7,100

8,260



121,475

    Commercial real estate
107,070

7,100

8,260


96

122,526

Commercial and industrial
27,313

255

2,294

194


30,056

Residential real estate
13,458

833

1,540


209,443

225,274

Home equity lines of credit
98




18,134

18,232

Consumer
279




12,517

12,796

Deposit account overdrafts






Total acquired loans
$
148,218

$
8,188

$
12,094

$
194

$
240,190

$
408,884

Total loans
$
852,370

$
29,822

$
44,472

$
251

$
693,983

$
1,620,898

Impaired Loans
The following table summarizes loans classified as impaired:
 
Unpaid
Principal
Balance
Recorded Investment
Total
Recorded
Investment
 
Average
Recorded
Investment
Interest
Income
Recognized
 
With
Allowance
Without
Allowance
Related
Allowance
(Dollars in thousands)
March 31, 2015
 
 
 
 
 
 
 
Commercial real estate, construction
$
44

$

$
44

$
44

$

$
18

$
2

Commercial real estate, other
1,762

742

786

1,528

189

675

18

    Commercial real estate
1,806

$
742

$
830

$
1,572

$
189

$
693

$
20

Commercial and industrial
4,330

1,428

2,103

3,531

527

1,249

11

Residential real estate
9,895

51

9,034

9,085

9

2,996

160

Home equity lines of credit
429


427

427


156

51

Consumer
155


149

149


60

41

Total
$
16,615

$
2,221

$
12,543

$
14,764

$
725

$
5,154

$
283

December 31, 2014
 
 
 
 
 
 
 
Commercial real estate, construction
$
101

$

$
96

96

$

$
57

$
6

Commercial real estate, other
2,074

653

1,148

1,801

189

1,632

7

    Commercial real estate
2,175

$
653

$
1,244

$
1,897

$
189

$
1,689

$
13

Commercial and industrial
2,379

1,945

399

2,344

816

493

5

Residential real estate
6,889

53

6,372

6,425

9

3,543

272

Home equity lines of credit
500


498

498


298

18

Consumer
155


150

150


109

11

Total
$
12,098

$
2,651

$
8,663

$
11,314

$
1,014

$
6,132

$
319

At March 31, 2015, Peoples' impaired loans shown in the table above included loans that were classified as troubled debt restructurings ("TDRs").
In assessing whether or not a borrower is experiencing financial difficulties, Peoples considers information currently available regarding the financial condition of the borrower. This information includes, but is not limited to, whether (i) the borrower is currently in payment default on any of the borrower's debt; (ii) a payment default is probable in the foreseeable future without the modification; (iii) the borrower has declared or is in the process of declaring bankruptcy; and (iv) the borrower's projected cash flow is insufficient to satisfy contractual payments due under the original terms of the loan without a modification.
Peoples considers all aspects of the modification to loan terms to determine whether or not a concession has been granted to the borrower. Key factors considered by Peoples include the borrower's ability to access funds at a market rate for debt with similar risk characteristics, the significance of the modification relative to the unpaid principal balance or collateral value of the debt, and the significance of a delay in the timing of payments relative to the original contractual terms of the loan. The most common concessions granted by Peoples generally include one or more modifications to the terms of the debt, such as (i) a reduction in the interest rate for the remaining life of the debt, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (iii) a temporary period of interest-only payments, and (iv) a reduction in the contractual payment amount for either a short period or the remaining term of the loan.

The following table summarizes the loans that were modified as a TDR during the three months ended March 31.
 
 
Three Months Ended
 
 
Recorded Investment (1)
 
Number of Contracts
Pre-Modification
Post-Modification
Remaining Recorded Investment
March 31, 2015
 
 
 
Originated loans:
 
 
 
 
Commercial real estate, other

$

$

$

Residential real estate




Home equity lines of credit
5

217

217

217

Consumer
1

3

3

3

Acquired loans:
 
 
 
 
Residential real estate
4

$
419

$
419

$
419

March 31, 2014
 
 
 
Originated loans:
 
 
 
 
Commercial real estate, other
1

$
511

$
511

$
503

Residential real estate
8

496

497

496

Home equity lines of credit
2

47

47

47

Consumer
5

64

64

64

(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.


The following table presents those loans for the three months ended March 31 that were modified as a TDR during the last twelve months that subsequently defaulted (i.e., 90 days or more past due following a modification).
 
March 31, 2015
 
March 31, 2014
 
Number of Contracts
Recorded Investment (1)
Impact on the Allowance for Loan Losses
 
Number of Contracts
Recorded Investment (1)
Impact on the Allowance for Loan Losses
Originated loans:
 
 
 
 
 
 
 
Residential real estate

$

$

 
1

$
51

$

Total

$

$

 
1

$
51

$

Acquired loans:
 
 
 
 
 
 
 
Residential real estate

$

$

 
1

$
40

$

Total

$

$

 
1

$
40

$

(1) The amounts shown are inclusive of all partial paydowns and charge-offs. Loans modified in a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.
Peoples had no additional commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.
Allowance for Loan Losses
Changes in the allowance for loan losses in the periods ended March 31, were as follows:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Home Equity Lines of Credit
Consumer
Deposit Account Overdrafts
Total
Balance, January 1, 2015
$
9,825

$
4,036

$
1,627

$
694

$
1,587

$
112

$
17,881

Charge-offs
(10
)

(186
)
(58
)
(187
)
(143
)
(584
)
Recoveries
55

12

115

15

186

58

441

Net recoveries (charge-offs)
45

12

(71
)
(43
)
(1
)
(85
)
(143
)
(Recovery of) provision for loan losses
(796
)
1,059

4

57

(74
)
100

350

Balance, March 31, 2015
$
9,074

$
5,107

$
1,560

$
708

$
1,512

$
127

$
18,088

 
 
 
 
 
 
 
 
Period-end amount allocated to:
 
 
 
 
 
 
Loans individually evaluated for impairment
$
189

$
527

$
9

$

$

$

$
725

Loans collectively evaluated for impairment
8,885

4,580

1,551

708

1,512

127

17,363

Ending balance
$
9,074

$
5,107

$
1,560

$
708

$
1,512

$
127

$
18,088

 
 
 
 
 
 
 
 
Balance, January 1, 2014
$
13,215

$
2,174

$
881

$
343

$
316

$
136

$
17,065

Charge-offs

(49
)
(137
)
(20
)
(302
)
(110
)
(618
)
Recoveries
112

5

38

6

184

70

415

Net recoveries (charge-offs)
112

(44
)
(99
)
(14
)
(118
)
(40
)
(203
)
Provision for loan losses





8

8

Balance, March 31, 2014
$
13,327

$
2,130

$
782

$
329

$
198

$
104

$
16,870

 
 
 
 
 
 
 
 
Period-end amount allocated to:
 
 
 
 
 
 
Loans individually evaluated for impairment
$
111

$
526

$

$

$

$

$
637

Loans collectively evaluated for impairment
13,216

1,604

782

329

198

104

16,233

Ending balance
$
13,327

$
2,130

$
782

$
329

$
198

$
104

$
16,870

The reduction in the allowance for loan losses allocated to commercial real estate, and related recovery of loan losses recorded during 2015 compared to 2014 was driven by net recoveries in recent years reducing the historical loss rates. Increases in commercial and industrial, residential real estate, home equity lines of credit and consumer categories of the allowance for loan losses, and related provision for loan losses recorded during 2015 were driven by net charge-off activity and increases in these respective loan portfolios.





14


Note 5. Long-Term Borrowings

The following table summarizes Peoples' long-term borrowings:
 
March 31, 2015
December 31, 2014
(Dollars in thousands)
Balance
Weighted-
Average
Rate
Balance
Weighted-
Average
Rate
Term note payable (parent company)
$
13,174

3.50
%
$
14,369

3.50
%
Callable national market repurchase agreements
40,000

3.63
%
40,000

3.63
%
FHLB putable, non-amortizing, fixed rate advances
50,000

3.32
%
83,995

3.30
%
FHLB amortizing, fixed rate advances
20,313

2.61
%
40,719

2.13
%
Subordinated debt
6,587

1.76
%

%
Total long-term borrowings
$
130,074

3.24
%
$
179,083

3.12
%
On December 18, 2012, Peoples entered into a Loan Agreement (the "Loan Agreement") to obtain a $24 million unsecured term loan from an unaffiliated financial institution with an original maturity of five years. On August 4, 2014, the Loan Agreement was amended (as amended, the "Amended Loan Agreement"). Under the Amended Loan Agreement, the interest rate on the term loan was reduced from 3.80% to 3.50%, and certain loan covenants related to the operations of Peoples' business were modified under the Amended Loan Agreement. Peoples is required to make quarterly principal and interest payments until the earlier of either full prepayment by Peoples or the stated maturity date. This note may be prepaid at any time prior to maturity without penalties, so long as no default has occurred. Concurrently, Peoples also entered into a Negative Pledge Agreement that precludes Peoples from selling, transferring, assigning, mortgaging, encumbering, pledging, or entering into a negative pledge agreement with respect to or otherwise disposing of any interest in the capital stock or other ownership interests owned by Peoples in its subsidiaries without prior written approval. Peoples is also subject to certain covenants under the Amended Loan Agreement, which include restrictions on ownership interests of its subsidiaries; cash and cash equivalents; transfers of criticized, classified or nonperforming assets; additional indebtedness; certain material transactions; and other financial covenants which include:
Peoples and Peoples Bank, National Association ("Peoples Bank") must maintain, as of the last day of each fiscal quarter, sufficient capital to qualify as "well capitalized" under applicable regulatory guidance;
Peoples Bank must maintain a "Total Risk-Based Capital Ratio" (as defined in the Loan Agreement) equal to or in excess of 12.50%, measured as of the last day of each fiscal quarter;
Peoples Bank must maintain a ratio of "Nonperforming Assets" to the sum of "Tangible Capital" plus the "Allowance for Loan Losses" (as each term is defined in the Loan Agreement) of not more than 20%, measured as of the last day of each fiscal quarter;
Peoples must maintain a "Fixed Charge Coverage Ratio" (as defined in the Amended Loan Agreement) that equals or exceeds 1.25 to 1.00, commencing with the quarter ended December 31, 2012 and for each quarter thereafter, with the items used in the ratio determined on a trailing 12-month basis;
issuance of dividends from Peoples Bank may not exceed the amount permitted by law without requiring regulatory approval;
minimum liquidity position of $2 million at Peoples; and
Peoples Bank must maintain a ratio of "Allowance for Loan Losses" to "Nonperforming Loans" (as each term is defined in the Amended Loan Agreement) of not less than 70% measured as of the last day of each fiscal quarter.
As of March 31, 2015, Peoples was in compliance with the applicable material covenants imposed by the Amended Loan Agreement.
Peoples' callable national market repurchase agreements consist of agreements with unrelated financial service companies and have original maturities ranging from five to ten years. In general, these agreements may not be terminated by Peoples prior to maturity without incurring additional costs. The callable agreements contain call option features, in which the buyer has the right, at its discretion, to terminate the repurchase agreement after an initial period ranging from three months to five years. After the initial call period, the buyer has a one-time option to terminate the agreement. If the


15


buyer exercises its option, Peoples would be required to repay the agreement in whole at the quarterly date. Peoples is required to make quarterly interest payments.
The putable, non-amortizing, fixed rate FHLB advances have original maturities ranging from ten to twenty years that may be repaid prior to maturity, subject to termination fees. The FHLB has the option, solely at its discretion, to terminate the advance after the initial fixed rate periods ranging from three months to five years, requiring full repayment of the advance by Peoples, prior to the stated maturity. If the advance is terminated prior to maturity, the FHLB will offer Peoples replacement funding at the then-prevailing rate on an advance product then offered by the FHLB, subject to normal FHLB credit and collateral requirements. These advances require monthly interest payments, with no repayment of principal until the earlier of either an option exercise by the FHLB or the stated maturity. The amortizing, fixed rate FHLB advances have a fixed rate for the term of the loan, with maturities ranging from ten to twenty years. These advances require monthly principal and interest payments, with some having a constant prepayment rate requiring an additional principal payment annually. These advances are not eligible for optional prepayment prior to maturity. During the first quarter of 2015, Peoples repaid several FHLB advances including putable, non-amortizing, fixed rate advances and amortizing, fixed-rate advances, totaling approximately $52.1 million that resulted in early termination fees of $520,000, and had a weighted-average cost of 1.49%.
On March 6, 2015, Peoples completed its acquisition of NB&T Financial Group, Inc. ("NB&T"), which included the assumption of Fixed/Floating Rate Junior Subordinated Debt Securities due 2037 (the "junior subordinated debt securities") at an acquisition-date fair value of $6.6 million held in a wholly-owned statutory trust whose common securities were wholly-owned by NB&T. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the Capital Securities held by third party investors. Distributions on the Capital Securities are payable at the annual rate of 1.50% over the 3-month LIBOR. Distributions on the Capital Securities are included in interest expense in the Unaudited Consolidated Financial Statements. These securities are considered Tier I capital (with certain limitations applicable) under current regulatory guidelines. The junior subordinated debt securities are subject to mandatory redemption, in whole or in part, upon repayment of the Capital Securities at maturity or their earlier redemption at the liquidation amount. Subject to prior approval of the Federal Reserve, the Capital Securities are redeemable prior to the maturity date of September 6, 2037, and are redeemable at par. Distributions on the Capital Securities can be deferred from time to time for a period not to exceed 20 consecutive semi-annual periods.
The aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
(Dollars in thousands)
Balance
Weighted-Average Rate
Nine Months Ending December 31, 2015
$
6,819

2.91
%
Year Ending December 31, 2016
7,734

3.07
%
Year Ending December 31, 2017
7,126

3.16
%
Year Ending December 31, 2018
42,390

3.33
%
Year Ending December 31, 2019
41,426

3.59
%
Thereafter
24,579

2.69
%
Total long-term borrowings
$
130,074

3.24
%



16


Note 6. Stockholders’ Equity 

The following table details the progression in Peoples’ common shares and treasury stock during the three months ended March 31, 2015:
 
 
Common Stock
Treasury
Stock
Shares at December 31, 2014
15,599,643

590,246

Changes related to stock-based compensation awards:
 
 
Grants of restricted common shares
107,036


Release of restricted common shares

21,636

Exercise of stock options for common shares


Changes related to deferred compensation plan for Boards of Directors:
 
 
Purchase of treasury stock

1,256

Reissuance of treasury stock

(8,125
)
Common shares issued under dividend reinvestment plan
4,148


Common shares issued under compensation plan for Board of Directors

(2,100
)
Common shares issued under employee stock purchase plan

(3,175
)
Issuance of common shares related to the acquisition of
 
 
NB&T Financial Group, Inc.

3,207,698


Shares at March 31, 2015
18,918,525

599,738

On March 6, 2015, Peoples completed its acquisition of NB&T, and issued 3,207,698 common shares reflecting $76.0 million of consideration, with the remainder paid in cash. Additional information regarding the NB&T acquisition can be found in Note 10 - Acquisitions in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q.
Under its Amended Articles of Incorporation, Peoples is authorized to issue up to 50,000 preferred shares, in one or more series, having such voting powers, designations, preferences, rights, qualifications, limitations and restrictions as determined by Peoples' Board of Directors. At March 31, 2015, Peoples had no preferred shares issued or outstanding.
Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the three months ended March 31, 2015:
(Dollars in thousands)
Unrealized Gain on Securities
Unrecognized Net Pension and Postretirement Costs
Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2014
$
2,542

$
(3,843
)
$
(1,301
)
Reclassification adjustments to net income:
 
 


  Realized gain on sale of securities, net of tax
(390
)

(390
)
  Realized loss due to settlement and curtailment, net of tax

175

175

Other comprehensive income, net of reclassifications and tax
5,775

3

5,778

Balance, March 31, 2015
$
7,927

$
(3,665
)
$
4,262



17



Note 7.  Employee Benefit Plans 

Peoples sponsors a noncontributory defined benefit pension plan that covers substantially all employees hired before January 1, 2010.  The plan provides retirement benefits based on an employee’s years of service and compensation.   For employees hired before January 1, 2003, the amount of postretirement benefit is based on the employee’s average monthly compensation pay over the highest five consecutive years out of the employee’s last ten years with Peoples while an eligible employee.  For employees hired on or after January 1, 2003, the amount of postretirement benefit is based on 2% of the employee’s annual compensation plus accrued interest.  Effective January 1, 2010, the pension plan was closed to new entrants.  Effective March 1, 2011, the accrual of pension plan benefits for all participants was frozen. Peoples recognized this freeze as a curtailment as of December 31, 2010 and March 1, 2011, under the terms of the pension plan. Peoples also provides post-retirement health and life insurance benefits to former employees and directors. Only those individuals who retired before January 27, 2012 were eligible for life insurance benefits. As of January 1, 2011, all retirees who desire to participate in the Peoples Bank medical plan do so by electing COBRA, which provides up to 18 months of coverage; retirees over the age of 65 also have the option to participate in a group Medicare supplemental plan. Peoples’ policy is to fund the cost of the health benefits as they arise.
The following tables detail the components of the net periodic cost for the plans:
 
 
Pension Benefits
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Interest cost
$
115

$
143

Expected return on plan assets
(130
)
(169
)
Amortization of net loss
33

33

Settlement of benefit obligation
269

486

Net periodic cost
$
287

$
493

 
Postretirement Benefits
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Interest cost
$
1

$
1

Amortization of net gain
(1
)
(2
)
Net periodic benefit
$

$
(1
)
Under US GAAP, Peoples is required to recognize a settlement gain or loss when the aggregate amount of lump-sum distributions to participants equals or exceeds the sum of the service and interest cost components of the net periodic pension cost. The amount of settlement gain or loss recognized is the pro rata amount of the unrealized gain or loss existing immediately prior to the settlement. In general, both the projected benefit obligation and the fair value of plan assets are required to be remeasured in order to determine the settlement gain or loss.
In the first three months of 2015, the total lump-sum distributions made to participants caused the total settlements to exceed the recognition threshold for settlement gains or losses. As a result, Peoples remeasured its pension obligation and plan assets as of January 1, 2015 as part of the calculation of the settlement loss recognized.


18


The following table summarizes the change in pension obligation and funded status as a result of this remeasurement and the aggregate settlements for the three months ended March 31, 2015:
 
As of
March 31, 2015
(Dollars in thousands)
December 31,
Before
Settlement
Impact of
Settlements
After
Settlements
Funded status:
2014
Projected benefit obligation
$
13,695

$
13,903

$
(625
)
$
13,278

Fair value of plan assets
8,259

8,454

(625
)
7,829

Funded status
$
(5,436
)
$
(5,449
)
$

$
(5,449
)
 
 
 
 
 
Gross unrealized loss (gain)
$
5,979

$
5,974

$
(269
)
$
5,705

 
 
 
 
 
Assumptions:
 
 
 
 
Discount rate
3.50
%
3.40
%
 
3.40
%
Expected return on plan assets
7.50
%
7.50
%
 
7.50
%
Note 8.  (Loss) Earnings Per Common Share 

The calculations of basic and diluted (loss) earnings per common share were as follows:
 
Three Months Ended
 
March 31,
(Dollars in thousands, except per share data)
2015
2014
Distributed earnings allocated to common shareholders
$
2,243

$
1,605

Undistributed (loss) earnings allocated to common shareholders
(2,941
)
3,146

Net (loss) earnings allocated to common shareholders
$
(698
)
$
4,751

 
 
 
Weighted-average common shares outstanding
15,802,334

10,636,089

Effect of potentially dilutive common shares
127,901

104,795

Total weighted-average diluted common shares outstanding
15,930,235

10,740,884

 
 
 
(Loss) Earnings per common share:
 
 
Basic
$
(0.04
)
$
0.45

Diluted
$
(0.04
)
$
0.44

 
 
 
Anti-dilutive shares excluded from calculation:
 
 
Stock options and SARs
42,584

73,422


Note 9.  Stock-Based Compensation 

Under the Peoples Bancorp Inc. Second Amended and Restated 2006 Equity Plan (the “2006 Equity Plan”), Peoples may grant, among other awards, nonqualified stock options, incentive stock options, restricted stock awards, stock appreciation rights and unrestricted share awards to employees and non-employee directors. The total number of common shares available under the 2006 Equity Plan is 1,081,260.  The maximum number of common shares that can be issued for incentive stock options is 800,000 common shares. Prior to 2007, Peoples granted nonqualified and incentive stock options to employees and nonqualified stock options to non-employee directors under the 2006 Equity Plan and predecessor plans.  Since February 2007, Peoples has granted a combination of restricted common shares and stock appreciation rights (“SARs”) to be settled in common shares to employees and restricted common shares to non-employee directors subject to


19


the terms and conditions prescribed by the 2006 Equity Plan. In general, common shares issued in connection with stock-based awards are issued from treasury shares to the extent available.  If no treasury shares are available, common shares are issued from authorized but unissued common shares.
Stock Options
Under the provisions of the 2006 Equity Plan and predecessor stock option plans, the exercise price per share of any stock option granted may not be less than the grant date fair market value of the underlying common shares.  All stock options granted to both employees and non-employee directors expire ten years from the date of grant. The most recent stock option grants to employees and non-employee directors occurred in 2006.  The stock options granted to employees vested three years after the grant date, while the stock options granted to non-employee directors vested six months after the grant date.
The following table summarizes the changes to Peoples' stock options for the three months ended March 31, 2015:
 
 
Number of Common Shares Subject to Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding at January 1
 
38,577

 
$
28.09

 
 
 
 
Expired
 
8,482

 
27.38

 
 
 
 
Outstanding at March 31
 
30,095

 
$
28.29

 
0.8 years
 
$

Exercisable at March 31
 
30,095

 
$
28.29

 
0.8 years
 
$

The following table summarizes Peoples’ stock options outstanding at March 31, 2015:
 
Options Outstanding & Exercisable
Range of Exercise Prices
Common Shares Subject to Options Outstanding & Exercisable
Weighted-Average Remaining Contractual Life
Weighted-Average
Exercise Price
$26.01
to
$27.74
5,198

0.0 years
$
26.01

$28.25
to
$28.26
13,697

0.9 years
28.25

$28.57
to
$30.00
11,200

1.1 years
29.40

Total
30,095

0.8 years
$
28.29

Stock Appreciation Rights
SARs granted to employees have an exercise price equal to the fair market value of Peoples’ common shares on the date of grant and will be settled using common shares of Peoples.  Additionally, the SARs granted to employees vested three years after the grant date and are to expire ten years from the date of grant. The most recent grant of SARs occurred in 2008. The following table summarizes the changes to Peoples' SARs for the three months ended March 31, 2015:
 
 
Number of Common Shares Subject to SARs
 
Weighted-
Average
Exercise
Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic
 Value
Outstanding at January 1
 
21,292

 
$
25.96

 
 
 
 
Outstanding at March 31
 
21,292

 
$
25.96

 
2.3 years
 
$
1,000

Exercisable at March 31
 
21,292

 
$
25.96

 
2.3 years
 
$
1,000



20


The following table summarizes Peoples’ SARs outstanding at March 31, 2015:
 
Exercise Price
Number of Common Shares Subject to SARs Outstanding & Exercisable
Weighted-
Average Remaining Contractual
Life
$23.26
2,000

2.3 years
$23.77
10,582

2.7 years
$29.25
8,710

1.8 years
Total
21,292

2.3 years
Restricted Common Shares
 Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-employee directors.  In general, the restrictions on restricted common shares awarded to non-employee directors expire after six months, while the restrictions on restricted common shares awarded to employees expire after periods ranging from one to three years. In the first quarter of 2015, Peoples granted restricted common shares subject to performance-based vesting to officers and key employees with restrictions that will lapse three years after the grant date provided that in order for the restricted common shares to vest, Peoples must have reported positive net income and maintained a well capitalized status by regulatory standards for each of the three fiscal years preceding the vesting date.

The following table summarizes the changes to Peoples’ restricted common shares for the three months ended March 31, 2015:
 
Time-Based Vesting
 
Performance-Based Vesting
 
Number of Common Shares
Weighted-Average Grant Date Fair Value
 
Number of Common Shares
Weighted-Average Grant Date Fair Value
Outstanding at January 1
47,591

$
19.48

 
125,079

$
21.73

Awarded


 
107,961

23.63

Released
23,712

15.70

 
49,058

21.74

Forfeited
500

15.64

 
425

21.79

Outstanding at March 31
23,379

$
23.39

 
183,557

$
22.84

 
For the three months ended March 31, 2015, the total intrinsic value of restricted common shares released was $1.7 million.
Stock-Based Compensation
Peoples recognized stock-based compensation expense, which is included as a component of Peoples’ salaries and employee benefit costs, based on the estimated fair value of the awards on the grant date.  The following table summarizes the amount of stock-based compensation expense and related tax benefit recognized:
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2015
2014
Total stock-based compensation
$
565

$
490

Recognized tax benefit
(198
)
(172
)
Net expense recognized
$
367

$
318

Total unrecognized stock-based compensation expense related to unvested awards was $2.8 million at March 31, 2015, which will be recognized over a weighted-average period of 2.4 years.


21



Note 10. Acquisitions

As of the close of business on March 6, 2015, Peoples completed its acquisition of NB&T for total consideration of $102.7 million which reflected the conversion of each of the 3,442,329 outstanding NB&T common shares into $7.75 in cash and 0.9319 in Peoples' common shares. NB&T merged into Peoples and NB&T's wholly-owned subsidiary, The National Bank and Trust Company, which operates 22 full-service branches in southwest Ohio, merged into Peoples Bank. The acquisition was accounted for as a business combination under the acquisition method of accounting under US GAAP. The assets purchased, liabilities assumed, and related identifiable intangible assets were recorded at their acquisition date fair values. Per the applicable accounting guidance for business combinations, these fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. The goodwill recognized will not be deductible for income tax purposes.
As a result of the NB&T acquisition, Peoples acquired loans of $390.0 million and deposits of $629.5 million after preliminary acquisition accounting adjustments. The balances and operations related to the acquisition are included in Peoples' Unaudited Consolidated Financial Statements from the date of the acquisition.
The following table provides the preliminary purchase price calculation as of the date of acquisition for NB&T, and the assets acquired and liabilities assumed at their estimated fair values.
(Dollars in thousands, except per share data)
NB&T
Purchase Price
 
Common shares outstanding of acquired company at acquisition date
3,442,329

Cash purchase price per share
$
7.75

    Cash consideration
26,678

Number of common shares of Peoples issued for each common share of acquired company
0.9319

Price per Peoples common share, based on closing stock price on acquisition date
$
23.70

    Common share consideration
76,027

    Total purchase price
$
102,705

 
 
Net Assets at Fair Value
 
Assets
 
  Cash and cash equivalents
$
130,275

  Investment securities
156,392

  Loans, including loans held for sale, net of deferred fees and costs
389,985

  Bank premises and equipment, net
10,702

  Other intangible assets
8,868

  Other assets
24,070

    Total assets
720,292

Liabilities
 
  Deposits
629,512

  Borrowings
6,570

  Accrued expenses and other liabilities
7,603

    Total liabilities
643,685

Net assets
$
76,607

Goodwill
$
26,098



22


Acquired loans are reported net of the unamortized fair value adjustment. The following table details the preliminary fair value adjustment for acquired loans as of the acquisition date:
(Dollars in thousands, except per share data)
NB&T
Nonimpaired Loans
 
Contractual cash flows
$
541,292

Nonaccretable difference
76,853

Expected cash flows
464,439

Accretable yield
99,678

Fair value
$
364,761

 
 
Purchase Credit Impaired Loans
 
Contractual cash flows
$
44,936

Nonaccretable difference
14,929

Expected cash flows
30,007

Accretable yield
4,783

Fair value
$
25,224

Peoples recorded non-interest expenses related to acquisitions, mainly the NB&T acquisition, of $9.0 million and net losses on asset disposals related to the NB&T acquisition of $0.6 million in the Consolidated Statement of Operations for the three months ended March 31, 2015.
The following table is a preliminary summary of the changes in goodwill and intangible assets during the period ended March 31, 2015:
(Dollars in thousands)
Goodwill
 
Gross Core Deposits
 
Gross Customer Relationships
Balance, December 31, 2014
$
98,562

 
$
13,546

 
$
8,859

Acquired intangible assets
26,098

 
8,623

 

Balance, March 31, 2015
$
124,660

 
$
22,169

 
$
8,859


(Dollars in thousands)
Gross Intangible Assets
 
Accumulated Amortization
 
Net Intangible Assets
March 31, 2015
 
 
 
 
 
Core deposits
$
22,169

 
$
(8,232
)
 
$
13,937

Customer relationships
8,859

 
(6,488
)
 
2,371

Total acquired intangible assets
$
31,028

 
$
(14,720
)
 
$
16,308

Servicing rights
 
 
 
 
2,469

Total other intangible assets
 

 
 

 
$
18,777



23


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and the Management’s Discussion and Analysis that follows:
 
At or For the Three Months Ended
 
March 31,
 
2015
2014
SIGNIFICANT RATIOS
 
 
Return on average stockholders' equity
(0.78
)%
8.56
%
Return on average assets
(0.10
)%
0.95
%
Net interest margin
3.46
 %
3.35
%
Efficiency ratio (a)
96.71
 %
71.13
%
Pre-provision net revenue to average assets (b)
 %
1.38
%
Average stockholders' equity to average assets
12.97
 %
11.05
%
Average loans to average deposits
81.70
 %
76.94
%
Dividend payout ratio
N/A

33.91
%
ASSET QUALITY RATIOS
 
 
Nonperforming loans as a percent of total loans (c)(d)
0.60
 %
0.73
%
Nonperforming assets as a percent of total assets (c)(d)
0.42
 %
0.47
%
Nonperforming assets as a percent of total loans and other real estate owned (c)(d)
0.68
 %
0.79
%
Allowance for loan losses as a percent of originated loans, net of deferred fees and costs (c)(d)
1.48
 %
1.49
%
Allowance for loan losses as a percent of nonperforming loans (c)(d)
149.96
 %
188.19
%
Provision for loan losses as a percent of average total loans
0.08
 %
%
Net recoveries as a percentage of average total loans (annualized)
0.03
 %
0.07
%
CAPITAL RATIOS (d)
 
 
Common Equity Tier 1
13.74
 %
N/A

Tier 1
14.06
 %
12.56
%
Total (Tier 1 and Tier 2)
15.03
 %
13.92
%
Tier 1 leverage
10.98
 %
8.56
%
Tangible equity to tangible assets (e)
8.89
 %
7.66
%
PER COMMON SHARE DATA
 
 
(Loss) earnings per common share – Basic
$
(0.04
)
$
0.45

(Loss) earnings per common share – Diluted
(0.04
)
0.44

Cash dividends declared per common share
0.15

0.15

Book value per common share (d)
22.82

21.63

Tangible book value per common share (d)(e)
$
15.01

$
14.38

Weighted-average number of common shares outstanding – Basic
15,802,334

10,636,089

Weighted-average number of common shares outstanding – Diluted
15,930,235

10,740,884

Shares outstanding at end of period
18,374,256

10,657,569

(a)
Non-interest expense (less other intangible asset amortization) as a percentage of fully tax-equivalent net interest income plus non-interest income (excluding gains or losses on investment securities and asset disposals and other transactions).
(b)
These amounts represent non-GAAP financial measures since they exclude the provision for loan losses and all gains and losses included in earnings.  Additional information regarding the calculation of these measures can be found later in this section under the caption “Pre-Provision Net Revenue”.
(c)
Nonperforming loans include loans 90 days past due and accruing, renegotiated loans and nonaccrual loans. Nonperforming assets include nonperforming loans and other real estate owned.
(d)
Data presented as of the end of the period indicated.
(e)
These amounts represent non-GAAP financial measures since they exclude the balance sheet impact of intangible assets acquired through acquisitions on both total stockholders’ equity and total assets.  Additional information regarding the calculation of these measures can be found later in this discussion under the caption “Capital/Stockholders’ Equity”.


24


Forward-Looking Statements
Certain statements in this Form 10-Q, which are not historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act , Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995.  Words such as “anticipates”, “estimates”, “may”, “feels”, “expects”, “believes”, “plans”, “will”, “would”, “should”, “could” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying such statements.  Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially.  Factors that might cause such a difference 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 integrate the Midwest Bancshares, Inc., Ohio Heritage Bancorp, Inc., North Akron Savings Bank and NB&T acquisitions and any future acquisitions may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(3)
Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(4)
local, regional, national and international economic conditions and the impact they may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated;
(5)
competitive pressures among financial institutions or from non-financial institutions may increase significantly, including product and pricing pressures, third-party relationships and revenues, and Peoples' ability to attract, develop and retain qualified professionals;
(6)
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 rates, interest margins and interest rate sensitivity;
(7)
changes in prepayment speeds, loan originations, levels of non-performing assets, delinquent loans and charge-offs, which may be less favorable than expected and adversely impact the amount of interest income generated;
(8)
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 continued economic uncertainty in the U.S., the European Union, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults;
(9)
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 ("OCC"), 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;
(10)
deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses;
(11)
changes in accounting standards, policies, estimates or procedures which may adversely affect Peoples' reported financial condition or results of operations;
(12)
Peoples' assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;
(13)
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;
(14)
Peoples' ability to receive dividends from its subsidiaries;
(15)
Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(16)
the impact of new minimum capital thresholds established as a part of the implementation of Basel III;


25


(17)
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;
(18)
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;
(19)
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;
(20)
the overall adequacy of Peoples' risk management program;
(21)
the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international military or terrorist activities or conflicts; and
(22)
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’ 2014 Form 10-K.
All forward-looking statements speak only as of the filing date of this Form 10-Q and are expressly qualified in their entirety by the cautionary statements.  Although management believes the expectations in these forward-looking statements are based on reasonable assumptions within the bounds of management’s knowledge of Peoples’ business and operations, it is possible that actual results may differ materially from these projections.  Additionally, Peoples undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the filing date of this Form 10-Q or to reflect the occurrence of unanticipated events except as may be required by applicable legal requirements.  Copies of documents filed with the SEC are available free of charge at the SEC’s website at www.sec.gov and/or from Peoples' website – www.peoplesbancorp.com under the “Investor Relations” section.
This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements, and Notes thereto, contained in Peoples’ 2014 Form 10-K, as well as the Unaudited Consolidated Financial Statements, Notes to the Unaudited Consolidated Financial Statements, ratios, statistics and discussions contained elsewhere in this Form 10-Q.
Business Overview
The following discussion and analysis of Peoples’ Unaudited Consolidated Financial Statements is presented to provide insight into management’s assessment of the financial condition and results of operations.
Peoples offers diversified financial products and services through 81 financial service locations and 81 ATMs in northeastern, central, southwestern and southeastern Ohio, west central West Virginia and northeastern Kentucky through its financial service units – Peoples Bank and Peoples Insurance Agency, LLC ("Peoples Insurance"), a subsidiary of Peoples Bank.  Peoples Bank is subject to regulation and examination primarily by the OCC and secondarily by the Federal Reserve Board and the Federal Deposit Insurance Corporation (the “FDIC”). Peoples Insurance is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states in which it may do business.
Peoples’ products and services include traditional banking products, such as deposit accounts, lending products and trust services.  Peoples provides services through traditional offices, ATMs, and telephone and internet-based banking.  Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary, employee benefit plans and asset management services.  Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer.
Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry.  The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could materially differ from those estimates.  Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Consolidated Financial Statements, and Management’s Discussion and Analysis at March 31, 2015, which were unchanged from the policies disclosed in Peoples’ 2014 Form 10-K.


26


 Summary of Recent Transactions and Events
The following is a summary of recent transactions and events that have impacted or are expected to impact Peoples’ results of operations or financial condition: 
At the close of business on March 6, 2015, Peoples completed the acquisition of NB&T and the 22 full-service offices of its subsidiary The National Bank and Trust Company in southwestern Ohio. Under the terms of the merger agreement, Peoples paid 0.9319 of Peoples' common shares and $7.75 in cash for each common share of NB&T, or total consideration of $102.7 million. The acquisition added $390.0 million of loans and $629.5 million of deposits at the acquisition date, after initial acquisition accounting adjustments.
At the close of business on October 24, 2014, Peoples completed the acquisition of North Akron Savings Bank ("North Akron") and its 4 full-service offices in Akron, Cuyahoga Falls, Munroe and Norton, Ohio. Under the terms of the merger agreement, Peoples paid $7,655 of consideration per share of North Akron common stock, or $20.1 million, of which 80% was paid in Peoples' common shares and the remaining 20% in cash. The acquisition added $111.5 million of loans and $108.1 million of deposits at the acquisition date, after acquisition accounting adjustments.
On August 7, 2014, Peoples announced the completion of the sale of 1,847,826 common shares at $23.00 per share to institutional investors through a private placement (the "Private Equity Issuance"). Peoples received net proceeds of $40.2 million from the sale, and used the proceeds, in part, to fund the cash consideration for the NB&T acquisition.
At the close of business on August 22, 2014, Peoples completed the acquisition of Ohio Heritage Bancorp, Inc. ("Ohio Heritage") and the 6 full-service offices of its subsidiary Ohio Heritage Bank in Coshocton, Newark, Heath, Mount Vernon and New Philadelphia, Ohio. Under the terms of the agreement, Peoples paid $110.00 of consideration per share of Ohio Heritage common stock, or $37.7 million, of which 85% was paid in Peoples' common shares and the remaining 15% in cash. The acquisition added $175.8 million of loans and $174.9 million of deposits at the acquisition date, after acquisition accounting adjustments.
At the close of business on May 30, 2014, Peoples completed the acquisition of Midwest Bancshares, Inc. ("Midwest") and the 2 full-service offices of its subsidiary First National Bank of Wellston in Wellston and Jackson, Ohio. Under the terms of the agreement, Peoples paid $65.50 of consideration per share of Midwest common stock, or $12.6 million, of which 50% was paid in cash and the remaining 50% in Peoples' common shares. The acquisition added $58.7 million of loans and $77.9 million of deposits at the acquisition date, after acquisition accounting adjustments.
In the first quarter of 2015, Peoples incurred $9.6 million of acquisition-related expenses, compared to $1.9 million in the fourth quarter of 2014 and $0.2 million in the first quarter of 2014, which were primarily severance costs, fees for legal costs, other professional services, deconversion costs and write-offs associated with assets acquired.
As described in Note 7 - Employee Benefit Plans of the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q, Peoples incurred settlement charges of $269,000 during the first quarter of 2015 due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the period. Settlement charges of $17,000 and $486,000 were recognized during the fourth and first quarter of 2014, respectively.
Peoples' net interest income and net interest margin are impacted by changes in market interest rates based upon actions taken by the Federal Reserve Board, either directly or through its Open Market Committee. These actions include changing its target Federal Funds Rate (the interest rate at which banks lend money to each other), Discount Rate (the interest rate charged to banks for money borrowed from the Federal Reserve Bank) and longer-term market interest rates (primarily U.S. Treasury securities). Longer-term market interest rates also are affected by the demand for U.S. Treasury securities. The resulting changes in the yield curve slope have a direct impact on reinvestment rates for Peoples' earning assets.
The Federal Reserve Board has maintained its target Federal Funds Rate at a historically low level of 0% to 0.25% since December 2008 and has maintained the Discount Rate at 0.75% since December 2010. The Federal Reserve Board has indicated the possibility these short-term rates could start to be raised as early as 2015.
From late 2008 until year-end 2014, the Federal Reserve Board took various actions to lower longer-term market interest rates as a means of stimulating the economy – a policy commonly referred to as “quantitative easing”. These actions included the buying and selling of mortgage-backed and other debt securities through its open market operations. In December 2013, the Federal Reserve Board announced plans to taper its quantitative easing efforts.


27


As a result, the slope of the U.S. Treasury yield curve has fluctuated significantly. Substantial flattening occurred in late 2008, in mid-2010 and early third quarter of 2011 through 2012, while moderate steepening occurred in the second half of 2009, late 2010 and mid-2013. The curve has remained relatively steep since mid-2013, primarily as a reaction to the Federal Reserve Board's announcement of a reduction in monthly asset purchases and generally improving economic conditions. The curve flattened gradually throughout 2014 and early 2015, primarily in response to the slowing global economy, geopolitical uncertainty and lower yields on sovereign debt throughout the world.
The impact of these transactions and events, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis.
EXECUTIVE SUMMARY
Peoples recorded a net loss for the quarter ended March 31, 2015 of $0.7 million, or $(0.04) per diluted common share, compared to net income of $4.8 million and $0.44 per diluted common share a year ago, and $4.2 million or $0.28 per diluted common share in the fourth quarter of 2014. The net loss in the first quarter of 2015, compared to the net income for the prior quarter and prior year first quarter, was primarily a result of the acquisition costs incurred.
Peoples' provision for loan losses for the three months ended March 31, 2015 was $350,000, compared to $8,000 during the three months ended March 31, 2014 and $128,000 for the three months ended December 31, 2014. Net charge-offs for the first quarter of 2015 were $0.1 million compared to net charge-offs of $0.2 million in the prior year first quarter and net recoveries of $0.2 million in the fourth quarter of 2014. Asset quality metrics remained favorable during the first quarter of 2015.
Net interest income was $21.4 million in the first quarter of 2015, compared to $15.5 million for the first quarter of 2014 and $20.1 million for the fourth quarter of 2014, while net interest margin was 3.46%, 3.35% and 3.53%, respectively. The improvements from the first quarter of 2014 were driven largely by growth in earning assets due to higher loan balances, the change in the asset mix, a reduction in funding costs and accretion income from the acquisitions completed to date. The compression in net interest margin compared to the fourth quarter of 2014 was due to the higher than normal cash balance that was carried for part of the quarter, due to the $130.3 million of cash acquired as part of the NB&T acquisition.
For the first quarter of 2015, total non-interest income grew 12% compared to the prior year first quarter and 13% compared to the prior quarter. The growth over the prior quarter was primarily due to annual performance-based insurance income, for which a majority is recognized in the first quarter each year. All categories comprising total non-interest income were higher compared to the prior year first quarter, most notably electronic banking income, trust and investment income and insurance income, which grew 29%, 11% and 5%, respectively. Annual performance-based insurance income was $1.4 million in the first quarter of 2015 compared to $0.1 million in the prior quarter and $1.2 million in the prior year first quarter.
Non-interest expenses were 37% higher than the prior quarter and 75% higher than the prior year first quarter. The majority of the increase is attributable to acquisition costs recognized in each period, for which $9.0 million was recognized in non-interest expenses during the first quarter of 2015, compared to $1.9 million in the prior quarter and $0.2 million in the first quarter of 2014. The $9.0 million recorded in the first quarter of 2015 consisted primarily of severance costs, deconversion costs, and professional and legal fees. Salaries and employee benefit costs accounted for much of the remainder of the growth in non-interest expenses compared to both periods, as the number of employees increased significantly, largely as a result of the acquisitions completed. Additionally, during the first quarter of 2015, Peoples incurred pension settlement charges of $269,000, compared to $17,000 in the prior quarter and $486,000 in the prior year first quarter.
At March 31, 2015, total assets were $3.25 billion, up $679.3 million from year-end 2014. This increase was primarily the result of the NB&T acquisition. The allowance for loan losses was $18.1 million, or 1.48% of originated loans (net of deferred fees and costs), compared to $17.9 million and 1.48% at December 31, 2014. The NB&T acquisition added approximately $390.0 million of loans at acquisition date, after preliminary acquisition accounting adjustments.
Total liabilities were $2.83 billion at March 31, 2015, up $600.2 million since year-end 2014. Retail deposit interest-bearing balances grew 32%, or $447.7 million, and non-interest bearing deposits increased 41%, or $202.0 million, since year-end 2014, primarily driven by the deposits acquired from NB&T, as well as seasonal increases in governmental and savings account balances and non-interest bearing balances. Peoples continues to focus on its strategy of reducing high-cost funding with increases in low-cost core deposits.


28


At March 31, 2015, total stockholders' equity was $419.2 million, up $79.1 million since December 31, 2014. During the first quarter of 2015, Peoples issued $76.0 million of common shares as part of the consideration for the NB&T acquisition. Regulatory capital ratios remained significantly higher than "well capitalized" minimums. Peoples' Tier 1 ratio remained stable at 14.06% at March 31, 2015, versus 14.32% at December 31, 2014, while the Total Risk-Based Capital ratio was 15.03% versus 15.48% at December 31, 2014. In addition, Peoples' tangible equity to tangible asset ratio was 8.89% and tangible book value per common share was $15.01 at March 31, 2015, versus 9.39% and $15.57 at December 31, 2014, respectively.

RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which interest income exceeds interest expense, remains Peoples’ largest source of revenue.  The amount of net interest income earned by Peoples each quarter is affected by various factors, including changes in market interest rates due to the Federal Reserve Board’s monetary policy, the level and degree of pricing competition for both loans and deposits in Peoples’ markets, and the amount and composition of Peoples’ earning assets and interest-bearing liabilities. 
The following tables detail Peoples’ average balance sheets for the periods presented:
 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
(Dollars in thousands)
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
Short-term investments
$
62,858

$
37

0.23
%
 
$
30,770

$
20

0.26
%
 
$
7,058

$
20

1.15
%
Other long-term investments
1,345

3

0.90
%
 
1,453

4

1.09
%
 
2,254

3

0.54
%
Investment Securities (1):
 
 
 
 
 
 
 
 
 
 
 
Taxable
673,949

4,407

2.62
%
 
654,516

4,225

2.58
%
 
623,444

4,383

2.81
%
Nontaxable (2)
84,313

917

4.35
%
 
65,317

736

4.51
%
 
51,867

641

4.94
%
Total investment securities
758,262

5,324

2.81
%
 
719,833

4,961

2.76
%
 
675,311

5,024

2.98
%
Loans (3):
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate, construction
45,224

488

4.32
%
 
32,013

354

4.42
%
 
51,839

498

3.84
%
Commercial real estate, other
600,980

6,994

4.66
%
 
555,945

6,537

4.70
%
 
454,107

5,114

4.50
%
Commercial and industrial
293,796

3,196

4.35
%
 
268,446

2,938

4.38
%
 
236,741

2,570

4.34
%
Residential real estate (4)
504,268

5,595

4.44
%
 
466,587

5,508

4.72
%
 
270,739

3,069

4.53
%
Home equity lines of credit
85,592

855

4.05
%
 
78,869

688

3.49
%
 
60,029

545

3.63
%
Consumer
188,395

2,076

4.47
%
 
183,868

2,210

4.77
%
 
141,209

1,614

4.73
%
Total loans
1,718,255

19,204

4.48
%
 
1,585,728

18,235

4.60
%
 
1,214,664

13,410

4.43
%
Less: Allowance for loan losses
(17,888
)
 
 
 
(17,495
)
 
 
 
(17,228
)
 
 
Net loans
1,700,367

19,204

4.52
%
 
1,568,233

18,235

4.65
%
 
1,197,436

13,410

4.64
%
Total earning assets
2,522,832

24,568

3.90
%
 
2,320,289

23,220

4.00
%
 
1,882,059

18,457

3.93
%
Intangible assets
120,596

 
 
 
107,002

 
 
 
77,448

 
 
Other assets
118,844

 
 
 
111,035

 
 
 
91,095

 
 
    Total assets
$
2,762,272

 
 
 
$
2,538,326

 
 
 
$
2,050,602

 
 


29


 
For the Three Months Ended
 
March 31, 2015
 
December 31, 2014
 
March 31, 2014
(Dollars in thousands)
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
326,385

$
43

0.05
%
 
$
284,221

$
38

0.05
%
 
$
220,935

$
30

0.06
%
Governmental deposit accounts
211,607

123

0.24
%
 
173,845

113

0.26
%
 
149,057

123

0.33
%
Interest-bearing demand accounts
181,322

39

0.09
%
 
170,006

36

0.08
%
 
137,026

28

0.08
%
Money market accounts
350,453

140

0.16
%
 
337,506

136

0.16
%
 
278,413

111

0.16
%
Brokered deposits
38,434

352

3.71
%
 
39,681

370

3.70
%
 
47,335

436

3.74
%
Retail certificates of deposit
444,602

862

0.78
%
 
431,534

865

0.80
%
 
360,457

840

0.95
%
Total interest-bearing deposits
1,552,803

1,559

0.41
%
 
1,436,793

1,558

0.43
%
 
1,193,223

1,568

0.53
%
Borrowed Funds:
 
 
 
 
 
 
 
 
 
 
 
Short-term FHLB advances
6,867

3

0.18
%
 
2,717

1

0.15
%
 
63,733

16

0.10
%
Retail repurchase agreements
77,962

32

0.16
%
 
74,213

32

0.17
%
 
39,141

15

0.15
%
Total short-term borrowings
84,829

35

0.17
%
 
76,930

33

0.17
%
 
102,874

31

0.12
%
Long-term FHLB advances
122,099

624

2.08
%
 
119,491

638

2.12
%
 
62,380

521

3.39
%
Wholesale repurchase agreements
40,000

363

3.63
%
 
40,000

371

3.71
%
 
40,000

363

3.63
%
Other borrowings
16,256

159

3.91
%
 
15,554

145

3.73
%
 
19,137

188

3.93
%
Total long-term borrowings
178,355

1,146

2.59
%
 
175,045

1,154

2.63
%
 
121,517

1,072

3.55
%
  Total borrowed funds
263,184

1,181

1.81
%
 
251,975

1,187

1.88
%
 
224,391

1,103

1.98
%
      Total interest-bearing liabilities
1,815,987

2,740

0.61
%
 
1,688,768

2,745

0.65
%
 
1,417,614

2,671

0.76
%
Non-interest-bearing deposits
550,318

 
 
 
493,901

 
 
 
385,471

 
 
Other liabilities
37,729

 

 
 
21,052

 

 
 
20,876

 

 
Total liabilities
2,404,034

 
 
 
2,203,721

 

 


1,823,961

 
 
Total stockholders’ equity
358,238

 

 
 
334,605

 

 
 
226,641

 

 
Total liabilities and
 
 
 
 
 
 
 
 
 
 
 
stockholders’ equity
$
2,762,272

 

 
 
$
2,538,326

 

 
 
$
2,050,602

 

 
Interest rate spread
 
$
21,828

3.29
%
 
 
$
20,475

3.35
%
 
 
$
15,786

3.17
%
Net interest margin
3.46
%
 
 
 
3.53
%
 
 
 
3.35
%

 
(1)
Average balances are based on carrying value.
(2)
Interest income and yields are presented on a fully tax-equivalent basis using a 35% federal statutory tax rate.
(3)
Average balances include nonaccrual and impaired loans. Interest income includes interest earned on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented.
(4)
Loans held for sale are included in the average loan balance listed. Related interest income on loans originated for sale prior to the loan being sold is included in loan interest income.

Net interest margin, which is calculated by dividing fully tax-equivalent (“FTE”) net interest income by average interest-earning assets, serves as an important measurement of the net revenue stream generated by the volume, mix and pricing of earning assets and interest-bearing liabilities.  FTE net interest income is calculated by increasing interest income to convert tax-exempt income earned on obligations of states and political subdivisions to the pre-tax equivalent of taxable income using a 35% federal statutory tax rate.  The following table details the calculation of FTE net interest income:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Net interest income, as reported
$
21,419

$
20,124

$
15,480

Taxable equivalent adjustments
409

351

306

Fully tax-equivalent net interest income
$
21,828

$
20,475

$
15,786



30


The following table provides an analysis of the changes in FTE net interest income:
 
Three Months Ended March 31, 2015 Compared to
(Dollars in thousands)
December 31, 2014
 
March 31, 2014
Increase (decrease) in:
Rate
Volume
Total (1)
 
Rate
Volume
Total (1)
INTEREST INCOME:
 
 
 
 
 
 
 
Short-term investments
$
(13
)
$
30

$
17

 
$
(116
)
$
133

$
17

Other long-term investments
(1
)

(1
)
 
6

(6
)

Investment Securities: (2)
 
 
 
 
 
 
 
Taxable
55

127

182

 
(1,306
)
1,330

24

Nontaxable
(164
)
345

181

 
(472
)
748

276

Total investment income
(109
)
472

363

 
(1,778
)
2,078

300

Loans:
 
 
 
 
 
 
 
Commercial real estate, construction
(6
)
140

134

 
245

(255
)
(10
)
Commercial real estate, other
58

399

457

 
176

1,704

1,880

Commercial and industrial
37

221

258

 
5

621

626

Residential real estate
(1,481
)
1,568

87

 
(447
)
2,973

2,526

Home equity lines of credit
111

56

167

 
59

251

310

Consumer
(406
)
272

(134
)
 
(380
)
842

462

Total loan income
(1,687
)
2,656

969

 
(342
)
6,136

5,794

Total interest income
(1,810
)
3,158

1,348

 
(2,230
)
8,341

6,111

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Savings accounts

5

5

 
(6
)
19

13

Government deposit accounts
(52
)
62

10

 
(173
)
173


Interest-bearing demand accounts
1

2

3

 
2

9

11

Money market accounts
1

3

4

 

29

29

Brokered certificates of deposit
8

(26
)
(18
)
 
(2
)
(82
)
(84
)
Retail certificates of deposit
(65
)
62

(3
)
 
(661
)
683

22

Total deposit cost
(107
)
108

1

 
(840
)
831

(9
)
Borrowed funds:
 
 
 
 
 
 
 
Short-term borrowings
(6
)
8

2

 
48

(44
)
4

Long-term borrowings
(59
)
51

(8
)
 
(1,136
)
1,210

74

Total borrowed funds cost
(65
)
59

(6
)
 
(1,088
)
1,166

78

Total interest expense
(172
)
167

(5
)
 
(1,928
)
1,997

69

Net interest income
$
(1,638
)
$
2,991

$
1,353

 
$
(302
)
$
6,344

$
6,042

(1)The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the
relationship of the dollar amounts of the changes in each.
(2)Presented on a fully tax-equivalent basis.
Net interest income increased 6% in the first quarter of 2015 compared to the prior quarter and 38% compared to the prior year first quarter. During the first quarter of 2015, net interest income and net interest margin benefited from normal accretion income, net of amortization expense, of $1.2 million related to the completed acquisitions, which added 8 basis points to net interest margin, compared to $1.2 million, or 20 basis points, during the prior quarter and $320,000, or 7 basis points, during the prior year first quarter.
The compression in net interest margin compared to the fourth quarter of 2014 was due to the higher than normal cash balance that was carried for part of the quarter, due largely to the $130.3 million of cash acquired as part of the NB&T acquisition. During the first quarter of 2015, the yield on investment securities increased 5 basis points, but declined 17 basis points from the prior year first quarter mainly due to changes in prepayment speeds. Loan growth from acquisitions and


31


higher loan production continues to benefit net interest income, although annualized organic loan growth during the first quarter of 2015 declined to 3%.
Funding costs declined 4 basis points during the first quarter of 2015 compared to the prior quarter, and 15 basis points from the prior year first quarter. Peoples continues to execute its strategy of replacing higher-cost funding with low-cost deposits.
Management has not changed its overall balance sheet strategy of reducing the size of the investment portfolio relative to total earning assets. Peoples continues to focus on reducing high-cost funding with increases in low-cost core deposits.
Additional information regarding changes in the Unaudited Consolidated Balance Sheets can be found under appropriate captions of the “FINANCIAL CONDITION” section of this discussion. Additional information regarding Peoples' interest rate risk and the potential impact of interest rate changes on Peoples' results of operations and financial condition can be found later in this discussion under the caption “Interest Rate Sensitivity and Liquidity”.
Provision for Loan Losses
The following table details Peoples’ provision for loan losses:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Provision for checking account overdrafts
$
100

$
128

$
8

Provision for other loan losses
250



Net provision for loan losses
$
350

$
128

$
8

As a percentage of average total loans (a)
0.08
%
0.03
%
%
(a) Presented on an annualized basis
 
 
 
The provision for loan losses recorded represents the amount needed to maintain the adequacy of the allowance for loan losses based on management’s quarterly analysis of the loan portfolio and procedural methodology that estimates the amount of probable credit losses.  This process considers various factors that affect losses, such as changes in Peoples’ loan quality, historical loss experience and current economic conditions. The provision for loan losses recorded during the first quarter of 2015 was primarily due to an increase in criticized assets due to a commercial relationship that was downgraded. The provision for loan losses recorded during the fourth quarter of 2014 and first quarter of 2014 reflected checking account overdrafts and favorable asset-quality metrics. During the first quarter of 2015, net charge-offs remained well below the long-term historical averages.
Additional information regarding changes in the allowance for loan losses and loan credit quality can be found later in this discussion under the caption “Allowance for Loan Losses”.
Net Other (Losses) Gains
The following table details the other losses and gains recognized by Peoples:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Net (loss) gain on OREO
$
(8
)
$
(95
)
$
18

Net loss on debt extinguishment
(520
)


Net loss on bank premises and equipment
(575
)
(51
)
(7
)
Net other (losses) gains
$
(1,103
)
$
(146
)
$
11

The loss on bank premises and equipment recorded during the first quarter of 2015 was due to asset write-offs associated with the NB&T acquisition. Also during the first quarter of 2015, Peoples recognized a loss on debt extinguishment from the prepayment of several FHLB advances, and a loss on OREO from decreases in the market value of residential properties that were sold. The losses recorded during the fourth quarter of 2014 were due to asset write-offs associated with the North Akron acquisition and a decrease in the fair value of OREO properties held. During the first quarter of 2014, Peoples


32


recorded a net gain on OREO due to a sale of residential property held, and the loss on bank premises and equipment was from the disposal of certain fixed assets during the quarter.
Non-Interest Income
Insurance income comprised the largest portion of first quarter 2015 non-interest income.  The following table details Peoples’ insurance income:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Property and casualty insurance commissions
$
2,412

$
2,320

$
2,453

Performance-based commissions
1,463

66

1,183

Life and health insurance commissions
381

417

425

Credit life and A&H insurance commissions
1

13

7

Other fees and charges
55

60

48

Total insurance income
$
4,312

$
2,876

$
4,116

The increase in insurance income was primarily driven by higher performance-based commissions compared to both the prior quarter and prior year first quarter. The bulk of performance-based commissions typically are recorded annually in the first quarter and are based on a combination of factors, such as loss experience of insurance policies sold, production volumes, and overall financial performance of the individual insurance carriers.
Deposit account service charges continued to comprise a sizable portion of Peoples' non-interest income.  The following table details Peoples’ deposit account service charges:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Overdraft and non-sufficient funds fees
$
1,650

$
1,893

$
1,544

Account maintenance fees
451

451

377

Other fees and charges
194

42

190

Total deposit account service charges
$
2,295

$
2,386

$
2,111

The amount of deposit account service charges, particularly fees for overdrafts and non-sufficient funds, is largely dependent on the timing and volume of customer activity.  Peoples typically experiences a lower volume of overdraft and non-sufficient funds fees annually in the first quarter attributable to customers receiving income tax refunds, while volumes generally increase in the fourth quarter in connection with the holiday shopping season.
Peoples' fiduciary and brokerage revenues continue to be based primarily upon the value of assets under management, with additional income generated from transaction commissions. The following tables detail Peoples’ trust and investment income and related assets under management:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Fiduciary
$
1,492

$
1,458

$
1,329

Brokerage
555

571

518

Total trust and investment income
$
2,047

$
2,029

$
1,847



33


 
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
(Dollars in thousands)
Trust assets under management
$
1,319,423

$
1,022,189

$
999,822

$
1,014,865

$
995,861

Brokerage assets under management
501,635

525,089

511,400

513,890

494,246

Total managed assets
$
1,821,058

$
1,547,278

$
1,511,222

$
1,528,755

$
1,490,107

Quarterly average
$
1,622,287

$
1,540,246

$
1,520,615

$
1,505,433

$
1,479,110

During the first quarter of 2015, trust assets under management increased 29% compared to the prior quarter, mainly due to the NB&T acquisition, which also contributed to the overall increase in trust and investment income during the first quarter of 2015 compared to the prior quarter and prior year first quarter. In recent years, Peoples added experienced financial advisors in underserved market areas, and generated new business and revenue related to retirement plans for which it manages the assets and provides services.
Peoples electronic banking services include ATM and debit cards, direct deposit services, internet and mobile banking, remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to clients. During the first quarter of 2015 compared to the prior quarter, electronic banking income grew 7% and compared to the prior year first quarter grew 29%. The growth in electronic banking income was primarily due to an increase in the volume of debit card transactions and ATM surcharges.
Mortgage banking income decreased 17% compared to the prior quarter, but was 33% higher than the prior year first quarter due to the sale of loans to the secondary market, which is driven by mortgage interest rates available and customers' preference for long-term, fixed-rate loans. In the first quarter of 2015, Peoples sold approximately $12.9 million of loans to the secondary market compared to $15.2 million in the fourth quarter of 2014 and $7.8 million in the first quarter of 2014.
Non-Interest Expense
Salaries and employee benefit costs remain Peoples’ largest non-interest expense, accounting for more than half of total non-interest expense.  
The following table details Peoples’ salaries and employee benefit costs:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Base salaries and wages
$
12,273

$
8,344

$
6,513

Sales-based and incentive compensation
1,828

2,059

1,503

Employee benefits
1,570

985

1,760

Stock-based compensation
565

729

490

Deferred personnel costs
(257
)
(333
)
(366
)
Payroll taxes and other employment costs
1,382

1,109

892

Total salaries and employee benefit costs
$
17,361

$
12,893

$
10,792

Full-time equivalent employees:
 
 
 

Actual at end of period
847

699

557

Average during the period
735

678

549

 
For the three months ended March 31, 2015, included in base salaries and wages were severance and retention payouts associated with the NB&T acquisition of $3.9 million. Sales-based and incentive compensation was lower compared to the linked quarter and higher than the prior year first quarter, and it is tied to corporate incentive plans and commissions from sales production. Employee benefits increased due to higher employee medical benefit costs and one-time pension settlement costs recognized, compared to the previous quarter. Peoples recognized $269,000 of settlement costs during the first quarter of 2015, compared to $17,000 in the prior quarter and $486,000 in the first quarter of 2014. Given the nature of the pension settlement, it is inherently difficult to estimate the amount or exact timing of future pension settlement charges. Stock-based compensation decreased compared to the prior quarter as Peoples recorded $298,000 in the fourth quarter of 2014 in connection with a one-time stock award of unrestricted common shares to all full-time and part-time employees who did not already participate in the equity plan. Payroll taxes and other employment costs also increased from the prior quarter and prior year first quarter as a result of severance costs associated with the NB&T acquisition and the annual vesting of stock-based awards that occurred during the first quarter of 2015.


34


Professional fees expense represents the cost of accounting, legal and other third-party professional services utilized by Peoples, and increased compared to both the prior quarter and prior year first quarter, due mainly to acquisition-related activities. Professional fees incurred as a result of acquisition-related activities were $1.4 million in the first quarter of 2015, compared to $998,000 in the prior quarter and $91,000 in the prior year first quarter.
Peoples’ net occupancy and equipment expense was comprised of the following:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
Depreciation
$
962

$
851

$
685

Repairs and maintenance costs
578

445

458

Net rent expense
211

232

241

Property taxes, utilities and other costs
544

489

432

Total net occupancy and equipment expense
$
2,295

$
2,017

$
1,816

Net occupancy and equipment expense increased during the first quarter of 2015 compared to the prior quarter and prior year first quarter, mostly due to higher depreciation and maintenance costs coupled with increases in real estate taxes and utilities in connection with recent acquisitions. Seasonal fluctuations occur in the timing of repairs and maintenance costs, such as snow removal, and are generally higher in the first and fourth quarters.
Electronic banking expense, which is comprised of bankcard, internet and mobile banking costs, declined during the first quarter of 2015 compared to the prior quarter and increased compared to the prior year first quarter. The decrease from the prior quarter was largely related to fewer completed debit card compromises at certain large retail companies. The primary reason for the increase compared to the prior year first quarter was a higher volume of transactions completed by customers and additional services provided.
Other non-interest expense has increased substantially compared to the prior quarter and prior year first quarter, primarily driven by acquisition-related costs, which include deconversion costs. During the first quarter of 2015, Peoples recognized $3.4 million of acquisition-related expenses compared to $365,000 in the prior quarter and none during the prior year first quarter.
Peoples' efficiency ratio, calculated as non-interest expense less amortization of other intangible assets divided by FTE net interest income plus non-interest income, was 96.71% for the first quarter of 2015, higher than the prior quarter of 76.55% and the prior year first quarter of 71.13%, primarily due to acquisition-related costs and pension settlement charges. Management continues to target an efficiency ratio in the range of 68% to 70%, absent acquisition-related costs and other one-time expenses, such as pension settlement charges.
Income Tax Expense
For the three months ended March 31, 2015, Peoples recorded income tax benefit of $0.2 million, which included acquisition-related costs that are not tax deductible of approximately $123,000. Peoples current estimate of the tax rate for the entire year of 2015 is between 30.0% and 31.0%. In comparison, Peoples recorded income tax expense of $2.1 million for the same period in 2014, for an effective tax rate of 31.0%.
Pre-Provision Net Revenue
Pre-provision net revenue ("PPNR") has become a key financial measure used by federal bank regulatory agencies when assessing the capital adequacy of financial institutions. PPNR is defined as net interest income plus non-interest income minus non-interest expense and, therefore, excludes the provision for loan losses and all gains and losses included in earnings. As a result, PPNR represents the earnings capacity that can be either retained in order to build capital or used to absorb unexpected losses and preserve existing capital.


35


The following table provides a reconciliation of this non-GAAP financial measure to the amounts reported in Peoples' consolidated financial statements for the periods presented:
 
Three Months Ended
 
March 31,
2015
December 31,
2014
March 31,
2014
(Dollars in thousands)
 
 
 
 
Pre-Provision Net Revenue:
 
 
 
(Loss) income before income taxes
$
(840
)
$
6,285

$
6,931

Add: provision for loan losses
350

128

8

Add: loss on debt extinguishment
520



Add: net loss on loans held-for-sale and OREO
8

95


Add: net loss on securities transactions


30

Add: net loss on other assets
575

51

7

Less: net gain on loans held-for-sale and OREO


18

Less: net gain on securities transactions
600

238


Pre-provision net revenue
$
13

$
6,321

$
6,958

 
 
 
 
Pre-provision net revenue
$
13

$
6,321

$
6,958

Total average assets
2,762,272

2,538,326

2,050,602

 
 
 
 
Pre-provision net revenue to total average assets
%
0.99
%
1.38
%
(a) Presented on an annualized basis.
During the first quarter of 2015, PPNR declined mainly due to increased costs from acquisition-related activities compared to prior periods.
FINANCIAL CONDITION
Cash and Cash Equivalents
At March 31, 2015, Peoples' interest-bearing deposits in other banks increased significantly compared to December 31, 2014, primarily due to the NB&T acquisition. These balances included $108.8 million of excess cash reserves being maintained at the Federal Reserve Bank at March 31, 2015, compared to $12.4 million at December 31, 2014. The amount of excess cash reserves maintained is dependent upon Peoples' daily liquidity position, which is driven primarily by changes in deposit and loan balances.
Through three months of 2015, Peoples' total cash and cash equivalents increased $104.9 million, as cash provided by investing activities of $147.9 million exceeded cash used in operating and financing activities totaling $5.9 million and $37.0 million, respectively. The increase in Peoples' investing activities was primarily due to the $103.6 million contributed by the NB&T acquisition coupled with proceeds from the investment portfolio outpacing purchases. Peoples' financing activities included $76.5 million of cash generated by increases in non-interest-bearing deposits, which was more than offset by declines of $57.9 million in interest-bearing deposits and payments of $55.9 million on long-term borrowings.
Through three months of 2014, Peoples' total cash and cash equivalents increased $10.9 million, as cash provided by operating and financing activities totaling $14.4 million exceeded the cash used in investing activities. Within Peoples' investing activities, the net $24.2 million provided by activities related to available-for-sale securities was used to partially fund the $30.0 million net loan growth. Within Peoples' financing activities, proceeds from increases in interest-bearing deposits were used to paydown short-term borrowings.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”


36


Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Available-for-sale securities, at fair value:
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. Treasury and government agencies
$

$
1

$
7

$
19

$
19

U.S. government sponsored agencies
5,488

5,950

8,689


295

States and political subdivisions
118,447

64,743

64,048

61,281

51,668

Residential mortgage-backed securities
597,232

527,291

518,159

491,628

500,516

Commercial mortgage-backed securities
28,241

27,847

27,542

27,746

26,750

Bank-issued trust preferred securities
5,649

5,645

8,194

8,132

7,995

Equity securities
5,765

5,403

5,188

4,997

4,854

Total fair value
$
760,822

$
636,880

$
631,827

$
593,803

$
592,097

Total amortized cost
$
748,622

$
632,967

$
631,500

$
592,954

$
598,445

Net unrealized gain (loss)
$
12,200

$
3,913

$
327

$
849

$
(6,348
)
 
 
 
 
 
 
Held-to-maturity securities, at amortized cost:
 
 
 
 
Obligations of:



 
 
 
States and political subdivisions
$
3,838

$
3,841

$
3,843

$
3,845

$
3,848

Residential mortgage-backed securities
36,564

36,945

37,316

37,766

37,151

Commercial mortgage-backed securities
7,643

7,682

7,724

7,765

7,804

Total amortized cost
$
48,045

$
48,468

$
48,883

$
49,376

$
48,803

 
 
 
 
 
 
Total investment portfolio:


 
 
 
 
Amortized cost
$
796,667

$
681,435

$
680,383

$
642,330

$
647,248

Carrying value
$
808,867

$
685,348

$
680,710

$
643,179

$
640,900

In the first quarter of 2015, Peoples acquired available-for-sale investment securities in the NB&T acquisition totaling approximately $156.4 million after preliminary acquisition accounting adjustments, and subsequently sold approximately $42.2 million of acquired investment securities. At March 31, 2015, the investment portfolio was 26.0% of total assets compared to 27.8% at year-end and 31.9% a year ago. In recent quarters, Peoples has maintained the size of the held-to-maturity securities portfolio, for which the unrealized gain or loss does not directly impact stockholders' equity, in contrast to the impact from the available-for-sale securities portfolio.
Peoples' investment in residential and commercial mortgage-backed securities largely consists of securities either guaranteed by the U.S. government or issued by U.S. government sponsored agencies, such as Fannie Mae and Freddie Mac. The remaining portions of Peoples' mortgage-backed securities consist of securities issued by other entities, including other financial institutions, which are not guaranteed by the U.S. government.
The amount of these “non-agency” securities included in the residential mortgage-backed securities totals above was as follows:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Total fair value
$
14,266

$
14,058

$
15,748

$
16,864

$
21,351

Total amortized cost
$
13,871

$
13,604

$
15,191

$
16,268

$
20,562

     Net unrealized gain
$
395

$
454

$
557

$
596

$
789

 
The increase in non-agency securities during the first quarter of 2015 was due to the NB&T acquisition. Management continues to reinvest the principal runoff from the non-agency securities into U.S agency investments, which has accounted for the continued decline in the fair value of these securities. At March 31, 2015, Peoples' non-agency portfolio consisted entirely of first lien residential mortgages, with nearly all of the underlying loans in these securities originated prior to 2004 and possessing fixed interest rates. Management continues to monitor the non-agency portfolio closely for leading indicators of increasing stress and will continue to be proactive in taking actions to mitigate such risk when necessary.


37


Loans
The following table provides information regarding outstanding loan balances:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Gross originated loans:
 
 
 
 
 
Commercial real estate, construction
$
44,276

$
37,901

$
25,244

$
54,360

$
53,767

Commercial real estate, other
429,541

434,660

442,710

411,082

408,523

     Commercial real estate
473,817

472,561

467,954

465,442

462,290

Commercial and industrial
247,103

249,975

228,297

232,199

213,004

Residential real estate
256,551

254,169

254,610

253,861

251,303

Home equity lines of credit
63,491

62,463

60,221

57,530

55,899

Consumer
176,857

169,913

164,851

156,132

142,629

Deposit account overdrafts
3,146

2,933

2,669

5,282

6,008

Total originated loans
$
1,220,965

$
1,212,014

$
1,178,602

$
1,170,446

$
1,131,133

Gross acquired loans:
 
 
 
 
 
Commercial real estate, construction
9,759

1,051

633

2,061

2,168

Commercial real estate, other
317,225

121,475

101,218

52,562

50,057

     Commercial real estate
326,984

122,526

101,851

54,623

52,225

Commercial and industrial
78,873

30,056

33,187

22,229

20,325

Residential real estate
317,529

225,274

156,479

59,513

17,491

Home equity lines of credit
38,222

18,232

15,013

4,308

4,420

Consumer
13,723

12,796

14,622

6,786

912

Total acquired loans (a)
$
775,331

$
408,884

$
321,152

$
147,459

$
95,373

Total loans
$
1,996,296

$
1,620,898

$
1,499,754

$
1,317,905

$
1,226,506

Percent of loans to total loans:
 
 
 
 
 
Commercial real estate, construction
2.7
%
2.4
%
1.7
%
4.3
%
4.6
%
Commercial real estate, other
37.4
%
34.2
%
36.3
%
35.1
%
37.4
%
     Commercial real estate
40.1
%
36.6
%
38.0
%
39.4
%
42.0
%
Commercial and industrial
16.3
%
17.3
%
17.4
%
19.3
%
19.0
%
Residential real estate
28.8
%
29.6
%
27.4
%
23.8
%
21.9
%
Home equity lines of credit
5.1
%
5.0
%
5.0
%
4.7
%
4.9
%
Consumer
9.5
%
11.3
%
12.0
%
12.4
%
11.7
%
Deposit account overdrafts
0.2
%
0.2
%
0.2
%
0.4
%
0.5
%
Total percentage
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
 
 
 
 
 
 
Residential real estate loans being serviced for others
$
386,261

$
352,779

$
343,659

$
341,893

$
340,057

 
(a)
Includes all loans acquired in 2012 and thereafter.
Total originated loans increased $8.9 million, or 3% from the prior quarter due to organic growth. Construction loans increased compared to the prior quarter primarily due to advances on existing loans. Commercial loan balances experienced some large payoffs during the first quarter of 2015, comprised mainly of five large relationships totaling $9.6 million of commercial and industrial and $6.9 million of commercial real estate loans. Consumer loan balances, which consist mostly of loans to finance automobile purchases, have continued to increase in recent quarters due largely to Peoples placing greater emphasis on its consumer lending activity. At March 31, 2015, the loans acquired from NB&T added approximately $8.4 million in construction loans, $200.2 million of commercial real estate loans, $49.3 million of commercial and industrial loans, $103.5 million of residential real estate loans, $24.0 million of home equity lines of credit and $2.9 million of consumer loans after acquisition accounting adjustments. Acquired loans also experienced a decline in the balances of loans previously acquired as residential real estate loans decreased $11.4 million and commercial real estate loans decreased $6.9 million due to run-off.


38


Loan Concentration
Peoples categorizes its commercial loans according to standard industry classifications and monitors for concentrations in a single industry or multiple industries that could be impacted by changes in economic conditions in a similar manner. Peoples' commercial lending activities continue to be spread over a diverse range of businesses from all sectors of the economy, with no single industry comprising over 10% of Peoples' total loan portfolio.
Loans secured by commercial real estate, including commercial construction loans, continue to comprise the largest portion of Peoples' loan portfolio. The following table provides information regarding the largest concentrations of commercial real estate loans within the loan portfolio at March 31, 2015:
(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, construction:
 
 
 
 
Apartment complexes
$
15,721

$
38,640

$
54,361

45.1
%
Office buildings and complexes:
 
 
 
 
Owner occupied
287

705

992

0.8
%
Non-owner occupied
3,295

1,467

4,762

4.0
%
Total office buildings and complexes
3,582

2,172

5,754

4.8
%
Assisted living facilities and nursing homes
9,907

3,951

13,858

11.5
%
Mixed commercial use facilities:
 
 



Owner occupied
692


692

0.6
%
Non-owner occupied
383

1,997

2,380

2.0
%
Total mixed commercial use facilities
1,075

1,997

3,072

2.6
%
Day care facilities - owner occupied
1,084

1,862

2,946

2.4
%
Restaurant facilities - owner occupied
2,976


2,976

2.5
%
Residential property
7,227

5,740

12,967

10.8
%
Retail facilities
2,088

1,812

3,900

3.2
%
Other
10,375

10,297

20,672

17.1
%
Total commercial real estate, construction
$
54,035

$
66,471

$
120,506

100.0
%



39


(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, other:
 
 
 
 
Lodging and lodging related
$
51,196

$

$
51,196

6.6
%
Apartment complexes
64,136

212

64,348

8.3
%
Office buildings and complexes:
 
 
 
 
Owner occupied
18,229

438

18,667

2.4
%
Non-owner occupied
45,504

702

46,206

6.0
%
Total office buildings and complexes
63,733

1,140

64,873

8.4
%
Light industrial facilities:
 
 
 
 
Owner occupied
31,266

314

31,580

4.1
%
Non-owner occupied
2,167


2,167

0.3
%
Total light industrial facilities
33,433

314

33,747

4.4
%
Retail facilities:
 
 
 
 
Owner occupied
21,384

115

21,499

2.8
%
Non-owner occupied
32,584


32,584

4.2
%
Total retail facilities
53,968

115

54,083

7.0
%
Assisted living facilities and nursing homes
39,745

252

39,997

5.2
%
Mixed commercial use facilities:
 
 
 
 
Owner occupied
22,733

6,438

29,171

3.8
%
Non-owner occupied
18,694

270

18,964

2.5
%
Total mixed commercial use facilities
41,427

6,708

48,135

6.3
%
Day care facilities - owner occupied
17,871


17,871

2.3
%
Health care facilities:
 
 
 
 
Owner occupied
5,884

35

5,919

0.8
%
Non-owner occupied
3,305

145

3,450

0.4
%
Total health care facilities
9,189

180

9,369

1.2
%
Residential property:
 
 
 
 
Owner occupied
878

801

1,679

0.2
%
Non-owner occupied
13,555

1,808

15,363

2.0
%
Total restaurant facilities
14,433

2,609

17,042

2.2
%
Restaurant facilities:
 
 
 
 
Owner occupied
12,974

23

12,997

1.7
%
Non-owner occupied
1,056


1,056

0.1
%
Total restaurant facilities
14,030

23

14,053

1.8
%
Warehouse facilities
16,422

227

16,649

2.2
%
Gas station facilities:
 
 
 
 
Owner occupied
5,387

75

5,462

0.7
%
Non-owner occupied
6,131

438

6,569

0.9
%
Total gas station facilities
11,518

513

12,031

1.6
%
Fitness center facilities:
 
 
 
 
Owner occupied
10,311

26

10,337

1.3
%
Non-owner occupied
229


229

%
Total fitness center facilities
10,540

26

10,566

1.3
%
Other
305,125

12,747

317,872

41.2
%
Total commercial real estate, other
$
746,766

$
25,066

$
771,832

100.0
%
Peoples' commercial lending activities continue to focus on lending opportunities inside its primary and secondary market areas within Ohio, West Virginia and Kentucky. In all other states, the aggregate outstanding balances of commercial loans in each state were less than $4.0 million at both March 31, 2015 and December 31, 2014.


40


Allowance for Loan Losses
The amount of the allowance for loan losses at the end of each period represents management's estimate of expected losses from existing loans based upon its quarterly analysis of the loan portfolio. While this process involves allocations being made to specific loans and pools of loans, the entire allowance is available for all losses incurred within the loan portfolio. The following details management's allocation of the allowance for loan losses:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Commercial real estate
9,074

9,825

10,546

10,267

13,327

Commercial and industrial
5,107

4,036

3,228

3,219

2,130

Total commercial
14,181

13,861

13,774

13,486

15,457

Residential real estate
1,560

1,627

1,765

1,818

782

Home equity lines of credit
708

694

658

656

329

Consumer
1,512

1,587

1,231

1,298

198

Deposit account overdrafts
127

112

128

126

104

Total allowance for loan losses
$
18,088

$
17,881

$
17,556

$
17,384

$
16,870

As a percent of originated loans, net of deferred fees and costs
1.48
%
1.48
%
1.49
%
1.49
%
1.49
%
The significant allocations to commercial loans reflect the higher credit risk associated with this type of lending and the size of this loan category in relationship to the entire loan portfolio. During the first quarter of 2015, Peoples' allowance for loan losses was maintained at 1.48% of originated loans, as increases in criticized assets were partially offset by decreases in nonperforming assets. As a percentage of total loans plus OREO, total nonperforming assets were 0.68% at March 31, 2015 compared to 0.75% at December 31, 2014 and 0.79% at March 31, 2014. Net charge-offs also remained at or below Peoples' long-term historical average. These factors had a direct impact on the estimated loss rates used to determine the allocations of allowance for loan losses for commercial loans.
In the first quarter of 2015, the allowance for loan losses allocated to commercial real estate decreased as a result of net recoveries in recent years reducing the historical loss rates. The increase in the allowance for loan losses allocated to commercial and industrial during the first quarter of 2015 was driven by higher criticized assets, mainly due to a single relationship comprised of three commercial and industrial loans totaling $13.7 million being downgraded during the quarter.
The significant allocations to commercial loans reflect the higher credit risk associated with these types of lending and the size of these loan categories in relationship to the entire loan portfolio. During the first quarter of 2015, Peoples experienced an increase of $42.6 million in criticized loans, which are those classified as watch, substandard or doubtful, of which $27.0 million was related to the NB&T acquisition. Peoples received principal paydowns of $8.8 million in the first quarter of 2015, and upgraded $3.0 million in loans based upon the financial condition of the borrowers. Net charge-offs continued to remain at or below Peoples' long-term historical rate.
The allowance allocated to the residential real estate and consumer loan categories is based upon Peoples' allowance methodology for homogeneous pools of loans. The fluctuations in these allocations have been directionally consistent with the changes in loan quality, loss experience and loan balances in these categories.


41


The following table summarizes Peoples’ net charge-offs and recoveries:
 
Three Months Ended
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Gross charge-offs:
 
 
 
 
 
Commercial real estate, construction
$

$

$

$

$

Commercial real estate, other
10

77

126



Commercial real estate
10

77

126



Commercial and industrial

150



49

Residential real estate
186

101

105

135

137

Home equity lines of credit
58

77

6

25

20

Consumer
187

350

289

250

302

Deposit account overdrafts
143

165

150

91

110

Total gross charge-offs
584

920

676

501

618

Recoveries:
 
 
 
 
 
Commercial real estate, construction





Commercial real estate, other
55

947

905

96

112

Commercial real estate
55

947

905

96

112

Commercial and industrial
12

9

9

54

5

Residential real estate
115


52

79

38

Home equity lines of credit
15

16

8

6

6

Consumer
186

124

222

167

184

Deposit account overdrafts
58

21

32

30

70

Total recoveries
441

1,117

1,228

432

415

Net charge-offs (recoveries):
 
 
 
 
 
Commercial real estate, construction





Commercial real estate, other
(45
)
(870
)
(779
)
(96
)
(112
)
Commercial real estate
(45
)
(870
)
(779
)
(96
)
(112
)
Commercial and industrial
(12
)
141

(9
)
(54
)
44

Residential real estate
71

101

53

56

99

Home equity lines of credit
43

61

(2
)
19

14

Consumer
1

226

67

83

118

Deposit account overdrafts
85

144

118

61

40

Total net charge-offs (recoveries)
$
143

$
(197
)
$
(552
)
$
69

$
203

Ratio of net charge-offs (recoveries) to average loans (annualized):
 
 
Commercial real estate, construction
 %
 %
 %
 %
 %
Commercial real estate, other
(0.01
)%
(0.22
)%
(0.22
)%
(0.03
)%
(0.04
)%
Commercial real estate
(0.01
)%
(0.22
)%
(0.22
)%
(0.03
)%
(0.04
)%
Commercial and industrial
 %
0.03
 %
 %
(0.03
)%
0.02
 %
Residential real estate
0.01
 %
0.03
 %
0.02
 %
0.02
 %
0.03
 %
Home equity lines of credit
0.01
 %
0.01
 %
 %
0.01
 %
0.01
 %
Consumer
 %
0.06
 %
0.02
 %
0.03
 %
0.04
 %
Deposit account overdrafts
0.02
 %
0.04
 %
0.03
 %
0.02
 %
0.01
 %
Total
0.03
 %
(0.05
)%
(0.15
)%
0.02
 %
0.07
 %
During the first quarter of 2015, charge-offs exceeded recoveries, but net charge-offs continued to remain well below the long-term historical average of 0.30% to 0.50%.


42


The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Loans 90+ days past due and accruing:
 
 
 
 
 
Commercial real estate, other
$
2,146

$
567

$
1,406

$
1,138

$

Commercial and industrial
408

301

279

903


Residential real estate
1,096

1,901

879

1,338

29

Home equity
47

20


39

129

Consumer
3

10

1

20

1

Total
3,700

2,799

2,565

3,438

159

Nonaccrual loans:
 
 
 
 
 
Commercial real estate, construction
96




96

Commercial real estate, other
1,890

2,278

2,014

1,835

2,913

Commercial and industrial
1,532

1,800

500

806

640

Residential real estate
2,931

2,695

2,633

2,807

3,294

Home equity
382

315

240

256

323

Consumer

3




Total
6,831

7,091

5,387

5,704

7,266

Troubled debt restructurings:
 
 
 
 
 
Commercial real estate, construction

96

96

96

897

Commercial real estate, other
275

306

339

1,356


Commercial and industrial
196

194




Residential real estate
977

658

465

675

637

Home equity
69

45

35

36

6

Consumer
14

16




Total
1,531

1,315

935

2,163

1,540

Total nonperforming loans (NPLs)
12,062

11,205

8,887

11,305

8,965

Other real estate owned (OREO)
 
 
 
 
 
Commercial
1,143

582

582

465

465

Residential
405

364

463

450

308

Total
1,548

946

1,045

915

773

Total nonperforming assets (NPAs)
$
13,610

$
12,151

$
9,932

$
12,220

$
9,738

NPLs as a percent of total loans
0.60
%
0.69
%
0.59
%
0.86
%
0.73
%
NPAs as a percent of total assets
0.42
%
0.47
%
0.41
%
0.56
%
0.47
%
NPAs as a percent of total loans and OREO
0.68
%
0.75
%
0.66
%
0.92
%
0.79
%
Allowance for loan losses as a percent of NPLs
149.96
%
159.58
%
197.54
%
153.78
%
188.19
%
During the first quarter of 2015, commercial real estate loans reported as loans 90 days past due and accruing increased primarily due to a single loan that was previously acquired and several loans acquired from NB&T. Interest income on the loans acquired that had evidence of credit quality deterioration since origination were being recognized on a level-yield method over the life of the loan. These increases were partially offset by several residential real estate loans that were current at March 31, 2015 and were more than 90 days past due at December 31, 2014. Nonaccrual loans were relatively flat compared to December 31, 2014. The increase in OREO during the first quarter of 2015 was due to properties acquired as part of the NB&T acquisition.


43


Deposits
The following table details Peoples’ deposit balances:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Interest-bearing deposits:
 
 
 
 
 
Retail certificates of deposit
$
494,896

$
432,563

$
408,868

$
373,072

$
355,345

Money market deposit accounts
402,252

337,387

309,721

268,939

276,226

Governmental deposit accounts
316,104

161,305

183,213

165,231

177,590

Savings accounts
406,276

295,307

262,949

244,472

227,695

Interest-bearing demand accounts
228,373

173,659

156,867

142,170

133,508

Total retail interest-bearing deposits
1,847,901

1,400,221

1,321,618

1,193,884

1,170,364

Brokered certificates of deposits
38,104

39,691

39,671

40,650

45,072

Total interest-bearing deposits
1,886,005

1,439,912

1,361,289

1,234,534

1,215,436

Non-interest-bearing deposits
695,131

493,162

500,330

426,384

417,629

Total deposits
$
2,581,136

$
1,933,074

$
1,861,619

$
1,660,918

$
1,633,065

During the first quarter of 2015, Peoples completed the acquisition of NB&T, which included retail certificates of deposits ("CDs") totaling $81.9 million, money market deposit accounts of $74.0 million, governmental deposit accounts of $120.9 million, savings accounts of $94.2 million, interest-bearing demand accounts of $56.3 million and non-interest bearing deposits of $179.7 million at March 31, 2015. Excluding the acquired deposit accounts, retail certificates of deposit and money market deposit accounts declined $28.7 million from December 31, 2014, while governmental deposits, savings and non-interest bearing deposits increased $72.9 million compared to year-end due to seasonal fluctuations that typically occur in the first quarter. Peoples also maintained its deposit strategy of growing low-cost core deposits, such as checking and savings accounts, and reducing its reliance on higher-cost, non-core deposits, such as CDs and brokered deposits.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Short-term borrowings:
 
 
 
 
 
FHLB advances
$

$
15,000

$

$
48,000

$
15,000

Retail repurchase agreements
91,101

73,277

71,897

67,869

53,777

Total short-term borrowings
91,101

88,277

71,897

115,869

68,777

Long-term borrowings:
 
 
 
 
 
FHLB advances
70,313

124,714

101,890

62,056

62,211

National market repurchase agreements
40,000

40,000

40,000

40,000

40,000

Term note payable (parent company)
13,174

14,369

15,564

16,759

17,953

Subordinated debt
6,587





Total long-term borrowings
130,074

179,083

157,454

118,815

120,164

Total borrowed funds
$
221,175

$
267,360

$
229,351

$
234,684

$
188,941

Peoples' short-term FHLB advances generally consist of overnight borrowings being maintained in connection with the management of Peoples' daily liquidity position.
Peoples repaid approximately $52.1 million of long-term FHLB advances during the first quarter of 2015 and recorded losses on debt extinguishment of $520,000. During the first quarter of 2015, Peoples also acquired subordinated debt in the acquisition of NB&T. Additional information regarding Peoples' long-term borrowings can be found in Note 5 - Long-Term Borrowings in the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q.
As disclosed in Peoples' 2014 Form 10-K, Peoples entered into a loan agreement in 2012, that was subsequently amended in 2014, and is subject to certain covenants. At March 31, 2015, Peoples was in compliance with the applicable material covenants, as explained in more detail in Note 5 - Long-Term Borrowings of the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q.


44


Capital/Stockholders’ Equity
During the first quarter of 2015, Peoples issued common shares (representing $76.0 million) in partial consideration for the NB&T acquisition, and the remaining consideration was paid in cash. At March 31, 2015, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under banking regulations. These higher capital levels reflect Peoples' desire to maintain strong capital positions to provide greater flexibility to grow the company. Also during the first quarter of 2015, Peoples adopted the new Basel III regulatory capital framework, as approved by the federal banking agencies. The adoption of this new framework modified the calculations and well capitalized thresholds of the current capital ratios and added the new Common Equity Tier 1 capital ratio. Additionally, under the new rules, in order to avoid limitations on capital distributions, including dividend payments, Peoples must hold a capital conservation buffer above the adequately capitalized Common Equity Tier 1 capital ratio. The capital conservation buffer is being phased in from 0.00% for 2015 to 2.50% by 2019.
The following table details Peoples' actual risk-based capital levels and corresponding ratios:
(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Capital Amounts:
 
 
 
 
 
Common Equity Tier 1
$
281,026

N/A

N/A

N/A

N/A

Tier 1
287,612

241,707

232,720

177,394

170,677

Total (Tier 1 and Tier 2)
307,572

261,371

251,977

196,426

189,145

Net risk-weighted assets
$
2,045,783

$
1,687,968

$
1,601,664

$
1,438,683

$
1,358,691

Capital Ratios:
 
 
 
 
 
Common Equity Tier 1
13.74
%
N/A

N/A

N/A

N/A

Tier 1
14.06
%
14.32
%
14.53
%
12.33
%
12.56
%
Total (Tier 1 and Tier 2)
15.03
%
15.48
%
15.73
%
13.65
%
13.92
%
Leverage ratio
10.98
%
9.92
%
10.64
%
8.76
%
8.56
%
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-GAAP financial information since their calculation removes the impact of intangible assets acquired through acquisitions on the Unaudited Consolidated Balance Sheets. Management believes this information is useful to investors since it facilitates the comparison of Peoples' operating performance, financial condition and trends to peers, especially those without a similar level of intangible assets to that of Peoples. Further, intangible assets generally are difficult to convert into cash, especially during a financial crisis, and could decrease substantially in value should there be deterioration in the overall franchise value. As a result, tangible equity represents a conservative measure of the capacity for a company to incur losses but remain solvent.
The following table reconciles the calculation of these non-GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:


45


(Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Tangible Equity:
 
 
 
 
 
Total stockholders' equity, as reported
$
419,218

$
340,118

$
319,282

$
244,270

$
230,576

Less: goodwill and other intangible assets
143,437

109,158

100,016

79,626

77,288

Tangible equity
$
275,781

$
230,960

$
219,266

$
164,644

$
153,288



 
 
 
 
Tangible Assets:
 
 
 
 
 
Total assets, as reported
$
3,247,031

$
2,567,769

$
2,432,903

$
2,163,274

$
2,078,253

Less: goodwill and other intangible assets
143,437

109,158

100,016

79,626

77,288

Tangible assets
$
3,103,594

$
2,458,611

$
2,332,887

$
2,083,648

$
2,000,965

 
 
 
 
 
 
Tangible Book Value per Share:
 
 
 
 
Tangible equity
$
275,781

$
230,960

$
219,266

$
164,644

$
153,288

Shares outstanding
18,374,256

14,836,727

14,150,279

10,926,436

10,657,569

 
 
 
 
 
 
Tangible book value per common share
$
15.01

$
15.57

$
15.50

$
15.07

$
14.38

 
 
 
 
 
 
Tangible Equity to Tangible Assets Ratio:
 
 
 
 
Tangible equity
$
275,781

$
230,960

$
219,266

$
164,644

$
153,288

Tangible assets
$
3,103,594

$
2,458,611

$
2,332,887

$
2,083,648

$
2,000,965

 
 
 
 
 
 
Tangible equity to tangible assets
8.89
%
9.39
%
9.40
%
7.90
%
7.66
%
The decrease in the tangible equity to tangible assets ratio during the first quarter of 2015 compared to the prior quarter was primarily caused by higher tangible assets and tangible equity due to the NB&T acquisition. Compared to the prior year first quarter, increases in stockholders' equity were driven primarily by issuances of equity in connection with acquisitions, the Private Equity Issuance and earnings exceeding dividends in 2014, while higher tangible assets were attributable to loan growth and acquisitions.
Interest Rate Sensitivity and Liquidity
While Peoples is exposed to various business risks, the risks relating to interest rate sensitivity and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature. The objective of Peoples' asset/liability management (“ALM”) function is to measure and manage these risks in order to optimize net interest income within the constraints of prudent capital adequacy, liquidity and safety. This objective requires Peoples to focus on interest rate risk exposure and adequate liquidity through its management of the mix of assets and liabilities, their related cash flows, and the rates earned and paid on those assets and liabilities. Ultimately, the ALM function is intended to guide management in the acquisition and disposition of earning assets, and selection of appropriate funding sources.
Interest Rate Risk
Interest rate risk (“IRR”) is one of the most significant risks arising in the normal course of business of financial services companies like Peoples. IRR is the potential for economic loss due to future interest rate changes that can impact the earnings stream as well as market values of financial assets and liabilities. Peoples' exposure to IRR is due primarily to differences in the maturity or repricing of earning assets and interest-bearing liabilities. In addition, other factors, such as prepayments of loans and investment securities, or early withdrawal of deposits, can expose Peoples to IRR and increase interest costs or reduce revenue streams.
Peoples has assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level and amount of IRR. The methods used by the ALCO to assess IRR remain unchanged from those disclosed in Peoples' 2014 Form 10-K.


46


The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis (dollars in thousands):
 
Increase in Interest Rate
Estimated Increase in
Net Interest Income
 
Estimated Decrease in Economic Value of Equity
(in Basis Points)
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
300
$
8,072

 
8.5
%
 
$
5,600

7.3
%
 
$
(72,925
)
 
(13.0
)%
 
$
(66,730
)
(15.7
)%
200
6,798

 
7.1
%
 
4,848

6.3
%
 
(44,148
)
 
(7.9
)%
 
(41,537
)
(9.8
)%
100
4,438

 
4.7
%
 
3,235

4.2
%
 
(18,061
)
 
(3.2
)%
 
(18,026
)
(4.2
)%
At March 31, 2015, Peoples' Unaudited Consolidated Balance Sheet remained positioned for a rising interest rate environment, as illustrated by the potential increase in net interest income shown in the above table. While parallel interest rate shock scenarios are useful in assessing the level of IRR inherent in Peoples' consolidated balance sheet, interest rates typically move in a non-parallel manner, with differences in the timing, direction and magnitude of changes in short-term and long-term interest rates. Thus, any benefit that could occur as a result of the Federal Reserve Board increasing short-term interest rates in future quarters could be offset by an inverse movement in long-term interest rates.
Liquidity
In addition to IRR management, another major objective of the ALCO is to maintain a sufficient level of liquidity. The methods used by the ALCO to monitor and evaluate the adequacy of Peoples' liquidity position remain unchanged from those disclosed in Peoples' 2014 Form 10-K.
At March 31, 2015, Peoples had liquid assets of $270.3 million, which represented 8.0% of total assets and unfunded commitments. This amount exceeded the minimal level of $67.6 million, or 2% of total loans and unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $88.5 million of unpledged securities not included in the measurement of liquid assets.
Management believes the current balance of cash and cash equivalents, and anticipated cash flows from the investment portfolio, along with the availability of other funding sources, will allow Peoples to meet anticipated cash obligations, as well as special needs and off-balance sheet commitments.
Off-Balance Sheet Activities and Contractual Obligations
Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the Unaudited Consolidated Financial Statements. These activities are part of Peoples' normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.
The following table details the total contractual amount of loan commitments and standby letters of credit:
 (Dollars in thousands)
March 31,
2015
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
Home equity lines of credit
$
85,591

$
62,704

$
59,549

$
50,558

$
49,918

Unadvanced construction loans
74,690

46,781

54,504

29,396

23,231

Other loan commitments
213,698

173,746

152,503

155,858

136,805

Loan commitments
373,979

283,231

266,556

235,812

209,954

 
 
 
 
 
 
Standby letters of credit
$
28,879

$
30,837

$
34,570

$
33,852

$
33,555

Management does not anticipate that Peoples’ current off-balance sheet activities will have a material impact on its future results of operations and financial condition based on historical experience and recent trends.
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this Item 3 is provided under the caption “Interest Rate Sensitivity and Liquidity” under “ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION” in this Form 10-Q, and is incorporated herein by reference.



47


ITEM 4.  CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Peoples’ management, with the participation of Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer, has evaluated the effectiveness of Peoples’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2015.  Based upon that evaluation, Peoples’ President and Chief Executive Officer and Peoples’ Executive Vice President, Chief Financial Officer and Treasurer have concluded that:
(a)
information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be accumulated and communicated to Peoples’ management, including its President and Chief Executive Officer and its Executive Vice President, Chief Financial Officer and Treasurer, as appropriate to allow timely decisions regarding required disclosure;
(b)
information required to be disclosed by Peoples in this Quarterly Report on Form 10-Q and other reports Peoples files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(c)
Peoples’ disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q.
 Changes in Internal Control Over Financial Reporting
There were no changes in Peoples’ internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Peoples’ fiscal quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.



48


PART II
ITEM 1.  LEGAL PROCEEDINGS
In the ordinary course of their respective businesses or operations, Peoples or one of its subsidiaries may be named as a plaintiff, a defendant, or a party to a legal proceeding or any of their respective properties may be subject to various pending and threatened legal proceedings and various actual and potential claims.  In view of the inherent difficulty of predicting the outcome of such matters, Peoples cannot state what the eventual outcome of any such matters will be; however, based on current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of Peoples.
ITEM 1A.  RISK FACTORS
There have been no material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2014 Form 10-K.  Those risk factors are not the only risks Peoples faces.  Additional risks and uncertainties not currently known to management or that management currently deems to be immaterial also may materially adversely affect Peoples’ business, financial condition and/or operating results.
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table details repurchases by Peoples and purchases by “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of Peoples’ common shares during the three months ended March 31, 2015:
Period
(a)
Total Number of Common Shares Purchased
 
(b)
Average Price Paid per Common Share
 
 (c)
Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs (1)
(d)
Maximum
Number of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1 - 31, 2015
13,324

(2)(3) 
$
23.32

(2)(3) 


February 1 - 28, 2015
9,143

(2)(3) 
$
23.38

(2)(3) 


March 1 - 31, 2015
193

(2) 
$
23.28

(2) 


Total
22,660

 
$
23.34

 


(1)
Peoples’ Board of Directors has not authorized any stock repurchase plans or programs for 2015.
(2)
Information reported includes 160 common shares, 671 common shares, and 193 common shares purchased in open market transactions during January, February, and March, respectively, by Peoples Bank under the Rabbi Trust Agreement establishing a rabbi trust that holds assets to provide funds for the payment of the benefits under the Peoples Bancorp Inc. Third Amended and Restated Deferred Compensation Plan for Directors of Peoples Bancorp Inc. and Subsidiaries.
(3)
Information reported includes 13,164 common shares and 8,472 common shares withheld in January and February, respectively, to pay income tax or other tax liabilities associated with vested restricted common shares.
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.  OTHER INFORMATION
None.
ITEM 6.  EXHIBITS
The exhibits required to be filed or furnished with this Form 10-Q are attached hereto or incorporated herein by reference.  For a list of such exhibits, see “Exhibit Index” beginning at page 58.


49


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



 
 
 
PEOPLES BANCORP INC.
 
 
 
 
Date:
May 1, 2015
By: /s/
CHARLES W. SULERZYSKI
 
 
 
Charles W. Sulerzyski
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
May 1, 2015
By: /s/
EDWARD G. SLOANE
 
 
 
Edward G. Sloane
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer



50


EXHIBIT INDEX
 
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
 
Exhibit
Number
 
 
Description
 
 
Exhibit Location
 
 
 
 
 
2.1
 
Agreement and Plan of Merger, dated as of January 21, 2014, between Peoples Bancorp Inc. and Midwest Bancshares, Inc.*
 
Included as Annex A to the proxy statement/prospectus which forms a part of the Registration Statement of Peoples Bancorp Inc. ("Peoples") on Form S-4 (Registration No. 333-194626)
 
 
 
 
 
2.2
 
Agreement and Plan of Merger, dated as of April 4, 2014, between Peoples Bancorp Inc. and Ohio Heritage Bancorp, Inc.*
 
Included as Annex A to the proxy statement/prospectus which forms a part of Peoples' Registration Statement on Form S-4 (Registration No. 333-196872)
 
 
 
 
 
2.3
 
Agreement and Plan of Merger, dated as of April 21, 2014, as amended, among Peoples Bancorp Inc., Peoples Bank, National Association and North Akron Savings Bank*
 
Included as Annex A to the proxy statement/prospectus which forms a part of Peoples' Registration Statement on Form S-4 (Registration No. 333-197736)
 
 
 
 
 
2.4
 
Agreement and Plan of Merger, dated as of August 4, 2014, as amended, between Peoples Bancorp Inc. and NB&T Financial Group, Inc.*
 
Included as Annex A to the joint proxy statement/prospectus which forms a part of Peoples' Registration Statement on Form S-4 (Registration No. 333-199152)
 
 
 
 
 
3.1(a)
 
Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on May 3, 1993)
 
Incorporated herein by reference to Exhibit 3(a) to Peoples' Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772)
 
 
 
 
 
3.1(b)
 
Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 22, 1994)
 
Incorporated herein by reference to Exhibit 3(a)(2) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-16772) (“Peoples’ 1997 Form 10-K”)
 
 
 
 
 
3.1(c)
 
Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 9, 1996)
 
Incorporated herein by reference to Exhibit 3(a)(3) to Peoples’ 1997 Form 10-K
 
 
 
 
 
3.1(d)
 
Certificate of Amendment to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on April 23, 2003)
 
Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (File No. 0-16772) (“Peoples’ March 31, 2003 Form 10-Q”)
 
 
 
 
 
3.1(e)
 
Certificate of Amendment by Shareholders to the Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on January 22, 2009)
 
Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on January 23, 2009 (File No. 0-16772)
 
 
 
 
 
3.1(f)
 
Certificate of Amendment by Directors to Articles filed with the Secretary of State of the State of Ohio on January 28, 2009, evidencing adoption of amendments by the Board of Directors of Peoples Bancorp Inc. to Article FOURTH of Amended Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of Peoples Bancorp Inc.
 
Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on February 2, 2009 (File No. 0-16772)
 
 
 
 
 
3.1(g)
 
Amended Articles of Incorporation of Peoples Bancorp Inc. (reflecting all amendments) [For SEC reporting compliance purposes only – not filed with Ohio Secretary of State]
 
Incorporated herein by reference to Exhibit 3.1(g) to Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 0-16772)
 
 
 
 
 
3.2(a)
 
Code of Regulations of Peoples Bancorp Inc.
 
Incorporated herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772)
 
 
 
 
 
* Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of SEC Regulation S-K. A copy of any omitted schedules or exhibits will be furnished supplementally to the SEC upon its request.


51


EXHIBIT INDEX
 
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
 
Exhibit
Number
 
 
Description
 
 
Exhibit Location
3.2(b)
 
Certified Resolutions Regarding Adoption of Amendments to Sections 1.03, 1.04, 1.05, 1.06, 1.08, 1.10, 2.03(C), 2.07, 2.08, 2.10 and 6.02 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 10, 2003
 
Incorporated herein by reference to Exhibit 3(c) to Peoples’ March 31, 2003 Form 10-Q
 
 
 
 
 
3.2(c)
 
Certificate regarding adoption of amendments to Sections 3.01, 3.03, 3.04, 3.05, 3.06, 3.07, 3.08 and 3.11 of the Code of Regulations of Peoples Bancorp Inc. by shareholders on April 8, 2004
 
Incorporated herein by reference to Exhibit 3(a) to Peoples’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (File No. 0-16772)
 
 
 
 
 
3.2(d)
 
Certificate regarding adoption of amendments to Sections 2.06, 2.07, 3.01 and 3.04 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 13, 2006
 
Incorporated herein by reference to Exhibit 3.1 to Peoples’ Current Report on Form 8-K dated and filed on April 14, 2006 (File No. 0-16772)
 
 
 
 
 
3.2(e)
 
Certificate regarding adoption of an amendment to Section 2.01 of Peoples Bancorp Inc.’s Code of Regulations by the shareholders on April 22, 2010
 
Incorporated herein by reference to Exhibit 3.2(e) to Peoples’ Quarterly Report on Form 10-Q/A (Amendment No. 1) for the quarterly period ended June 30, 2010 (File No. 0-16772) ("Peoples' June 30, 2010 Form 10-Q/A")
 
 
 
 
 
3.2(f)
 
Code of Regulations of Peoples Bancorp Inc. (reflecting all amendments) [For SEC reporting compliance purposes only]
 
Incorporated herein by reference to Exhibit 3.2(f) to Peoples’ June 30, 2010 Form 10-Q/A
 
 
 
 
 
10.1
 
Form of Peoples Bancorp Inc. Second Amended and Restated 2006 Equity Plan Performance-Based Restricted Stock Award Agreement used and to be used to evidence awards of performance-based restricted stock granted to executive officers of Peoples Bancorp Inc.
 
Filed herewith
 
 
 
 
 
10.2
 
Form of Peoples Bancorp Inc. Second Amended and Restated 2006 Equity Plan Performance Unit Award Agreement used and to be used to evidence awards of performance units granted to executive officers of Peoples Bancorp Inc.
 
Filed herewith
 
 
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer]
 
Filed herewith
 
 
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer]
 
Filed herewith
 
 
 
 
 
32
 
Section 1350 Certifications
 
Furnished herewith
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
Submitted electronically herewith #
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Submitted electronically herewith #
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Submitted electronically herewith #
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
Submitted electronically herewith #
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Submitted electronically herewith #
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Submitted electronically herewith #
 
 
 
 
 
# Attached as Exhibit 101 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 of Peoples Bancorp Inc. are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited) at March 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2015 and 2014; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2015 and 2014; (iv) Consolidated Statement of Stockholders' Equity (unaudited) for the three months ended March 31, 2015; (v) Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2015 and 2014; and (vi) Notes to the Unaudited Consolidated Financial Statements.


52