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EX-32 - EXHIBIT 32 - PEOPLES BANCORP INCexhibit32-0930201510xq.htm
EX-31.1 - EXHIBIT 31.1 - PEOPLES BANCORP INCexhibit311-0930201510xq.htm
EX-31.2 - EXHIBIT 31.2 - PEOPLES BANCORP INCexhibit312-0930201510xq.htm
10-Q - PDF VERSION OF 10-Q - PEOPLES BANCORP INCpebo0930201510qfinal.pdf



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 September 30, 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: 18,406,224 common shares, without par value, at October 28, 2015.




Table of Contents
 
 



2


PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
September 30,
2015
December 31,
2014
(Dollars in thousands)
Assets
 
 
Cash and due from banks
$
51,770

$
42,230

Interest-bearing deposits in other banks
11,971

19,224

Total cash and cash equivalents
63,741

61,454

Available-for-sale investment securities, at fair value (amortized cost of $780,609 at September 30, 2015 and $632,967 at December 31, 2014)
793,285

636,880

Held-to-maturity investment securities, at amortized cost (fair value of $47,135 at September 30, 2015 and $48,442 at December 31, 2014)
46,399

48,468

Other investment securities, at cost
38,496

28,311

Total investment securities
878,180

713,659

Loans, net of deferred fees and costs
2,050,245

1,620,898

Allowance for loan losses
(23,331
)
(17,881
)
Net loans
2,026,914

1,603,017

Loans held for sale
1,636

4,374

Bank premises and equipment, net
53,401

40,335

Goodwill
133,201

98,562

Other intangible assets
18,138

10,596

Other assets
53,619

35,772

Total assets
$
3,228,830

$
2,567,769

Liabilities
 
 
Non-interest-bearing deposits
$
711,226

$
493,162

Interest-bearing deposits
1,819,630

1,439,912

Total deposits
2,530,856

1,933,074

Short-term borrowings
129,165

88,277

Long-term borrowings
116,400

179,083

Accrued expenses and other liabilities
27,649

27,217

Total liabilities
2,804,070

2,227,651

Stockholders’ Equity
 
 
Preferred stock, no par value, 50,000 shares authorized, no shares issued at September 30, 2015 and December 31, 2014


Common stock, no par value, 24,000,000 shares authorized, 18,932,498 shares issued at September 30, 2015 and 15,599,643 shares issued at December 31, 2014, including shares in treasury
343,505

265,742

Retained earnings
90,960

90,391

Accumulated other comprehensive income (loss), net of deferred income taxes
4,985

(1,301
)
Treasury stock, at cost, 589,396 shares at September 30, 2015 and 590,246 shares at December 31, 2014
(14,690
)
(14,714
)
Total stockholders’ equity
424,760

340,118

Total liabilities and stockholders’ equity
$
3,228,830

$
2,567,769


See Notes to the Unaudited Consolidated Financial Statements


3


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
    
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands, except per share data)
2015
2014
 
2015
2014
Interest Income:
 
 
 
 
 
Interest and fees on loans
$
22,870

$
15,910

 
$
64,176

$
43,353

Interest and dividends on taxable investment securities
4,484

4,181

 
13,400

12,661

Interest on tax-exempt investment securities
800

470

 
2,202

1,332

Other interest income (expense)
24

5

 
125

(14
)
Total interest income
28,178

20,566

 
79,903

57,332

Interest Expense:
 
 
 
 
 
Interest on deposits
1,539

1,514

 
4,716

4,548

Interest on short-term borrowings
42

46

 
108

114

Interest on long-term borrowings
1,061

1,147

 
3,331

3,288

Total interest expense
2,642

2,707

 
8,155

7,950

Net interest income
25,536

17,859

 
71,748

49,382

Provision for (recovery of) loan losses
5,837

(380
)
 
6,859

211

Net interest income after provision for (recovery of) loan losses
19,699

18,239

 
64,889

49,171

Other Income:
 
 
 
 
 
Insurance income
3,275

3,169

 
10,870

10,728

Deposit account service charges
2,922

2,449

 
8,065

6,787

Trust and investment income
2,497

1,876

 
7,088

5,656

Electronic banking income
2,241

1,695

 
6,533

4,796

Mortgage banking income
212

334

 
927

872

Net gain on investment securities
62

124

 
673

160

Net loss on asset disposals and other transactions
(51
)
(109
)
 
(1,290
)
(285
)
Other non-interest income
759

338

 
1,857

1,036

Total other income
11,917

9,876

 
34,723

29,750

Other Expenses:
 
 
 
 
 
Salaries and employee benefit costs
13,572

11,667

 
45,493

33,700

Net occupancy and equipment
2,840

2,267

 
8,273

5,822

Professional fees
1,287

1,451

 
5,542

3,625

Electronic banking expense
1,408

1,283

 
3,852

3,316

Amortization of other intangible assets
1,127

367

 
2,944

912

Data processing and software
910

673

 
2,670

1,798

Marketing expense
459

668

 
2,175

1,540

Communication expense
628

421

 
1,722

1,170

Franchise tax
502

388

 
1,552

1,215

FDIC insurance
562

331

 
1,516

878

Foreclosed real estate and other loan expenses
159

177

 
1,031

509

Other non-interest expense
2,658

2,514

 
11,034

6,543

Total other expenses
26,112

22,207

 
87,804

61,028

Income before income taxes
5,504

5,908

 
11,808

17,893

Income tax expense
1,370

1,729

 
3,450

5,454

  Net income
$
4,134

$
4,179

 
$
8,358

$
12,439

Earnings per common share - basic
$
0.23

$
0.33

 
$
0.48

$
1.09

Earnings per common share - diluted
$
0.22

$
0.32

 
$
0.47

$
1.08

Weighted-average number of common shares outstanding - basic
18,127,131

12,632,341

 
17,357,034

11,348,625

Weighted-average number of common shares outstanding - diluted
18,271,979

12,765,880

 
17,487,642

11,464,020

Cash dividends declared
$
2,759

$
1,675

 
$
7,789

$
4,932

Cash dividends declared per common share
$
0.15

$
0.15

 
$
0.45

$
0.45

See Notes to the Unaudited Consolidated Financial Statements


4


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2015
2014
 
2015
2014
Net income
$
4,134

$
4,179

 
$
8,358

$
12,439

Other comprehensive income (loss):
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
Gross unrealized holding gain (loss) arising in the period
7,171

(395
)
 
9,458

15,503

Related tax (expense) benefit
(2,509
)
139

 
(3,309
)
(5,426
)
Less: reclassification adjustment for net gain included in net income
62

124

 
673

160

Related tax expense
(22
)
(43
)
 
(236
)
(56
)
Net effect on other comprehensive income (loss)
4,622

(337
)
 
5,712

9,973

Defined benefit plans:
 
 
 
 
 
Net (loss) income arising during the period
(167
)
(311
)
 
340

(1,490
)
  Related tax benefit (expense)
58

109

 
(119
)
522

Amortization of unrecognized loss and service cost on benefit plans
26

32

 
88

97

Related tax expense
(9
)
(11
)
 
(30
)
(34
)
Recognition of loss due to settlement and curtailment
82

361

 
454

1,383

Related tax expense
(29
)
(126
)
 
(159
)
(484
)
Net effect on other comprehensive (loss) income
(39
)
54

 
574

(6
)
Total other comprehensive income (loss), net of tax (expense) benefit
4,583

(283
)
 
6,286

9,967

Total comprehensive income
$
8,717

$
3,896

 
$
14,644

$
22,406




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

$
90,391

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

Net income

8,358



8,358

Other comprehensive income, net of tax


6,286


6,286

Cash dividends declared

(7,789
)


(7,789
)
Tax benefit from exercise of stock options
63




63

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



184

184

Purchase of treasury stock



(628
)
(628
)
Common shares issued under dividend reinvestment plan
299




299

Common shares issued under compensation plan for Board of Directors
(23
)


178

155

Common shares issued under employee stock purchase plan
(35
)


290

255

Stock-based compensation expense
1,432




1,432

Issuance of common shares related to acquisition of NB&T Financial Group, Inc.
76,027




76,027

Balance, September 30, 2015
$
343,505

$
90,960

$
4,985

$
(14,690
)
$
424,760

 
See Notes to the Unaudited Consolidated Financial Statements


5


PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
 
September 30,
(Dollars in thousands)
2015
2014
Net cash provided by operating activities
$
31,096

$
19,422

Investing activities:
 
 
Available-for-sale investment securities:
 
 
Purchases
(155,043
)
(109,356
)
Proceeds from sales
49,918

88,561

Proceeds from principal payments, calls and prepayments
95,107

55,170

Held-to-maturity investment securities:
 
 
Purchases

(1,017
)
Proceeds from principal payments
1,712

1,022

Net increase in loans
(43,102
)
(67,963
)
Net expenditures for premises and equipment
(7,049
)
(5,363
)
Proceeds from sales of other real estate owned
509

204

Proceeds from bank owned life insurance contracts

6,322

Business acquisitions, net of cash received
97,277

10,080

(Return of) investment in limited partnership and tax credit funds
(108
)
358

Net cash provided by (used in) investing activities
39,221

(21,982
)
Financing activities:
 
 
Net increase in non-interest-bearing deposits
92,628

43,085

Net decrease in interest-bearing deposits
(123,889
)
(15,270
)
Net increase (decrease) in short-term borrowings
40,888

(45,753
)
Proceeds from long-term borrowings

5,268

Payments on long-term borrowings
(69,666
)
(7,916
)
Cash dividends paid
(7,426
)
(4,618
)
Purchase of treasury stock
(628
)
(407
)
Proceeds from issuance of common shares

40,242

Excess tax benefit from share-based payments
63

79

Net cash (used in) provided by financing activities
(68,030
)
14,710

Net increase in cash and cash equivalents
2,287

12,150

Cash and cash equivalents at beginning of period
61,454

53,820

Cash and cash equivalents at end of period
$
63,741

$
65,970

 

 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 September 30, 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.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by Peoples as of the required effective dates. 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.
In September 2015, the FASB issued an accounting standards update 2015-16 - Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The simplification eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts of such adjustments, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. For public business entities (such as Peoples), the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments are to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the amendments with earlier application permitted for financial statements that have not been issued. Peoples elected to early adopt as of July 1, 2015, and will recognize measurement-period adjustments during the period in which Peoples determines the amounts of such adjustments, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date.
In May 2014, the FASB issued new accounting guidance that revises the criteria for determining when to recognize revenue from contracts with customers and expands disclosure requirements. This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. In August 2015, the FASB issued an update that defers the effective date of the revenue recognition guidance by one year. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018, for Peoples). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. Peoples has elected to implement this new accounting guidance using a cumulative-effect approach. Management's preliminary analysis suggests that the adoption of this new accounting guidance is not expected to have a material effect on Peoples' financial condition or results of operations. There are many aspects of this new accounting guidance that are still being interpreted, and the FASB has recently issued and proposed updates to certain aspects of the guidance. Therefore, the results of Peoples' preliminary analysis of the materiality of the adoption of this new accounting guidance may change based on the conclusions reached as to the application of the new accounting guidance.


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
September 30, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

U.S. government sponsored agencies
2,993


2,993


States and political subdivisions
115,249


115,249


Residential mortgage-backed securities
639,327


639,327


Commercial mortgage-backed securities
24,348


24,348


Bank-issued trust preferred securities
4,776


4,776


Equity securities
6,592

6,383

209


Total available-for-sale securities
$
793,285

$
6,383

$
786,902

$

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)
September 30, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,258

$

$
4,258

$

Residential mortgage-backed securities
36,080


36,080


Commercial mortgage-backed securities
6,797


6,797


Total held-to-maturity securities
$
47,135

$

$
47,135

$

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 management's 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 September 30, 2015, impaired loans with an aggregate outstanding principal balance of $58.7 million were measured and reported at a fair value of $48.1 million.  For the three and nine months ended September 30, 2015, Peoples recognized $4.1 million and $7.2 million, respectively, 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:
 
 
September 30, 2015
 
December 31, 2014
(Dollars in thousands)
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
63,741

$
63,741

 
$
61,454

$
61,454

Investment securities
878,180

878,916

 
713,659

713,633

Loans
2,028,550

1,990,941

 
1,607,391

1,581,813

Financial liabilities:
 
 
 
 
 
Deposits
$
2,530,856

$
2,535,874

 
$
1,933,074

$
1,938,021

Short-term borrowings
129,165

129,165

 
88,277

88,277

Long-term borrowings
116,400

121,753

 
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
September 30, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. Treasury and government agencies
$

$

$

$

U.S. government sponsored agencies
2,904

89


2,993

States and political subdivisions
112,132

3,196

(79
)
115,249

Residential mortgage-backed securities
634,892

8,836

(4,401
)
639,327

Commercial mortgage-backed securities
23,930

418


24,348

Bank-issued trust preferred securities
5,140

42

(406
)
4,776

Equity securities
1,611

5,071

(90
)
6,592

Total available-for-sale securities
$
780,609

$
17,652

$
(4,976
)
$
793,285

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 September 30, 2015 and December 31, 2014.  At September 30, 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 September 30 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2015
2014
 
2015
2014
Gross gains realized
$
94

$
129

 
$
726

$
863

Gross losses realized
32

5

 
53

703

Net gain realized
$
62

$
124

 
$
673

$
160

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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
7,453

$
71

15

 
$
213

$
8

1

 
$
7,666

$
79

Residential mortgage-backed securities
105,219

1,167

28

 
96,747

3,234

31

 
201,966

4,401

Commercial mortgage-backed securities



 



 


Bank-issued trust preferred securities
2,139

3


 
2,595

403

3

 
4,734

406

Equity securities
339

17

2

 
102

73

1

 
441

90

Total
$
115,150

$
1,258

45

 
$
99,657

$
3,718

36

 
$
214,807

$
4,976

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 September 30, 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 September 30, 2015 and December 31, 2014, were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At September 30, 2015, approximately 97% 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 3%, 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 $0.7 million and $0.5 million, respectively. Management 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 September 30, 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 September 30, 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

989


1,915

2,904

States and political subdivisions
246

9,275

29,640

72,971

112,132

Residential mortgage-backed securities

9,728

51,764

573,400

634,892

Commercial mortgage-backed securities


20,026

3,904

23,930

Bank-issued trust preferred securities



5,140

5,140

Equity securities
 
 
 
 
1,611

Total available-for-sale securities
$
246

$
19,992

$
101,430

$
657,330

$
780,609

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

$

$

$

$

U.S. government sponsored agencies

1,000


1,993

2,993

States and political subdivisions
248

9,586

30,477

74,938

115,249

Residential mortgage-backed securities

9,763

52,331

577,233

639,327

Commercial mortgage-backed securities


20,365

3,983

24,348

Bank-issued trust preferred securities



4,776

4,776

Equity securities
 
 
 
 
6,592

Total available-for-sale securities
$
248

$
20,349

$
103,173

$
662,923

$
793,285

Total weighted-average yield
5.04
%
2.16
%
2.78
%
2.63
%
2.65
%
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
September 30, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,833

$
430

$
(5
)
$
4,258

Residential mortgage-backed securities
35,712

666

(298
)
36,080

Commercial mortgage-backed securities
6,854


(57
)
6,797

Total held-to-maturity securities
$
46,399

$
1,096

$
(360
)
$
47,135

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 or the nine months ended September 30, 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
September 30, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$

$


 
$
320

$
5

1

 
$
320

$
5

Residential mortgage-backed securities
3,304

36

1

 
10,320

262

2

 
13,624

298

Commercial mortgage-backed securities
588

8


 
6,209

49

1

 
6,797

57

Total
$
3,892

$
44

1

 
$
16,849

$
316

4

 
$
20,741

$
360

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 September 30, 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
$

$
325

$

$
3,508

$
3,833

Residential mortgage-backed securities


492

35,220

35,712

Commercial mortgage-backed securities



6,854

6,854

Total held-to-maturity securities
$

$
325

$
492

$
45,582

$
46,399

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$

$
320

$

$
3,938

$
4,258

Residential mortgage-backed securities


499

35,581

36,080

Commercial mortgage-backed securities



6,797

6,797

Total held-to-maturity securities
$

$
320

$
499

$
46,316

$
47,135

Total weighted-average yield
%
3.14
%
2.28
%
2.69
%
2.69
%
Other Securities
Peoples' other investment securities on the Unaudited 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 $488.8 million and $352.8 million at September 30, 2015 and December 31, 2014, respectively, and held-to-maturity investment securities with carrying values of $21.8 million and $22.9 million at September 30, 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 $11.7 million and $13.5 million at September 30, 2015 and December 31, 2014, respectively, and held-to-maturity securities with carrying values of $23.6 million and $24.5 million at September 30, 2015 and December 31, 2014, respectively, to secure additional borrowing capacity at the FHLB and the FRB.


13


Note 4.  Loans

Peoples' loan portfolio consists 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)
September 30,
2015
December 31, 2014
Originated loans:
 
 
Commercial real estate, construction
$
68,798

$
37,901

Commercial real estate, other
429,120

434,660

    Commercial real estate
497,918

472,561

Commercial and industrial
288,697

249,975

Residential real estate
282,863

254,169

Home equity lines of credit
71,620

62,463

Consumer
213,394

169,913

Deposit account overdrafts
1,317

2,933

Total originated loans
$
1,355,809

$
1,212,014

Acquired Loans:
 
 
Commercial real estate, construction
$
12,278

$
1,051

Commercial real estate, other
281,510

121,475

    Commercial real estate
293,788

122,526

Commercial and industrial
68,759

30,056

Residential real estate
288,269

225,274

Home equity lines of credit
34,147

18,232

Consumer
9,473

12,796

Deposit account overdrafts


Total acquired loans
$
694,436

$
408,884

Loans, net of deferred fees and costs
$
2,050,245

$
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)
September 30,
2015
December 31,
2014
Commercial real estate, other
$
17,465

$
7,762

Commercial and industrial
3,660

1,041

Residential real estate
28,302

15,183

Consumer
220

306

Total outstanding balance
$
49,647

$
24,292

Net carrying amount
$
37,442

$
19,067



14


Changes in the accretable yield for purchase credit impaired loans for the nine months ended September 30, 2015 were as follows:
(Dollars in thousands)
Accretable Yield
Balance, December 31, 2014
$
3,172

Additions:
 
    Reclassification from nonaccretable to accretable
2,074

    NB&T Financial Group, Inc.
3,611

Accretion
(1,322
)
Balance, September 30, 2015
$
7,535

Cash flows expected to be collected on purchase credit impaired loans are estimated semi-annually by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default, and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.
Peoples pledges 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 $551.5 million and $457.1 million at September 30, 2015 and December 31, 2014, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $199.9 million and $150.7 million at September 30, 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)
September 30,
2015
December 31,
2014
 
September 30,
2015
December 31,
2014
Originated loans:
 
 
 
 
 
Commercial real estate, construction
$

$

 
$

$

Commercial real estate, other
2,190

2,575

 


    Commercial real estate
2,190

2,575

 


Commercial and industrial
13,717

1,286

 


Residential real estate
3,213

3,049

 
79

818

Home equity lines of credit
330

341

 

20

Consumer
72

19

 
19

2

Total originated loans
$
19,522

$
7,270

 
$
98

$
840

Acquired loans:
 
 
 
 
 
Commercial real estate, construction
$

$
96

 
$

$

Commercial real estate, other
453

9

 
834

567

    Commercial real estate
453

105

 
834

567

Commercial and industrial
294

708

 
1,674

301

Residential real estate
828

304

 
1,144

1,083

Home equity lines of credit
39

19

 
10


Consumer
8


 

8

Total acquired loans
$
1,622

$
1,136

 
$
3,662

$
1,959

Total loans
$
21,144

$
8,406

 
$
3,760

$
2,799



15


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
 
September 30, 2015
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$

$

 
$
68,798

$
68,798

Commercial real estate, other
7,654

893

1,161

9,708

 
419,412

429,120

    Commercial real estate
7,654

893

1,161

9,708

 
488,210

497,918

Commercial and industrial
1,702

116

13,680

15,498

 
273,199

288,697

Residential real estate
1,997

1,599

1,289

4,885

 
277,978

282,863

Home equity lines of credit
124

178

104

406

 
71,214

71,620

Consumer
1,203

134

19

1,356

 
212,038

213,394

Deposit account overdrafts




 
1,317

1,317

Total originated loans
$
12,680

$
2,920

$
16,253

$
31,853

 
$
1,323,956

$
1,355,809

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$

$

$
40

$
40

 
$
12,238

$
12,278

Commercial real estate, other
1,133

4,066

1,237

6,436

 
275,074

281,510

    Commercial real estate
1,133

4,066

1,277

6,476

 
287,312

293,788

Commercial and industrial
671


1,942

2,613

 
66,146

68,759

Residential real estate
1,368

1,652

1,684

4,704

 
283,565

288,269

Home equity lines of credit
36

106

10

152

 
33,995

34,147

Consumer
129

13


142

 
9,331

9,473

Deposit account overdrafts




 


Total acquired loans
$
3,337

$
5,837

$
4,913

$
14,087

 
$
680,349

$
694,436

Total loans
$
16,017

$
8,757

$
21,166

$
45,940

 
$
2,004,305

$
2,050,245

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



16


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”.


17


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