10-Q



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, 2016
                                                                                        
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: 18,157,962 common shares, without par value, at April 27, 2016.


Table of Contents

Table of Contents
 
 



2
Table of Contents

PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
March 31,
2016
December 31,
2015
(Dollars in thousands)
Assets
 
 
Cash and due from banks
$
54,319

$
53,663

Interest-bearing deposits in other banks
8,977

17,452

Total cash and cash equivalents
63,296

71,115

Available-for-sale investment securities, at fair value (amortized cost of $785,544 at March 31, 2016 and $780,304 at December 31, 2015)
802,194

784,701

Held-to-maturity investment securities, at amortized cost (fair value of $46,202 at March 31, 2016 and $45,853 at December 31, 2015)
44,866

45,728

Other investment securities, at cost
38,402

38,401

Total investment securities
885,462

868,830

Loans, net of deferred fees and costs
2,105,115

2,072,440

Allowance for loan losses
(17,261
)
(16,779
)
Net loans
2,087,854

2,055,661

Loans held for sale
950

1,953

Bank premises and equipment, net
52,156

53,487

Goodwill
132,631

132,631

Other intangible assets
16,366

16,986

Other assets
56,214

58,307

Total assets
$
3,294,929

$
3,258,970

Liabilities
 
 
Non-interest-bearing deposits
$
716,202

$
717,939

Interest-bearing deposits
1,870,881

1,818,005

Total deposits
2,587,083

2,535,944

Short-term borrowings
135,068

160,386

Long-term borrowings
113,188

113,670

Accrued expenses and other liabilities
31,104

29,181

Total liabilities
2,866,443

2,839,181

Stockholders’ equity
 
 
Preferred stock, no par value, 50,000 shares authorized, no shares issued at March 31, 2016 and December 31, 2015
—

—

Common stock, no par value, 24,000,000 shares authorized, 18,934,185 shares issued at March 31, 2016 and 18,931,200 shares issued at December 31, 2015, including shares in treasury
343,504

343,948

Retained earnings
96,037

90,790

Accumulated other comprehensive income (loss), net of deferred income taxes
7,592

(359
)
Treasury stock, at cost, 831,018 shares at March 31, 2016 and 586,686 shares at December 31, 2015
(18,647
)
(14,590
)
Total stockholders’ equity
428,486

419,789

Total liabilities and stockholders’ equity
$
3,294,929

$
3,258,970


See Notes to the Unaudited Consolidated Financial Statements


3
Table of Contents

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

    
 
Three Months Ended
 
March 31,
(Dollars in thousands, except per share data)
2016
2015
Interest income:
 
 
Interest and fees on loans
$
22,966

$
19,160

Interest and dividends on taxable investment securities
4,681

4,363

Interest on tax-exempt investment securities
780

596

Other interest income
16

40

Total interest income
28,443

24,159

Interest expense:
 
 
Interest on deposits
1,601

1,559

Interest on short-term borrowings
87

35

Interest on long-term borrowings
988

1,146

Total interest expense
2,676

2,740

Net interest income
25,767

21,419

Provision for loan losses
955

350

Net interest income after provision for loan losses
24,812

21,069

Other income:
 
 
Insurance income
4,498

4,312

Deposit account service charges
2,603

2,295

Electronic banking income
2,535

1,980

Trust and investment income
2,382

2,047

Mortgage banking income
160

303

Net gain on investment securities
96

600

Net loss on asset disposals and other transactions
(31
)
(1,103
)
Other non-interest income
876

571

Total other income
13,119

11,005

Other expenses:
 
 
Salaries and employee benefit costs
14,247

17,361

Net occupancy and equipment expense
2,884

2,295

Professional fees
1,459

2,447

Electronic banking expense
1,433

1,124

Amortization of other intangible assets
1,008

673

Data processing and software expense
749

735

Communication expense
628

502

FDIC insurance expense
617

424

Franchise tax expense
538

548

Marketing expense
398

645

Foreclosed real estate and other loan expenses
251

321

Other non-interest expense
2,070

5,839

Total other expenses
26,282

32,914

Income (loss) before income taxes
11,649

(840
)
Income tax expense (benefit)
3,654

(151
)
  Net income (loss)
$
7,995

$
(689
)
Earnings (loss) per common share - basic
$
0.44

$
(0.04
)
Earnings (loss) per common share - diluted
$
0.44

$
(0.04
)
Weighted-average number of common shares outstanding - basic
18,071,746

15,802,334

Weighted-average number of common shares outstanding - diluted
18,194,990

15,930,235

Cash dividends declared
$
2,748

$
2,272

Cash dividends declared per common share
$
0.15

$
0.15


See Notes to the Unaudited Consolidated Financial Statements


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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
2015
Net income (loss)
$
7,995

$
(689
)
Other comprehensive income:
 
 
Available-for-sale investment securities:
 
 
Gross unrealized holding gain arising in the period
12,329

8,886

Related tax expense
(4,316
)
(3,111
)
Less: reclassification adjustment for net gain included in net income
96

600

Related tax expense
(34
)
(210
)
Net effect on other comprehensive income
7,951

5,385

Defined benefit plans:
 
 
Net loss arising during the period
—

(26
)
  Related tax benefit
—

9

Amortization of unrecognized loss and service cost on benefit plans
—

32

Related tax expense
—

(12
)
Recognition of loss due to settlement and curtailment
—

269

Related tax expense
—

(94
)
Net effect on other comprehensive income
—

178

Total other comprehensive income, net of tax expense
7,951

5,563

Total comprehensive income
$
15,946

$
4,874




CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 
 
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders' Equity
 
Common Shares
Retained Earnings
Treasury Stock
(Dollars in thousands)
Balance, December 31, 2015
$
343,948

$
90,790

$
(359
)
$
(14,590
)
$
419,789

Net income
—

7,995

—

—

7,995

Other comprehensive income, net of tax
—

—

7,951

—

7,951

Cash dividends declared
—

(2,748
)
—

—

(2,748
)
Reissuance of treasury stock for common share awards
(849
)
—

—

849

—

Tax expense from exercise of stock options
(3
)
—

—

—

(3
)
Reissuance of treasury stock for deferred compensation plan for Boards of Directors
—

—

—

165

165

Repurchase of common shares in connection with employee incentive and director compensation plans
—

—

—

(292
)
(292
)
Common shares repurchased under the share repurchase program
—

—

—

(4,965
)
(4,965
)
Common shares issued under dividend reinvestment plan
102

—

—

—

102

Common shares issued under compensation plan for Board of Directors
(18
)
—

—

76

58

Common shares issued under employee stock purchase plan
(14
)
—

—

110

96

Stock-based compensation expense
338

—

—

—

338

Balance, March 31, 2016
$
343,504

$
96,037

$
7,592

$
(18,647
)
$
428,486

 
See Notes to the Unaudited Consolidated Financial Statements


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PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
2015
Net cash provided by (used in) operating activities
$
16,826

$
(5,884
)
Investing activities:
 
 
Available-for-sale investment securities:
 
 
Purchases
(35,810
)
(33,787
)
Proceeds from sales
981

42,803

Proceeds from principal payments, calls and prepayments
26,627

21,646

Held-to-maturity investment securities:
 
 
Proceeds from principal payments
750

316

Net (increase) decrease in loans
(31,933
)
15,384

Net expenditures for premises and equipment
(2,660
)
(2,152
)
Proceeds from sales of other real estate owned
141

55

Business acquisitions, net of cash received
(244
)
103,597

Investment in limited partnership and tax credit funds
12

—

Net cash (used in) provided by investing activities
(42,136
)
147,862

Financing activities:
 
 
Net (decrease) increase in non-interest-bearing deposits
(1,737
)
76,533

Net increase (decrease) in interest-bearing deposits
52,905

(57,900
)
Net (decrease) increase in short-term borrowings
(25,318
)
2,824

Payments on long-term borrowings
(460
)
(55,867
)
Cash dividends paid
(2,645
)
(2,149
)
Purchase of treasury stock under the share repurchase program
(4,965
)
—

Repurchase of common shares in connection with employee incentive and director compensation plans to be held as treasury stock
(292
)
(534
)
Proceeds from issuance of common shares
6

—

Excess tax (expense) benefit from share-based payments
(3
)
63

Net cash provided by (used in) financing activities
17,491

(37,030
)
Net (decrease) increase in cash and cash equivalents
(7,819
)
104,948

Cash and cash equivalents at beginning of period
71,115

61,454

Cash and cash equivalents at end of period
$
63,296

$
166,402

 

 See Notes to the Unaudited Consolidated Financial Statements



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Table of Contents

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, 2015 (“2015 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’ 2015 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, 2016 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, 2015, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2015 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, for the most part, during the first quarter of each year. For the three months ended March 31, 2016 and 2015, the amount of performance-based insurance commissions recognized totaled $1.6 million and $1.5 million, respectively.
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 March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09 - Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of the simplification initiative is to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. For public entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Peoples will adopt this new guidance as required, and it is not expected to have a material impact on Peoples' results of operations.
In March 2016, the FASB issued ASU 2016-08 - Revenue from Contracts with Customers (Topic 606) which amended the accounting guidance issued by the FASB in May 2014 that revised the criteria for determining when to recognize revenue from contracts with customers and expanded disclosure requirements. The amendment defers the effective date by one year (reflected below). This accounting guidance can be implemented using either a retrospective method or a cumulative-effect approach. This new guidance will be effective for interim and annual reporting periods beginning after December 15, 2018 (effective January 1, 2019, for Peoples). Early adoption is permitted but only for interim and annual reporting periods beginning after December 15, 2016. Peoples has elected to implement the new accounting guidance using a cumulative-effect approach and will adopt this new guidance as required. Management's preliminary analysis suggests that the adoption of the new accounting guidance is not expected to have a material effect on Peoples' financial condition or results of operations. There are many aspects of the new accounting guidance that are still being interpreted, and the FASB has recently issued and


7
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proposed updates to certain aspects of the guidance. Therefore, the results of Peoples' preliminary analysis of the materiality of the adoption of the new accounting guidance may change based on the conclusions reached as to the application of the new accounting guidance.
In March 2016, the FASB issued ASU 2016-06 - Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendment is intended to resolve the diversity in practice by assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to the debt instrument hosts, which is one of the criteria for bifurcating an embedded derivative. When a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise the call (put) option is related to interest rates or credit risks. For public entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Peoples is currently evaluating the impact of adopting the new guidance on Peoples' consolidated financial statements, but it is not expected to have a material impact.
In February 2016, the FASB issued ASU 2016-02 - Leases (Topic 842). The amendment was issued to improve the financial reporting of leasing activities and provide a faithful representation of leasing transactions and improve understanding and comparability of a lessee's financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. The ASU will require both finance and operating leases to be recognized on the balance sheet. The ASU will affect all companies and organizations that lease real estate. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (effective January 1, 2019, for Peoples). Peoples will adopt this new guidance as required, but it is not expected to have a material impact on Peoples' consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01 - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment is intended to enhance the reporting model for financial instruments to provide users of financial statements with more useful information. The new ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income. However, a reporting organization may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment (if any), from observable price changes in orderly transactions for similar investments of the same issuer. The ASU is effective for fiscal years beginning after December 15, 2019 (effective January 1, 2020, for Peoples). Peoples is currently evaluating the impact of adopting the new guidance on Peoples' consolidated financial statements which may result in an impact to the income statement on a quarterly and annual basis, as market rates fluctuate. Peoples will adopt this guidance as required.
On January 1, 2016, the multi-year phase-in of capital buffer requirements under the Basel III Final Rule began. Banking organizations are required to maintain a minimum Common Equity Tier 1 ("CET1") risk-based capital ratio of 4.50%, a Tier 1 risk-based capital ratio of 6.00%, and a Total risk-based capital ratio of 8.00% to be considered "adequately capitalized." In addition, the Basel III Final Rule introduces a new “capital conservation buffer”, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio above the minimum, but below any of the three required ratios including the capital conservation buffer, will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. This buffer was implemented beginning January 1, 2016 at the 0.625% level and increases by 0.625% on each subsequent January 1, until it reaches 2.50% on January 1, 2019.
The regulatory capital standards are defined by the following key measurements:
(a) The “Leverage Ratio” is defined as Tier 1 capital to average assets. To be considered “adequately capitalized” under this measurement, a bank must maintain a leverage ratio greater than or equal to 4.00%. For a bank to be considered “well capitalized,” it must maintain a leverage ratio greater than or equal to 5.00%.
(b) The “CET1 Ratio” is defined as Common Equity Tier 1 capital to total risk-weighted assets. To be considered “adequately capitalized” under this measurement, a bank must maintain a CET1 ratio greater than or equal to 4.50%. For a bank to be considered “well capitalized,” it must maintain a CET1 ratio greater than or equal to 6.50%.
(c) The “Core Capital Ratio” is defined as Tier 1 capital to total risk-weighted assets. To be considered “adequately capitalized” under this measurement, a bank must maintain a core capital ratio greater than or equal to 6.00%. For a bank to be considered “well capitalized,” it must maintain a core capital ratio greater than or equal to 8.00%.
(d) The “Total Capital Ratio” is defined as total capital to total risk-weighted assets. To be considered “adequately capitalized” under this measurement, a bank must maintain a total capital ratio greater than or equal to 8.00%. For a bank to be considered “well capitalized,” it must maintain a total capital ratio greater than or equal to 10.00%.


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Peoples will be required to maintain risk-based capital ratios beginning January 1, 2019 as follows:
 
Effective January 1, 2019
 
As of March 31, 2016
 
Stated Minimum Ratios
Fully Implemented Capital Conservation Buffer
Effective Minimum Ratios
 
Peoples
Peoples Bank
CET1
4.50
%
2.50
%
7.00
%
 
13.10
%
11.62
%
Tier 1 capital
6.00
%
2.50
%
8.50
%
 
13.41
%
12.53
%
Total capital
8.00
%
2.50
%
10.50
%
 
14.29
%
13.32
%

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, 2016
 
 
 
 
Obligations of:
 
 
 
 
U.S. government sponsored agencies
$
2,004

$
—

$
2,004

$
—

States and political subdivisions
114,328

—

114,328

—

Residential mortgage-backed securities
650,674

—

650,674

—

Commercial mortgage-backed securities
24,258

—

24,258

—

Bank-issued trust preferred securities
4,330

—

4,330

—

Equity securities
6,600

6,386

214

—

Total available-for-sale securities
$
802,194

$
6,386

$
795,808

$
—

December 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. government sponsored agencies
$
2,966

$
—

$
2,966

$
—

States and political subdivisions
114,726

—

114,726

—

Residential mortgage-backed securities
632,293

—

632,293

—

Commercial mortgage-backed securities
23,845

—

23,845

—

Bank-issued trust preferred securities
4,635

—

4,635

—

Equity securities
6,236

6,024

212

—

Total available-for-sale securities
$
784,701

$
6,024

$
778,677

$
—



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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, 2016
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,250

$
—

$
4,250

$
—

Residential mortgage-backed securities
35,921

—

35,921

—

Commercial mortgage-backed securities
6,031

—

6,031

—

Total held-to-maturity securities
$
46,202

$
—

$
46,202

$
—

December 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,221

$
—

$
4,221

$
—

Residential mortgage-backed securities
35,196

—

35,196

—

Commercial mortgage-backed securities
6,436

—

6,436

—

Total held-to-maturity securities
$
45,853

$
—

$
45,853

$
—

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 volatility, 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 the pricing services in management's overall assessment of the reasonableness of the fair values provided, and challenges prices when management believes a material discrepancy in pricing exists.
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, 2016, impaired loans with an aggregate outstanding principal balance of $52.3 million were measured and reported at a fair value of $44.9 million.  For the three months ended March 31, 2016, Peoples recognized $0.6 million 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’ Unaudited 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, 2016
 
December 31, 2015
(Dollars in thousands)
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
63,296

$
63,296

 
$
71,115

$
71,115

Investment securities
885,462

886,798

 
868,830

868,955

Loans (1)
2,088,804

2,057,998

 
2,057,614

2,018,482

Financial liabilities:
 
 
 
 
 
Deposits
$
2,587,083

$
2,591,488

 
$
2,535,944

$
2,540,131

Short-term borrowings
135,068

135,068

 
160,386

160,386

Long-term borrowings
113,188

118,190

 
113,670

117,299

(1) Includes loans held for sale


10
Table of Contents

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.

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, 2016
 
 
 
 
Obligations of:
 
 
 
 
U.S. government sponsored agencies
$
1,944

$
60

$
—

$
2,004

States and political subdivisions
110,139

4,192

(3
)
114,328

Residential mortgage-backed securities
642,835

10,293

(2,454
)
650,674

Commercial mortgage-backed securities
23,668

590

—

24,258

Bank-issued trust preferred securities
5,152

—

(822
)
4,330

Equity securities
1,806

4,866

(72
)
6,600

Total available-for-sale securities
$
785,544

$
20,001

$
(3,351
)
$
802,194

December 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
U.S. government sponsored agencies
$
2,908

$
58

$
—

$
2,966

States and political subdivisions
111,283

3,487

(44
)
114,726

Residential mortgage-backed securities
635,504

4,905

(8,116
)
632,293

Commercial mortgage-backed securities
23,770

119

(44
)
23,845

Bank-issued trust preferred securities
5,146

—

(511
)
4,635

Equity securities
1,693

4,627

(84
)
6,236

Total available-for-sale securities
$
780,304

$
13,196

$
(8,799
)
$
784,701

Peoples’ investment in equity securities was comprised largely of common stocks issued by various unrelated bank holding companies at both March 31, 2016 and December 31, 2015.  At March 31, 2016, there were no securities of a single issuer that exceeded 10% of stockholders' equity.


11
Table of Contents

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)
2016
2015
Gross gains realized
$
96

$
600

Gross losses realized
—

—

Net gain realized
$
96

$
600

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.
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, 2016
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
—

$
—

—

 
$
215

$
3

1

 
$
215

$
3

Residential mortgage-backed securities
69,140

415

17

 
116,130

2,039

36

 
185,270

2,454

Bank-issued trust preferred securities
1,991

163

1

 
2,339

659

3

 
4,330

822

Equity securities
20

2

1

 
106

70

1

 
126

72

Total
$
71,151

$
580

19

 
$
118,790

$
2,771

41

 
$
189,941

$
3,351

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
7,662

$
38

8

 
$
213

$
6

1

 
$
7,875

$
44

Residential mortgage-backed securities
303,549

3,902

76

 
102,090

4,214

33

 
405,639

8,116

Commercial mortgage-backed securities
6,682

44

3

 
—

—

—

 
6,682

44

Bank-issued trust preferred securities
2,129

19

1

 
2,506

492

3

 
4,635

511

Equity securities
438

15

2

 
106

69

1

 
544

84

Total
$
320,460

$
4,018

90

 
$
104,915

$
4,781

38

 
$
425,375

$
8,799

Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair value on a quarterly basis. At March 31, 2016, 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, 2016 and December 31, 2015, were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At March 31, 2016, 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 100% 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 March 31, 2016 were primarily attributable to the floating-rate nature of those investments, the current interest rate environment and spreads within that sector.


12
Table of Contents

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, 2016.  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. government sponsored agencies
$
993

$
—

$
—

$
951

$
1,944

States and political subdivisions
239

12,322

30,930

66,648

110,139

Residential mortgage-backed securities
1

13,866

51,865

577,103

642,835

Commercial mortgage-backed securities
—

3,278

16,656

3,734

23,668

Bank-issued trust preferred securities
—

—

—

5,152

5,152

Equity securities
 
 
 
 
1,806

Total available-for-sale securities
$
1,233

$
29,466

$
99,451

$
653,588

$
785,544

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. government sponsored agencies
$
1,000

$
—

$
—

$
1,004

$
2,004

States and political subdivisions
245

12,728

31,981

69,374

114,328

Residential mortgage-backed securities
1

13,837

52,809

584,027

650,674

Commercial mortgage-backed securities
—

3,400

17,075

3,783

24,258

Bank-issued trust preferred securities
—

—

—

4,330

4,330

Equity securities
 
 
 
 
6,600

Total available-for-sale securities
$
1,246

$
29,965

$
101,865

$
662,518

$
802,194

Total weighted-average yield
1.96
%
3.12
%
3.34
%
2.74
%
2.83
%
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, 2016
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,828

$
422

$
—

$
4,250

Residential mortgage-backed securities
35,005

990

(74
)
35,921

Commercial mortgage-backed securities
6,033

1

(3
)
6,031

Total held-to-maturity securities
$
44,866

$
1,413

$
(77
)
$
46,202

December 31, 2015
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
3,831

$
394

$
(4
)
$
4,221

Residential mortgage-backed securities
35,367

363

(534
)
35,196

Commercial mortgage-backed securities
6,530

—

(94
)
6,436

Total held-to-maturity securities
$
45,728

$
757

$
(632
)
$
45,853

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, 2016 and 2015.


13
Table of Contents

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, 2016
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

$
—

—

 
$
10,313

$
74

2

 
$
10,313

$
74

Commercial mortgage-backed securities
127

3

1

 
—

—

—

 
127

3

Total
$
127

$
3

1

 
$
10,313

$
74

2

 
$
10,440

$
77

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
—

$
—

—

 
$
319

$
4

1

 
$
319

$
4

Residential mortgage-backed securities
3,706

89

2

 
10,040

445

2

 
13,746

534

Commercial mortgage-backed securities
540

4

1

 
5,895

90

1

 
6,435

94

Total
$
4,246

$
93

3

 
$
16,254

$
539

4

 
$
20,500

$
632

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, 2016.  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
$
—

$
323

$
976

$
2,529

$
3,828

Residential mortgage-backed securities
—

—

482

34,523

35,005

Commercial mortgage-backed securities
—

—

—

6,033

6,033

Total held-to-maturity securities
$
—

$
323

$
1,458

$
43,085

$
44,866

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$
—

$
332

$
1,116

$
2,802

$
4,250

Residential mortgage-backed securities
—

—

492

35,429

35,921

Commercial mortgage-backed securities
—

—

—

6,031

6,031

Total held-to-maturity securities
$
—

$
332

$
1,608

$
44,262

$
46,202

Total weighted-average yield
—
%
3.03
%
2.85
%
3.32
%
3.30
%
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 $561.7 million and $495.5 million at March 31, 2016 and December 31, 2015, respectively, and held-to-maturity investment securities with carrying values of $20.8 million and $21.4 million at March 31, 2016 and December 31, 2015, 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 $10.8 million and $11.1 million at March 31, 2016 and December 31, 2015, respectively, and held-to-maturity securities with carrying values of $23.1 million and $23.3 million at March 31, 2016 and December 31, 2015, respectively, to secure additional borrowing capacity at the FHLB and the FRB.


14
Table of Contents

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)
March 31,
2016
December 31, 2015
Originated loans:
 
 
Commercial real estate, construction
$
69,499

$
63,785

Commercial real estate, other
471,998

471,184

    Commercial real estate
541,497

534,969

Commercial and industrial
308,649

288,130

Residential real estate
302,512

288,783

Home equity lines of credit
76,959

74,176

Consumer
245,596

227,133

Deposit account overdrafts
2,083

1,448

Total originated loans
$
1,477,296

$
1,414,639

Acquired loans:
 
 
Commercial real estate, construction
$
11,882

$
12,114

Commercial real estate, other
256,201

265,092

    Commercial real estate
268,083

277,206

Commercial and industrial
59,161

63,589

Residential real estate
263,237

276,772

Home equity lines of credit
30,742

32,253

Consumer
6,596

7,981

Deposit account overdrafts
—

—

Total acquired loans
$
627,819

$
657,801

Loans, net of deferred fees and costs
$
2,105,115

$
2,072,440

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,
2016
December 31,
2015
Commercial real estate, other
$
16,636

$
16,893

Commercial and industrial
2,866

3,040

Residential real estate
26,210

27,155

Consumer
168

193

Total outstanding balance
$
45,880

$
47,281

Net carrying amount
$
33,637

$
35,064

Changes in the accretable yield for purchased credit impaired loans for the three months ended March 31, 2016 were as follows:
(Dollars in thousands)
Accretable Yield
Balance, December 31, 2015
$
7,042

Reclassification from nonaccretable to accretable
1,916

Accretion
(491
)
Balance, March 31, 2016
$
8,467



15
Table of Contents

The reclassification from nonaccretable to accretable related to the re-estimation of cash flows on the acquired purchased credit impaired loan portfolios completed during the first quarter of 2016, coupled with the loans performing better than expected. The majority of the reclassification related to prepayment speeds decreasing in the residential portfolio, resulting in higher total expected cash flows.
Cash flows expected to be collected on purchased 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 $553.8 million and $554.8 million at March 31, 2016 and December 31, 2015, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB. The outstanding balances of these loans totaled $183.5 million and $195.5 million at March 31, 2016 and December 31, 2015, 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,
2016
December 31,
2015
 
March 31,
2016
December 31,
2015
Originated loans:
 
 
 
 
 
Commercial real estate, construction
$
891

$
921

 
$
—

$
—

Commercial real estate, other
6,754

7,041

 
277

—

    Commercial real estate
7,645

7,962

 
277

—

Commercial and industrial
461

480

 
1,401

680

Residential real estate
3,082

3,057

 
104

169

Home equity lines of credit
223

321

 
—

—

Consumer
120

92

 
16

1

Total originated loans
$
11,531

$
11,912

 
$
1,798

$
850

Acquired loans:
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

 
$
—

$
—

Commercial real estate, other
573

469

 
2,486

2,425

    Commercial real estate
573

469

 
2,486

2,425

Commercial and industrial
413

247

 
673

1,306

Residential real estate
906

798

 
1,603

1,353

Home equity lines of credit
150

98

 
184

35

Consumer
6

7

 
2

—

Total acquired loans
$
2,048

$
1,619

 
$
4,948

$
5,119

Total loans
$
13,579

$
13,531

 
$
6,746

$
5,969



16
Table of Contents

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, 2016
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
891

$
—

$
—

$
891

 
$
68,608

$
69,499

Commercial real estate, other
789

7,065

631

8,485

 
463,513

471,998

    Commercial real estate
1,680

7,065

631

9,376

 
532,121

541,497

Commercial and industrial
852

275

1,490

2,617

 
306,032

308,649

Residential real estate
2,975

1,063

1,094

5,132

 
297,380

302,512

Home equity lines of credit
84

147

58

289

 
76,670

76,959

Consumer
943

204

46

1,193

 
244,403

245,596

Deposit account overdrafts
—

—

—

—

 
2,083

2,083

Total originated loans
$
6,534

$
8,754

$
3,319

$
18,607

 
$
1,458,689

$
1,477,296

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
95

$
—

$
40

$
135

 
$
11,747

$
11,882

Commercial real estate, other
618

206

2,961

3,785

 
252,416

256,201

    Commercial real estate
713

206

3,001

3,920

 
264,163

268,083

Commercial and industrial
70

115

954

1,139

 
58,022

59,161

Residential real estate
6,278

699

2,080

9,057

 
254,180

263,237

Home equity lines of credit
81

—

296

377

 
30,365

30,742

Consumer
31

9

2

42

 
6,554

6,596

Deposit account overdrafts
—

—

—

—

 
—

—

Total acquired loans
$
7,173

$
1,029

$
6,333

$
14,535

 
$
613,284

$
627,819

Total loans
$
13,707

$
9,783

$
9,652

$
33,142

 
$
2,071,973

$
2,105,115

December 31, 2015
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
913

$
—

$
8

$
921

 
$
62,864

$
63,785

Commercial real estate, other
7,260

1,258

379

8,897

 
462,287

471,184

    Commercial real estate
8,173

1,258

387

9,818

 
525,151

534,969

Commercial and industrial
1,437

215

767

2,419

 
285,711

288,130

Residential real estate
3,124

1,105

1,263

5,492

 
283,291

288,783

Home equity lines of credit
161

7

104

272

 
73,904

74,176

Consumer
1,387

250

32

1,669

 
225,464

227,133

Deposit account overdrafts
—

—

—

—

 
1,448

1,448

Total originated loans
$
14,282

$
2,835

$
2,553

$
19,670

 
$
1,394,969

$
1,414,639

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

$
40

$
40

 
$
12,074

$
12,114

Commercial real estate, other
1,592

352

2,730

4,674

 
260,418

265,092

    Commercial real estate
1,592

352

2,770

4,714

 
272,492

277,206

Commercial and industrial
177

232

1,553

1,962

 
61,627

63,589

Residential real estate
4,910

2,480

1,745

9,135

 
267,637

276,772

Home equity lines of credit
318

20

95

433

 
31,820

32,253

Consumer
90

31

—

121

 
7,860

7,981

Deposit account overdrafts
—

—

—

—

 
—

—

Total acquired loans
$
7,087

$
3,115

$
6,163

$
16,365

 
$
641,436

$
657,801

Total loans
$
21,369

$
5,950

$
8,716

$
36,035

 
$
2,036,405

$
2,072,440



17
Table of Contents

Credit Quality Indicators
As discussed in Note 1 of the Notes to the Consolidated Financial Statements included in Peoples' 2015 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 estimated 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”.


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Table of Contents

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, 2016
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
67,813

$
—

$
891

$
—

$
795

$
69,499

Commercial real estate, other
442,631

13,209

16,158

—

—

471,998

    Commercial real estate
510,444

13,209

17,049

—

795

541,497

Commercial and industrial
269,170

32,857

6,618

—

4

308,649

Residential real estate
21,766

1,176

12,184

200

267,186

302,512

Home equity lines of credit
780

—

170

—

76,009

76,959

Consumer
215

—

2

—

245,379

245,596

Deposit account overdrafts
—

—

—

—

2,083

2,083

Total originated loans
$
802,375

$
47,242

$
36,023

$
200

$
591,456

$
1,477,296

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
11,882

$
—

$
—

$
—

$
—

$
11,882

Commercial real estate, other
224,941

13,924

17,262

74

—

256,201

    Commercial real estate
236,823

13,924

17,262

74

—

268,083

Commercial and industrial
56,978

123

1,732

328

—

59,161

Residential real estate
18,596

670

1,790

—

242,181

263,237

Home equity lines of credit
322

—

—

—

30,420

30,742

Consumer
236

—

—

—

6,360

6,596

Deposit account overdrafts
—

—

—

—

—

—

Total acquired loans
$
312,955

$
14,717

$
20,784

$
402

$
278,961

$
627,819

Total loans
$
1,115,330

$
61,959

$
56,807

$
602

$
870,417

$
2,105,115

December 31, 2015
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
62,225

$
—

$
913

$
—

$
647

$
63,785

Commercial real estate, other
434,868

18,710

17,595

—

11

471,184

    Commercial real estate
497,093

18,710

18,508

—

658

534,969

Commercial and industrial
259,183

23,601

5,344

—

2

288,130

Residential real estate
21,903

1,168

12,282

187

253,243

288,783

Home equity lines of credit
785

—

175

—

73,216

74,176

Consumer
208

—

3

—

226,922

227,133

Deposit account overdrafts
—

—

—

—

1,448

1,448

Total originated loans
$
779,172

$
43,479

$
36,312

$
187

$
555,489

$
1,414,639

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
12,114

$
—

$
—

$
—

$
—

$
12,114

Commercial real estate, other
233,630

13,866

17,521

75

—

265,092

    Commercial real estate
245,744

13,866

17,521

75

—

277,206

Commercial and industrial
56,077

3,078

4,238

196

—

63,589

Residential real estate
18,027

1,409

1,786

—

255,550

276,772

Home equity lines of credit
316

—

—

—

31,937

32,253

Consumer
256

—

—

—

7,725

7,981

Deposit account overdrafts
—

—

—

—

—

—

Total acquired loans
$
320,420

$
18,353

$
23,545

$
271

$
295,212

$
657,801

Total loans
$
1,099,592

$
61,832

$
59,857

$
458

$
850,701

$
2,072,440



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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, 2016
 
 
 
 
 
 
 
Commercial real estate, construction
$
945

$
—

$
935

$
935

$
—

$
946

$
1

Commercial real estate, other
24,586

6,508

14,482

20,990

1,294

21,035

235

    Commercial real estate
$
25,531

$
6,508

$
15,417

$
21,925

$
1,294

$
21,981

$
236

Commercial and industrial
5,106

2,036

1,424

3,460

453

3,376

51

Residential real estate
32,777

367

30,148

30,515

103

29,604

385

Home equity lines of credit
1,024

—

1,017

1,017

—

718

12

Consumer
464

—

376

376

—

322

8

Total
$
64,902

$
8,911

$
48,382

$
57,293

$
1,850

$
56,001

$
692

December 31, 2015
 
 
 
 
 
 
 
Commercial real estate, construction
$
957

$
—

$
957

$
957

$
—

$
227

$
3

Commercial real estate, other
23,430

6,396

12,775

19,171

1,363

13,071

815

    Commercial real estate
$
24,387

$
6,396

$
13,732

$
20,128

$
1,363

$
13,298

$
818

Commercial and industrial
5,670

1,224

4,130

5,354

351

4,049

246

Residential real estate
31,304

370

28,834

29,204

106

26,785

1,354

Home equity lines of credit
425

—

419

419

—

325

18

Consumer
383

—

298

298

—

295

28

Total
$
62,169

$
7,990

$
47,413

$
55,403

$
1,820

$
44,752

$
2,464

At March 31, 2016, 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 loan, such as (i) a reduction in the interest rate for the remaining life of the loan, (ii) an extension of the maturity date at an interest rate lower than the current market rate for new loans 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.



20
Table of Contents

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)
(Dollars in thousands)
Number of Contracts
Pre-Modification
Post-Modification
Remaining Recorded Investment
March 31, 2016
 
 
 
Originated loans:
 
 
 
Commercial and industrial
4

$
701

$
701

$
703

Residential real estate
2

83

83

83

Consumer
5

46

46

46

Total originated loans
11

$
830

$
830

$
832

Acquired loans:
 
 
 
Home equity lines of credit
1

$
12

$
12

$
12

Residential real estate
6

399

401

400

Consumer
2

4

4

4

Total acquired loans
9

$
415

$
417

$
416

March 31, 2015
 
 
 
Originated loans:
 
 
 
Home equity lines of credit
5

$
217

$
217

$
217

Consumer
1

3

3

3

Total originated loans
6

$
220

$
220

$
220

Acquired loans:
 
 
 
Residential real estate
4

$
419

$
419

$
419

Total acquired loans
4

$
419

$
419

$
419

(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 did not have any originated and acquired loans that were modified as a TDR during the last twelve months that subsequently defaulted. Peoples had no additional commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.


21
Table of Contents

Allowance for Originated Loan Losses
Changes in the allowance for originated loan losses for the three months 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, 2016
$
7,076

$
5,382

$
1,257

$
732

$
1,971

$
121

$
16,539

Charge-offs
—

(1,012
)
(150
)
(10
)
(622
)
(163
)
(1,957
)
Recoveries
1,164

—

29

7

260

70

1,530

Net recoveries (charge-offs)
1,164

(1,012
)
(121
)
(3
)
(362
)
(93
)
(427
)
(Recovery of) provision for loan losses
(748
)
925

122

4

547

97

947

Balance, March 31, 2016
$
7,492

$
5,295

$
1,258

$
733

$
2,156

$
125

$
17,059

 
 
 
 
 
 
 
 
Period-end amount allocated to:
 
 
 
 
 
 
Loans individually evaluated for impairment
$
1,294

$
453

$
103

$
—

$
—

$
—

$
1,850

Loans collectively evaluated for impairment
6,198

4,842

1,155

733

2,156

125

15,209

Ending balance
$
7,492

$
5,295

$
1,258

$
733

$
2,156

$
125

$
17,059

 
 
 
 
 
 
 
 
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

13

115

15

186

58

442

Net recoveries (charge-offs)
45

13

(71
)
(43
)
(1
)
(85
)
(142
)
(Recovery of) provision for loan losses
(796
)
1,059

4

57

(74
)
100

350

Balance, March 31, 2015
$
9,074

$
5,108

$
1,560

$
708

$
1,512

$
127

$
18,089

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

$
527

$
9

$
—

$
—

$
—

$
725

Loans collectively evaluated for impairment
8,885

4,581

1,551

708

1,512

127

17,364

Ending balance
$
9,074

$
5,108

$
1,560

$
708

$
1,512

$
127

$
18,089

The recovery of provision for loan losses recorded for originated commercial real estate loans during the first quarter of 2016 was due primarily to the recovery of originated loan losses during the first three months of 2016. The increase in provision for originated commercial and industrial loans during 2016 was primarily related to loan growth. The changes in the residential real estate, home equity lines of credit and consumer categories of the allowance for originated loan losses and the related provision for originated loan losses recorded during 2016 were driven by net charge-off activity and increases in the size of the respective loan portfolios.

Allowance for Acquired Loan Losses
Acquired loans are recorded at their fair value as of the acquisition date with no valuation allowance, and monitored for changes in credit quality and subsequent increases or decreases in expected cash flows. Decreases in expected cash flows of acquired credit impaired loans are recognized as an impairment, with the amount of the expected loss included in management's evaluation of the appropriateness of the allowance for loan losses. The methods utilized to estimate the required allowance for loan losses for nonimpaired acquired loans are similar to those utilized for originated loans; however, Peoples records a provision for loan losses only when the computed allowance exceeds the remaining fair value adjustment. As of March 31, 2016, the expected cash flows for both nonimpaired acquired loans and acquired credit impaired loans had decreased from those as of the respective acquisition dates, resulting in Peoples recording provision for loan losses with respect to those acquired loans.


22
Table of Contents

The following table presents activity in the allowance for loan losses for acquired loans for the three months ended March 31:
 
Three Months Ended
(Dollars in thousands)
March 31, 2016

March 31, 2015

Purchased credit impaired loans:
 
 
Balance, January 1
$
240

$
—

Charge-offs
(46
)
—

Recoveries
—

—

Net charge-offs
(46
)
—

Provision for loan losses
8

—

Balance, March 31
$
202

$
—


Note 5. Long-Term Borrowings
The following table summarizes Peoples' long-term borrowings:
 
March 31, 2016
December 31, 2015
(Dollars in thousands)
Balance
Weighted-
Average
Rate
Balance
Weighted-
Average
Rate
FHLB putable, non-amortizing, fixed-rate advances
$
50,000

3.32
%
$
50,000

3.32
%
FHLB amortizing, fixed-rate advances
16,474

2.69
%
16,934

2.69
%
Callable national market repurchase agreements
40,000

3.63
%
40,000

3.63
%
Junior subordinated debt securities
6,783

2.14
%
6,736

1.83
%
Unamortized debt issuance costs
(69
)
—
%
—

—
%
Total long-term borrowings
$
113,188

3.27
%
$
113,670

3.25
%
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 advances after the initial fixed rate periods ranging from three months to five years, requiring full repayment of the advances by Peoples, prior to the stated maturity. If an 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.
Peoples' 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.
On March 6, 2015, Peoples acquired 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 acquisition date, junior subordinated debt securities with a fair value of $6.6 million were held in a 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. Since September 6, 2012, the


23
Table of Contents

Capital Securities have been 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.
On December 18, 2012, Peoples entered into a Loan Agreement (the "U.S. Bank Loan Agreement") to obtain a $24 million unsecured term loan from U.S. Bank, National Association (the "U.S. Bank") with an original maturity of five years. On August 4, 2014, the U.S. Bank 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 operation of Peoples' business were modified. Peoples was required to make quarterly principal and interest payments until the earlier of either full prepayment by Peoples or the stated maturity date. The term loan could be prepaid at any time prior to maturity without penalties, so long as no default had occurred. Concurrently, Peoples also entered into a Negative Pledge Agreement that precluded 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 was also subject to certain covenants under the Amended Loan Agreement, which included 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. The term loan was prepaid on July 24, 2015 without penalties.

On December 19, 2012, Peoples obtained a $5 million revolving credit loan from U.S. Bank under the U.S. Bank Loan Agreement. On August 4, 2014, as part of the amendment to the U.S. Bank Loan Agreement, the revolving credit loan amount under the Amended Loan Agreement was increased to $10 million and on December 17, 2015, the revolving credit loan amount under the Amended Loan Agreement increased to $15 million, with a maturity date of December 15, 2016. The revolving credit loan bore interest at a fixed per annum rate equal to 3% plus the one-month LIBOR rate, to be reset monthly. The revolving credit loan was subject to the same covenants as detailed above for the term loan. At December 31, 2015, the revolving credit loan had no outstanding principal balance. Effective March 2, 2016, Peoples terminated the Amended Loan Agreement. As of the termination date, Peoples had no outstanding borrowings under the Amended Loan Agreement. Peoples paid an immaterial non-usage fee in connection with the termination of the Amended Loan Agreement.
On March 4, 2016, Peoples entered into a Credit Agreement (the "RJB Credit Agreement"), with Raymond James Bank, N.A. ("Raymond James") which provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $15 million (the "RJB Loan Commitment") for the purpose of: (i) to the extent that any amounts remained outstanding, paying off the $15 million revolving credit loan to Peoples pursuant to the Amended Loan Agreement; (ii) making acquisitions; (iii) making stock repurchases; (iv) working capital needs; and (v) other general corporate purposes. On March 4, 2016, Peoples paid fees of $70,600, representing 0.47% of the RJB Loan Commitment.
Any loan under the RJB Credit Agreement will bear interest per annum at a rate equal to 3.00% plus the one-month LIBOR rate, which rate will reset monthly. Accrued interest, if any, is payable on the last business day of each calendar month, beginning with March 31, 2016, with the then outstanding principal balance of any outstanding loans, along with any accrued and unpaid interest, due and payable on March 4, 2019. In addition, Peoples is to pay an undrawn borrowing availability fee on the last business day of each calendar month, beginning with March 31, 2016, at a rate equal to 0.25% per annum on the amount by which the RJB Loan Commitment exceeds the average daily unpaid principal balance for that calendar month. The RJB Credit Agreement also contains yield protection provisions in favor of the lender with a look back period of 180 days, the obligations under which will only be imposed on Peoples to the extent that they are imposed on similarly-situated borrowers.
The RJB Credit Agreement is unsecured. However, the RJB Credit Agreement contains negative covenants which preclude Peoples from: (i) taking any action which could, directly or indirectly, decrease Peoples’ ownership (alone or together with any of Peoples’ subsidiaries) interest in Peoples Bank (Peoples’ Ohio state-chartered subsidiary bank) or any of Peoples Bank’s subsidiaries to a level below the percentage of equity interests held as of March 4, 2016; (ii) taking any action to or allowing Peoples Bank or any of Peoples Bank’s subsidiaries to take any action to directly or indirectly create, assume, incur, suffer or permit to exist any pledge, encumbrance, security interest, assignment, lien or charge of any kind or character on the equity interests of Peoples Bank or any of Peoples Bank’s subsidiaries; or (iii) taking any action to or allow Peoples Bank or any of Peoples Bank’s subsidiaries to sell, transfer, issue, reissue or exchange, or grant any option with respect to, any equity interest of Peoples Bank or any of Peoples Bank’s subsidiaries. There are also negative covenants limiting the actions which may be taken with respect to the authorization or issuance of additional shares of any class of equity interests of Peoples Bank or any of Peoples Bank’s subsidiaries or the grant to any person other than the lender of any proxy for existing equity interests of Peoples Bank or any of Peoples Bank’s subsidiaries.


24
Table of Contents

The RJB Credit Agreement contains covenants which are usual and customary for comparable transactions. In addition to the negative covenants affecting the equity interests of Peoples Bank and Peoples Bank’s subsidiaries discussed above, under the RJB Credit Agreement, the following covenants must be complied with:
(a)    neither Peoples nor any of its subsidiaries may create, incur or suffer to exist additional indebtedness with an aggregate principal amount which exceeds $10 million at any time outstanding, subject to specific negotiated carve-outs;
(b)    neither Peoples nor any of its subsidiaries may be a party to certain material transactions (such as mergers or consolidations with third parties, liquidations or dissolutions, sales of assets, acquisitions, investments and sale/leaseback transactions), subject to transactions in the ordinary course of the banking business of Peoples Bank and new investments in an aggregate amount not exceeding $10 million being permitted as well as specific negotiated carve-outs;
(c)    neither Peoples nor any of its subsidiaries may voluntarily prepay, defease, purchase, redeem, retire or otherwise acquire any subordinated indebtedness issued by them; subject to specific negotiated carve-outs and the consent of Raymond James Bank; and
(d)    neither Peoples nor any of its subsidiaries may make any Restricted Payments (as defined in the RJB Credit Agreement), except that, to the extent legally permissible, (i) any subsidiary may declare and pay dividends to Peoples or a wholly-owned subsidiary of Peoples and (ii) Peoples may declare and pay dividends on its common shares provided that no event of default exists before or after giving effect to the dividend and Peoples is in compliance (on a pro forma basis) with the financial covenants specified in the RJB Credit Agreement, after giving effect to the dividend.
Peoples and Peoples Bank are also required to satisfy certain financial covenants including:
(i)    Peoples (on a consolidated basis) and Peoples Bank must be “well capitalized” at all times, as defined and determined by the applicable governmental authority having jurisdiction over Peoples or Peoples Bank;
(ii)    Peoples (on a consolidated basis) and Peoples Bank must maintain a Total risk-based capital ratio (as defined by the applicable governmental authority having regulatory authority over Peoples or Peoples Bank) of at least 12.5% as of the last day of any fiscal quarter;
(iii)    Peoples Bank must maintain a ratio of “Non-Performing Assets” to “Tangible Primary Capital” of not more than 20% as of the last day of any fiscal quarter;
(iv)    Peoples Bank must maintain a ratio of “Loan Loss Reserves” to “Non-Performing Loans” of not less than 70% at all times; and
(v)    Peoples (on a consolidated basis) must maintain a “Fixed Charge Coverage Ratio” that equals or exceeds 1.25 to 1.00 as of the end of each fiscal quarter, with the items used in this ratio being determined on a trailing four-fiscal quarter basis.
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, 2016
$
2,514

2.31
%
Year ending December 31, 2017
2,307

2.45
%
Year ending December 31, 2018
82,367

3.47
%
Year ending December 31, 2019
1,422

2.57
%
Year ending December 31, 2020
3,901

3.35
%
Thereafter
20,677

2.70
%
Total long-term borrowings
$
113,188

3.27
%


Note 6. Stockholders’ Equity 
The following table details the progression in Peoples’ common shares and treasury stock during the three months ended March 31, 2016:
 
 
Common Shares
Treasury
Stock
Shares at December 31, 2015
18,931,200

586,686

Changes related to stock-based compensation awards:
 
 
Release of restricted common shares
—

13,771

Cancellation of restricted common shares
(2,810
)
—

Grant of restricted common shares
—

(35,500
)
Changes related to deferred compensation plan for Boards of Directors:
 
 
Purchase of treasury stock
—

2,946

Reissuance of treasury stock
—

(8,531
)
Common shares repurchased under the share repurchase program
—

279,770

Common shares issued under dividend reinvestment plan
5,795

—

Common shares issued under compensation plan for Board of Directors
—

(3,196
)
Common shares issued under employee stock purchase plan
—

(4,928
)
Shares at March 31, 2016
18,934,185

831,018

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, 2016, Peoples had no preferred shares issued or outstanding.
Accumulated Other Comprehensive (Loss) Income
The following table details the change in the components of Peoples’ accumulated other comprehensive (loss) income for the three months ended March 31, 2016:
(Dollars in thousands)
Unrealized Gain on Securities
Unrecognized Net Pension and Postretirement Costs
Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2015
$
2,869

$
(3,228
)
$
(359
)
Reclassification adjustments to net income:
 
 


  Realized gain on sale of securities, net of tax
(62
)
—

(62
)
Other comprehensive income, net of reclassifications and tax
8,013

—

8,013

Balance, March 31, 2016
$
10,820

$
(3,228
)
$
7,592


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


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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)
2016
2015
Interest cost
$
110

$
115

Expected return on plan assets
(100
)
(130
)
Amortization of net loss
—

33

Settlement of benefit obligation
—

269

Net periodic cost
$
10

$
287

 
Postretirement Benefits
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
2015
Interest cost
$
1

$
1

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

$
—

There were no settlement charges recorded in the first quarter of 2016 under the noncontributory defined benefit pension plan.
Note 8.  Earnings Per Common Share 
The calculations of basic and diluted earnings per common share were as follows:
 
Three Months Ended
 
March 31,
(Dollars in thousands, except per share data)
2016
2015
Distributed earnings allocated to common shareholders
$
2,740

$
2,243

Undistributed earnings (loss) allocated to common shareholders
5,255

(2,941
)
Net earnings (loss) allocated to common shareholders
$
7,995

$
(698
)
 
 
 
Weighted-average common shares outstanding
18,071,746

15,802,334

Effect of potentially dilutive common shares
123,244

127,901

Total weighted-average diluted common shares outstanding
18,194,990

15,930,235

 
 
 
Earnings (loss) per common share:
 
 
Basic
$
0.44

$
(0.04
)
Diluted
$
0.44

$
(0.04
)
 
 
 
Anti-dilutive shares excluded from calculation:
 
 
Stock options and SARs
32,806

42,584

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 ("SARs") and unrestricted share awards to employees and non-employee directors. The total number of common


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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 SARs to be settled in common shares to employees and restricted common shares to non-employee directors subject to 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, 2016:
 
 
Number of Common Shares Subject to Options
 
Weighted-Average Exercise Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic Value
Outstanding at January 1
 
20,310

 
$
28.83

 
 
 
 
Expired
 
10,310

 
28.25

 
 
 
 
Outstanding at March 31
 
10,000

 
$
29.43

 
0.2 years
 
$
—

Exercisable at March 31
 
10,000

 
$
29.43

 
0.2 years
 
$
—

The following table summarizes Peoples’ stock options outstanding at March 31, 2016:
 
Options Outstanding & Exercisable
Range of Exercise Prices
Common Shares Subject to Options Outstanding & Exercisable
Weighted-Average Remaining Contractual Life
Weighted-Average
Exercise Price
$28.57
to
$30.00
10,000

0.2 years
$
29.43

Total
10,000

0.2 years
$
29.43

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, 2016:
 
 
Number of Common Shares Subject to SARs
 
Weighted-
Average
Exercise
Price
 
Weighted-Average Remaining Contractual Life
 
Aggregate Intrinsic
 Value
Outstanding at January 1
 
17,748

 
$
25.86

 
 
 
 
Forfeited
 
779

 
26.44

 
 
 
 
Outstanding at March 31
 
16,969

 
$
25.79

 
1.3 years
 
$
—

Exercisable at March 31
 
16,969

 
$
25.79

 
1.3 years
 
$
—



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The following table summarizes Peoples’ SARs outstanding at March 31, 2016:
 
Exercise Price
Number of Common Shares Subject to SARs Outstanding & Exercisable
Weighted-
Average Remaining Contractual
Life
$23.26
2,000

1.3 years
$23.77
8,541

1.7 years
$29.25
6,428

0.8 years
Total
16,969

1.3 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 2016, Peoples granted an aggregate of 35,500 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 in full, 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, 2016:
 
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
30,734

$
21.76

 
158,763

$
22.86

Awarded
—

—

 
35,500

17.86

Released
—

—

 
41,028

21.74

Forfeited
2,000

21.92

 
810

23.44

Outstanding at March 31
28,734

$
21.75

 
152,425

$
21.99

 
For the three months ended March 31, 2016, the total intrinsic value of restricted common shares released was $3.5 million compared to $1.7 million at March 31, 2015.
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 for each period:
 
Three Months Ended
 
March 31,
(Dollars in thousands)
2016
2015
Total stock-based compensation
$
338

$
565

Recognized tax benefit
(118
)
(198
)
Net expense recognized
$
220

$
367

Total unrecognized stock-based compensation expense related to unvested awards was $2.1 million at March 31, 2016, which will be recognized over a weighted-average period of 2.0 years.


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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,
 
2016
2015
SIGNIFICANT RATIOS (a)
 
 
Return on average stockholders' equity
7.59
%
(0.78
)%
Return on average assets
0.98
%
(0.10
)%
Net interest margin
3.53
%
3.46
 %
Efficiency ratio (b)(d)
64.26
%
96.72
 %
Pre-provision net revenue to total average assets (e)
1.54
%
—
 %
Average stockholders' equity to average assets
12.94
%
12.97
 %
Average loans to average deposits
81.43
%
81.70
 %
Investment securities as percentage of total assets
26.87
%
25.97
 %
Dividend payout ratio
34.37
%
N/A

ASSET QUALITY RATIOS (a)
 
 
Nonperforming loans as a percent of total loans (c)(f)
0.97
%
0.60
 %
Nonperforming assets as a percent of total assets (c)(f)
0.64
%
0.42
 %
Nonperforming assets as a percent of total loans and other real estate owned (c)(f)
1.00
%
0.68
 %
Allowance for loan losses as a percent of originated loans, net of deferred fees and costs (c)(g)
1.17
%
1.48
 %
Allowance for loan losses as a percent of nonperforming loans (c)(f)
84.92
%
149.96
 %
Provision for loan losses as a percent of average total loans
0.18
%
0.08
 %
Net charge-offs as a percentage of average total loans (annualized)
0.09
%
0.03
 %
CAPITAL RATIOS (a)
 

 
Common Equity Tier 1 risk-based capital (g)
13.10
%
13.78
 %
Tier 1
13.41
%
14.10
 %
Total (Tier 1 and Tier 2)
14.29
%
15.04
 %
Tier 1 leverage
9.45
%
11.30
 %
Tangible equity to tangible assets (b)
8.88
%
8.61
 %
PER COMMON SHARE DATA (a)
 
 
Earnings (loss) per common share – basic
$
0.44

$
(0.04
)
Earnings (loss) per common share – diluted
0.44

(0.04
)
Cash dividends declared per common share
0.15

0.15

Book value per common share (c)
23.60

22.82

Tangible book value per common share (b)(c)
$
15.39

$
14.53

Weighted-average number of common shares outstanding – basic
18,071,746

15,802,334

Weighted-average number of common shares outstanding – diluted
18,194,990

15,930,235

Common shares outstanding at end of period
18,157,932

18,374,256

(a)
Reflects the impact of the acquisition of NB&T beginning March 6, 2015.
(b)
These amounts represent non-GAAP financial measures since they exclude intangible asset amortization, and net gains or losses on security transactions, debt extinguishment, loans held-for-sale and other real estate owned and other assets and uses fully tax-equivalent net interest income.  Additional information regarding the calculation of these measures can be found under the caption “Capital/Stockholders’ Equity”.
(c)
Data presented as of the end of the period indicated.
(d)
Total other expense (less intangible asset amortization) as a percentage of fully tax-equivalent net interest income plus non-interest income (which excludes gains or losses on investment securities, asset disposals and other transactions). Additional information regarding the calculation of these non-GAAP financial measures can be found under the caption “Efficiency Ratio”.
(e)
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 under the caption “Pre-Provision Net Revenue”.


29
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(f)
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.
(g)
Peoples' capital conservation buffer was 6.29% at March 31, 2016, compared to 2.50% for the fully phased-in capital conservation buffer by January 1, 2019.
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”, “estimate”, “may”, “feel”, “expect”, “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 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 United States ("U.S.") government and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which may adversely impact interest rates, interest margins and interest rate sensitivity;
(7)
changes in prepayment speeds, loan originations, levels of nonperforming 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, continued economic uncertainty in the U.S., the European Union, Asia, and other areas, which could decrease sales volumes and increase loan delinquencies and defaults;
(9)
legislative or regulatory changes or actions, promulgated and to be promulgated thereunder by governmental and regulatory agencies in the State of Ohio, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, 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, including in particular the rules and regulations promulgated and to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010;
(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;


30
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(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;
(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 (the "SEC"), including those risk factors included in the disclosures under the heading "ITEM 1A. RISK FACTORS" of Peoples’ Annual Report on Form 10-K for the fiscal year ended December 31, 2015 ("Peoples' 2015 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’ 2015 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 82 financial service locations, including 74 full-service bank branches, and 81 Automated Teller Machines ("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 Ohio Division of Financial Institutions (the "ODFI") and the Federal Reserve Bank of Cleveland. Peoples Bank is also subject to regulations of the Consumer Financial Protection Bureau. 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


31
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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, 2016, which were unchanged from the policies disclosed in Peoples’ 2015 Form 10-K.
 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: 
◦
In the fourth quarter of 2016, Peoples will be converting its core banking systems. Peoples anticipates one-time costs associated with the conversion of approximately $1.2 million. The costs will be recorded in each of the remaining quarters of 2016, with a significant majority in the third and fourth quarters. The conversion will support Peoples' future growth, and will provide efficiencies for our back-office area.
◦
Effective March 2, 2016, Peoples terminated the U.S. Bank Loan Agreement dated as of December 18, 2012, as amended. As of the termination date, Peoples had no outstanding borrowings under the U.S. Bank Loan Agreement. Peoples paid an immaterial non-usage fee in connection with the termination of the U.S. Bank Loan Agreement.
◦
On March 4, 2016, Peoples entered into a Credit Agreement, (the "RBJ Credit Agreement") with Raymond James Bank, N.A., which provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $15 million, for the purpose of: (i) to the extent that any amounts remained outstanding, paying off the $15 million revolving line of credit to Peoples pursuant to the U.S. Bank Loan Agreement; (ii) making acquisitions; (iii) making stock repurchases; (iv) working capital needs; and (v) other general corporate purposes. On March 4, 2016, Peoples paid fees of $70,600, representing 0.47% of the loan commitment under the RJB Credit Agreement.
◦
On January 6, 2016, Peoples Bank acquired a small financial advisory book of business in Marietta, Ohio for total cash consideration of $0.5 million, and recorded $0.5 million of customer relationship intangibles. The acquisition did not materially impact Peoples' financial position, results of operations or cash flows.
◦
On July 24, 2015, Peoples repaid the $12.0 million term loan then outstanding under the U.S. Bank Loan Agreement. There were no early termination fees associated with the repayment. The revolving credit loan commitment available under the U.S. Bank Loan Agreement remained outstanding until the March 2, 2016 termination date of the U.S. Bank Loan Agreement.
◦
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 in 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 $384.6 million of loans and $629.5 million of deposits at the acquisition date, after preliminary acquisition accounting adjustments.
◦
The first quarter of 2015, contained $9.0 million of non-core acquisition expenses, which included $4.0 million of salaries and employee benefit costs, $3.6 million of other non-interest expense, and $1.4 million of professional fees.
◦
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.
◦
For the first time in nine years, the Federal Reserve Board raised the Federal Funds Rate at the Federal Open Market Committee meeting in December of 2015. The Federal Funds Rate was increased 25 basis points to a range of 0.25% to 0.50%. The Federal Reserve Board also raised the Discount Rate from 0.75% to 1.00%. The Federal Reserve Board has indicated that these short-term rates could possibly again be raised in 2016.
The impact of these transactions and events, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis.



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EXECUTIVE SUMMARY
Peoples recorded net income for the quarter ended March 31, 2016 of $8.0 million, or $0.44 per diluted common share, compared to a net loss of $0.7 million, or a loss of $0.04 per diluted common share, a year ago and net income of $2.6 million, or $0.14 per diluted common share, in the fourth quarter of 2015. During the first quarter of 2016, Peoples recorded total revenue of $38.9 million compared to $32.4 million a year ago and $37.5 million in the fourth quarter of 2015. Total non-interest expenses during the first quarter of 2016 were $26.3 million compared to $32.9 million a year ago and $27.3 million in the fourth quarter of 2015. The increase in earnings in the first quarter of 2016, compared to prior periods, was due to the increase in total revenue and decrease in non-interest expenses, reducing the efficiency ratio to 64.26% for the quarter. Additionally, the provision for loan losses was $1.0 million for the first quarter of 2016, compared to $0.4 million in the prior year first quarter and $7.2 million in the fourth quarter of 2015. The comparison of quarterly income statement results and average balance sheet between the first quarter of 2015 and the first quarter of 2016 was affected by the NB&T acquisition, which closed March 6, 2015.
Net interest income was $25.8 million in the first quarter of 2016, compared to $21.4 million for the first quarter of 2015 and $25.8 million for the fourth quarter of 2015, while net interest margin was 3.53%, 3.46% and 3.56%, respectively. The slight decrease in net interest margin, from the linked quarter, was driven primarily by a shift in the mix of funding which slightly increased funding costs and a decrease in accretion income from acquisitions, offset partially by an increase in average earning assets due to higher loan balances. The accretion income, net of amortization expense, from acquisitions added 12 basis points of net interest margin in the first quarter of 2016, compared to 18 basis points for the first quarter of 2015 and16 basis points for the linked quarter.
Peoples' provision for loan losses for the three months ended March 31, 2016 was $1.0 million, compared to $0.4 million during the three months ended March 31, 2015 and $7.2 million for the fourth quarter of 2015. The provision for loan losses recorded in the first quarter of 2016 was primarily driven by loan growth experienced during the quarter, coupled with the net charge-offs recorded. The provision for loan losses recorded in the first quarter of 2015 was primarily due to an increase in criticized assets due to a commercial loan relationship that was downgraded. Net charge-offs and the provision for loan losses in the fourth quarter of 2015 were due primarily to the charge-off associated with one large commercial loan relationship.
Asset quality during the quarter remained relatively stable. Net charge-offs were relatively flat compared to the fourth quarter of 2015, excluding the impact of the $13.1 million charge-off in the fourth quarter related to the one large commercial relationship. Compared to the first quarter of 2015, net charge-offs increased $331,000. The annualized net charge-off rate for the first quarter of 2016 was 0.09%, compared to 2.64% for the fourth quarter of 2015, or 0.11% excluding the one large commercial charge-off, and 0.03% for the first quarter of 2015.
For the first quarter of 2016, total non-interest income grew $1.5 million, or 13%, compared to the linked quarter, and $2.1 million, or 19%, compared to the first quarter of 2015. The growth in non-interest income compared to the linked quarter was primarily due to the annual performance-based insurance income, of which a majority is recognized in the first quarter of each year. The growth compared to the first quarter of 2015 was due to growth in almost all categories, most notably electronic banking income, trust and investment income, and deposit account service charges, largely due to the impact of the NB&T acquisition, which closed March 6, 2015.
Non-interest expenses for the first quarter of 2016 were $26.3 million, compared to $32.9 million during the first quarter of 2015 and $27.3 million for the fourth quarter of 2015. Non-interest expenses decreased in the current quarter due primarily to $9.0 million of acquisition-related expenses recorded in the first quarter of 2015, and $0.8 million in the fourth quarter of 2015.
The efficiency ratio for the first quarter of 2016 was 64.26%, compared to 96.72% for the first quarter of 2015 and 67.94% for the linked quarter. The improvement in the efficiency ratio for the first quarter of 2016 was primarily due to decreased expenses coupled with revenue growth increasing at a larger rate than expenses.
At March 31, 2016, total assets were $3.29 billion, up $36.0 million from year-end 2015. This increase was primarily the result of a $32.2 million increase in net loan balances, or 6% annualized growth. The increase in loans was driven primarily by growth of $19.1 million, or 8% annualized, in consumer loan balances. The allowance for loan losses was $17.3 million, or 1.17% of originated loans (net of deferred fees and costs), compared to $16.8 million and 1.19%, respectively, at December 31, 2015.
Total liabilities were $2.87 billion at March 31, 2016, up $27.3 million since year-end 2015. The increase in liabilities was primarily due to a 2%, or $51.1 million, increase in deposits offset partially by a $25.8 million, or 9%, decrease in


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borrowed funds. Total interest-bearing deposits increased 3%, or $52.9 million, and non-interest-bearing deposits decreased slightly from December 31, 2015.
At March 31, 2016, total stockholders' equity was $428.5 million, up $8.7 million since December 31, 2015. Regulatory capital ratios remained significantly higher than "well capitalized" minimums. Peoples' Common Equity Tier 1 risk-based capital ratio was 13.10% at March 31, 2016, compared to 13.36% at December 31, 2015. The Tier 1 risk-based capital ratio at 13.41% at March 31, 2016, versus 13.67% at December 31, 2015, while the Total risk-based capital ratio was 14.29% versus 14.54% at December 31, 2015. In addition, Peoples' tangible equity to tangible asset ratio was 8.88%, and tangible book value per common share was $15.39 at March 31, 2016, versus 8.69% and $14.68 at December 31, 2015, 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. 



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The following tables detail Peoples’ average balance sheets for the periods presented:
 
For the Three Months Ended
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
(Dollars in thousands)
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
Short-term investments
$
12,436

$
16

0.52
%
 
$
12,840

$
8

0.25
%
 
$
62,858

$
37

0.23
%
Long-term investments
—

—

—
%
 
1,096

2

0.72
%
 
1,345

3

0.90
%
Investment Securities (1)(2):
 
 
 
 
 
 
 
 
 
 
 
Taxable
763,136

4,726

2.48
%
 
768,355

4,696

2.44
%
 
673,949

4,407

2.62
%
Nontaxable
112,508

1,200

4.27
%
 
112,583

1,215

4.32
%
 
84,313

917

4.35
%
Total investment securities
875,644

5,926

2.71
%
 
880,938

5,911

2.68
%
 
758,262

5,324

2.81
%
Loans (2)(3):
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate, construction
80,202

781

3.86
%
 
82,426

843

4.00
%
 
45,224

488

4.32
%
Commercial real estate, other
736,036

8,492

4.58
%
 
714,231

8,115

4.45
%
 
599,432

6,994

4.66
%
Commercial and industrial
356,375

3,695

4.11
%
 
353,471

3,863

4.28
%
 
293,777

3,196

4.35
%
Residential real estate (4)
565,514

6,166

4.36
%
 
570,716

6,320

4.43
%
 
504,354

5,595

4.44
%
Home equity lines of credit
106,968

1,190

4.49
%
 
106,223

1,208

4.51
%
 
85,592

855

4.05
%
Consumer
246,644

2,685

4.39
%
 
233,201

2,675

4.55
%
 
188,395

2,076

4.47
%
Total loans
2,091,739

23,009

4.38
%
 
2,060,268

23,024

4.41
%
 
1,716,774

19,204

4.48
%
Less: Allowance for loan losses
(16,845
)
 
 
 
(22,867
)
 
 
 
(17,888
)
 
 
Net loans
2,074,894

23,009

4.42
%
 
2,037,401

23,024

4.46
%
 
1,698,886

19,204

4.53
%
Total earning assets
2,962,974

28,951

3.90
%
 
2,932,275

28,945

3.91
%
 
2,521,351

24,568

3.90
%
Intangible assets
149,528

 
 
 
150,717

 
 
 
121,556

 
 
Other assets
160,133

 
 
 
157,612

 
 
 
121,330

 
 
    Total assets
$
3,272,635

 
 
 
$
3,240,604

 
 
 
$
2,764,237

 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
421,797

$
56

0.05
%
 
$
409,827

$
55

0.05
%
 
$
326,385

$
43

0.05
%
Governmental deposit accounts
298,685

147

0.20
%
 
284,079

147

0.21
%
 
211,607

123

0.24
%
Interest-bearing demand accounts
251,341

45

0.07
%
 
239,627

43

0.07
%
 
181,322

39

0.09
%
Money market accounts
398,515

160

0.16
%
 
393,219

158

0.16
%
 
350,455

140

0.16
%
Brokered deposits
33,875

315

3.75
%
 
33,849

318

3.73
%
 
38,434

352

3.71
%
Retail certificates of deposit
454,224

878

0.78
%
 
456,516

769

0.67
%
 
444,602

862

0.78
%
Total interest-bearing deposits
1,858,437

1,601

0.35
%
 
1,817,117

1,490

0.33
%
 
1,552,805

1,559

0.41
%
Borrowed Funds:
 
 
 
 
 
 
 
 
 
 
 
Short-term FHLB advances
57,956

54

0.38
%
 
50,772

35

0.27
%
 
6,867

3

0.18
%
Retail repurchase agreements
77,733

33

0.17
%
 
90,309

39

0.17
%
 
77,961

32

0.16
%
Total short-term borrowings
135,689

87

0.26
%
 
141,081

74

0.21
%
 
84,828

35

0.17
%
Long-term FHLB advances
66,631

524

3.18
%
 
67,437

537

3.16
%
 
122,099

624

2.08
%
Wholesale repurchase agreements
40,000

367

3.67
%
 
40,000

371

3.71
%
 
40,000

363

3.63
%
Other borrowings
6,739

97

5.76
%
 
6,711

94

5.60
%
 
16,257

159

3.91
%
Total long-term borrowings
113,370

988

3.50
%
 
114,148

1,002

3.50
%
 
178,356

1,146

2.59
%
  Total borrowed funds
249,059

1,075

1.74
%
 
255,229

1,076

1.68
%
 
263,184

1,181

1.81
%
      Total interest-bearing liabilities
2,107,496

2,676

0.51
%
 
2,072,346

2,566

0.49
%
 
1,815,989

2,740

0.61
%
Non-interest-bearing deposits
710,297

 
 
 
716,339

 
 
 
550,318

 
 
Other liabilities
31,299

 

 
 
29,218

 

 
 
39,692

 

 
Total liabilities
2,849,092

 
 
 
2,817,903

 

 


2,405,999

 
 
Total stockholders’ equity
423,543

 

 
 
422,701

 

 
 
358,238

 

 
Total liabilities and stockholders’ equity
$
3,272,635

 

 
 
$
3,240,604

 

 
 
$
2,764,237

 

 
Interest rate spread
 
$
26,275

3.39
%
 
 
$
26,379

3.42
%
 
 
$
21,828

3.29
%
Net interest margin
3.53
%
 
 
 
3.56
%
 
 
 
3.46
%


35
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(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 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.
 
 
 
 
 
 
 
 
The following table provides an analysis of the changes in FTE net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016 Compared to
(Dollars in thousands)
December 31, 2015
 
March 31, 2015
Increase (decrease) in:
Rate
Volume
Total (1)
 
Rate
Volume
Total (1)
INTEREST INCOME:
 
 
 
 
 
 
 
Short-term investments
$
12

$
(5
)
$
7

 
$
131

$
(153
)
$
(22
)
Other long-term investments
1

(2
)
(1
)
 
—

(2
)
(2
)
Investment Securities (2): 
 
 
 
 
 
 
 
Taxable
189

(159
)
30

 
(1,242
)
1,561

319

Nontaxable
(14
)
(1
)
(15
)
 
(119
)
402

283

Total investment income
175

(160
)
15

 
(1,361
)
1,963

602

Loans (2):
 
 
 
 
 
 
 
Commercial real estate, construction
(35
)
(27
)
(62
)
 
(326
)
619

293

Commercial real estate, other
185

192

377

 
(881
)
2,379

1,498

Commercial and industrial
(343
)
175

(168
)
 
(1,013
)
1,512

499

Residential real estate
(97
)
(57
)
(154
)
 
(601
)
1,172

571

Home equity lines of credit
(38
)
20

(18
)
 
101

234

335

Consumer
(461
)
471

10

 
(247
)
856

609

Total loan income
(789
)
774

(15
)
 
(2,967
)
6,772

3,805

Total interest income
(601
)
607

6

 
(4,197
)
8,580

4,383

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Savings accounts
—

1

1

 
—

13

13

Government deposit accounts
(24
)
24

—

 
(107
)
131

24

Interest-bearing demand accounts
—

2

2

 
(36
)
42

6

Money market accounts
1

1

2

 
(1
)
21

20

Brokered certificates of deposit
(3
)
—

(3
)
 
23

(60
)
(37
)
Retail certificates of deposit
136

(27
)
109

 
(36
)
52

16

Total deposit cost
110

1

111

 
(157
)
199

42

Borrowed funds:
 
 
 
 
 
 
 
Short-term borrowings
13

—

13

 
9

43

52

Long-term borrowings
11

(25
)
(14
)
 
1,505

(1,663
)
(158
)
Total borrowed funds cost
24

(25
)
(1
)
 
1,514

(1,620
)
(106
)
Total interest expense
134

(24
)
110

 
1,357

(1,421
)
(64
)
Net interest income
$
(735
)
$
631

$
(104
)
 
$
(5,554
)
$
10,001

$
4,447

(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)Interest income and yields are presented on a fully tax-equivalent basis using a 35% federal tax rate.
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


36
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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 tax rate.  
The following table details the calculation of FTE net interest income:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Net interest income, as reported
$
25,767

$
25,864

$
21,419

Taxable equivalent adjustments
508

515

409

Fully tax-equivalent net interest income
$
26,275

$
26,379

$
21,828

Net interest income decreased slightly in the first quarter of 2016 compared to the prior quarter and increased 20% compared to the prior year first quarter. During the first quarter of 2016, net interest income and net interest margin benefited from normal accretion income, net of amortization expense, of $1.0 million related to the completed acquisitions, which added 12 basis points to net interest margin, compared to $1.2 million, or 16 basis points, during the linked quarter and $1.2 million, or 18 basis points, during the prior year first quarter.
The net interest margin, excluding the impact of amortization and accretion from the acquisitions completed, improved slightly compared to the linked quarter. Funding costs increased 2 basis points during the first quarter of 2016 compared to the linked quarter and decreased 10 basis points from the prior year first quarter. Peoples continues to execute its strategy of replacing higher-cost funding with low-cost 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,
2016
December 31,
2015
March 31,
2015
 
(Dollars in thousands)
 
Other loan losses
858

7,100

250

 
Checking account overdrafts
$
97

$
138

$
100

 
Provision for loan losses
$
955

$
7,238

$
350

 
As a percentage of average total loans (a)
0.18
%
1.39
%
0.08
%
 
(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 recorded in the current quarter was primarily due to loan growth coupled with the net charge-offs recorded. The provision for loan losses recorded during the linked quarter was primarily due to the charge-off associated with one large commercial loan relationship. The provision for loan losses recorded during the first quarter of 2015 was primarily due to an increase in criticized assets due to the one large commercial loan relationship that was downgraded. During the first quarter of 2016, net charge-offs remained 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”.


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Net Loss on Asset Disposals and Other Transactions
The following table details the net loss on asset disposals and other transactions recognized by Peoples:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Net loss on other real estate owned
$
(1
)
$
(398
)
$
(8
)
Net loss on debt extinguishment
—

—

(520
)
Net loss on bank premises and equipment
(30
)
(58
)
(575
)
Net loss on asset disposals and other transactions
$
(31
)
$
(456
)
$
(1,103
)
The net loss on bank premises and equipment during the first quarter of 2016 was due mainly to the sale of two closed branches. The loss on bank premises and equipment recorded during the fourth quarter of 2015 was due to the write-down of closed branches to market value and the net loss on other real estate owned ("OREO") during the fourth quarter of 2015 related to write-downs of four OREO properties to market value and the loss on the sale of one property. During the first quarter of 2015, a loss on bank premises and equipment was recorded 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.

Non-Interest Income
Insurance income comprised the largest portion of first quarter 2016 non-interest income.  The following table details Peoples’ insurance income:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Property and casualty insurance commissions
$
2,448

$
2,342

$
2,412

Performance-based commissions
1,580

16

1,463

Life and health insurance commissions
419

465

381

Credit life and A&H insurance commissions
9

11

1

Other fees and charges
42

79

55

Total insurance income
$
4,498

$
2,913

$
4,312

The increase in revenue for the first quarter of 2016 compared to the linked quarter was due to timing of performance-based commissions. The majority 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,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Overdraft and non-sufficient funds fees
$
1,806

$
2,103

$
1,650

Account maintenance fees
561

573

451

Other fees and charges
236

104

194

Total deposit account service charges
$
2,603

$
2,780

$
2,295

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.


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Peoples' electronic banking services include ATM and debit cards, direct deposit services, internet and mobile banking, and remote deposit capture, and serve as alternative delivery channels to traditional sales offices for providing services to clients. During the first quarter of 2016, compared to the linked quarter, electronic banking income increased 5% and, compared to the prior year first quarter, grew 28%. The growth in electronic banking income year-over-year was primarily due to an increase in the volume of debit card transactions and ATM surcharges due largely to the NB&T acquisition.
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,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Fiduciary
$
1,661

$
1,840

$
1,492

Brokerage
721

649

555

Total trust and investment income
$
2,382

$
2,489

$
2,047

 
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
(Dollars in thousands)
Trust assets under management
$
1,254,824

$
1,275,253

$
1,261,112

$
1,303,792

$
1,319,423

Brokerage assets under management
706,314

664,153

621,242

641,412

566,635

Total managed assets
$
1,961,138

$
1,939,406

$
1,882,354

$
1,945,204

$
1,886,058

Quarterly average
$
1,935,108

$
1,928,308

$
1,926,070

$
1,929,579

$
1,687,287

Trust assets under management have decreased over the past 12 months due to significant market volatility which has had a negative impact on account values and fee income recognized on trust accounts.
In March 2015, trust assets under management increased due to the NB&T acquisition. The comparison of total trust and investment income results between the first quarter of 2016 and the first quarter of 2015 was affected by the acquisition on March 6, 2015. 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.
Mortgage banking income decreased 59% compared to the linked quarter, and 47% compared to the prior year first quarter due to decreased sales of loans to the secondary market, which was driven by mortgage interest rates available and customers' preference for long-term, fixed-rate loans. In the first quarter of 2016, Peoples sold approximately $6.0 million of loans to the secondary market compared to $14.9 million in the fourth quarter of 2015 and $12.9 million in the first quarter of 2015.




39
Table of Contents

Non-Interest Expense
The increases in expenses during the first quarter of 2016 compared to the first quarter of 2015 were affected by the NB&T acquisition, which closed March 6, 2015.
Salaries and employee benefit costs remain Peoples’ largest non-interest expense, accounting for approximately one-half of total non-interest expense.  The following table details Peoples’ salaries and employee benefit costs:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Base salaries and wages
$
9,767

$
10,009

$
12,273

Sales-based and incentive compensation
1,803

1,365

1,828

Employee benefits
1,548

1,330

1,570

Stock-based compensation
338

411

565

Deferred personnel costs
(425
)
(407
)
(257
)
Payroll taxes and other employment costs
1,216

1,015

1,382

Total salaries and employee benefit costs
$
14,247

$
13,723

$
17,361

Full-time equivalent employees:
 
 
 

Actual at end of period
821

817

847

Average during the period
817

823

735

 
For the three months ended March 31, 2016, total salaries and employee benefit costs increased $524,000 compared to the linked quarter and decreased $3.1 million from the prior year first quarter. The increase from the linked quarter was primarily due to increases in corporate incentive programs. The decrease from the prior year period related to severance and retention payouts associated with the NB&T acquisition which were included in base salaries and wages in 2015.
Peoples’ net occupancy and equipment expense was comprised of the following:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Depreciation
$
1,239

$
1,298

$
962

Repairs and maintenance costs
730

713

578

Net rent expense
229

207

211

Property taxes, utilities and other costs
686

716

544

Total net occupancy and equipment expense
$
2,884

$
2,934

$
2,295

Net occupancy and equipment expense decreased during the first quarter of 2016 compared to the linked quarter. The decrease was primarily due to lower depreciation, property taxes and utilities. Net occupancy and equipment expense increased from the prior year first quarter due to higher depreciation and maintenance costs, coupled with increases in real estate taxes and utilities, due to the expansion of Peoples' footprint as a result of the NB&T acquisition.
Professional fees decreased from the prior year, mainly due to the decrease of acquisition-related activities. There were no professional fees incurred as a result of acquisition-related activities in the first quarter of 2016, compared to $1.4 million of acquisition-related professional fees for the first three months of 2015. This decrease in acquisition-related fees was offset partially due to the expansion of Peoples' branch structure as a result of the NB&T acquisition.
Marketing expense decreased $247,000 from the prior year quarter, related to the timing of the NB&T acquisition and additional marketing campaigns in the new market areas in the first quarter of 2015. The decrease of $265,000 from the linked quarter was the result of timing of marketing activities.
Other non-interest expense decreased substantially compared to the first three months of 2015, primarily driven by acquisition-related costs, which included deconversion costs. For the first three months of 2015, other non-interest expense included $3.7 million of acquisition-related costs.
 


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Income Tax Expense (Benefit)
For the three months ended March 31, 2016, Peoples recorded income tax expense of $3.7 million, for an effective tax rate of 31.4%, compared to an income tax benefit of $0.2 million for the same period in 2015, which included the tax impact of acquisition-related costs that are not tax deductible of approximately $123,000. Peoples' current estimate of the effective tax rate for the entire year of 2016 is between 30.0% and 32.0%.
Pre-Provision Net Revenue
Pre-provision net revenue ("PPNR") has become a key financial measure used by state and 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.
The following table provides a reconciliation of this non-GAAP financial measure to the amounts reported for income (loss) before taxes in Peoples' consolidated financial statements for the periods presented:
 
Three Months Ended
 
March 31,
2016
December 31,
2015
March 31,
2015
(Dollars in thousands)
Pre-Provision Net Revenue:
 
 
 
Income (loss) before income taxes
$
11,649

$
3,008

$
(840
)
Add: provision for loan losses
955

7,238

350

Add: loss on debt extinguishment
—

—

520

Add: net loss on loans held-for-sale and OREO
1

398

8

Add: net loss on bank premises and equipment
30

100

575

Less: net gain on securities transactions
96

56

600

Pre-provision net revenue
$
12,539

$
10,688

$
13

Total average assets
$
3,272,635

$
3,240,604

$
2,764,237

Pre-provision net revenue to total average assets (a)
1.54
%
1.31
%
—
%
(a) Presented on an annualized basis.
 
 
 
The first quarter of 2016 PPNR was higher than both the linked quarter and the first quarter of 2015, due largely to the increased revenue and decreased expenses as reported. The first quarter of 2016 PPNR increased compared to prior periods due to a reduction in acquisition-related costs.


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Efficiency Ratio
The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total other expenses (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus non-interest income. This measure is non-GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses FTE net interest income.
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,
 
December 31,
 
March 31,
(in $000’s)
2016
 
2015
 
2015
 
 
 
 
 
 
Efficiency ratio:
 
 
 
 
 
Total other expenses
$
26,282

 
$
27,277

 
$
32,914

Less: Amortization of intangible assets
1,008

 
1,133

 
673

Adjusted non-interest expense
25,274


26,144


32,241

Total non-interest income
13,054

 
12,101

 
11,508

Net interest income
25,767

 
25,864

 
21,419

Add: Fully tax-equivalent adjustment
$
508

 
$
515

 
$
409

Net interest income on a fully taxable-equivalent basis
$
26,275

 
$
26,379

 
$
21,828

Adjusted revenue
$
39,329

 
$
38,480

 
$
33,336

Efficiency ratio
64.26
%
 
67.94
%
 
96.72
%

The decrease in the efficiency ratio was primarily due to decreased expenses coupled with revenue growth increasing at a larger rate than expenses. Management continues to target an efficiency ratio of 65% absent acquisition-related costs and other non-core charges, such as pension settlement charges.
FINANCIAL CONDITION
Cash and Cash Equivalents
At March 31, 2016, Peoples' interest-bearing deposits in other banks decreased from December 31, 2015, as excess cash was utilized to purchase additional investments and fund loan growth. These balances included $2.7 million of excess cash reserves being maintained at the Federal Reserve Bank at March 31, 2016, compared to $8.7 million at December 31, 2015. 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 the first three months of 2016, Peoples' total cash and cash equivalents decreased $7.8 million, as cash used in investing activities was $42.4 million, which exceeded cash provided by financing and operating activities of $17.5 million and $16.8 million, respectively. Peoples' investing activities reflected a $31.9 million net increase in loans. Financing activities included a net increase in deposits of $51.2 million, offset partially by net payments of $25.3 million on short-term borrowings.
Through the first 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 financing and operating activities totaling $37.0 million and $5.9 million, respectively. The increase in cash provided by Peoples' investing activities was primarily due to the $103.6 million contributed by the NB&T acquisition coupled with proceeds from sales within the investment portfolio outpacing purchases. Peoples' financing activities included $76.5 million of cash generated by a net increase in non-interest-bearing deposits, which was more than offset by a net decrease of $57.9 million in interest-bearing deposits and payments of $55.9 million on long-term borrowings.

Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”


42
Table of Contents

Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Available-for-sale securities, at fair value:
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. government sponsored agencies
$
2,004

$
2,966

$
2,993

$
3,934

$
5,488

States and political subdivisions
114,328

114,726

115,249

114,213

118,447

Residential mortgage-backed securities
650,674

632,293

639,327

579,701

597,232

Commercial mortgage-backed securities
24,258

23,845

24,348

27,200

28,241

Bank-issued trust preferred securities
4,330

4,635

4,776

4,668

5,649

Equity securities
6,600

6,236

6,592

6,504

5,765

Total fair value
$
802,194

$
784,701

$
793,285

$
736,220

$
760,822

Total amortized cost
$
785,544

$
780,304

$
780,609

$
730,632

$
748,622

Net unrealized gain
$
16,650

$
4,397

$
12,676

$
5,588

$
12,200

Held-to-maturity securities, at amortized cost:
 
 
 
 
Obligations of:



 
 
 
States and political subdivisions
$
3,828

$
3,831

$
3,833

$
3,836

$
3,838

Residential mortgage-backed securities
35,005

35,367

35,712

36,084

36,564

Commercial mortgage-backed securities
6,033

6,530

6,854

7,563

7,643

Total amortized cost
$
44,866

$
45,728

$
46,399

$
47,483

$
48,045

Other investment securities, at cost
$
38,402

$
38,401

$
38,496

$
38,496

$
36,251

Total investment portfolio:


 
 
 
 
Amortized cost
$
830,410

$
826,032

$
827,008

$
778,115

$
796,667

Carrying value
$
885,462

$
868,830

$
878,180

$
822,199

$
845,118

In the first quarter of 2016, the carrying value of investments increased $16.6 million from the linked quarter, due primarily to the fair value increase of $12.3 million and purchases of $35.7 million, offset partially by principal payments of $27.4 million, amortization of $3.2 million and sales of $0.8 million.
At March 31, 2016, the investment portfolio was 26.87% of total assets, compared to 26.66% at year-end and 25.97% 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,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Total fair value
$
4,046

$
4,201

$
6,556

$
8,351

$
14,266

Total amortized cost
$
4,244

$
4,331

$
6,546

$
8,322

$
13,871

     Net unrealized (loss) gain
$
(198
)
$
(130
)
$
10

$
29

$
395

 
Management continues to reinvest the principal runoff from the non-agency securities into U.S. agency investments, which accounted for the decline in the past year. At March 31, 2016, 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.


43
Table of Contents

Loans
The following table provides information regarding outstanding loan balances:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Gross originated loans:
 
 
 
 
 
Commercial real estate, construction
$
69,499

$
63,785

$
68,798

$
50,168

$
44,276

Commercial real estate, other
471,998

471,184

429,120

449,163

429,541

     Commercial real estate
541,497

534,969

497,918

499,331

473,817

Commercial and industrial
308,649

288,130

288,697

256,080

247,103

Residential real estate
302,512

288,783

282,863

263,095

256,551

Home equity lines of credit
76,959

74,176

71,620

67,384

63,491

Consumer
245,596

227,133

213,394

196,306

176,857

Deposit account overdrafts
2,083

1,448

1,317

3,263

3,146

Total originated loans
$
1,477,296

$
1,414,639

$
1,355,809

$
1,285,459

$
1,220,965

Gross acquired loans:
 
 
 
 
 
Commercial real estate, construction
$
11,882

$
12,114

$
12,278

$
11,220

$
9,759

Commercial real estate, other
256,201

265,092

281,510

293,369

311,868

     Commercial real estate
268,083

277,206

293,788

304,589

321,627

Commercial and industrial
59,161

63,589

68,759

71,013

78,807

Residential real estate
263,237

276,772

288,269

302,673

317,824

Home equity lines of credit
30,742

32,253

34,147

36,607

38,222

Consumer
6,596

7,981

9,473

11,692

13,724

Total acquired loans (a)
$
627,819

$
657,801

$
694,436

$
726,574

$
770,204

Total loans
$
2,105,115

$
2,072,440

$
2,050,245

$
2,012,033

$
1,991,169

Percent of loans to total loans:
 
 
 
 
 
Commercial real estate, construction
3.9
%
3.7
%
4.0
%
3.1
%
2.7
%
Commercial real estate, other
34.5
%
35.5
%
34.5
%
36.8
%
37.2
%
     Commercial real estate
38.4
%
39.2
%
38.5
%
39.9
%
39.9
%
Commercial and industrial
17.5
%
17.0
%
17.4
%
16.3
%
16.4
%
Residential real estate
26.9
%
27.3
%
27.9
%
28.1
%
28.8
%
Home equity lines of credit
5.1
%
5.1
%
5.2
%
5.2
%
5.1
%
Consumer
12.0
%
11.3
%
10.9
%
10.3
%
9.6
%
Deposit account overdrafts
0.1
%
0.1
%
0.1
%
0.2
%
0.2
%
Total percentage
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Residential real estate loans being serviced for others
$
383,531

$
390,398

$
387,200

$
392,625

$
386,261

 
(a)
Includes all loans acquired in 2012 and thereafter.
Total loans increased $32.7 million, or 1.6%, from the linked quarter. The increase was driven primarily by a $17.1 million increase in consumer loan balances. 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. Indirect lending was the main contributor to the consumer loan growth during the quarter as balances grew $16.7 million, or 40% annualized. Commercial loans grew $13.5 million, with commercial and industrial loan growth of $16.1 million more than offsetting a decrease in commercial real estate loans for the quarter. Compared to the prior year period, loan balances increased $113.9 million, with the growth almost equally divided between consumer and commercial loan balances. The growth in consumer loans was driven by indirect lending, which grew $60.2 million. The growth in commercial loans was due to commercial and industrial loan growth of $41.9 million.
The mix of the loan portfolio has continually changed, with indirect lending accounting for 20% of the consumer loan portfolio at March 31, 2016, compared to 18% at December 31, 2015 and 14% at March 31, 2015. Similarly, within the commercial loan portfolio, commercial and industrial loans comprised 31% of the commercial loan portfolio at March 31, 2016, compared to 30% at December 31, 2015 and 29% at March 31, 2015. Average gross loan balances for the first quarter of 2016 compared to the linked quarter increased $31.5 million, or 2%, and increased $375.0 million, or 22%, compared to


44
Table of Contents

the first quarter of 2015. The increase compared to the linked quarter was due mainly to commercial real estate and consumer loans. The increase compared to the prior year first quarter was due to the NB&T acquisition.
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, 2016:
(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, construction:
 
 
 
 
Apartment complexes
$
36,766

$
40,983

$
77,749

53.2
%
Mixed commercial use facilities:
 
 



Owner occupied
2,019

6,348

8,367

5.7
%
Non-owner occupied
3,603

9,530

13,133

9.0
%
Total mixed commercial use facilities
5,622

15,878

21,500

14.7
%
Assisted living facilities and nursing homes
9,306

474

9,780

6.7
%
Residential property
6,433

2,608

9,041

6.2
%
Retail facilities
2,287

1,658

3,945

2.7
%
Land development
1,265

1,726

2,991

2.0
%
Other
19,702

1,512

21,214

14.5
%
Total commercial real estate, construction
$
81,381

$
64,839

$
146,220

100.0
%



45
Table of Contents

(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, other:
 
 
 
 
Office buildings and complexes:
 
 
 
 
Owner occupied
$
30,921

$
2,224

$
33,145

4.4
%
Non-owner occupied
45,566

45

45,611

6.0
%
Total office buildings and complexes
76,487

2,269

78,756

10.4
%
Apartment complexes
61,100

168

61,268

8.1
%
Mixed commercial use facilities:
 
 
 
 
Owner occupied
32,102

3,442

35,544

4.7
%
Non-owner occupied
21,576

327

21,903

2.9
%
Total mixed commercial use facilities
53,678

3,769

57,447

7.6
%
Retail facilities:
 
 
 
 
Owner occupied
20,865

2,112

22,977

3.0
%
Non-owner occupied
32,456

1,077

33,533

4.4
%
Total retail facilities
53,321

3,189

56,510

7.4
%
Lodging and lodging related
42,437

—

42,437

5.6
%
Light industrial facilities:
 
 
 
 
Owner occupied
33,490

94

33,584

4.5
%
Non-owner occupied
2,830

—

2,830

0.4
%
Total light industrial facilities
36,320

94

36,414

4.9
%
Assisted living facilities and nursing homes
29,687

255

29,942

4.1
%
Warehouse facilities
21,292

227

21,519

2.9
%
Residential property:
 
 
 
 
Owner occupied
1,325

1,258

2,583

0.3
%
Non-owner occupied
13,050

1,934

14,984

2.0
%
Total residential facilities
14,375

3,192

17,567

2.3
%
Day care center:
 
 
 
 
Owner occupied
14,719

—

14,719

2.0
%
Non-owner occupied
149

—

149

—
%
Total restaurant facilities
14,868

—

14,868

2.0
%
Other
324,634

12,757

337,391

44.7
%
Total commercial real estate, other
$
728,199

$
25,920

$
754,119

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, 2016 and December 31, 2015.


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Table of Contents

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,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Commercial real estate
7,492

7,076

7,506

7,185

9,074

Commercial and industrial
5,295

5,382

11,486

7,194

5,107

Total commercial
12,787

12,458

18,992

14,379

14,181

Residential real estate
1,258

1,257

1,182

1,299

1,560

Home equity lines of credit
733

732

777

738

708

Consumer
2,156

1,971

1,820

1,674

1,512

Deposit account overdrafts
125

121

154

154

127

Originated allowance for loan losses
17,059

16,539

22,925

18,244

18,088

Purchased credit impaired loan losses
202

240

303

—

—

Nonimpaired acquired loans
—

—

103

—

—

Acquired allowance for loan losses
202

240

406

—

—

Allowance for loan losses
$
17,261

$
16,779

$
23,331

$
18,244

$
18,088

As a percent of originated loans, net of deferred fees and costs
1.17
%
1.19
%
1.72
%
1.42
%
1.48
%
The allowance for loan losses as a percent of originated loans, net of deferred fees and costs, was 1.17%, 1.48% and 1.19% at March 31, 2016, March 31, 2015 and December 31, 2015, respectively. The decrease in the coverage of allowance for loan losses from March 31, 2015 was due to the specific reserve on the one commercial loan relationship that was charged-off in the fourth quarter of 2015. The coverage of allowance for loan losses at March 31, 2016 was relatively unchanged from December 31, 2015. The increase of $0.4 million in the allowance for loan losses for commercial real estate relates to the increased size of the portfolio. The decrease in the coverage from September 30, 2015 related to the specific reserve for the one large commercial relationship that was charged-off in the fourth quarter of 2015. 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. 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.
Classified loans, which are those categorized as substandard or doubtful, decreased $2.9 million during the quarter and $13.1 million compared to the first quarter of 2015. The decrease in classified loans compared to the first quarter of 2015 was due to the charge-off of the one large commercial relationship during the fourth quarter of 2015.



47
Table of Contents

The following table summarizes Peoples’ net charge-offs and recoveries:
 
Three Months Ended
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Gross charge-offs:
 
 
 
 
 
Commercial real estate, other
$
28

$
120

$
137

$
34

$
10

Commercial and industrial
1,012

13,150

83

343

—

Residential real estate
168

94

255

96

186

Home equity lines of credit
10

9

35

23

58

Consumer
622

484

387

295

187

Deposit account overdrafts
163

209

243

180

143

Total gross charge-offs
2,003

14,066

1,140

971

584

Recoveries:
 
 
 
 
 
Commercial real estate, other
1,164

13

8

27

55

Commercial and industrial
—

5

—

81

13

Residential real estate
29

108

47

44

115

Home equity lines of credit
7

12

27

65

15

Consumer
260

189

242

139

186

Deposit account overdrafts
70

37

41

35

58

Total recoveries
1,530

364

365

391

442

Net (recoveries) charge-offs:
 
 
 
 
 
Commercial real estate, other
(1,136
)
107

129

7

(45
)
Commercial and industrial
1,012

13,145

83

262

(13
)
Residential real estate
139

(14
)
208

52

71

Home equity lines of credit
3

(3
)
8

(42
)
43

Consumer
362

295

145

156

1

Deposit account overdrafts
93

172

202

145

85

Total net charge-offs
$
473

$
13,702

$
775

$
580

$
142

Ratio of net charge-offs (recoveries) to average total loans (annualized):
 
 
Commercial real estate, other
(0.22
)%
0.02
%
0.02
%
—
 %
(0.01
)%
Commercial and industrial
0.19
 %
2.53
%
0.02
%
0.05
 %
—
 %
Residential real estate
0.03
 %
—
%
0.04
%
0.01
 %
—
 %
Home equity lines of credit
—
 %
—
%
—
%
(0.01
)%
0.01
 %
Consumer
0.07
 %
0.06
%
0.03
%
0.03
 %
—
 %
Deposit account overdrafts
0.02
 %
0.03
%
0.04
%
0.03
 %
0.02
 %
Total
0.09
 %
2.64
%
0.15
%
0.11
 %
0.02
 %
Net charge-offs were still below Peoples' historical rate of 20 to 30 basis points. Peoples recorded net charge-offs of $473,000 for the three months ended March 31, 2016, resulting in an annualized net charge-off rate of 9 basis points. The commercial real estate loan recovery during the first quarter of 2016 was due to a $1 million recovery on a relationship that was previously charged-off. During the fourth quarter of 2015, Peoples recorded a $13.2 million charge-off of one commercial and industrial loan relationship. These factors have an impact on the estimated loss rates used to determine the allocations of allowance for loan losses for commercial loans.





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The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Loans 90+ days past due and accruing:
 
 
 
 
 
Commercial real estate, other
$
2,763

$
2,425

$
834

$
984

$
2,146

Commercial and industrial
2,074

1,986

1,674

488

408

Residential real estate
1,707

1,522

1,223

1,651

1,096

Home equity
184

35

10

17

47

Consumer
18

1

19

25

3

Total
6,746

5,969

3,760

3,165

3,700

Nonaccrual loans:
 
 
 
 
 
Commercial real estate, construction
891

921

—

—

96

Commercial real estate, other
7,220

7,357

2,306

1,756

1,890

Commercial and industrial
500

350

157

14,089

1,532

Residential real estate
2,966

2,991

3,046

3,113

2,931

Home equity
308

340

287

373

382

Consumer
30

31

31

34

—

Total
11,915

11,990

5,827

19,365

6,831

Troubled debt restructurings:
 
 
 
 
 
Commercial real estate, other
107

153

337

242

275

Commercial and industrial
374

377

13,854

196

196

Residential real estate
1,022

864

995

917

977

Home equity
65

79

82

84

69

Consumer
96

68

49

19

14

Total
1,664

1,541

15,317

1,458

1,531

Total nonperforming loans (NPLs)
20,325

19,500

24,904

23,988

12,062

OREO:
 
 
 
 
 
Commercial
597

644

1,476

1,143

1,143

Residential
82

89

90

179

405

Total
679

733

1,566

1,322

1,548

Total nonperforming assets (NPAs)
$
21,004

$
20,233

$
26,470

$
25,310

$
13,610

NPLs as a percent of total loans
0.97
%
0.94
%
1.21
%
1.19
%
0.60
%
NPAs as a percent of total assets
0.64
%
0.62
%
0.82
%
0.79
%
0.42
%
NPAs as a percent of total loans and OREO
1.00
%
0.98
%
1.29
%
1.25
%
0.68
%
Allowance for loan losses as a percent of NPLs
84.92
%
86.05
%
93.68
%
76.05
%
149.96
%
The increase of $0.8 million in nonperforming loans during the first quarter of 2016 was primarily due to the increase in loans 90+ days past due and accruing, which was mainly the result of a loan moving into that classification. The increase in nonaccrual commercial real estate loans during the third quarter of 2015 was a result of a commercial real estate relationship in the skilled nursing sector being placed on nonaccrual status. The increase in nonperforming loans during the second quarter of 2015 was due to the one large commercial relationship, being placed on nonaccrual status. This relationship was restructured in the third quarter of 2015 and moved from nonaccrual status to TDR status and subsequently charged-off in the fourth quarter of 2015.
The decrease in OREO during the first quarter of 2016 was due to net sales outpacing new OREO properties being recorded. The decrease in the fourth quarter of 2015 related to the sale of an OREO property.



49
Table of Contents

Deposits
The following table details Peoples’ deposit balances:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Non-interest-bearing deposits
$
716,202

$
717,939

$
711,226

$
681,357

$
695,131

Interest-bearing deposits:
 
 
 
 
 
Retail certificates of deposit
439,460

448,992

461,398

480,687

494,896

Money market deposit accounts
395,022

394,119

393,472

395,788

402,257

Governmental deposit accounts
313,904

276,639

293,889

304,221

316,104

Savings accounts
434,381

414,375

404,676

410,371

406,276

Interest-bearing demand accounts
254,241

250,023

232,354

234,025

228,373

Brokered certificates of deposits
33,873

33,857

33,841

38,123

38,104

Total interest-bearing deposits
1,870,881

1,818,005

1,819,630

1,863,215

1,886,010

  Total deposits
$
2,587,083

$
2,535,944

$
2,530,856

$
2,544,572

$
2,581,141

Total deposits increased $51.1 million during the quarter, with the growth largely due to the increase of $37.3 million in governmental deposits and $20.0 million in savings accounts. Balances in each of these account types normally are higher in the first quarter of each year compared to the other quarters. Compared to the first quarter of 2015, period-end deposits increased $5.9 million, with the growth in non-interest-bearing deposits more than offsetting the slight decline in interest-bearing deposit balances. The increase in non-interest-bearing deposits was mainly due to growth of $22.0 million in business demand accounts. The decline in interest-bearing deposit balances was due primarily to the $59.7 million decrease in certificates of deposit, both retail and brokered, which was partially offset by growth of $28.1 million in savings accounts and $25.9 million in interest-bearing demand accounts.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Short-term borrowings:
 
 
 
 
 
FHLB advances
$
63,000

$
76,000

$
40,000

$
—

$
—

Retail repurchase agreements
72,068

84,386

89,165

92,711

91,101

Total short-term borrowings
135,068

160,386

129,165

92,711

91,101

Long-term borrowings:
 
 
 
 
 
FHLB advances
66,474

66,934

69,715

70,018

70,313

National market repurchase agreements
40,000

40,000

40,000

40,000

40,000

Unamortized debt issuance costs
(69
)
—

—

—

—

Term note payable (parent company)
—

—

—

11,978

13,174

Junior subordinated debt securities
6,783

6,736

6,685

6,637

6,587

Total long-term borrowings
113,188

113,670

116,400

128,633

130,074

Total borrowed funds
$
248,256

$
274,056

$
245,565

$
221,344

$
221,175

Peoples' short-term FHLB advances generally consist of overnight borrowings being maintained in connection with the management of Peoples' daily liquidity position. In the third quarter of 2015, Peoples repaid the $12.0 million principal amount term loan then outstanding under the U.S. Bank Loan Agreement. There were no early termination fees associated with the repayment and the revolving credit loan commitment available under the U.S. Bank Loan Agreement remained outstanding. Effective March 2, 2016, Peoples terminated the U.S. Bank Loan Agreement, which had no outstanding borrowings. The only fee paid by Peoples in connection with the termination of the U.S. Bank Loan Agreement was an immaterial non-usage fee.
On March 4, 2016, Peoples entered into the RJB Credit Agreement, which provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $15 million, and in connection therewith, Peoples paid fees of $70,600, representing 0.47% of the loan commitment under the RJB Credit Agreement. For more information concerning the terms of the RJB Credit Agreement, see the discussion in Note 5 of the Notes to the Unaudited Consolidated Financial Statements included in this Form 10-Q.


50
Table of Contents

Capital/Stockholders’ Equity
At March 31, 2016, capital levels for both Peoples and Peoples Bank remained substantially higher than the minimum amounts needed to be considered "well capitalized" institutions under applicable banking regulations. These higher capital levels reflect Peoples' desire to maintain a strong capital position. 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 risk-based capital ratios and added the new Common Equity Tier 1 risk-based capital ratio. Additionally, under the new rules, in order to avoid limitations on dividends, equity repurchases and compensation, Peoples must exceed the three minimum required ratios by at least the capital conservation buffer. The capital conservation buffer is being phased in from 0.625% beginning January 1, 2016 to 2.50% by January 1, 2019, and applies to the CET1 ratio, Tier 1 capital ratio and Total risk-based capital ratio. At March 31, 2016, Peoples' capital conservation buffer was 6.29%, compared to 2.50% for the fully phased-in capital conservation buffer required by January 1, 2019. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at March 31, 2016.
The following table details Peoples' actual risk-based capital levels and corresponding ratios:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Capital Amounts:
 
 
 
 
 
Common Equity Tier 1
$
288,787

$
288,416

$
287,020

$
285,680

$
290,511

Tier 1
295,569

295,151

293,705

292,316

297,097

Total (Tier 1 and Tier 2)
314,896

313,974

319,277

312,773

317,057

Net risk-weighted assets
$
2,203,776

$
2,158,713

$
2,133,399

$
2,079,341

$
2,107,617

Capital Ratios:
 
 
 
 
 
Common Equity Tier 1
13.10
%
13.36
%
13.45
%
13.74
%
13.78
%
Tier 1
13.41
%
13.67
%
13.77
%
14.06
%
14.10
%
Total (Tier 1 and Tier 2)
14.29
%
14.54
%
14.97
%
15.04
%
15.04
%
Leverage ratio
9.45
%
9.52
%
9.57
%
9.50
%
11.30
%
Peoples' capital ratios decreased slightly in the first quarter of 2016, primarily due to stock repurchases of $5.0 million and an increase in net risk-weighted assets of $45.1 million.
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 measures since their calculation removes the impact of goodwill and 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.


51
Table of Contents


The following table reconciles the calculation of these non-GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:
(Dollars in thousands)
March 31,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Tangible equity:
 
 
 
 
 
Total stockholders' equity, as reported
$
428,486

$
419,789

$
424,760

$
418,164

$
419,218

Less: goodwill and other intangible assets
148,997

149,617

151,339

151,169

152,291

Tangible equity
$
279,489

$
270,172

$
273,421

$
266,995

$
266,927



 
 
 
 
Tangible assets:
 
 
 
 
 
Total assets, as reported
$
3,294,929

$
3,258,970

$
3,228,830

$
3,210,425

$
3,253,835

Less: goodwill and other intangible assets
148,997

149,617

151,339

151,169

152,291

Tangible assets
$
3,145,932

$
3,109,353

$
3,077,491

$
3,059,256

$
3,101,544

 
 
 
 
 
 
Tangible book value per common share:
 
 
 
 
Tangible equity
$
279,489

$
270,172

$
273,421

$
266,995

$
266,927

Common shares outstanding
18,157,932

18,404,864

18,400,809

18,391,575

18,374,256

 
 
 
 
 
 
Tangible book value per common share
$
15.39

$
14.68

$
14.86

$
14.52

$
14.53

 
 
 
 
 
 
Tangible equity to tangible assets ratio:
 
 
 
 
Tangible equity
$
279,489

$
270,172

$
273,421

$
266,995

$
266,927

Tangible assets
$
3,145,932

$
3,109,353

$
3,077,491

$
3,059,256

$
3,101,544

 
 
 
 
 
 
Tangible equity to tangible assets
8.88
%
8.69
%
8.88
%
8.73
%
8.61
%
Tangible book value per common share increased 5.9% from the prior year first quarter and 4.8% from the linked quarter. The increase from the previous year was primarily attributed to a decrease in the number of common shares outstanding. The increase from the linked quarter was due to increased earnings in the first quarter of 2016 coupled with a decrease in the number of common shares outstanding.
The increase in the tangible equity to tangible assets ratio at March 31, 2016 compared to the ratio at December 31, 2015 was due mainly to the increase in tangible equity. Tangible equity increased during the quarter largely as a result of the increase in the market value of Peoples' available-for-sale investment portfolio coupled with the current year-to-date earnings.
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.


52
Table of Contents

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' 2015 Form 10-K.
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, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
300
$
2,625

 
2.6
%
 
$
1,477

1.5
%
 
$
(81,790
)
 
(14.0
)%
 
$
(88,774
)
(15.3
)%
200
2,827

 
2.8
%
 
1,943

1.9
%
 
(51,022
)
 
(8.7
)%
 
(57,205
)
(9.9
)%
100
2,372

 
2.4
%
 
1,823

1.8
%
 
(22,031
)
 
(3.8
)%
 
(27,036
)
(4.7
)%
At March 31, 2016, 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' 2015 Form 10-K.
At March 31, 2016, Peoples had liquid assets of $152.7 million, which represented 4.2% of total assets and unfunded commitments. This amount exceeded the minimal level of $72.7 million, or 2% of total loans and unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $69.6 million of unpledged investment 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
In the normal course of business, Peoples is a party to financial instruments with off-balance sheet risk necessary to meet the financing needs of Peoples' customers. These financial instruments include commitments to extend credit and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Unaudited Consolidated Balance Sheets. The contract amounts of these instruments express the extent of involvement Peoples has in these financial instruments.
Loan Commitments and Standby Letters of Credit
Loan commitments are made to accommodate the financial needs of Peoples' customers. Standby letters of credit are instruments issued by Peoples Bank guaranteeing the beneficiary payment by Peoples Bank in the event of default by Peoples Bank's customer in the nonperformance of an obligation or service. Historically, most loan commitments and standby letters of credit expire unused. Peoples' exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. Peoples uses the same underwriting standards in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.
Peoples routinely engages in activities that involve, to varying degrees, elements of risk that are not reflected in whole or in part in the 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


53
Table of Contents

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,
2016
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Home equity lines of credit
$
84,826

$
84,148

$
84,613

$
84,687

$
85,591

Unadvanced construction loans
70,389

77,479

73,715

64,244

74,690

Other loan commitments
245,679

233,689

224,673

216,957

213,698

Loan commitments
$
400,894

$
395,316

$
383,001

$
365,888

$
373,979

Standby letters of credit
$
22,376

$
22,970

$
22,494

$
22,247

$
28,879

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.
Interest Rate Swaps
Peoples maintains an interest rate protection program for commercial loan customers, which was established in 2010. Under this program, Peoples provides its customer with a fixed-rate loan while creating a variable-rate asset for Peoples by the customer entering into an interest rate swap with Peoples on terms that match the loan. Peoples offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. These interest rate swaps do not qualify as designated hedges; therefore, each swap is accounted for as a standalone derivative. Peoples had interest rate swaps associated with commercial loans with a notional value of $78.6 million and fair value of $5.3 million at March 31, 2016 and a notional value of $72.2 million and fair value of $3.1 million at December 31, 2015. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.
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.
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, 2016.  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, 2016, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.


54
Table of Contents

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 management's 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’ 2015 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, 2016:
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 ( or Approximate Dollar Value) of Common Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1 - 31, 2016
91,219

(1)(2)(3) 
$
17.71

(1)(2)(3) 
84,257

$
18,504,220

February 1 - 29, 2016
178,322

(1)(2)(3) 
$
17.64

(1)(2)(3) 
169,613

15,512,703

March 1 - 31, 2016
26,400

(1)(2) 
$
17.92

(1)(2) 
25,900

15,049,184

Total
295,941

 
$
17.68

 
279,770

$
15,049,184

(1)
On November 3, 2015, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to $20 million of its outstanding common shares. The total number of common shares purchased under this share repurchase program as of April 27, 2016 was 279,770 at an aggregate price of $5.0 million.
(2)
Information reported includes 600 common shares, 1,300 common shares and 500 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 6,362 common shares and 7,409 common shares withheld in January and February 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


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Table of Contents

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 59.


56
Table of Contents

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:
April 28, 2016
By: /s/
CHARLES W. SULERZYSKI
 
 
 
Charles W. Sulerzyski
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
April 28, 2016
By: /s/
JOHN C. ROGERS
 
 
 
John C. Rogers
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer



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Table of Contents

EXHIBIT INDEX
 
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
 
Exhibit
Number
 
 
Description
 
 
Exhibit Location
 
 
 
 
 
2.1
 
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)
 
 
 
 
 
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)
 
 
 
 
 
* 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.


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EXHIBIT INDEX
 
PEOPLES BANCORP INC. QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
 
Exhibit
Number
 
 
Description
 
 
Exhibit Location
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
 
 
 
 
 
4.1(a)
 
Third Amendment to Loan Agreement executed by Peoples Bancorp Inc., as Borrower, and accepted by U.S. Bank National Association, as Lender, Effective as of January 12, 2016
 
Incorporated herein by reference to Exhibit 4.2(c) to Peoples' Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File No. 0-16772) ("Peoples' 2015 Form 10-K")
 
 
 
 
 
4.1(b)
 
Fourth Amendment to Loan Agreement executed by Peoples Bancorp Inc., as Borrower, and accepted by U.S. Bank National Association, as Lender, Effective as of February 23, 2016
 
Incorporated herein by reference to Exhibit 4.2(d) to Peoples' 2015 Form 10-K
 
 
 
 
 
4.2
 
Notice of Removal of Administrator and Appointment of Replacement, dated February 24, 2016, delivered to Wilmington Trust Company by the continuing Administrators named therein and Peoples Bancorp Inc.
 
Incorporated herein by reference to Exhibit 4.9 to Peoples' 2015 Form 10-K
 
 
 
 
 
10.1
 
Credit Agreement, dated as of March 4, 2016, between Peoples Bancorp Inc., as Borrower, and Raymond James Bank, N.A., as Lender
 
Incorporated herein by reference to Exhibit 10.1 to Peoples' Current Report on Form 8-K dated and filed on March 8, 2016 (File No. 0-16772) ("Peoples' March 8, 2016 Form 8-K")
 
 
 
 
 
10.2
 
Revolving Note issued by Peoples Bancorp Inc. on March 4, 2016 to Raymond James Bank, N.A., in the maximum aggregate principal amount of $15,000,000
 
Incorporated herein by reference to Exhibit 10.2 to Peoples' March 8, 2016 Form 8-K
 
 
 
 
 
10.3
 
Form of Change in Control Agreement to be adopted between Peoples Bancorp Inc. and individuals who are first elected as executive officers of Peoples Bancorp Inc. after March 24, 2016
 
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, 2016 of Peoples Bancorp Inc. are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited) at March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income (unaudited) for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2016 and 2015; (iv) Consolidated Statement of Stockholders' Equity (unaudited) for the three months ended March 31, 2016; (v) Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2016 and 2015; and (vi) Notes to the Unaudited Consolidated Financial Statements.


59