10-Q 1 pebo0630201910q.htm 10-Q Document



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 June 30, 2019
                                                                                        
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: 000-16772
pebonewlogoa17.jpg
PEOPLES BANCORP INC.
(Exact name of Registrant as specified in its charter)
Ohio
 
 
 
31-0987416
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
138 Putnam Street, P.O. Box 738, Marietta, Ohio
 
 
 
45750
(Address of principal executive offices)
 
 
 
(Zip Code)
Registrant’s telephone number, including area code:
 
 
 
(740) 373-3155
 
 
Not Applicable
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Shares, without par value
PEBO
The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated
filer o
Accelerated filer x
Non-accelerated filer o

Smaller reporting company o
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 20,698,571 common shares, without par value, at July 31, 2019.



Table of Contents
 
 



2

PART I
ITEM 1.  FINANCIAL STATEMENTS
PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
June 30,
2019
December 31,
2018
 
(Dollars in thousands)
(Unaudited)
 
Assets
 
 
Cash and cash equivalents:
 
 
Cash and due from banks
$
56,731

$
61,775

Interest-bearing deposits in other banks
36,692

15,837

Total cash and cash equivalents
93,423

77,612

Available-for-sale investment securities, at fair value (amortized cost of $910,431 at June 30, 2019 and $804,655 at December 31, 2018)
919,364

791,891

Held-to-maturity investment securities, at amortized cost (fair value of $35,747 at June 30, 2019 and $36,963 at December 31, 2018)
34,839

36,961

Other investment securities
43,508

42,985

Total investment securities
997,711

871,837

Loans, net of deferred fees and costs (a)
2,833,533

2,728,778

Allowance for loan losses
(21,357
)
(20,195
)
Net loans
2,812,176

2,708,583

Loans held for sale
5,928

5,470

Bank premises and equipment, net of accumulated depreciation
64,451

56,542

Bank owned life insurance
69,909

68,934

Goodwill
163,292

151,245

Other intangible assets
13,471

10,840

Other assets
56,015

40,391

Total assets
$
4,276,376

$
3,991,454

Liabilities
 
 
Deposits:
 
 
Non-interest-bearing
$
643,058

$
607,877

Interest-bearing
2,720,555

2,347,588

Total deposits
3,363,613

2,955,465

Short-term borrowings
186,457

356,198

Long-term borrowings
85,691

109,644

Accrued expenses and other liabilities
61,593

50,007

Total liabilities
3,697,354

3,471,314

Stockholders’ equity
 
 
Preferred stock, no par value, 50,000 shares authorized, no shares issued at June 30, 2019 and December 31, 2018
—

—

Common stock, no par value, 24,000,000 shares authorized, 21,142,256 shares issued at June 30, 2019 and 20,124,378 shares issued at December 31, 2018, including shares in treasury
418,950

386,814

Retained earnings
171,410

160,346

Accumulated other comprehensive income (loss), net of deferred income taxes
316

(12,933
)
Treasury stock, at cost, 489,802 shares at June 30, 2019 and 601,289 shares at December 31, 2018
(11,654
)
(14,087
)
Total stockholders’ equity
579,022

520,140

Total liabilities and stockholders’ equity
$
4,276,376

$
3,991,454

(a) Also referred to throughout the document as "total loans" and "loans held for investment."
See Notes to the Unaudited Consolidated Financial Statements


3

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands, except per share data)
2019
2018
 
2019
2018
Interest income:
 
 
 
 
 
Interest and fees on loans
$
36,660

$
31,250

 
$
70,713

$
58,131

Interest and dividends on taxable investment securities
5,969

5,830

 
11,779

11,480

Interest on tax-exempt investment securities
729

635

 
1,266

1,278

Other interest income
263

54

 
439

106

Total interest income
43,621

37,769

 
84,197

70,995

Interest expense:
 
 
 
 
 
Interest on deposits
5,719

3,101

 
10,563

5,314

Interest on short-term borrowings
1,233

1,175

 
2,406

2,143

Interest on long-term borrowings
620

685

 
1,265

1,371

Total interest expense
7,572

4,961

 
14,234

8,828

Net interest income
36,049

32,808

 
69,963

62,167

Provision for loan losses
626

1,188

 
363

3,171

Net interest income after provision for loan losses
35,423

31,620

 
69,600

58,996

Non-interest income:
 
 
 
 
 
Insurance income
3,486

3,369

 
8,107

8,024

Trust and investment income
3,401

3,232

 
6,513

6,300

Electronic banking income
3,267

2,785

 
6,254

5,570

Deposit account service charges
2,977

2,388

 
5,318

4,508

Mortgage banking income
1,000

969

 
1,788

1,320

Bank owned life insurance income
490

497

 
975

965

Commercial loan swap fees
516

146

 
662

262

Net loss on investment securities
(57
)
(147
)
 
(27
)
(146
)
Net loss on asset disposals and other transactions
(293
)
(405
)
 
(475
)
(331
)
Other non-interest income
502

421

 
1,603

1,752

Total non-interest income
15,289

13,255

 
30,718

28,224

Non-interest expense:
 
 
 
 
 
Salaries and employee benefit costs
20,824

18,025

 
40,026

34,015

Net occupancy and equipment expense
3,132

2,803

 
6,110

5,669

Professional fees
2,344

3,022

 
3,620

4,740

Electronic banking expense
1,693

1,407

 
3,270

2,857

Data processing and software expense
1,567

1,359

 
3,112

2,681

Amortization of other intangible assets
824

861

 
1,518

1,615

Franchise tax expense
772

614

 
1,477

1,258

Marketing expense
490

656

 
1,084

981

FDIC insurance expense
381

416

 
752

782

Foreclosed real estate and other loan expenses
469

338

 
724

550

Communication expense
317

300

 
595

644

Other non-interest expense
6,063

6,170

 
8,448

8,400

Total non-interest expense
38,876

35,971

 
70,736

64,192

Income before income taxes
11,836

8,904

 
29,582

23,028

Income tax expense
2,238

1,012

 
5,615

3,395

Net income
$
9,598

$
7,892

 
$
23,967

$
19,633

Earnings per common share - basic
$
0.47

$
0.41

 
$
1.20

$
1.05

Earnings per common share - diluted
$
0.46

$
0.41

 
$
1.19

$
1.04

Weighted-average number of common shares outstanding - basic
20,277,028

19,160,728

 
19,824,035

18,646,266

Weighted-average number of common shares outstanding - diluted
20,442,366

19,293,381

 
19,972,350

18,773,169

Cash dividends declared
$
7,035

$
5,466

 
$
12,903

$
10,237

Cash dividends declared per common share
$
0.34

$
0.28

 
$
0.64

$
0.54

See Notes to the Unaudited Consolidated Financial Statements


4

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
    
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Net income
$
9,598

$
7,892

 
$
23,967

$
19,633

Other comprehensive income (loss):
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
Gross unrealized holding gain (loss) arising during the period
12,947

(2,661
)
 
21,672

(12,774
)
Related tax (expense) benefit
(2,719
)
559

 
(4,551
)
3,737

Less: reclassification adjustment for net gain included in net income
(57
)
(147
)
 
(27
)
(146
)
Related tax benefit
12

31

 
6

31

Amounts reclassified out of accumulated other comprehensive loss per ASU 2016-01 (a)
—

—

 
—

(5,020
)
Net effect on other comprehensive income (loss)
10,273

(1,986
)
 
17,142

(13,942
)
Defined benefit plans:
 
 
 
 
 
Net gain arising during the period
—

—

 
2

—

Amortization of unrecognized loss and service cost on benefit plans
20

26

 
37

52

Related tax expense
(4
)
(5
)
 
(8
)
(11
)
Net effect on other comprehensive income
16

21

 
31

41

Cash flow hedges:
 
 
 
 
 
Net (loss) gain arising during the period
(3,134
)
537

 
(4,967
)
1,915

  Related tax benefit (expense)
658

(113
)
 
1,043

(402
)
Net effect on other comprehensive (loss) income
(2,476
)
424

 
(3,924
)
1,513

Total other comprehensive income (loss), net of tax
7,813

(1,541
)
 
13,249

(12,388
)
Total comprehensive income
$
17,411

$
6,351

 
$
37,216

$
7,245

(a) As of January 1, 2018, Peoples adopted ASU 2016-01, which resulted in the reclassification of $5.0 million in net unrealized gains on equity investment securities from accumulated other comprehensive loss to retained earnings.
See Notes to the Unaudited Consolidated Financial Statements



5

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
 
Common Stock
Retained Earnings
Treasury Stock
(Dollars in thousands)
Balance, December 31, 2018
$
386,814

$
160,346

$
(12,933
)
$
(14,087
)
$
520,140

Net income
—

23,967

—

—

23,967

Other comprehensive income, net of tax
—

—

13,249

—

13,249

Cash dividends declared
—

(12,903
)
—

—

(12,903
)
Reissuance of treasury stock for common share awards
(2,821
)
—

—

2,821

—

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

—

—

53

53

Repurchase of treasury stock in connection with employee incentive plan and under compensation plan for Boards of Directors
—

—

—

(684
)
(684
)
Common shares issued under dividend reinvestment plan
384

—

—

—

384

Common shares issued under compensation plan for Boards of Directors
52

—

—

157

209

Common shares issued under employee stock purchase plan
28

—

—

86

114

Stock-based compensation
2,056

—

—

—

2,056

Issuance of common shares related to merger with First Prestonsburg Bancshares Inc.
32,437

—

—

—

32,437

Balance, June 30, 2019
$
418,950

$
171,410

$
316

$
(11,654
)
$
579,022

 
See Notes to the Unaudited Consolidated Financial Statements





6

PEOPLES BANCORP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
 
June 30,
(Dollars in thousands)
2019
2018
Net cash provided by operating activities
$
18,821

$
27,499

Investing activities:
 
 
Available-for-sale investment securities:
 
 
Purchases
(116,433
)
(81,441
)
Proceeds from sales
72,481

14,489

Proceeds from principal payments, calls and prepayments
70,728

60,088

Held-to-maturity investment securities:
 
 
Proceeds from principal payments
1,984

2,627

Other investment securities:
 
 
Purchases
(376
)
(1,089
)
Proceeds from sales
3,872

7,111

Proceeds from insurance claim
26

—

Net decrease (increase) in loans held for investment
29,219

(92,582
)
Net expenditures for premises and equipment
(1,233
)
(2,721
)
Proceeds from sales of other real estate owned
143

265

Business acquisitions, net of cash received
7,795

4,695

Investment in limited partnership and tax credit funds
(44
)
(399
)
Net cash provided by (used in) investing activities
68,162

(88,957
)
Financing activities:
 

 

Net (decrease) increase in non-interest-bearing deposits
(23,318
)
364

Net increase in interest-bearing deposits
173,571

19,705

Net (decrease) increase in short-term borrowings
(207,329
)
66,412

Payments on long-term borrowings
(849
)
(1,062
)
Cash dividends paid
(12,467
)
(10,001
)
Repurchase of treasury stock in connection with employee incentive program and compensation plan for Boards of Directors to be held as treasury stock
(684
)
(1,143
)
Proceeds from issuance of common shares
6

15

Contingent consideration payments made after a business combination
(102
)
(224
)
Net cash (used in) provided by financing activities
(71,172
)
74,066

Net increase in cash and cash equivalents
15,811

12,608

Cash and cash equivalents at beginning of period
77,612

72,194

Cash and cash equivalents at end of period
$
93,423

$
84,802

 
 
 
Supplemental cash flow information:
 
 
     Interest paid
13,765

8,765

     Income taxes paid
6,150

6,065

Supplemental noncash disclosures:
 
 
     Transfers from loans to other real estate owned
49

16

 
 See Notes to the Unaudited Consolidated Financial Statements



7

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, 2018 (“Peoples' 2018 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 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2018 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 June 30, 2019 for potential recognition or disclosure in these unaudited consolidated financial statements.  In the opinion of management, these unaudited consolidated financial statements reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated.  Such adjustments are normal and recurring in nature.  Intercompany accounts and transactions have been eliminated.  The Consolidated Balance Sheet at December 31, 2018, contained herein, has been derived from the audited Consolidated Balance Sheet included in Peoples’ 2018 Form 10-K. 
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year, due in part to seasonal variations and unusual or infrequently occurring items.
New Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies that are adopted by Peoples as of the required effective dates. The following accounting pronouncements should be read in conjunction with "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples’ 2018 Form 10-K.
Accounting Standards Update ("ASU") 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. This accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples early adopted this new accounting guidance as of January 1, 2019, and it will be incorporated in the October 1, 2019 annual goodwill and intangible assets impairment analysis, but it is not expected to have a material impact on Peoples' consolidated financial statements.
ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This accounting guidance replaces the current "incurred loss" model for recognizing credit losses with an "expected loss" model, referred to as the Current Expected Credit Loss ("CECL") model. Under the CECL model, Peoples will be required to present certain financial assets carried at amortized cost, such as loans held-for-investment and held-to-maturity investment securities, at the net amount expected to be collected. ASU 2018-19 clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20, and should be accounted for according to Topic 842.
The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the "incurred loss" model required under current US GAAP, which delays recognition until it is probable a loss has been incurred. Accordingly, Peoples expects that the adoption of the CECL model will materially affect how the allowance for loan losses is determined and could require significant increases to the allowance for loan losses. Moreover, the CECL model may create more volatility in the level of Peoples' allowance for loan losses. If required to materially increase the level of allowance for loan losses for any reason, such increase could adversely affect Peoples' business, financial condition and results of operations.


8

The CECL standard will become effective for interim and annual reporting periods beginning after December 15, 2019 (effective January 1, 2020 for Peoples). Peoples has a committee that meets regularly to monitor progress and oversee the project. Peoples has implemented a third-party software solution, and is utilizing the tool to run test calculations throughout 2019 in anticipation of the full implementation at the beginning of 2020. Peoples has engaged consultants to assist with the completion of certain aspects of the project plan. Peoples will complete model validation during 2019, and is currently refining the economic forecasting process, documenting accounting policies, reviewing business processes and evaluating potential changes to the control environment. Peoples intends to complete a test run of its process, inclusive of the model, by the end of the third quarter of 2019, pending any unforeseen circumstances or significant changes to the requirements. Peoples expects to recognize a one-time cumulative-effect adjustment to the allowance for loan loss provision, and related tax effect, as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The impact of the adoption will depend on relevant data at the adoption date, including the characteristics of the loan portfolio, macroeconomic conditions and forecasts. Peoples has not yet determined the magnitude of any such one-time cumulative-effect adjustment or of the overall impact of the new standard on Peoples' financial condition or results of operations.
Note 2 Fair Value of Assets and Liabilities
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. In accordance with fair value accounting guidance, Peoples measures, records and reports various types of assets and liabilities at fair value on either a recurring or a non-recurring basis in the Consolidated Financial Statements. Those assets and liabilities are presented below in the sections entitled “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis” and “Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis.”
Depending on the nature of the asset or liability, Peoples uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under US GAAP uses a hierarchy, which is described in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10‑K.
Assets and liabilities are assigned to a level within the fair value hierarchy based on the lowest level of significant input used to measure fair value. Assets and liabilities may change levels within the fair value hierarchy due to market conditions or other circumstances. Those transfers are recognized on the date of the event that prompted the transfer. There were no transfers of assets or liabilities required to be measured at fair value on a recurring basis between levels of the fair value hierarchy during the periods presented.
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis
The following table provides the fair value for assets and liabilities required to be measured and reported at fair value on a recurring basis on the Consolidated Balance Sheets by level in the fair value hierarchy.
 
Recurring Fair Value Measurements at Reporting Date
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Level 1
Level 2
Level 3
 
Level 1
Level 2
Level 3
 
Assets:
 
 
 
 
 
 
 
Available-for-sale investment securities:
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
  U.S. government sponsored agencies
$
—

$
19,051

$
—

 
$
—

$
—

$
—

  States and political subdivisions
—

125,418

—

 
—

88,587

—

Residential mortgage-backed securities
—

748,132

—

 
—

692,608

—

Commercial mortgage-backed securities
—

22,664

—

 
—

6,707

—

Bank-issued trust preferred securities
—

4,099

—

 
—

3,989

—

Total available-for-sale securities
—

919,364

—

 
—

791,891

—

Equity investment securities
111

188

—

 
94

183

—

Derivative assets (a)
—

9,972

—

 
—

4,544

—

Liabilities:
 
 
 
 
 
 
 
Derivative liabilities (b)
$
—

$
14,020

$
—

 
$
—

$
3,562

$
—

(a) Included in other assets on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
(b) Included in accrued expenses and other liabilities on the Unaudited Consolidated Balance Sheets. For additional information, see "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.


9

Available-for-Sale Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, 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.
Equity Investment Securities: The fair values of Peoples' equity investment securities are obtained from quoted prices in active exchange markets for identical assets or liabilities (Level 1) or quoted prices in less active markets (Level 2).
Derivative Assets and Liabilities: Derivative assets and liabilities are recognized on the Consolidated Balance Sheets at their fair value within other assets and accrued expenses and other liabilities, respectively. The fair value for derivative instruments is determined based on market prices, broker-dealer quotations on similar products, or other related input parameters (Level 2).
Assets and Liabilities Required to be Measured and Reported at Fair Value on a Non-Recurring Basis
The following table provides the fair value for each class of assets and liabilities required to be measured and reported at fair value on a non-recurring basis on the Unaudited Consolidated Balance Sheets by level in the fair value hierarchy.
 
Non-Recurring Fair Value Measurements at Reporting Date
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Level 1
Level 2
Level 3
 
Level 1
Level 2
Level 3
 
Impaired loans
$
—

$
—

$
32,952

 
$
—

$
—

$
24,129

Other real estate owned ("OREO")
—

—

123

 
—

—

94

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 the market value provided by independent, licensed or certified appraisers (Level 3), less estimated selling costs. At June 30, 2019, impaired loans with an aggregate principal balance of $43.2 million were outstanding and reported at fair value of $33.0 million.  For the three and six months ended June 30, 2019, Peoples recognized an increase of $223,000 and $830,000 in the specific reserve on impaired loans, through the allowance for loan losses.
Other Real Estate Owned: OREO, included in other assets on the Consolidated Balance Sheets, is comprised primarily of commercial and residential real estate properties acquired by Peoples in satisfaction of a loan. OREO obtained in satisfaction of a loan is recorded at the lower of cost or estimated fair value, less estimated costs to sell the property. The carrying value of OREO is not re-measured to fair value on a recurring basis, but is based on recent real estate appraisals and is updated at least annually. These appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales approach and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available (Level 3).


10

Financial Instruments Not Required to be Measured or Reported at Fair Value
The following table provides the carrying amount for each class of assets and liabilities and the fair value for certain financial instruments that are not required to be measured or reported at fair value on the Consolidated Balance Sheets.
 
Fair Value Measurements of Other Financial Instruments
(Dollars in thousands)
Fair Value Hierarchy Level
June 30, 2019
 
December 31, 2018
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
 
Assets:
 
 
 
 
 
 
Cash and cash equivalents
1
$
93,423

$
93,423

 
$
77,612

$
77,612

Held-to-maturity investment securities:
 
 
 
 
 
 
   Obligations of:
 
 
 
 
 
 
States and political subdivisions
2
4,398

4,880

 
4,403

4,896

Residential mortgage-backed securities
2
23,335

23,451

 
29,044

28,603

Commercial mortgage-backed securities
2
7,106

7,416

 
3,514

3,464

        Total held-to-maturity securities
 
34,839

35,747

 
36,961

36,963

Other investment securities:
 
 
 
 
 
 
Federal Home Loan Bank ("FHLB") stock
2
29,257

29,257

 
29,367

29,367

Federal Reserve Bank ("FRB") stock
2
12,294

12,294

 
12,294

12,294

Nonqualified deferred compensation
2
1,293

1,293

 
987

987

Other investment securities
2
365

365

 
60

60

Other investment securities (a)
 
43,209

43,209

 
42,708

42,708

Net loans
3
2,812,176

3,076,717

 
2,708,583

2,907,537

Loans held for sale
2
5,928

6,353

 
5,470

5,492

Bank owned life insurance
3
69,909

69,909

 
68,934

68,934

Servicing rights (b)
3
2,571

3,617

 
2,655

4,568

Liabilities:
 
 
 
 
 
 
Deposits
2
$
3,363,613

$
3,335,686

 
$
2,955,465

$
2,953,452

Short-term borrowings
2
186,457

187,337

 
356,198

349,994

Long-term borrowings
2
85,691

84,933

 
109,644

107,696

(a) Other investment securities, as reported on the Unaudited Consolidated Balance Sheets, also includes equity investment securities for 2018, which are reported in the Assets and Liabilities Required to be Measured and Reported at Fair Value on a Recurring Basis table above.
(b) Included in other intangible assets on the Unaudited Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or market value.
 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:
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, balances due from other banks, interest-bearing deposits in other banks, federal funds sold and other short-term investments with original maturities of ninety days or less. The carrying amount for cash and due from banks is a reasonable estimate of fair value. (Level 1).
Held-to-Maturity Investment Securities: The fair values used by Peoples are obtained from an independent pricing service and represent either quoted market prices for the identical securities (Level 1) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatility, 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.
Other Investment Securities: Other investment securities are measured at their respective redemption values due to restrictions placed on their transferability (Level 2).
Net 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). Fair values for loans are


11

estimated using a discounted cash flow methodology. The discount rates take into account interest rates currently being offered to customers for loans with similar terms, the credit risk associated with the loan and other market factors, including liquidity.
Loans Held for Sale: Loans originated and intended to be sold in the secondary market, generally 1-4 family residential loans, are carried, in aggregate, at the lower of cost or estimated fair value. The use of a valuation model using quoted prices of similar instruments are significant inputs in arriving at the fair value (Level 2).
Bank Owned Life Insurance: Peoples' bank owned life insurance policies are recorded at their cash surrender value (Level 3). Peoples recognizes tax-exempt income from the periodic increases in the cash surrender value of these policies and from death benefits.
Servicing Rights: The fair value of the servicing rights is determined by using a discounted cash flow model, which estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates (Level 3).
Deposits: The fair value of fixed maturity certificates of deposit ("CDs") is estimated using a discounted cash flow calculation based on current rates offered for deposits of similar remaining maturities (Level 2).
Short-term Borrowings: The fair value of short-term borrowings is estimated using discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2). 
Long-term Borrowings: The fair value of long-term borrowings is estimated using a discounted cash flow analysis based on rates currently available to Peoples for borrowings with similar terms (Level 2). 
Certain financial assets and financial liabilities that are not required to be measured or reported at fair value can be subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).  These financial assets and liabilities include the following: customer relationships, deposit base, banking center networks, and other information required to compute Peoples’ aggregate fair value that 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
June 30, 2019
 
 
 
 
Obligations of:
 
 
 
 
U.S. government sponsored agencies
$
18,606

$
445

$
—

$
19,051

States and political subdivisions
122,809

2,721

(112
)
125,418

Residential mortgage-backed securities
742,164

8,770

(2,802
)
748,132

Commercial mortgage-backed securities
22,656

148

(140
)
22,664

Bank-issued trust preferred securities
4,196

100

(197
)
4,099

Total available-for-sale securities
$
910,431

$
12,184

$
(3,251
)
$
919,364

December 31, 2018
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
88,358

$
787

$
(558
)
$
88,587

Residential mortgage-backed securities
705,289

2,720

(15,401
)
692,608

Commercial mortgage-backed securities
6,812

—

(105
)
6,707

Bank-issued trust preferred securities
4,196

75

(282
)
3,989

Total available-for-sale securities
$
804,655

$
3,582

$
(16,346
)
$
791,891


The unrealized losses related to residential mortgage-backed securities at June 30, 2019 and December 31, 2018, were attributed to changes in market interest rates and spreads since the securities were purchased.


12

The gross gains and gross losses realized by Peoples from sales of available-for-sale securities for the periods ended June 30 were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Gross gains realized
$
30

$
3

 
$
60

$
5

Gross losses realized
87

150

 
87

151

Net losses realized
$
(57
)
$
(147
)
 
$
(27
)
$
(146
)
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
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
—

$
—

—

 
$
8,020

$
112

5

 
$
8,020

$
112

Residential mortgage-backed securities
17,932

154

7

 
226,208

2,648

77

 
244,140

2,802

Commercial mortgage-backed securities
—

—

—

 
6,380

140

5

 
6,380

140

Bank-issued trust preferred securities
—

—

—

 
1,803

197

2

 
1,803

197

Total
$
17,932

$
154

7

 
$
242,411

$
3,097

89

 
$
260,343

$
3,251

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
 
 
States and political subdivisions
$
10,173

$
18

17

 
$
19,918

$
540

20

 
$
30,091

$
558

Residential mortgage-backed securities
47,562

226

50

 
517,335

15,175

170

 
564,897

15,401

Commercial mortgage-backed securities
—

—

—

 
6,707

105

3

 
6,707

105

Bank-issued trust preferred securities
—

—

—

 
1,718

282

2

 
1,718

282

Total
$
57,735

$
244

67

 
$
545,678

$
16,102

195

 
$
603,413

$
16,346


Management systematically evaluates available-for-sale investment securities for other-than-temporary declines in fair value on a quarterly basis.  At June 30, 2019, 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 June 30, 2019 and December 31, 2018 were largely attributable to changes in market interest rates and spreads since the securities were purchased.
At June 30, 2019, approximately 99% of the mortgage-backed securities with a market value that had been at an unrealized loss position for twelve months or more were issued by U.S. government sponsored agencies. The remaining 1%, or two positions, consisted of privately issued mortgage-backed securities with all of the underlying mortgages originated prior to 2004. Both of these positions had a fair value of less than 90% of their book value, with an aggregate book and fair value of $211,000 and $147,000, 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 remaining number of loans underlying these securities.
The unrealized losses with respect to the two bank-issued trust preferred securities that had been in an unrealized loss position for twelve months or more at June 30, 2019 were primarily attributable to the subordinated nature of the debt.


13

The table below presents the amortized cost, fair value and total weighted-average yield of available-for-sale securities by contractual maturity at June 30, 2019.  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.  
 
(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
$
—

$
2,984

$
14,644

$
978

$
18,606

States and political subdivisions
4,234

31,186

44,207

43,182

122,809

Residential mortgage-backed securities
1

1,919

60,647

679,597

742,164

Commercial mortgage-backed securities
—

17,107

1,848

3,701

22,656

Bank-issued trust preferred securities
—

—

4,196

—

4,196

Total available-for-sale securities
$
4,235

$
53,196

$
125,542

$
727,458

$
910,431

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. government sponsored agencies
$
—

$
3,041

$
15,011

$
999

$
19,051

States and political subdivisions
4,236

31,477

45,518

44,187

125,418

Residential mortgage-backed securities
1

1,934

60,507

685,690

748,132

Commercial mortgage-backed securities
—

17,195

1,904

3,565

22,664

Bank-issued trust preferred securities
—

—

4,099

—

4,099

Total available-for-sale securities
$
4,237

$
53,647

$
127,039

$
734,441

$
919,364

Total weighted-average yield
2.36
%
2.52
%
2.77
%
2.93
%
2.88
%
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
June 30, 2019
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,398

$
482

$
—

$
4,880

Residential mortgage-backed securities
23,335

256

(140
)
23,451

Commercial mortgage-backed securities
7,106

310

—

7,416

Total held-to-maturity securities
$
34,839

$
1,048

$
(140
)
$
35,747

December 31, 2018
 
 
 
 
Obligations of:
 
 
 
 
States and political subdivisions
$
4,403

$
493

$
—

$
4,896

Residential mortgage-backed securities
29,044

191

(632
)
28,603

Commercial mortgage-backed securities
3,514

—

(50
)
3,464

Total held-to-maturity securities
$
36,961

$
684

$
(682
)
$
36,963

There were no gross gains or gross losses realized by Peoples from sales of held-to-maturity securities for any of the three and six months ended June 30, 2019 and 2018.


14

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
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

$
—

—

 
$
11,639

$
140

3

 
$
11,639

$
140

Total
$
—

$
—

—

 
$
11,639

$
140

3

 
$
11,639

$
140

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

$
—

—

 
$
13,102

$
632

5

 
$
13,102

$
632

Commercial mortgage-backed securities
—

—

—

 
3,464

50

1

 
3,464

50

Total
$
—

$
—

—

 
$
16,566

$
682

6

 
$
16,566

$
682

The table below presents the amortized cost, fair value and total weighted-average yield of held-to-maturity securities by contractual maturity at June 30, 2019.  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. 
 
(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
$
305

$
—

$
2,984

$
1,109

$
4,398

Residential mortgage-backed securities
—

—

4,002

19,333

23,335

Commercial mortgage-backed securities
—

410

3,893

2,803

7,106

Total held-to-maturity securities
$
305

$
410

$
10,879

$
23,245

$
34,839

Fair value
 
 
 
 
 
Obligations of:
 
 
 
 
 
States and political subdivisions
$
307

$
—

$
3,458

$
1,115

$
4,880

Residential mortgage-backed securities
—

—

4,070

19,381

23,451

Commercial mortgage-backed securities
—

412

4,196

2,808

7,416

Total held-to-maturity securities
$
307

$
412

$
11,724

$
23,304

$
35,747

Total weighted-average yield
2.62
%
2.29
%
1.49
%
2.81
%
2.83
%
Other Investment Securities
Peoples' other investment securities on the Unaudited Consolidated Balance Sheet consist largely of shares of FHLB of Cincinnati and FRB of Cleveland stock, and other equity investment securities.
The following table summarizes the carrying value of Peoples' other investment securities:
(Dollars in thousands)
June 30, 2019
December 31, 2018
FHLB stock
$
29,257

$
29,367

FRB stock
12,294

12,294

Nonqualified deferred compensation
1,293

987

Equity investment securities
299

277

Other investment securities
365

60

Total other investment securities
$
43,508

$
42,985

Peoples redeemed $1.1 million during the second quarter of 2019 and $1.8 million during the first quarter of 2019 of FHLB stock to be in compliance with requirements of the FHLB of Cincinnati.
During the three and six months ended June 30, 2019, Peoples recorded the change in the fair value of equity investment securities held at June 30, 2019 in other non-interest income, resulting in unrealized gains of zero and $22,000, respectively. During the three and six months ended June 30, 2018, Peoples recorded the change in the fair value of equity investment securities held at June 30, 2018 in other non-interest income, resulting in unrealized losses of $658,000 and $198,000,


15

respectively. Net realized gains on sales of equity investment securities, included in other non-interest income during the first six months of 2019, consisted of a realized gain of $787,000 related to the sale of restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock.
At June 30, 2019, Peoples' investment in equity investment securities was comprised largely of common stocks issued by various unrelated bank holding companies. There were no equity investment securities of a single issuer that exceeded 10% of Peoples' stockholders' equity.
Pledged Securities
Peoples had pledged available-for-sale investment securities with carrying values of $499.5 million and $430.0 million at June 30, 2019 and December 31, 2018, respectively, and held-to-maturity investment securities with carrying values of $14.6 million and $16.9 million at June 30, 2019 and December 31, 2018, 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 $54.3 million and $60.1 million at June 30, 2019 and December 31, 2018, respectively, and held-to-maturity securities with carrying values of $15.6 million and $16.7 million at June 30, 2019 and December 31, 2018, respectively, to secure additional borrowing capacity at the FHLB and the FRB.

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 central and eastern Kentucky. Acquired loans consist of loans purchased in 2012 or thereafter. Loans that were acquired and subsequently re-underwritten are reported as originated upon execution of such credit actions (for example, renewals and increases in lines of credit). The major classifications of loan balances (in each case, net of deferred fees and costs) excluding loans held for sale, were as follows:
(Dollars in thousands)
June 30,
2019
December 31, 2018
Originated loans:
 
 
Commercial real estate, construction
$
102,904

$
124,013

Commercial real estate, other
641,061

632,200

    Commercial real estate
743,965

756,213

Commercial and industrial
548,460

530,207

Residential real estate
299,173

296,860

Home equity lines of credit
90,374

93,326

Consumer, indirect
419,595

407,167

Consumer, direct
72,209

71,674

   Consumer
491,804

478,841

Deposit account overdrafts
676

583

Total originated loans
$
2,174,452

$
2,156,030

Acquired loans:
 
 
Commercial real estate, construction
$
6,775

$
12,404

Commercial real estate, other
201,909

184,711

    Commercial real estate
208,684

197,115

Commercial and industrial
51,506

35,537

Residential real estate
348,439

296,937

Home equity lines of credit
41,262

40,653

Consumer, indirect
90

136

Consumer, direct
9,100

2,370

   Consumer
9,190

2,506

Total acquired loans
$
659,081

$
572,748

Total loans
$
2,833,533

$
2,728,778



16

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 purchased credit impaired loans included in the loan balances above are summarized as follows:
(Dollars in thousands)
June 30,
2019
December 31,
2018
Commercial real estate
$
13,116

$
11,955

Commercial and industrial
4,479

1,287

Residential real estate
23,509

20,062

Consumer
640

58

Total outstanding balance
$
41,744

$
33,362

Net carrying amount
$
28,125

$
22,475

Changes in the accretable yield for purchased credit impaired loans for the six months ended June 30 were as follows:
(Dollars in thousands)
June 30,
2019
June 30,
2018
Balance, beginning of period
$
8,955

$
6,704

Additions:
 
 
ASB Financial Corp.
—

2,415

First Prestonsburg Bancshares Inc.
3,853

—

Accretion
(1,148
)
(897
)
Balance, June 30
$
11,660

$
8,222

The fair value of newly acquired loans is determined at the time of acquisition and Peoples completes annual re-estimations of cash flows on acquired purchased credit impaired loans in August of each year. At the end of each quarter, Peoples evaluates factors to determine if a material change has occurred in acquired purchased credit impaired loans, and if a re-estimation is needed. Factors evaluated to determine if a re-estimation is needed include changes in: risk ratings, maturity dates, charge-offs, payoffs, nonaccrual status, loans that have become past due and actual cash flows compared to the projected cash flows from the last re-estimation. Peoples evaluates these changes quarterly and compares the current status or activity to those at the previous cash flow re-estimation date, and the related materiality of the changes. As of June 30, 2019, these changes, when compared to the total loan portfolio and the factors at the last re-estimation date, would not have a material impact on amounts recorded since the last re-estimation. Peoples completed a re-estimation of cash flows on purchased credit impaired loans in August 2018.
Cash flows expected to be collected on purchased credit impaired loans are estimated 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 the principal expected to be collected. In re-forecasting future estimated cash flows, credit loss expectations are adjusted as necessary.
Pledged Loans
Peoples pledges certain loans secured by 1-4 family and multifamily residential mortgages under a blanket collateral agreement to secure borrowings from the FHLB of Cincinnati. The amount of loans pledged under this blanket collateral agreement totaled $488.4 million and $505.7 million at June 30, 2019 and December 31, 2018, respectively. Peoples also pledges commercial loans to secure borrowings with the FRB of Cleveland. The outstanding balances of these loans totaled $153.0 million and $180.9 million at June 30, 2019 and December 31, 2018, respectively.


17

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)
June 30,
2019
December 31,
2018
 
June 30,
2019
December 31,
2018
Originated loans:
 
 
 
 
 
Commercial real estate, construction
$
688

$
710

 
$
—

$
—

Commercial real estate, other
6,241

6,565

 
—

786

    Commercial real estate
6,929

7,275

 
—

786

Commercial and industrial
2,044

1,673

 
—

—

Residential real estate
3,816

4,105

 
438

398

Home equity lines of credit
452

596

 
53

7

Consumer, indirect
535

480

 
—

—

Consumer, direct
12

56

 
—

—

    Consumer
547

536

 
—

—

Total originated loans
$
13,788

$
14,185

 
$
491

$
1,191

Acquired loans:
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

 
$
230

$
—

Commercial real estate, other
308

319

 
557

15

    Commercial real estate
308

319

 
787

15

Commercial and industrial
36

36

 
261

18

Residential real estate
1,716

1,921

 
1,853

1,032

Home equity lines of credit
742

637

 
—

—

Consumer, direct
1

—

 
57

—

Total acquired loans
$
2,803

$
2,913

 
$
2,958

$
1,065

Total loans
$
16,591

$
17,098

 
$
3,449

$
2,256



18

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
 
June 30, 2019
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

$
688

$
688

 
$
102,216

$
102,904

Commercial real estate, other
—

—

6,050

6,050

 
635,011

641,061

    Commercial real estate
—

—

6,738

6,738

 
737,227

743,965

Commercial and industrial
606

3

1,937

2,546

 
545,914

548,460

Residential real estate
1,391

1,177

2,478

5,046

 
294,127

299,173

Home equity lines of credit
387

18

461

866

 
89,508

90,374

Consumer, indirect
3,024

216

111

3,351

 
416,244

419,595

Consumer, direct
306

17

2

325

 
71,884

72,209

    Consumer
3,330

233

113

3,676

 
488,128

491,804

Deposit account overdrafts
—

—

—

—

 
676

676

Total originated loans
$
5,714

$
1,431

$
11,727

$
18,872

 
$
2,155,580

$
2,174,452

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

$
230

$
230

 
$
6,545

$
6,775

Commercial real estate, other
661

728

773

2,162

 
199,747

201,909

    Commercial real estate
661

728

1,003

2,392

 
206,292

208,684

Commercial and industrial
488

60

297

845

 
50,661

51,506

Residential real estate
1,685

2,075

2,700

6,460

 
341,979

348,439

Home equity lines of credit
228

109

563

900

 
40,362

41,262

Consumer, indirect
—

—

—

—

 
90

90

Consumer, direct
88

52

57

197

 
8,903

9,100

    Consumer
88

52

57

197


8,993

9,190

Total acquired loans
$
3,150

$
3,024

$
4,620

$
10,794

 
$
648,287

$
659,081

Total loans
$
8,864

$
4,455

$
16,347

$
29,666

 
$
2,803,867

$
2,833,533



19

 
Loans Past Due
 
Current
Loans
Total
Loans
(Dollars in thousands)
30 - 59 days
60 - 89 days
90 + Days
Total
 
December 31, 2018
 
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
—

$
—

$
710

$
710

 
$
123,303

$
124,013

Commercial real estate, other
12

736

7,151

7,899

 
624,301

632,200

    Commercial real estate
12

736

7,861

8,609

 
747,604

756,213

Commercial and industrial
1,678

3,520

1,297

6,495

 
523,712

530,207

Residential real estate
4,457

1,319

2,595

8,371

 
288,489

296,860

Home equity lines of credit
531

30

431

992

 
92,334

93,326

Consumer, indirect
3,266

488

165

3,919

 
403,248

407,167

Consumer, direct
308

50

42

400

 
71,274

71,674

    Consumer
3,574

538

207

4,319


474,522

478,841

Deposit account overdrafts
—

—

—

—

 
583

583

Total originated loans
$
10,252

$
6,143

$
12,391

$
28,786

 
$
2,127,244

$
2,156,030

Acquired loans:
 
 
 
 
 
 
 
Commercial real estate, construction
$
511

$
—

$
—

$
511

 
$
11,893

$
12,404

Commercial real estate, other
523

457

233

1,213

 
183,498

184,711

    Commercial real estate
1,034

457

233

1,724

 
195,391

197,115

Commercial and industrial
111

13

18

142

 
35,395

35,537

Residential real estate
6,124

1,823

1,885

9,832

 
287,105

296,937

Home equity lines of credit
238

233

534

1,005

 
39,648

40,653

Consumer, indirect
—

—

—

—

 
136

136

Consumer, direct
23

6

—

29

 
2,341

2,370

    Consumer
23

6

—

29

 
2,477

2,506

Total acquired loans
$
7,530

$
2,532

$
2,670

$
12,732

 
$
560,016

$
572,748

Total loans
$
17,782

$
8,675

$
15,061

$
41,518

 
$
2,687,260

$
2,728,778

Delinquency trends remained stable, as 99.0% of Peoples' portfolio was considered “current” at June 30, 2019, compared to 98.5% at December 31, 2018.
Credit Quality Indicators
As discussed in "Note 1 Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 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.
“Special Mention” (grade 5): Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned.” Loans in this risk 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 a 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 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


20

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, classification of the loan 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 a 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 during the period in which the loan becomes uncollectible. Consequently, Peoples typically does not maintain a recorded investment in loans within this category.
Consumer loans and other smaller-balance loans are evaluated and categorized as “substandard,” “doubtful,” or “loss” based upon the regulatory definition of these classes and consistent with regulatory requirements. All other loans not evaluated individually, nor meeting the regulatory conditions to be categorized as described above, would be considered as being “not rated.”
The following table summarizes the risk category of loans within Peoples' loan portfolio based upon the most recent analysis performed:
 
Pass Rated
(Grades 1 - 4)
Special Mention
(Grade 5)
Substandard
(Grade 6)
Doubtful (Grade 7)
Not
Rated
Total
Loans
(Dollars in thousands)
June 30, 2019
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
100,231

$
—

$
1,431

$
—

$
1,242

$
102,904

Commercial real estate, other
622,966

7,673

10,416

6

—

641,061

    Commercial real estate
723,197

7,673

11,847

6

1,242

743,965

Commercial and industrial
525,738

5,807

16,915

—

—

548,460

Residential real estate
13,752

201

14,682

249

270,289

299,173

Home equity lines of credit
17

—

—

—

90,357

90,374

Consumer, indirect
—

—

—

—

419,595

419,595

Consumer, direct
24

—

—

—

72,185

72,209

   Consumer
24

—

—

—

491,780

491,804

Deposit account overdrafts
—

—

—

—

676

676

Total originated loans
$
1,262,728

$
13,681

$
43,444

$
255

$
854,344

$
2,174,452

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
4,338

$
1,636

$
801

$
—

$
—

$
6,775

Commercial real estate, other
178,425

12,700

10,693

91

—

201,909

    Commercial real estate
182,763

14,336

11,494

91

—

208,684

Commercial and industrial
43,171

3,265

5,038

32

—

51,506

Residential real estate
17,634

2,686

2,564

130

325,425

348,439

Home equity lines of credit
81

—

—

—

41,181

41,262

Consumer, indirect
1

—

—

—

89

90

Consumer, direct
19

—

—

—

9,081

9,100

   Consumer
20

—

—

—

9,170

9,190

Total acquired loans
$
243,669

$
20,287

$
19,096

$
253

$
375,776

$
659,081

Total loans
$
1,506,397

$
33,968

$
62,540

$
508

$
1,230,120

$
2,833,533



21

 
Pass Rated
(Grades 1 - 4)
Special Mention
(Grade 5)
Substandard
(Grade 6)
Doubtful (Grade 7)
Not
Rated
Total
Loans
(Dollars in thousands)
December 31, 2018
 
 
 
 
 
 
Originated loans:
 
 
 
 
 
 
Commercial real estate, construction
$
121,457

$
—

$
1,472

$
—

$
1,084

$
124,013

Commercial real estate, other
612,099

10,898

9,203

—

—

632,200

    Commercial real estate
733,556

10,898

10,675

—

1,084

756,213

Commercial and industrial
476,290

45,990

7,692

—

235

530,207

Residential real estate
14,229

500

11,971

409

269,751

296,860

Home equity lines of credit
453

—

—

—

92,873

93,326

Consumer, indirect
8

—

—

—

407,159

407,167

Consumer, direct
30

—

—

—

71,644

71,674

   Consumer
38

—

—

—

478,803

478,841

Deposit account overdrafts
—

—

—

—

583

583

Total originated loans
$
1,224,566

$
57,388

$
30,338

$
409

$
843,329

$
2,156,030

Acquired loans:
 
 
 
 
 
 
Commercial real estate, construction
$
8,976

$
1,795

$
1,633

$
—

$
—

$
12,404

Commercial real estate, other
169,260

7,241

8,114

96

—

184,711

    Commercial real estate
178,236

9,036

9,747

96

—

197,115

Commercial and industrial
32,471

2,008

1,058

—

—

35,537

Residential real estate
17,370

1,938

2,033

137

275,459

296,937

Home equity lines of credit
33

—

—

—

40,620

40,653

Consumer, indirect
4

—

—

—

132

136

Consumer, direct
31

—

—

—

2,339

2,370

   Consumer
35

—

—

—

2,471

2,506

Total acquired loans
$
228,145

$
12,982

$
12,838

$
233

$
318,550

$
572,748

Total loans
$
1,452,711

$
70,370

$
43,176

$
642

$
1,161,879

$
2,728,778

In the first six months of 2019, Peoples' classified loans, which are loans categorized as substandard or doubtful, increased compared to the balances at December 31, 2018 mostly due to downgrades during the period combined with loans acquired in the First Prestonsburg merger, which were partially offset by paydowns on classified loans. At June 30, 2019, criticized loans, which are those categorized as special mention, substandard or doubtful, declined compared to the balance at December 31, 2018, largely due to the upgrade of two commercial relationships, partially offset by loans acquired in the First Prestonsburg merger.
At June 30, 2019, Peoples had a total of $2.2 million of loans secured by residential real estate mortgages that were in the process of foreclosure.


22

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)
June 30, 2019
 
 
 
 
 
 
 
Commercial real estate, construction
$
1,793

$
—

$
1,706

$
1,706

$
—

$
1,728

$
29

Commercial real estate, other
15,546

4,753

10,296

15,049

520

14,722

250

    Commercial real estate
17,339

4,753

12,002

16,755

520

16,450

279

Commercial and industrial
4,265

1,485

2,731

4,216

449

3,226

47

Residential real estate
22,195

387

23,170

23,557

53

22,086

629

Home equity lines of credit
1,469

419

1,051

1,470

68

1,343

40

Consumer, indirect
445

96

356

452

23

413

15

Consumer, direct
464

49

415

464

18

207

9

    Consumer
909

145

771

916

41

620

24

Total
$
46,177

$
7,189

$
39,725

$
46,914

$
1,131

$
43,725

$
1,019

December 31, 2018
 
 
 
 
 
 
 
Commercial real estate, construction
$
2,376

$
—

$
2,376

$
2,376

$
—

$
1,732

$
74

Commercial real estate, other
15,464

274

14,946

15,220

119

14,043

455

    Commercial real estate
17,840

274

17,322

17,596

119

15,775

529

Commercial and industrial
3,305

790

2,436

3,226

157

2,423

72

Residential real estate
25,990

644

24,034

24,678

154

22,769

1,134

Home equity lines of credit
2,291

424

1,869

2,293

73

1,832

109

Consumer, indirect
496

—

503

503

—

278

15

Consumer, direct
79

22

57

79

6

63

20

    Consumer
575

22

560

582

6

341

35

Total
$
50,001

$
2,154

$
46,221

$
48,375

$
509

$
43,140

$
1,879

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 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.


23

The following table summarizes the loans that were modified as a TDR during the three months ended June 30:
 
 
Three Months Ended
 
 
Recorded Investment (a)
(Dollars in thousands)
Number of Contracts
Pre-Modification
Post-Modification
Remaining Recorded Investment
June 30, 2019
 
 
 
Originated loans:
 
 
 
Residential real estate
1

$
37

$
37

$
37

Home equity lines of credit
2

60

60

60

Consumer, indirect
7

110

110

110

Consumer, direct
3

41

41

41

   Consumer
10

151

151

151

Total originated loans
13

$
248

$
248

$
248

Acquired loans:
 
 
 
Commercial real estate, other
7

$
725

$
699

$
700

Commercial and industrial
4

1,259

1,259

1,259

Residential real estate
35

1,823

1,823

1,823

Home equity lines of credit
7

113

113

113

Consumer, direct
16

340

340

340

Total acquired loans
69

$
4,260

$
4,234

$
4,235

June 30, 2018
 
 
 
Originated loans:
 
 
 
Residential real estate
5

$
717

$
717

$
717

Home equity lines of credit
3

61

61

61

Consumer, indirect
14

230

230

230

Consumer, direct
5

27

27

27

   Consumer
19

257

257

257

Total originated loans
27

$
1,035

$
1,035

$
1,035

Acquired loans:
 
 
 
Residential real estate
11

$
720

$
720

$
720

Home equity lines of credit
4

86

86

86

Consumer, direct
3

57

57

57

Total acquired loans
18

$
863

$
863

$
863

(a) 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.
 
 


24

 
 
Six Months Ended
 
 
Recorded Investment (a)
(Dollars in thousands)
Number of Contracts
Pre-Modification
Post-Modification
Remaining Recorded Investment
June 30, 2019
 
 
 
Originated loans:
 
 
 
Commercial and industrial
2

$
38

$
38

$
35

Residential real estate
3

436

440

437

Home equity lines of credit
4

139

139

139

Consumer, indirect
8

123

123

123

Consumer, direct
5

69

69

67

   Consumer
13

192

192

190

Total originated loans
22

$
805

$
809

$
801

Acquired loans:
 
 
 
Commercial real estate, other
7

$
724

$
699

$
700

Commercial and industrial
4

1,259

1,259

1,259

Residential real estate
36

1,847

1,847

1,842

Home equity lines of credit
9

179

179

178

Consumer, direct
16

340

340

340

Total acquired loans
72

$
4,349

$
4,324

$
4,319

June 30, 2018
 
 
 
Originated loans:
 
 
 
Residential real estate
7

$
910

$
910

$
911

Home equity lines of credit
3

61

61

61

Consumer, indirect
21

316

316

302

Consumer, direct
7

31

31

31

   Consumer
28

347

347

333

Total originated loans
38

$
1,318

$
1,318

$
1,305

Acquired loans:
 
 
 
Commercial real estate, other
1

$
50

$
50

$
48

Residential real estate
13

989

989

989

Home equity lines of credit
4

86

86

86

Consumer, direct
3

57

57

57

Total acquired loans
21

$
1,182

$
1,182

$
1,180

(a) 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.
 


25

The following table presents those acquired loans modified in a TDR during the year that subsequently defaulted (i.e., were 90 days or more past due following a modification) during the six-month periods ended June 30:
 
June 30, 2019
 
June 30, 2018
(Dollars in thousands)
Number of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan Losses
 
Number of Contracts
Recorded Investment (a)
Impact on the Allowance for Loan Losses
Acquired loans:
 
 
 
 
 
 
 
Consumer, direct
1

$
34

$
—

 
—

$
—

$
—

Total
1

$
34

$
—

 
—

$
—

$
—

(a) The amount shown is 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 loans that were modified as a TDR during the last twelve months that subsequently defaulted. Peoples had no commitments to lend additional funds to the related debtors whose terms have been modified in a TDR.
Allowance for Originated Loan Losses
Changes in the allowance for originated loan losses for the six months ended June 30 were as follows:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Home Equity Lines of Credit
Consumer Indirect
Consumer Direct
Deposit Account Overdrafts
Total
Balance, January 1, 2019
$
8,003

$
6,178

$
1,214

$
618

$
3,214

$
351

$
81

$
19,659

Charge-offs
(153
)
(63
)
(176
)
(9
)
(819
)
(96
)
(349
)
(1,665
)
Recoveries
12

2,012

133

2

162

40

106

2,467

Net (charge-offs) recoveries
(141
)
1,949

(43
)
(7
)
(657
)
(56
)
(243
)
802

Provision for (recoveries of) loan losses
383

(930
)
13

(13
)
615

47

248

363

Balance, June 30, 2019
$
8,245

$
7,197

$
1,184

$
598

$
3,172

$
342

$
86

$
20,824

 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
7,797

$
5,813

$
904

$
693

$
2,944

$
464

$
70

$
18,685

Charge-offs
(849
)
(38
)
(227
)
(57
)
(1,479
)
(219
)
(420
)
(3,289
)
Recoveries
43

—

67

9

272

84

116

591

Net charge-offs
(806
)
(38
)
(160
)
(48
)
(1,207
)
(135
)
(304
)
(2,698
)
Provision for (recovery of) loan losses
1,280

(410
)
261

(27
)
1,602

136

329

3,171

Balance, June 30, 2018
$
8,271

$
5,365

$
1,005

$
618

$
3,339

$
465

$
95

$
19,158



26

The following table details the recorded investment and allowance for originated loan losses disaggregated based on impairment method:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Residential Real Estate
Home Equity Lines of Credit
Consumer Indirect
Consumer Direct
Deposit Account Overdrafts
Total
June 30, 2019
 
 
 
 
 
 
 
 
Allowance for loan losses allocated to:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
520

$
449

$
53

$
68

$
23

$
18

$
—

$
1,131

Loans collectively evaluated for impairment
7,725

6,748

1,131

530

3,149

324

86

19,693

Ending balance
$
8,245

$
7,197

$
1,184

$
598

$
3,172

$
342

$
86

$
20,824

 
 
 
 
 
 
 
 
 
Recorded investment in:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
16,755

$
4,216

$
23,557

$
1,470

$
452

$
464

$
—

$
46,914

Loans collectively evaluated for impairment
727,210

544,244

275,616

88,904

419,143

71,745

676

2,127,538

Ending balance
$
743,965

$
548,460

$
299,173

$
90,374

$
419,595

$
72,209

$
676

$
2,174,452

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Allowance for loan losses allocated to:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
119

$
157

$
154

$
73

$
—

$
6

$
—

$
509

Loans collectively evaluated for impairment
7,884

6,021

1,060

545

3,214

345

81

19,150

Ending balance
$
8,003

$
6,178

$
1,214

$
618

$
3,214

$
351

$
81

$
19,659

 
 
 
 
 
 
 
 
 
Recorded investment in:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
17,596

$
3,226

$
24,678

$
2,293

$
503

$
79

$
—

$
48,375

Loans collectively evaluated for impairment
738,617

526,981

272,182

91,033

406,664

71,595

583

2,107,655

Ending balance
$
756,213

$
530,207

$
296,860

$
93,326

$
407,167

$
71,674

$
583

$
2,156,030

 
 
 
 
 
 
 
 
 
June 30, 2018
 
 
 
 
 
 
 
 
Allowance for loan losses allocated to:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
1

$
191

$
47

$
14

$
31

$
45

$
—

$
329

Loans collectively evaluated for impairment
8,270

5,174

958

604

3,308

420

95

18,829

Ending balance
$
8,271

$
5,365

$
1,005

$
618

$
3,339

$
465

$
95

$
19,158

 
 
 
 
 
 
 
 
 
Recorded investment in:
 
 
 
 
 
 
 
Loans individually evaluated for impairment
$
19,162

$
3,173

$
26,497

$
1,736

$
441

$
150

$
—

$
51,159

Loans collectively evaluated for impairment
737,051

468,097

273,437

88,221

372,943

71,395

860

2,012,004

Ending balance
$
756,213

$
471,270

$
299,934

$
89,957

$
373,384

$
71,545

$
860

$
2,063,163



27

Allowance for Loan Losses for Acquired Loans
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 purchased 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 non-impaired 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.
The following table presents activity in the allowance for loan losses for acquired loans:
 
Three Months Ended
 
Six Months Ended
(Dollars in thousands)
June 30, 2019
June 30, 2018
 
June 30, 2019
June 30, 2018
Non-impaired loans:
 
 
 
 
 
Balance, beginning of period
$
380

$
—

 
$
383

$
—

Charge-offs
—

—

 
(3
)
—

Balance, end of period
$
380

$
—

 
$
380

$
—

 
 
 
 
 
 
Purchased credit impaired loans:
 
 
 
 
 
Balance, beginning of period
$
153

$
108

 
$
153

$
108

Balance, end of period
$
153

$
108

 
$
153

$
108

The allowance for loan losses for non-impaired acquired loans was established at December 31, 2018.
Note 5 Long-Term Borrowings
The following table summarizes Peoples' long-term borrowings:
 
June 30, 2019
 
December 31, 2018
(Dollars in thousands)
Balance
Weighted-
Average
Rate
 
Balance
Weighted-
Average
Rate
FHLB putable, non-amortizing, fixed-rate advances
$
65,000

2.18
%
 
$
85,000

2.05
%
FHLB amortizing, fixed-rate advances
13,324

1.73
%
 
17,361

2.09
%
Junior subordinated debt securities
7,367

7.34
%
 
7,283

7.83
%
Total long-term borrowings
$
85,691

2.55
%
 
$
109,644

2.44
%
Peoples continually evaluates its overall balance sheet position given the interest rate environment. During the first six months of 2019, no additional borrowings were entered into, and two long-term FHLB non-amortizing advances totaling $20.0 million were reclassified to short-term borrowings as the maturity became less than one year.
As of June 30, 2019, Peoples had one remaining FHLB putable option-based advance. The FHLB has the option, at its sole discretion, to terminate the advance after the initial fixed rate period of three months, requiring full repayment of the advance by Peoples prior to the stated maturity. If the advance is terminated prior to maturity, the FHLB will offer Peoples replacement funding at the then-prevailing rate on an advance product then offered by the FHLB, subject to normal FHLB credit and collateral requirements. Peoples is required to make quarterly interest payments.
The amortizing, fixed-rate FHLB advances have a fixed rate for the term of each advance, with maturities ranging from eight to thirteen 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.


28

The aggregate minimum annual retirements of long-term borrowings in future periods are as follows:
(Dollars in thousands)
Balance
Weighted-Average Rate
Six months ending December 31, 2019
$
2,568

1.48
%
Year ending December 31, 2020
2,555

1.35
%
Year ending December 31, 2021
21,979

1.74
%
Year ending December 31, 2022
16,521

1.95
%
Year ending December 31, 2023
1,157

1.06
%
Thereafter
40,911

3.41
%
Total long-term borrowings
$
85,691

2.55
%
Effective April 3, 2019, Peoples terminated the Credit Agreement, dated as of March 4, 2016, between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), with a revolving line of credit in the maximum aggregate principal amount of $15.0 million. As of the termination date, April 3, 2019, and December 31, 2018, there were no borrowings outstanding under the RJB Credit Agreement. Additional information regarding the RJB Credit Agreement can be found in "Note 9 Long-Term Borrowings" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K.
Note 6 Stockholders’ Equity 
The following table details the progression in Peoples’ common shares and treasury stock during the six months ended June 30, 2019:
 
Common Stock
Treasury
Stock
Shares at December 31, 2018
20,124,378

601,289

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

17,481

Cancellation of restricted common shares
—

3,465

Grant of restricted common shares
—

(122,286
)
Grant of common shares
—

(4,680
)
Changes related to deferred compensation plan for Boards of Directors:
 
 
Purchase of treasury stock
—

3,834

Disbursed out of treasury stock
—

(2,187
)
Common shares issued under dividend reinvestment plan
12,400

—

Common shares issued under compensation plan for Boards of Directors
—

(3,490
)
Common shares issued under employee stock purchase plan
—

(3,624
)
Issuance of common shares related to the merger with First Prestonsburg Bancshares Inc.
1,005,478

—

Shares at June 30, 2019
21,142,256

489,802

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 June 30, 2019, Peoples had no preferred shares issued or outstanding.
The following table details the cash dividends declared per common share during 2019 and the comparable period of 2018:
 
2019
2018
First quarter
$
0.30

$
0.26

Second quarter
0.34

0.28

Third quarter
0.34

0.28

Total dividends declared
$
0.98

$
0.82


Accumulated Other Comprehensive Income (Loss)
The following table details the change in the components of Peoples’ accumulated other comprehensive income (loss) for the six months ended June 30, 2019:
(Dollars in thousands)
Unrealized Gain (Loss) on Securities
Unrecognized Net Pension and Postretirement Costs
Unrealized Gain (Loss) on Cash Flow Hedge
Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2018
$
(10,082
)
$
(3,711
)
$
860

$
(12,933
)
Reclassification adjustments to net income:
 
 
 


  Realized gain on sale of securities, net of tax
21

—

—

21

Other comprehensive income (loss), net of reclassifications and tax
17,121

31

(3,924
)
13,228

Balance, June 30, 2019
$
7,060

$
(3,680
)
$
(3,064
)
$
316

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 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 during the years 2003 through 2009, 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. Effective July 1, 2013, a participant in the pension plan who is employed by Peoples may elect to receive or to commence receiving such person's retirement benefits as of the later of such person's normal retirement date or the first day of the month first following the date such person makes an election to receive his or her retirement benefits.
Peoples also provides post-retirement health and life insurance benefits to certain former employees and directors. Only those individuals who retired before January 27, 2012 were eligible for life insurance benefits. As of January 1, 2011, all retirees who desire to participate in the Peoples Bank medical plan do so by electing COBRA, which provides up to 18 months of coverage; retirees over the age of 65 also have the option to pay to participate in a group Medicare supplemental plan. Peoples only pays 100% of the cost for those individuals who retired before January 1, 1993. For all others, the retiree is responsible for most, if not all, of the cost of the health benefits.  Peoples’ policy is to fund the cost of the benefits as they arise.


29

The following tables detail the components of the net periodic cost for the plans described above:
 
 
Pension Benefits
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Interest cost
$
110

$
105

 
$
219

$
210

Expected return on plan assets
(196
)
(146
)
 
(391
)
(293
)
Amortization of net loss
20

27

 
39

55

Net periodic income
$
(66
)
$
(14
)
 
$
(133
)
$
(28
)
 
Postretirement Benefits
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Interest cost
$
1

$
1

 
$
2

$
2

Amortization of prior service cost
(1
)
—

 
(1
)
—

Amortization of net loss
—

(1
)
 
(2
)
(3
)
Net periodic income
$
—

$
—

 
$
(1
)
$
(1
)
There were no settlement charges recorded during any of the three and six months ended June 30, 2019 and June 30, 2018 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
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands, except per common share data)
2019
2018
 
2019
2018
Distributed earnings allocated to common shareholders
$
6,935

$
5,407

 
$
12,711

$
10,123

Undistributed earnings allocated to common shareholders
2,568

2,427

 
11,067

9,389

Net earnings allocated to common shareholders
$
9,503

$
7,834

 
$
23,778

$
19,512

 
 
 
 
 
 
Weighted-average common shares outstanding
20,277,028

19,160,728

 
19,824,035

18,646,266

Effect of potentially dilutive common shares
165,338

132,653

 
148,315

126,903

Total weighted-average diluted common shares outstanding
20,442,366

19,293,381

 
19,972,350

18,773,169

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
$
0.47

$
0.41

 
$
1.20

$
1.05

Diluted
$
0.46

$
0.41

 
$
1.19

$
1.04

Anti-dilutive common shares excluded from calculation:
 
 
 
 
 
Restricted shares
87

—

 
46

32



30

Note 9 Derivative Financial Instruments
Peoples utilizes interest rate swap agreements as part of its asset/liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.
Derivatives and Hedging Activities - Risk Management Objective of Using Derivatives
Peoples is exposed to certain risks arising from both its business operations and economic conditions. Peoples principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Peoples manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its assets and liabilities, and through the use of derivative financial instruments. Specifically, Peoples enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or expected cash amounts, the values of which are determined by interest rates. Peoples’ derivative financial instruments are used to manage differences in the amount, timing and duration of Peoples' known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. Peoples also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in Peoples' assets or liabilities. Peoples manages a matched book with respect to customer-related derivative financial instruments in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Peoples' objectives in using interest rate derivatives are to add stability to interest income and expense, and to manage its exposure to interest rate movements. To accomplish these objectives, Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of June 30, 2019, Peoples had entered into fifteen interest rate swap contracts with an aggregate notional value of $140.0 million. Peoples will pay a fixed rate of interest for up to ten years while receiving a floating rate component of interest equal to the three-month LIBOR rate. The interest received on the floating rate component is intended to offset the interest paid on rolling three-month FHLB advances or rolling three-month brokered certificates of deposit, which will continue to be rolled through the life of the swaps. Amounts reported in accumulated other comprehensive income (loss) ("AOCI"), related to derivatives will be reclassified to interest income or expense as interest payments are made or received on Peoples' variable-rate assets or liabilities. During the three and six months ended June 30, 2019, Peoples had reclassifications of gains to interest expense of $70,000 and $153,000, respectively, and during the three and six months ended June 30, 2018, Peoples had reclassifications of gains to interest expense of $28,000 and $16,000, respectively.
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of each derivative is reported in AOCI (outside of earnings), net of tax, and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Peoples assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transaction. The reset dates and the payment dates on the 90-day advances or brokered certificates of deposit used to fund the swaps are matched to the reset dates and payment dates on the receipt of the 3-month LIBOR floating portion of the swaps to ensure effectiveness of the cash flow hedge. Effectiveness is measured by ensuring that reset dates and payment dates are matched. The amount of pre-tax AOCI for Peoples' cash flow hedges was $3.9 million at June 30, 2019.
The following table summarizes information about the interest rate swaps designated as cash flow hedges:
(Dollars in thousands)
June 30,
2019
December 31,
2018
Notional amount
$
140,000

$
110,000

Weighted average pay rates
2.27
%
2.37
%
Weighted average receive rates
1.80
%
2.57
%
Weighted average maturity
5.6 years

6.2 years

Unrealized gains
$
3,879

$
860



31

The following table presents net losses or gains recorded in AOCI and in the Unaudited Consolidated Statements of Income related to the cash flow hedges:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Amount of loss (gain) recognized in AOCI, pre-tax
$
2,994

$
(529
)
 
$
4,661

$
(1,907
)
Amount of (gain) loss recognized in earnings
$
—

$
—

 
$
(19
)
$
30

The following table reflects the cash flow hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
 
June 30,
2019
December 31,
2018
(Dollars in thousands)
Notional Amount
Fair Value
Notional Amount
Fair Value
Included in other assets:
 
 
 
 
Interest rate swaps related to debt
$
35,000

$
316

$
60,000

$
2,093

Total included in other assets
$
35,000

$
316

$
60,000

$
2,093

 
 
 
 
 
Included in accrued expenses and other liabilities:
 
 
 
 
Interest rate swaps related to debt
$
105,000

$
4,363

$
50,000

$
1,111

Total included in accrued expenses and other liabilities
$
105,000

$
4,363

$
50,000

$
1,111

At June 30, 2019, Peoples had $14.4 million and no amount of cash pledged at December 31, 2018, against interest rate swaps related to debt, however, the counterparties had pledged no amount of cash and $130,000, respectively.
Non-Designated Hedges
Peoples maintains an interest rate protection program for commercial loan customers, which was established in 2010. Under this program, Peoples originates variable rate loans with interest rate swaps, where the customer enters into an interest rate swap with Peoples on terms that match the terms of the loan. By entering into the interest rate swap with the customer, Peoples Bank effectively provides the customer with a fixed rate loan while creating a variable rate asset for Peoples Bank. Peoples Bank offsets its exposure in the swap 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 gross notional value of $492.0 million and fair value of $9.7 million of equally offsetting assets and liabilities at June 30, 2019, and a gross notional value of $453.4 million and fair value of $2.5 million of equally offsetting assets and liabilities at December 31, 2018. These interest rate swaps did not have a material impact on Peoples' results of operation or financial condition.
The following table reflects the non-designated hedges, which are included in the Unaudited Consolidated Balance Sheets at fair value:
 
June 30,
2019
December 31,
2018
(Dollars in thousands)
Notional Amount
Fair Value
Notional Amount
Fair Value
Included in other assets:
 
 
 
 
Interest rate swaps related to commercial loans
$
245,996

$
9,656

$
226,662

$
2,451

Total included in other assets
$
245,996

$
9,656

$
226,662

$
2,451

 
 
 
 
 
Included in accrued expenses and other liabilities:
 
 
 
 
Interest rate swaps related to commercial loans
$
245,996

$
9,656

$
226,662

$
2,451

Total included in accrued expenses and other liabilities
$
245,996

$
9,656

$
226,662

$
2,451

Peoples had no cash pledged against interest rate swaps related to commercial loans.


32

Note 10 Stock-Based Compensation 
Under the Peoples Bancorp Inc. Third Amended and Restated 2006 Equity Plan (the "2006 Equity Plan"), Peoples may grant, among other awards, nonqualified stock options, incentive stock options, restricted common stock awards, stock appreciation rights ("SARs"), performance units and unrestricted common share awards to employees and non-employee directors. The total number of common shares available under the 2006 Equity Plan is 891,340.  The maximum number of common shares that can be issued for incentive stock options is 500,000 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 2009, Peoples has granted restricted common shares to employees, and periodically to non-employee directors, subject to the terms and conditions prescribed by the 2006 Equity Plan. Additionally, in 2018 and 2019, the Board of Directors granted unrestricted common shares to non-employee directors and to all full-time and part-time employees who did not already participate in 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.
Restricted Common Shares
 Under the 2006 Equity Plan, Peoples may award restricted common shares to officers, key employees and non-employee directors.  Since 2018, common shares awarded to non-employee directors have vested immediately upon grant with no restrictions. Restrictions on restricted common shares awarded to employees typically expire after periods ranging from one to three years. In the first six months of 2019, Peoples granted an aggregate of 117,200 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. During the first six months of 2019, Peoples granted, to certain key employees, an aggregate of 5,086 restricted common shares subject to time-based vesting with restrictions that will lapse three years after the grant date.
The following table summarizes the changes to Peoples’ restricted common shares for the six months ended June 30, 2019:
 
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
43,679

$
29.64

 
175,772

$
31.08

Awarded
5,086

32.05

 
117,200

32.20

Released
17,500

21.69

 
33,400

17.86

Forfeited
2,852

37.79

 
613

34.50

Outstanding at June 30
28,413

$
34.16

 
258,959

$
33.29

 
For the six months ended June 30, 2019, the total intrinsic value for restricted common shares released was $1.6 million compared to $3.2 million for the six months ended June 30, 2018.
Performance Unit Awards
Under the 2006 Equity Plan, Peoples may grant performance unit awards to officers, key employees and non-employee directors.  On July 26, 2017, Peoples granted a total of seven performance unit awards to individuals who were then serving as officers, with a maximum aggregate dollar amount of $1.3 million represented by the performance units subject to such awards and each performance unit representing $1.00. As of June 30, 2019, one of seven performance unit awards had been forfeited as one of the individuals granted a performance unit award left Peoples before meeting the minimum service requirement to retain the performance unit award. The performance unit awards granted cover the performance period beginning January 1, 2018 and ending on December 31, 2019, and are subject to two performance goals. Twenty-five percent of the performance units subject to each award will vest if, but only if, the related company-specific target performance goal is achieved. The remaining 75% of the performance units subject to each award will vest based on the relative performance of Peoples compared to a defined peer group (measured by percentile ranking) with respect to the related maximum performance goal. If, for the performance period, the target level of achievement for the first performance goal and/or the maximum level of achievement for the second performance goal is not reached, the dollar amount represented by the performance units associated with each performance goal will be adjusted to reflect the level of performance achieved. After the vesting date, the participant will receive that number of common shares of Peoples equal to (i) the aggregate number of


33

the participant's performance units (and equivalent dollar value of such performance units) that vested based on the performance achieved under both performance goals (ii) divided by the fair market value of a common share of Peoples on the date the performance units are deemed to have vested (which will be the last day of the performance period) and rounded down to the nearest whole common share.
Stock-Based Compensation
Peoples recognizes stock-based compensation, which is included as a component of Peoples’ salaries and employee benefit costs, for restricted common shares and performance unit awards, as well as purchases made by participants in the employee stock purchase plan. For restricted common shares, Peoples recognizes stock-based compensation based on the estimated fair value of the awards on the grant date, for the portion of awards that is expected to vest over the vesting period. For performance unit awards, Peoples recognizes stock-based compensation over the performance period, based on the portion of the awards that is expected to vest based on the expected level of achievement of the two performance goals. Peoples also has an employee stock purchase plan whereby employees can purchase Peoples' common shares at a discount of up to 15%. The following table summarizes the amount of stock-based compensation expense and related tax benefit recognized for each period:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(Dollars in thousands)
2019
2018
 
2019
2018
Total stock-based compensation expense
$
930

$
424

 
$
2,138

$
1,510

Recognized tax benefit
(195
)
(89
)
 
(449
)
(317
)
Net expense recognized
$
735

$
335

 
$
1,689

$
1,193

Restricted common shares were the primary form of stock-based compensation awards granted by Peoples in the three and six months ended June 30, 2019 and 2018. The fair value of restricted common share awards on the grant date is the market price of Peoples' common shares. Total unrecognized stock-based compensation expense related to unvested awards was $3.6 million at June 30, 2019, which will be recognized over a weighted-average period of 2.1 years. On February 14, 2018, an aggregate of 11,112 unrestricted common shares were granted as a one-time special award to all full-time and part-time employees who did not already participate in the 2006 Equity Plan, with a related stock-based compensation expense of $388,000 being recognized. On June 3, 2019, an aggregate of 880 unrestricted common shares were granted as a one-time special award to all full-time and part-time First Prestonsburg employees, with a related stock-based compensation expense of $27,000 being recognized. For the three and six months ended June 30, 2019, Peoples recorded $11,000 and $50,000, respectively, of stock-based compensation associated with the performance unit awards and for the three and six months ended June 30, 2018 recorded $81,000 and $125,000, respectively. Additionally, Peoples recognized $16,000 and $32,000 of stock-based compensation associated with the employee stock purchase plan, based on purchases by employees thereunder, in the three and six months ended June 30, 2019, respectively, and $14,000 and $28,000 for the three and six months ended June 30, 2018, respectively.
Unrestricted common shares awarded to non-employee directors are included as a component of Peoples' other non-interest expense. On January 31, 2019, Peoples granted, to non-employee directors, an aggregate of 3,200 unrestricted common shares, which resulted in an additional $102,000 of stock-based compensation expense being recognized. On January 31, 2018, Peoples granted, to non-employee directors, an aggregate of 3,600 unrestricted common shares, which resulted in an additional $128,000 of stock-based compensation expense being recognized.


34

Note 11 Revenue
The following table details Peoples' revenue from contracts with customers:
 
Three Months Ended
 
Six Months Ended
(Dollars in thousands)
June 30, 2019
June 30, 2018
 
June 30, 2019
June 30, 2018
Insurance income:
 
 
 
 
 
Commission and fees from sale of insurance policies (a)
$
3,306

$
3,193

 
$
6,339

$
6,382

Fees related to third-party administration services (a)
178

173

 
347

292

Performance-based commissions (b)
2

3

 
1,421

1,350

Trust and investment income (a)
3,401

3,232

 
6,513

6,300

Electronic banking income:
 
 
 
 
 
Interchange income (a)
2,747

2,520

 
5,190

4,784

Promotional and usage income (a)
520

265

 
1,064

786

Deposit account service charges:
 
 
 
 
 
Ongoing maintenance fees for deposit accounts (a)
1,012

646

 
1,764

1,321

Transactional-based fees (b)
1,965

1,742

 
3,554

3,187

Commercial loan swap fees (b)
516

146

 
662

262

Other non-interest income transactional-based fees (b)
253

262

 
424

543

Total
$
13,900

$
12,182

 
$
27,278

$
25,207

 
 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
 
Services transferred over time
$
11,164

$
10,029

 
$
21,217

$
19,865

Services transferred at a point in time
2,736

2,153

 
6,061

5,342

Total
$
13,900

$
12,182

 
$
27,278

$
25,207

(a) Services transferred over time.
(b) Services transferred at a point in time.
Peoples records contract assets for income that has been recognized over a period of time for fulfillment of performance obligations, but has not yet been received related to electronic banking income. This income typically relates to bonuses for which Peoples is eligible, but will not receive until a certain time in the future. Peoples records contract liabilities for payments received for commission income related to the sale of insurance policies, for which the performance obligations have not yet been fulfilled. The contract liabilities are recognized as income over time, during the period in which the performance obligations are fulfilled, which is over the insurance policy period. Peoples also records contract liabilities for bonuses received related to electronic banking income, for which income is recognized during the period in which the performance obligations are fulfilled.
The following table details the change in Peoples' contract assets and contract liabilities for the period ended June 30, 2019:
 
Contract Assets
Contract Liabilities
(Dollars in thousands)
Balance, January 1, 2019
$
207

$
5,055

     Additional income receivable
183

—

     Additional deferred income
—

4,013

     Receipt of income previously receivable
(11
)
—

     Recognition of income previously deferred
—

(3,521
)
Balance, June 30, 2019
$
379

$
5,547



35

Note 12 Acquisitions
On April 12, 2019, Peoples completed the merger with First Prestonsburg Bancshares Inc. ("First Prestonsburg"). First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bank of Prestonsburg, Inc. ("First Commonwealth"), which operates nine full-service branches located in eastern and central Kentucky, merged into Peoples Bank. Consideration of $32.4 million was paid by Peoples in the form of 12.512 common shares of Peoples stock to shareholders of First Prestonsburg for each share of First Prestonsburg common stock they owned, which resulted in the issuance of 1,005,478 common shares of Peoples stock. In addition, immediately prior to the closing of the merger, First Prestonsburg paid a special cash distribution of $140.30 per share (for an aggregate amount of $11.3 million) which was deemed part of the purchase price to its shareholders. As a result, First Prestonsburg shareholders received a total purchase price of $43.7 million.


36

The following table provides the preliminary purchase price calculation as of the date of acquisition for the First Prestonsburg acquisition, and the assets acquired and liabilities assumed at their estimated fair values.
 
 
(Dollars in thousands, except per share data)
 
Consideration
 
Common shares
80,362

Number of common shares of Peoples issued for each common share of acquired company
12.512

Price per Peoples common share, based on closing date
$
32.26

    Common share consideration
$
32,437

 
 
Net Assets at Fair Value
 
Assets
 
  Cash and due from banks
$
4,998

  Interest-bearing deposits in other banks
2,798

    Total cash and cash equivalents
7,796

  Available-for-sale investment securities
137,658

  Other investment securities
3,068

    Total investment securities
140,726

  Total loans
130,407

  Bank premises and equipment, net of accumulated depreciation
8,255

  Other intangible assets
4,234

  Other assets
2,677

    Total assets
$
294,095

Liabilities
 
Deposits:
 
  Non-interest-bearing
$
40,089

  Interest-bearing
217,151

    Total deposits
257,240

  Short-term borrowings
14,400

  Accrued expenses and other liabilities
2,065

    Total liabilities
$
273,705

Net assets
$
20,390

Goodwill
$
12,047

The estimated fair values presented in the above table reflect certain fair value estimates made as of the date of acquisition. Adjustments to acquisition date estimated fair values are recorded in the period in which the adjustment is determined and, as a result, previously recorded results may change.


37

Acquired loans are reported net of the unamortized fair value adjustment. The following table details the fair value adjustment for acquired loans as of the acquisition date:
 
 
(Dollars in thousands)
First Prestonsburg
Non-impaired Loans
 
Contractual cash flows
$
168,903

Nonaccretable difference
19,756

Expected cash flows
149,147

Accretable yield
27,789

Fair value
$
121,358

Credit Impaired Loans
 
Contractual cash flows
$
17,706

Nonaccretable difference
4,804

Expected cash flows
12,902

Accretable yield
3,853

Fair value
$
9,049

Peoples recorded non-interest expense related to acquisitions of $6.8 million and $7.0 million for the three and six months ended June 30, 2019, respectively. Total non-interest income declined due to losses of $253,000 associated with the First Prestonsburg merger. For each of the three and six months ended June 30, 2019, salaries and employee benefit costs included $2.4 million, related to change in control agreements, retention and severance bonuses, and regular payroll and taxes after conversion. Professional fees related to the acquisition included $562,000 and $620,000 for the three and six months ended June 30, 2019, respectively, and other non-interest expenses included $3.7 million and $3.8 million (mainly contract termination fees) for the three and six months ended June 30, 2019, respectively.
Note 13 Leases
Peoples leases certain banking facilities and equipment under various agreements with original terms providing for fixed monthly payments over periods generally ranging from two to twenty years.  Certain leases contain renewal options and rent escalation clauses calling for rent increases over the term of the lease.  Short-term leases of certain facilities and equipment, with lease terms of 12 months or less, are recognized on a straight-line basis over the lease term. At June 30, 2019, Peoples did not have any finance leases or any significant lessor agreements.
Peoples elected certain practical expedients, in accordance with Accounting Standards Codification ("ASC") 842. Peoples elected to recognize a cumulative-effect adjustment to the opening balance of retained earnings on January 1, 2019 for the implementation of ASU 2016-02. Peoples also made an accounting policy election to account for each separate lease component of a contract and its associated non-lease components as a single lease component for all leases subject to ASC 842.
The table below details Peoples' lease expense, which is included in net occupancy and equipment expense in the Unaudited Consolidated Statements of Income:
 
Three Months Ended
 
Six Months Ended
(Dollars in thousands)
June 30, 2019
 
June 30, 2019
Operating lease expense
$
311

 
618

Short-term lease expense
32

 
62

Total lease expense
$
343

 
$
680



38

The following table details the right-of-use asset, the lease liability and other information related to Peoples' operating leases:
(Dollars in thousands)
June 30, 2019
Right-of-use asset:
 
     Other assets
$
6,661

Lease liability:
 
     Accrued expenses and other liabilities
$
6,839

 
 
Other information:
 
     Weighted-average remaining lease term
13.1 years

     Weighted-average discount rate
2.46
%
The increased right-of-use asset and lease liability at June 30, 2019 were due to acquired leases associated with the First Prestonsburg merger.
The following table summarizes the maturity of remaining lease liabilities:
(Dollars in thousands)
Balance
Six months ending December 31, 2019
$
10

Year ending December 31, 2020
112

Year ending December 31, 2021
148

Year ending December 31, 2022
700

Year ending December 31, 2023
63

Thereafter
5,806

Total lease liability
$
6,839




39

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following data should be read in conjunction with the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis that follows:
 
At or For the Three Months Ended
 
At or For the Six Months Ended
 
June 30,
 
June 30,
 
2019
2018
 
2019
2018
Operating Data (a)
 
 
 
 
 
Total interest income
$
43,621

$
37,769

 
$
84,197

$
70,995

Total interest expense
7,572

4,961

 
14,234

8,828

Net interest income
36,049

32,808

 
69,963

62,167

Provision for loan losses
626

1,188

 
363

3,171

Net loss on investment securities
(57
)
(147
)
 
(27
)
(146
)
Net loss on asset disposals and other transactions
(293
)
(405
)
 
(475
)
(331
)
Total non-interest income excluding net gains and losses
15,639

13,807

 
31,220

28,701

Total non-interest expense
38,876

35,971

 
70,736

64,192

Net income
9,598

7,892

 
23,967

19,633

Balance Sheet Data (a)
 
 
 
 
 
Total investment securities
$
997,711

$
876,765

 
$
997,711

$
876,765

Loans, net of deferred fees and costs ("total loans")
2,833,533

2,686,491

 
2,833,533

2,686,491

Allowance for loan losses
21,357

19,266

 
21,357

19,266

Goodwill and other intangible assets
176,763

163,953

 
176,763

163,953

Total assets
4,276,376

3,972,091

 
4,276,376

3,972,091

Non-interest-bearing deposits
643,058

585,861

 
643,058

585,861

Other interest-bearing deposits
2,394,398

2,363,398

 
2,394,398

2,363,398

Brokered certificates of deposits
326,157

211,062

 
326,157

211,062

Short-term borrowings
186,457

360,727

 
186,457

360,727

Junior subordinated debentures held by subsidiary trust
7,367

7,195

 
7,367

7,195

Other long-term borrowings
85,691

113,085

 
85,691

113,085

Total stockholders' equity
579,022

499,339

 
579,022

499,339

Tangible assets (b)
4,099,613

3,808,138

 
4,099,613

3,808,138

Tangible equity (b)
402,259

335,386

 
402,259

335,386

Per Common Share Data (a)
 
 
 
 
 
Earnings per common share – basic
$
0.47

$
0.41

 
$
1.20

$
1.05

Earnings per common share – diluted
0.46

0.41

 
1.19

1.04

Cash dividends declared per common share
0.34

0.28

 
0.64

0.54

Book value per common share (c)
27.98

25.57

 
27.98

25.57

Tangible book value per common share (b)(c)
$
19.44

$
17.17

 
$
19.44

$
17.17

Weighted-average number of common shares outstanding – basic
20,277,028

19,160,728

 
19,824,035

18,646,266

Weighted-average number of common shares outstanding – diluted
20,442,366

19,283,381

 
19,972,350

18,773,169

Common shares outstanding at end of period
20,696,041

19,528,952

 
20,696,041

19,528,952

Closing stock price at end of period
$
32.26

$
37.78

 
$
32.26

$
37.78



40

 
At or For the Three Months Ended
 
At or For the Six Months Ended
 
June 30,
 
June 30,
 
2019
2018
 
2019
2018
Significant Ratios (a)
 
 
 
 
 
Return on average stockholders' equity (d)
6.81
%
6.46
%
 
8.87
 %
8.39
%
Return on average tangible equity (d)(e)
10.55
%
10.47
%
 
13.49
 %
13.21
%
Return on average assets (d)
0.91
%
0.81
%
 
1.17
 %
1.06
%
Return on average assets adjusted for non-core items (d)(f)
1.44
%
1.35
%
 
1.47
 %
1.34
%
Average stockholders' equity to average assets
13.33
%
12.57
%
 
13.24
 %
12.60
%
Average total loans to average deposits
86.37
%
89.57
%
 
87.81
 %
88.37
%
Net interest margin (d)(g)
3.77
%
3.74
%
 
3.78
 %
3.70
%
Efficiency ratio (h)
73.24
%
74.96
%
 
68.09
 %
68.53
%
Efficiency ratio adjusted for non-core items (i)
60.21
%
62.03
%
 
61.19
 %
61.73
%
Pre-provision net revenue to total average assets (j)
1.21
%
1.10
%
 
1.49
 %
1.44
%
Dividend payout ratio
73.30
%
69.27
%
 
53.84
 %
52.15
%
Total investment securities as percentage of total assets (c)
23.33
%
22.07
%
 
23.33
 %
22.07
%
Asset Quality Ratios (a)
 
 
 
 
 
Nonperforming loans as a percent of total loans (c)(k)
0.71
%
0.67
%
 
0.71
 %
0.67
%
Nonperforming assets as a percent of total assets (c)(k)
0.47
%
0.46
%
 
0.47
 %
0.46
%
Nonperforming assets as a percent of total loans and OREO (c)(k)
0.71
%
0.67
%
 
0.71
 %
0.67
%
Criticized loans as a percent of total loans (c)(l)
3.42
%
4.50
%
 
3.42
 %
4.50
%
Classified loans as a percent of total loans (c)(m)
2.23
%
2.07
%
 
2.23
 %
2.07
%
Allowance for loan losses as a percent of total loans (c)
0.75
%
0.72
%
 
0.75
 %
0.72
%
Allowance for loan losses as a percent of nonperforming loans (c)(k)
106.57
%
106.77
%
 
106.57
 %
106.77
%
Provision for loan losses as a percent of average total loans
0.09
%
0.18
%
 
0.03
 %
0.26
%
Net charge-offs (recoveries) as a percentage of average total loans
0.03
%
0.11
%
 
(0.06
)%
0.22
%
Capital Information (a)(c)
 

 
 
 
 
Common equity tier 1 capital ratio (n)
14.16
%
13.03
%
 
14.16
 %
13.03
%
Tier 1 risk-based capital ratio
14.41
%
13.29
%
 
14.41
 %
13.29
%
Total risk-based capital ratio (tier 1 and tier 2)
15.14
%
13.99
%
 
15.14
 %
13.99
%
Leverage ratio
10.26
%
9.73
%
 
10.26
 %
9.73
%
Common equity tier 1 capital
$
410,979

$
358,987

 
$
410,979

$
358,987

Tier 1 capital
418,347

366,182

 
418,347

366,182

Total capital (tier 1 and tier 2)
439,704

385,448

 
439,704

385,448

Total risk-weighted assets
$
2,903,387

$
2,755,112

 
$
2,903,387

$
2,755,112

Total stockholders' equity to total assets
13.54
%
12.57
%
 
13.54
 %
12.57
%
Tangible equity to tangible assets (b)
9.81
%
9.07
%
 
9.81
 %
9.07
%
(a)
Reflects the impact of the acquisition of First Prestonsburg Bancshares Inc. ("First Prestonsburg") beginning April 12, 2019, and of ASB Financial Corp. ("ASB") beginning April 13, 2018.
(b)
These amounts represent non-US GAAP financial measures since they exclude the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity and total assets.  Additional information regarding the calculation of these non-US GAAP financial measures can be found under the caption “Capital/Stockholders’ Equity.”
(c)
Data presented as of the end of the period indicated.
(d)
Ratios are presented on an annualized basis.
(e)
Return on average tangible equity represents a non-US GAAP financial measures since it excludes the after-tax impact of amortization of other intangible assets from earnings and it excludes the balance sheet impact of goodwill and other intangible assets acquired through acquisitions on total stockholders’ equity. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Return on Average Tangible Equity Ratio.”
(f)
Return on average assets adjusted for non-core items represents a non-US GAAP financial measure since it excludes the impact of the Tax Cuts and Jobs Act on the remeasurement of deferred tax assets and deferred tax liabilities, and the after-tax impact of all gains and/or losses, core banking system conversion revenue and expenses, acquisition-related expenses, pension settlement charges, and other non-recurring expenses in earnings. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption "Return on Average Assets Adjusted for Non-Core Items."
(g)
Information presented on a fully tax-equivalent basis.
(h)
The efficiency ratio is defined as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income (excluding all gains and losses). This amount represents a non-US GAAP financial measure since it


41

excludes amortization of other intangible assets, and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio.”
(i)
The efficiency ratio adjusted for non-core items is defined as core non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus core non-interest income excluding all gains and losses. This amount represents a non-US GAAP financial measure since it excludes the impact of all gains and/or losses, and acquisition-related expenses included in earnings, and uses fully tax-equivalent net interest income. Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Efficiency Ratio.”
(j)
Pre-provision net revenue is defined as net interest income plus total non-interest income (excluding all gains and losses) minus total non-interest expense. This ratio represents a non-US GAAP financial measure since it excludes the provision for loan losses and all gains and/or losses included in earnings. This measure is a key metric used by federal bank regulatory agencies in their evaluation of capital adequacy for financial institutions.  Additional information regarding the calculation of this non-US GAAP financial measure can be found under the caption “Pre-Provision Net Revenue.”
(k)
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.
(l)
Includes loans categorized as special mention, substandard and doubtful.
(m)
Includes loans categorized as substandard and doubtful.
(n)
Peoples' capital conservation buffer was 7.14% at June 30, 2019 and 5.99% at June 30, 2018, compared to 2.50% for the fully phased-in capital conservation buffer required at 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 of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are identified by the fact they are not historical facts and include words such as "anticipate," "estimate," "may," "feel," "expect," "believe," "plan," "will," "will likely," "would," "should," "could," "project," "goal," "target," "potential," "seek," "intend," and similar expressions.
These forward-looking statements reflect management's current expectations based on all information available to management and its knowledge of Peoples' business and operations. Additionally, Peoples' financial condition, results of operations, plans, objectives, future performance and business are subject to risks and uncertainties that may cause actual results to differ materially. These factors include, but are not limited to:
(1)
the success, impact, and timing of the implementation of Peoples' business strategies, including the successful integration of the business of First Prestonsburg, and the expansion of consumer lending activity;
(2)
risks and uncertainties associated with Peoples' entry into new geographic markets and risks resulting from Peoples' inexperience in these new geographic markets;
(3)
Peoples' ability to integrate future acquisitions, which may be unsuccessful, or may be more difficult, time-consuming or costly than expected;
(4)
competitive pressures among financial institutions, or from non-financial institutions, which may increase significantly, including product and pricing pressures, changes to third-party relationships and revenues, changes in the manner of providing services, customer acquisition and retention pressures, and Peoples' ability to attract, develop and retain qualified professionals;
(5)
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, loan demand and interest rate sensitivity;
(6)
uncertainty regarding the nature, timing, cost, and effect of legislative or regulatory changes or actions, promulgated and to be promulgated by governmental and regulatory agencies in the state of Ohio, the Federal Deposit Insurance Corporation, 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, and the Basel III regulatory capital reform;
(7)
the effects of easing restrictions on participants in the financial services industry;
(8)
local, regional, national and international economic conditions (including the impact of potential or imposed tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars and other changes in trade regulations) and the impact these conditions may have on Peoples, its customers and its counterparties, and Peoples' assessment of the impact, which may be different than anticipated;


42

(9)
the existence or exacerbation of general geopolitical instability and uncertainty;
(10)
changes in policy and other regulatory and legal developments, and uncertainty or speculation pending the enactment of such changes;
(11)
Peoples may issue equity securities in connection with future acquisitions, which could cause ownership and economic dilution to Peoples' current shareholders;
(12)
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;
(13)
adverse changes in economic conditions and/or activities, including, but not limited to, continued economic uncertainty in the U.S., the European Union (including the uncertainty surrounding the actions to be taken to implement the referendum by British voters to exit the European Union), Asia, and other areas, which could decrease sales volumes, add volatility to the global stock markets, and increase loan delinquencies and defaults;
(14)
deterioration in the credit quality of Peoples' loan portfolio, which may adversely impact the provision for loan losses;
(15)
Peoples may have more credit risk and higher credit losses to the extent loans are concentrated by location or industry of the borrowers or collateral;
(16)
changes in accounting standards, policies, estimates or procedures, including the new current expected credit loss rule issued by the Financial Accounting Standards Board in June 2016, which will require banks to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred, which may adversely affect Peoples' reported financial condition or results of operations;
(17)
Peoples' assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;
(18)
the discontinuation of the London Inter-Bank Offered Rate and other reference rates may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies;
(19)
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;
(20)
the volatility from quarter to quarter of mortgage banking income, whether due to interest rates, demand, the fair value of mortgage loans, or other factors;
(21)
Peoples' ability to receive dividends from its subsidiaries;
(22)
Peoples' ability to maintain required capital levels and adequate sources of funding and liquidity;
(23)
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;
(24)
the costs and effects of new federal and state laws, and other regulatory and legal developments, including the outcome of potential regulatory or other governmental inquiries and legal proceedings and results of regulatory examinations;
(25)
Peoples' ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks, including those of Peoples' third-party vendors and other service providers, which may prove inadequate, and could adversely affect customer confidence in Peoples and/or result in Peoples incurring a financial loss;
(26)
Peoples' ability to anticipate and respond to technological changes, and Peoples' reliance on, and the potential failure of, a number of third-party vendors to perform as expected, including Peoples' primary core banking system provider, which can impact Peoples' ability to respond to customer needs and meet competitive demands;


43

(27)
operational issues stemming from and/or capital spending necessitated by the potential need to adapt to industry changes in information technology systems on which Peoples and its subsidiaries are highly dependent;
(28)
changes in consumer spending, borrowing and saving habits, whether due to tax reform legislation, changes in retail distribution strategies, consumer preferences and behavior, changes in business and economic conditions, legislative or regulatory initiatives, or other factors, which may be different than anticipated;
(29)
the adequacy of Peoples' internal controls and risk management program in the event of changes in strategic, reputational, market, economic, operational, cyber security, compliance, legal, asset/liability repricing, liquidity, credit and interest rate risks associated with Peoples' business;
(30)
the impact on Peoples' businesses, personnel, facilities, or systems, related to fraud, theft, or violence;
(31)
the impact on Peoples' businesses, as well as on the risks described above, of various domestic or international widespread natural or other disasters, pandemics, cyber attacks, civil unrest, military or terrorist activities or international conflicts;
(32)
Peoples' continued ability to grow deposits; and
(33)
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, 2018 and under the heading "ITEM 1A. RISK FACTORS" in Part II of this Form 10-Q.
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’ 2018 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 89 locations, including 79 full-service bank branches, and 86 Automated Teller Machines ("ATMs") in northeastern, central, southwestern and southeastern Ohio, west central West Virginia, and central and eastern 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"), the Federal Reserve Bank ("FRB") of Cleveland and the Federal Deposit Insurance Corporation (the "FDIC"). Peoples Bank is also subject to regulations of the Consumer Financial Protection Bureau (the "CFPB") which regulates consumer financial products and services and certain financial services providers. Peoples Insurance is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states in which Peoples Insurance 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, mobile banking and telephone and internet-based banking.  Peoples also offers a complete array of insurance products and makes available custom-tailored fiduciary, employee benefit plan and asset management services.  Brokerage services are offered by Peoples exclusively through an unaffiliated registered broker-dealer located at Peoples Bank's offices.


44

Critical Accounting Policies
The accounting and reporting policies of Peoples conform to US GAAP and to general practices within the financial services industry.  The preparation of the financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could materially differ from those estimates.  Management has identified the accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to understanding Peoples’ Unaudited Consolidated Financial Statements, and Management’s Discussion and Analysis at June 30, 2019, which were unchanged from the policies disclosed in Peoples’ 2018 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: 
◦
On April 12, 2019, Peoples completed the previously-announced merger with First Prestonsburg. First Prestonsburg merged into Peoples and First Prestonsburg's wholly-owned subsidiary, First Commonwealth Bank of Prestonsburg, Inc., which operated nine full-service bank branches in central and eastern Kentucky, merged into Peoples Bank. Total purchase price of $43.7 million was paid in the merger, of which $11.3 million was in the form of a special cash dividend paid by First Prestonsburg to shareholders of First Prestonsburg prior to the merger with the remainder being paid in the form of an aggregate of 1,005,478 Peoples common shares by Peoples. The merger added $130.4 million of total loans and $257.2 million of total deposits at the acquisition date, after preliminary fair value adjustments. Peoples also recorded $4.2 million of other intangible assets and $12.0 million of goodwill. These amounts reflect information available through the date of the filing of this Quarterly Report on Form 10-Q. Refer to "Note 12 Acquisitions" of the Notes to the Unaudited Consolidated Financial Statements for additional information.
◦
At the close of business on April 13, 2018, Peoples completed the merger with ASB. ASB merged into Peoples, and ASB's wholly-owned subsidiary, American Savings Bank, fsb, which operated seven full-service bank branches and two loan production offices in southern Ohio and eastern Kentucky, merged into Peoples Bank. Under the terms of the merger agreement, Peoples paid total consideration of $41.5 million. The merger added $239.2 million of total loans and loans held for sale in the aggregate, and $198.6 million of total deposits at the acquisition date, after acquisition accounting adjustments. Peoples also recorded $2.6 million of other intangible assets and $18.1 million of goodwill.
◦
During the second quarter of 2019, Peoples incurred $7.0 million of acquisition-related costs, compared to $253,000 in the first quarter of 2019, and $6.3 million in the second quarter of 2018. During the first six months of 2019, Peoples incurred $7.3 million of acquisition-related costs, compared to $6.4 million during the first six months of 2018. The acquisition costs in 2019 and 2018 were primarily related to the First Prestonsburg and ASB mergers, respectively, and were primarily related to fees associated with early termination of contracts, severance costs and write-offs associated with assets acquired.
◦
During the second quarter of 2019, Peoples entered into $30.0 million of interest rate swaps, with a notional value in aggregate of $30.0 million, which became effective immediately and will mature between 2023 and 2026, with interest rates ranging from 1.89% to 1.91%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
◦
During the first quarter of 2019, Peoples recognized a $1.8 million recovery on a previously charged-off commercial loan.
◦
During the second quarter of 2019, Peoples closed one full-service bank branch located in West Virginia when the lease expired in June 2019. During the first quarter of 2019, Peoples closed one insurance office located in Ohio when the lease for the location expired at the end of January 2019 and one full-service bank branch located in West Virginia when the lease for the location expired in March 2019. Employees at the closed locations were relocated to other branches or offices.
◦
On April 22, 2019, Peoples Bank signed an agreement to open a Federal Funds liquidity facility with Canadian Imperial Bank of Commerce, which either party may cancel at any time. The $20.0 million line increases Peoples Bank's contingent liquidity and will serve to help manage Peoples Bank's daily liquidity needs. As of June 30, 2019, Peoples Bank had not borrowed under the agreement.
◦
On April 3, 2019, Peoples entered into a Loan Agreement (the “U.S. Bank Loan Agreement”) with U.S. Bank National Association. The U.S. Bank Loan Agreement has a one-year term and provides Peoples with a revolving line of credit in the maximum aggregate principal amount of $20.0 million that may be used: (i) for working capital


45

purposes; (ii) to finance dividends or other distributions (other than stock dividends and stock splits) on or in respect of Peoples’ capital stock and redemptions, repurchases or other acquisitions of any of Peoples’ capital stock permitted under the U.S. Bank Loan Agreement and (iii) to finance acquisitions permitted under the U.S. Bank Loan Agreement.
◦
Effective April 3, 2019, Peoples terminated the Credit Agreement, dated as of March 4, 2016 between Peoples, as Borrower, and Raymond James Bank, N.A., as Lender (the "RJB Credit Agreement"), with a revolving line of credit in the maximum aggregate principal amount of $15.0 million.
◦
During the first quarter of 2019, Peoples sold its restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock, resulting in a gain of $787,000 recorded in other non-interest income.
◦
Multiple items impacted Peoples' income tax expense during 2018, primarily as a result of the Tax Cuts and Jobs Act, which lowered the statutory federal corporate income tax rate to 21% as of January 1, 2018, from a previous rate of 35%. There were no similar items in 2019.
▪
Beginning on January 1, 2018, Peoples began recognizing income tax expense at the 21% statutory federal corporate income tax rate.
▪
During the fourth quarter of 2018, Peoples finalized the remeasurement of its net deferred tax assets and liabilities at the new statutory federal corporate income tax rate of 21%, which resulted in a reduction to income tax expense of $705,000 in 2018. The final adjustment was mainly due to Peoples' contribution of $3.2 million to Peoples' defined benefit pension plan during 2018.
▪
During 2018, Peoples released a valuation allowance, which reduced income tax expense by $0.8 million. The valuation allowance was related to a historical tax credit that Peoples had invested in during 2015. Peoples sold $6.7 million of equity investment securities in the second quarter of 2018, which resulted in a capital gain for tax purposes. This capital gain was large enough to offset an anticipated future capital loss, which is expected to be recognized due to the structure of the historical tax credit investment, resulting in the release of the valuation allowance.
◦
During the fourth quarter of 2018, Peoples incurred $91,000 in pension settlement costs due to the aggregate amount of lump-sum distributions to participants in Peoples' defined benefit pension plan exceeding the threshold for recognizing such charges during the period. There were no such costs during the first or second quarters of 2019 or the first or second quarters of 2018.
◦
On July 31, 2018, Peoples entered into $50.0 million of interest rate swaps, which became effective immediately and will mature between 2021 and 2028, with interest rates ranging from 2.92% to 3.00%. Additionally, the three interest rate swaps acquired with the ASB acquisition matured in July of 2018. These swaps locked in funding rates for $40.0 million, in notional value, in FHLB advances that matured in 2018, which had interest rates ranging from 3.57% to 3.92%. For additional information regarding Peoples' interest rate swaps, refer to "Note 9 Derivative Financial Instruments" of the Notes to the Unaudited Consolidated Financial Statements.
◦
On January 1, 2018, Peoples adopted ASU 2016-01, resulting in the reclassification of $7.8 million of equity investment securities from available-for-sale investment securities to other investment securities and the reclassification of $5.0 million in net unrealized gains on equity investment securities from accumulated other comprehensive loss to retained earnings.
◦
The Federal Reserve Board began tightening monetary policy in December 2015 by raising the benchmark Federal Funds Target Rate. Since then, the rate has increased several times from a range of 0.25% to 0.50% to its current range of 2.25% to 2.50%. Market participants are now expecting two eases this year and potentially one early next year. While recent economic numbers have been fairly strong, the Federal Reserve Board is contemplating lowering rates in order to prevent the economy from slipping into what many investors believe is a long-overdue recession. The Federal Reserve Board has also indicated it would pause reducing its balance sheet beginning in September 2019 as planned. As a result, interest rates will likely remain rather low throughout the rest of 2019. Peoples is closely monitoring interest rates, both foreign and domestic; and potential impacts of changes in interest rates to Peoples' operations.
The impact of these transactions and events, where material, is discussed in the applicable sections of this Management’s Discussion and Analysis of Results of Operations and Financial Condition.


46

EXECUTIVE SUMMARY
Peoples recorded net income of $9.6 million for the second quarter of 2019, representing earnings per diluted common share of $0.46, compared to $14.4 million, or $0.73 per diluted common share, for the first quarter of 2019, and $7.9 million, or $0.41 per diluted share, for the second quarter of 2018. During the second quarter of 2019, earnings per diluted common share were negatively impacted by $0.28 per share for acquisition-related costs. During the first quarter of 2019, earnings per diluted common share were positively impacted by $0.07 per share for the recovery on a previously charged-off commercial loan and by $0.03 per share for income related to the sale of restricted Class B Visa stock, partially offset by the negative impact of $0.01 per share for acquisition-related costs. During the second quarter of 2018, earnings per diluted common share were negatively impacted by $0.25 per share in acquisition-related costs, and were positively impacted by $0.04 per share due to the release of a tax valuation allowance.
During the first six months of 2019, net income was $24.0 million, or $1.19 per diluted share, compared to $19.6 million, or $1.04 per diluted common share, for the same period in 2018. The increased earnings were primarily due to increases in net interest income, deposit account service charges, and electronic banking income, which were partially offset by increased salaries and employee benefit costs, and other non-interest expenses, which were impacted by the First Prestonsburg and ASB mergers, in 2019 compared to 2018. Acquisition-related costs negatively impacted earnings per diluted common share by $0.29 and $0.27 during the first six months of 2019 and 2018, respectively.
Net interest income increased to $36.0 million for the second quarter of 2019, up 6% compared to $33.9 million for the first quarter of 2019, and increased by 10% compared to $32.8 million for the second quarter of 2018. Net interest margin was 3.77% for the second quarter of 2019, compared to 3.80% for the first quarter of 2019, and 3.74% for the second quarter of 2018. The slight decline in net interest margin during the quarter was driven by higher costs for time deposits and governmental deposits, which more than offset increased loan yields, driven by the First Prestonsburg merger. Compared to the first quarter of 2019, net interest income was positively impacted by the merger of First Prestonsburg. The increase in net interest income compared to the second quarter of 2018 was driven by higher yields on loans combined with the impact of First Prestonsburg earning assets. These were partially offset by higher deposit costs due to increased competition for deposits, combined with additional interest expense related to the acquired First Prestonsburg deposits.
For the second quarter of 2019, accretion income from acquisitions, net of amortization expense, was $1.2 million, compared to $722,000 for the first quarter of 2019 and $523,000 for the second quarter of 2018, which added 13 basis points, 8 basis points, and 6 basis points, respectively, to net interest margin. The growth in net accretion income compared to the first quarter of 2019 and the second quarter of 2018 was due to the First Prestonsburg merger, specifically the loan discount that was accreted during the quarter.
For the first six months of 2019, net interest income was $70.0 million, and net interest margin was 3.78%, compared to $62.2 million and 3.70%, respectively, during the same period in 2018. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg and ASB acquisitions, and higher yields from interest rate increases. The interest income from higher average loan balances outpaced interest expense from deposits, which increased due to the recent acquisitions and increased competition for deposits. The first six months of 2018 benefited from proceeds of $589,000 received on investment securities that had been previously written down due to other-than-temporary impairment ("OTTI"), which added 3 basis points to net interest margin.
Accretion income, net of amortization expense, from acquisitions was $1.9 million for the first six months of 2019 and $1.1 million for the first six months of 2018, which added 10 basis points and 6 basis points, respectively, to net interest margin. The growth in net accretion income compared to the first six months of 2018 was largely due to the First Prestonsburg acquisition.
During the first quarter of 2019, Peoples recorded a provision for loan losses of $626,000, compared to a recovery of loan losses of $263,000 for the first quarter of 2019 and a provision for loan losses of $1.2 million for the second quarter of 2018. Net charge-offs for the second quarter of 2019 were $208,000, or 0.03% of average total loans, compared to net recoveries of $1.0 million, or 0.15% of average total loans, for the linked quarter and net charge-offs of $720,000, or 0.11% of average total loans, for the second quarter of 2018. Net recoveries during the first quarter of 2019 were driven by a $1.8 million recovery recorded on a previously charged-off commercial loan. Given the low net charge-offs in the current quarter, combined with originated loan balances remaining stable during the second quarter of 2019, the provision for loan losses during each of the current and linked quarter was lower than historical trends. Provision for loan losses during the first six months of 2019 was $363,000, compared to $3.2 million for the first six months of 2018. Net recoveries for the first six months of 2019 were $799,000, compared to net charge-offs of $2.7 million for the first six months of 2018. The first six months of 2019 included the $1.8 million recovery recorded on a previously charged-off commercial loan. The first six months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship.


47

For the second quarter of 2019, total non-interest income declined $140,000, or 1%, compared to the first quarter of 2019 and was up $2.0 million, or 15%, from the second quarter of 2018. The first quarter of 2019 included $1.4 million of annual performance-based insurance commissions, which are primarily received in the first quarter each year. Additionally, other non-interest income in the first quarter of 2019 included $787,000 of income related to the sale of restricted Class B Visa stock. During the second quarter of 2019, these two items were largely offset by increases in a number of categories, including income from deposit account service charges, commercial loan swap fee income, trust and investment income, electronic banking income, and mortgage banking income. The increase in total non-interest income from the second quarter of 2018 was driven by increases in all non-interest income categories, with the exception of bank owned life insurance, which had a slight decrease. For the first six months of 2019, total non-interest income grew 9%, as most categories of non-interest income increased, including income from deposit account service charges, electronic banking income, mortgage banking income, and commercial loan swap fee income.
Total non-interest expense increased $7.0 million, or 22%, in the second quarter of 2019 compared to the first quarter of 2019 and grew $2.9 million, or 8%, compared to the second quarter of 2018. The increase compared to the linked quarter was primarily due to acquisition-related expenses of First Prestonsburg, coupled with the ongoing cost of running the First Prestonsburg operations. The growth in total non-interest expense compared to the second quarter of 2018 was led by higher salaries and employee benefit costs, partially offset by a decline in professional fees. Base salaries, stock-based compensation, and medical insurance were the main contributors to the increase in salaries and employee benefit costs, which were impacted by employees that have been added in the last twelve months from acquisitions and for future growth, as well as higher medical claims. Base salaries were also impacted by annual merit increases, which included the implementation of a $15 per hour minimum wage throughout the company, which began being phased in during 2018 and will be largely implemented by January 1, 2020. Professional fees declined 22% compared to the second quarter of 2018, primarily due to consulting work performed during the second quarter of 2018 which was not repeated in 2019.
During the first six months of 2019, total non-interest expense increased 10% compared to 2018. This increase was led by higher salaries and employee benefit costs, partially offset by a decline in professional fees. Salaries and employee benefit costs were up primarily due to higher base salaries, medical insurance and stock-based compensation. Base salaries were impacted by the First Prestonsburg and ASB acquisitions, annual merit increases, which included the implementation of a $15 per hour minimum wage throughout the company, and employees that have been added in the last twelve months for future growth. The increase in medical insurance was driven by higher medical claims. Stock-based compensation increased as a result of the employees that have been added in the last twelve months from recent acquisitions and for future growth. Professional fees declined 24% compared to the first six months of 2018, mostly due to consulting work performed during the first six months of 2018 which was not repeated in 2019.
Peoples' efficiency ratio, calculated as total non-interest expense less amortization of other intangible assets divided by fully tax-equivalent ("FTE") net interest income, plus total non-interest income, excluding all gains and losses, for the second quarter of 2019 was 73.2%, compared to 62.7% for the first quarter of 2019 and 75.0% for the second quarter of 2018. The efficiency ratio increased compared to the linked quarter, driven by higher acquisition-related expenses. The efficiency ratio, when adjusted for non-core items, was 60.2% for the second quarter of 2019, compared to 62.2% for the first quarter of 2019 and 62.0% for the second quarter of 2018. During the first six months of 2019, the efficiency ratio was 68.1%, compared to 68.5% for the same period in 2018. The efficiency ratio, when adjusted for non-core items, during the first six months of 2019 was 61.2% and was 61.7% for the first six months of 2018.
Income tax expense was $2.2 million for the second quarter of 2019, compared to $3.4 million for the linked quarter and $1.0 million for the second quarter of 2018. The decline in income tax expense compared to the linked quarter was due to lower pre-tax income. The current quarter included a tax benefit of $59,000 recorded for the vesting of restricted stock during the current quarter, compared to a tax benefit of $133,000 in the linked quarter. The vesting of a majority of stock awards granted by Peoples occurs annually in the first quarter. The increase in income tax expense compared to the second quarter of 2018 was primarily due to higher pre-tax income. For the first six months of 2019, Peoples recorded income tax expense of $5.6 million, compared to $3.4 million for the same period in the prior year. The year-over-year increase in income tax expense was primarily due to higher pre-tax income. The first six months of 2019 included a tax benefit of $192,000 recorded for the vesting of restricted stock during the period. The first six months of 2018 also included an $805,000 valuation allowance release, as well as a tax benefit of $296,000 recorded for the vesting of restricted stock during the period.
At June 30, 2019, total assets were $4.28 billion, compared to $3.99 billion at December 31, 2018. The 7% increase compared to December 31, 2018 was primarily due to the First Prestonsburg merger, which added $294.1 million of assets, including $130.4 million in total loans, after preliminary fair value adjustments.


48

Total liabilities were $3.70 billion at June 30, 2019, up $226.0 million since December 31, 2018. The increase in liabilities during the first six months of 2019 was primarily due to an increase in deposits of $408.1 million, partially offset by a decline in borrowings of $193.7 million. The growth in deposits compared to December 31, 2018, was mostly due to acquired First Prestonsburg deposit balances, which totaled $232.2 million at June 30, 2019. Retail certificates of deposit ("CDs") grew $102.9 million, of which $65.3 million was from First Prestonsburg. Governmental deposit and brokered CDs were up $64.4 million and $62.3 million, respectively, compared to December 31, 2018.
At June 30, 2019, total stockholders' equity was $579.0 million, an increase of $58.9 million, compared to December 31, 2018. The increase in total stockholders' equity was mostly due to the $32.4 million of common shares issued in connection with the First Prestonsburg merger, net income of $9.6 million and other comprehensive income of $7.8 million, partially offset by dividends paid of $7.0 million.
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. 
Net interest margin, which is calculated by dividing 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 interest-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 federal corporate income tax rate of 21%.  
The following table details the calculation of FTE net interest income:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Net interest income
$
36,049

33,914

$
32,808

 
$
69,963

$
62,167

Taxable equivalent adjustments
267

200

223

 
467

450

Fully tax-equivalent net interest income
$
36,316

$
34,114

$
33,033

 
$
70,430

$
62,617





49

The following tables detail Peoples’ average balance sheets for the periods presented:
 
For the Three Months Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
(Dollars in thousands)
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
Short-term investments
$
27,979

$
263

3.77
%
 
$
16,247

$
176

4.39
%
 
$
10,815

$
56

2.00
%
Investment securities (a)(b):
 
 
 
 
 
 
 
 
 
 
 
Taxable (c)
874,427

6,006

2.75
%
 
780,721

5,847

3.00
%
 
793,497

5,868

2.96
%
Nontaxable
118,241

923

3.12
%
 
83,319

680

3.26
%
 
96,991

804

3.32
%
Total investment securities
992,668

6,929

2.79
%
 
864,040

6,527

3.03
%
 
890,488

6,672

3.00
%
Loans (b)(d):
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate, construction
124,334

1,655

5.27
%
 
131,683

1,732

5.26
%
 
118,206

1,438

4.81
%
Commercial real estate, other
833,991

11,322

5.37
%
 
806,181

10,596

5.26
%
 
840,677

10,434

4.91
%
Commercial and industrial
599,432

8,081

5.33
%
 
578,954

7,681

5.31
%
 
503,364

6,216

4.89
%
Residential real estate (e)
646,978

7,918

4.90
%
 
603,253

6,927

4.59
%
 
600,799

6,749

4.49
%
Home equity lines of credit
132,395

2,006

6.08
%
 
131,089

1,860

5.75
%
 
131,970

1,701

5.17
%
Consumer, indirect
412,986

4,255

4.13
%
 
409,975

4,088

4.04
%
 
359,941

3,498

3.90
%
Consumer, direct
80,442

1,459

7.27
%
 
73,457

1,189

6.56
%
 
72,820

1,230

6.77
%
Total loans
2,830,558

36,696

5.20
%
 
2,734,592

34,073

5.00
%
 
2,627,777

31,266

4.73
%
Allowance for loan losses
(21,311
)
 
 
 
(20,406
)
 
 
 
(19,071
)
 
 
Net loans
2,809,247

36,696

5.20
%
 
2,714,186

34,073

5.04
%
 
2,608,706

31,266

4.77
%
Total earning assets
3,829,894

43,888

4.56
%
 
3,594,473

40,776

4.55
%
 
3,510,009

37,994

4.31
%
Goodwill and other intangible assets
175,169

 
 
 
161,673

 
 
 
161,600

 
 
Other assets
234,716

 
 
 
229,475

 
 
 
226,348

 
 
    Total assets
$
4,239,779

 
 
 
$
3,985,621

 
 
 
$
3,897,957

 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
523,295

$
110

0.08
%
 
$
472,656

$
91

0.08
%
 
$
477,167

$
69

0.06
%
Governmental deposit accounts
331,607

848

1.03
%
 
297,537

557

0.76
%
 
312,999

273

0.35
%
Interest-bearing demand accounts
603,494

231

0.15
%
 
569,472

247

0.18
%
 
581,600

202

0.14
%
Money market accounts
414,307

654

0.63
%
 
395,324

531

0.54
%
 
393,580

323

0.33
%
Retail certificates of deposit
477,530

2,079

1.75
%
 
396,977

1,417

1.45
%
 
395,304

1,242

1.26
%
Brokered certificates of deposit
272,693

1,797

2.64
%
 
314,163

2,001

2.58
%
 
187,387

992

2.13
%
Total interest-bearing deposits
2,622,926

5,719

0.87
%
 
2,446,129

4,844

0.80
%
 
2,348,037

3,101

0.53
%
Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Short-term FHLB advances
193,963

1,140

2.36
%
 
198,643

1,115

2.28
%
 
225,635

966

1.72
%
Repurchase agreements and other
46,631

93

0.80
%
 
46,111

58

0.50
%
 
85,188

209

0.98
%
Total short-term borrowings
240,594

1,233

2.06
%
 
244,754

1,173

1.94
%
 
310,823

1,175

1.52
%
Long-term FHLB advances
96,519

491

2.04
%
 
100,930

508

2.04
%
 
114,287

559

1.96
%
Other borrowings
7,346

129

7.02
%
 
7,304

137

7.50
%
 
7,766

126

6.49
%
Total long-term borrowings
103,865

620

2.39
%
 
108,234

645

2.41
%
 
122,053

685

2.25
%
  Total borrowed funds
344,459

1,853

2.16
%
 
352,988

1,818

2.09
%
 
432,876

1,860

1.72
%
      Total interest-bearing liabilities
2,967,385

7,572

1.02
%
 
2,799,117

6,662

0.96
%
 
2,780,913

4,961

0.71
%
Non-interest-bearing deposits
654,468

 
 
 
613,924

 
 
 
585,800

 
 
Other liabilities
52,934

 

 
 
48,384

 

 
 
41,368

 

 
Total liabilities
3,674,787

 
 
 
3,461,425

 
 

3,408,081

 
 
Total stockholders’ equity
564,992

 

 
 
524,196

 

 
 
489,876

 

 
Total liabilities and stockholders’ equity
$
4,239,779

 

 
 
$
3,985,621

 

 
 
$
3,897,957

 

 
Interest rate spread (b)
 
$
36,316

3.54
%
 
 
$
34,114

3.59
%
 
 
$
33,033

3.60
%
Net interest margin (b)
3.77
%
 
 
 
3.80
%
 
 
 
3.74
%



50

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Six Months Ended
 
June 30, 2019
 
June 30, 2018
(Dollars in thousands)
Average Balance
Income/ Expense
Yield/Cost
 
Average Balance
Income/ Expense
Yield/Cost
Short-term investments
$
22,145

$
439

4.00
%
 
$
11,052

$
106

1.93
%
Investment securities (a)(b):
 
 
 
 
 
 
 
Taxable
827,831

11,853

2.86
%
 
784,628

11,555

2.95
%
Nontaxable
100,876

1,603

3.18
%
 
97,062

1,618

3.33
%
Total investment securities
928,707

13,456

2.90
%
 
881,690

13,173

2.99
%
Loans (b)(c):
 
 
 
 
 
 
 
Commercial real estate, construction
127,988

3,387

5.26
%
 
118,396

2,771

4.66
%
Commercial real estate, other
820,163

21,918

5.32
%
 
803,085

19,558

4.84
%
Commercial and industrial
589,249

15,762

5.32
%
 
491,643

11,787

4.77
%
Residential real estate (d)
625,236

14,845

4.75
%
 
546,558

12,058

4.41
%
Home equity lines of credit
131,746

3,866

5.92
%
 
120,360

2,972

4.98
%
Consumer, indirect
411,489

8,343

4.09
%
 
351,581

6,628

3.80
%
Consumer, other
76,969

2,648

6.94
%
 
70,633

2,392

6.83
%
Total loans
2,782,840

70,769

5.07
%
 
2,502,256

58,166

4.64
%
Less: Allowance for loan losses
(20,861
)
 
 
 
(18,878
)
 
 
Net loans
2,761,979

70,769

5.12
%
 
2,483,378

58,166

4.68
%
Total earning assets
3,712,831

84,664

4.55
%
 
3,376,120

71,445

4.23
%
Intangible assets
168,458

 
 
 
152,943

 
 
Other assets
232,114

 
 
 
219,268

 
 
    Total assets
$
4,113,403

 
 
 
$
3,748,331

 
 
Deposits:
 
 
 
 
 
 
 
Savings accounts
$
498,115

$
201

0.08
%
 
$
465,091

$
133

0.06
%
Governmental deposit accounts
314,666

1,405

0.90
%
 
302,286

490

0.33
%
Interest-bearing demand accounts
586,577

478

0.16
%
 
574,465

423

0.15
%
Money market accounts
404,868

1,185

0.59
%
 
380,834

549

0.29
%
Retail certificates of deposit
437,476

3,496

1.61
%
 
366,923

2,007

1.10
%
Brokered certificates of deposit
293,313

3,798

2.61
%
 
172,101

1,712

2.01
%
Total interest-bearing deposits
2,535,015

10,563

0.84
%
 
2,261,700

5,314

0.47
%
Borrowed funds:
 
 
 
 
 
 
 
Short-term FHLB advances
196,290

2,255

2.32
%
 
185,195

1,629

1.77
%
Repurchase agreements and other
46,373

151

0.65
%
 
93,634

514

1.10
%
Total short-term borrowings
242,663

2,406

2.00
%
 
278,829

2,143

1.55
%
Long-term FHLB advances
98,712

999

2.04
%
 
116,628

1,123

1.94
%
Other borrowings
7,325

266

7.26
%
 
7,439

248

6.67
%
Total long-term borrowings
106,037

1,265

2.40
%
 
124,067

1,371

2.22
%
  Total borrowed funds
348,700

3,671

2.12
%
 
402,896

3,514

1.75
%
      Total interest-bearing liabilities
2,883,715

14,234

0.99
%
 
2,664,596

8,828

0.67
%
Non-interest-bearing deposits
634,308

 
 
 
569,711

 
 
Other liabilities
50,674

 

 
 
41,872

 

 
Total liabilities
3,568,697

 
 
 
3,276,179

 

 

Total stockholders’ equity
544,706

 

 
 
472,152

 

 
Total liabilities and stockholders’ equity
$
4,113,403

 

 
 
$
3,748,331

 

 
Interest rate spread (b)
 
$
70,430

3.56
%
 
 
$
62,617

3.56
%
Net interest margin (b)
 
 
3.78
%
 
 
 
3.70
%
(a)
Average balances are based on carrying value.
(b)
Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.
(c)
Interest income and yield presented for the second quarter of 2018 include $248,000 of proceeds on an investment security for which an other-than-temporary-impairment had been recorded in previous years. Interest income and yield presented for the first six months of 2018 include $589,000 of proceeds on an investment security for which an other-than-temporary-impairment had been recorded in previous years.


51

(d)
Average balances include nonaccrual, impaired loans and loans held for sale. Interest income includes interest earned and received on nonaccrual loans prior to the loans being placed on nonaccrual status. Loan fees included in interest income were immaterial for all periods presented.
(e)
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 June 30, 2019 Compared to
 
Compared to
(Dollars in thousands)
March 31, 2019
 
June 30, 2018
 
June 30, 2018
Increase (decrease) in:
Rate
Volume
Total (a)
 
Rate
Volume
Total (a)
 
Rate
Volume
Total (a)
INTEREST INCOME:
 
 
 
 
 
 
 
 
 
 
 
Short-term investments
$
(155
)
$
242

$
87

 
$
74

$
133

$
207

 
$
169

$
164

$
333

Investment Securities (b): 
 
 
 
 
 
 
 
 
 
 
 
Taxable
(2,234
)
2,393

159

 
(1,908
)
2,046

138

 
282

16

298

Nontaxable
(191
)
434

243

 
(271
)
390

119

 
(14
)
(1
)
(15
)
Total investment income
(2,425
)
2,827

402

 
(2,179
)
2,436

257

 
268

15

283

Loans (b):
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate, construction
11

(88
)
(77
)
 
140

77

217

 
380

236

616

Commercial real estate, other
280

446

726

 
1,424

(536
)
888

 
1,937

423

2,360

Commercial and industrial
50

350

400

 
604

1,261

1,865

 
1,464

2,511

3,975

Residential real estate
471

520

991

 
629

540

1,169

 
965

1,822

2,787

Home equity lines of credit
124

22

146

 
299

6

305

 
595

299

894

Consumer, indirect
125

42

167

 
219

538

757

 
527

1,188

1,715

Consumer, direct
145

125

270

 
85

144

229

 
236

20

256

Total loan income
1,206

1,417

2,623

 
3,400

2,030

5,430

 
6,104

6,499

12,603

Total interest income
$
(1,374
)
$
4,486

$
3,112

 
$
1,295

$
4,599

$
5,894

 
$
6,541

$
6,678

$
13,219

INTEREST EXPENSE:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Savings accounts
$
8

$
11

$
19

 
$
34

$
7

$
41

 
$
58

$
10

$
68

Governmental deposit accounts
220

71

291

 
558

17

575

 
894

21

915

Interest-bearing demand accounts
(92
)
76

(16
)
 
21

8

29

 
46

9

55

Money market accounts
94

29

123

 
313

18

331

 
599

37

636

Retail certificates of deposit
334

328

662

 
544

293

837

 
1,051

438

1,489

Brokered certificates of deposit
291

(495
)
(204
)
 
281

524

805

 
626

1,460

2,086

Total deposit cost
855

20

875

 
1,751

867

2,618

 
3,274

1,975

5,249

Borrowed funds:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
180

(120
)
60

 
886

(828
)
58

 
679

(416
)
263

Long-term borrowings
(13
)
(12
)
(25
)
 
136

(201
)
(65
)
 
171

(277
)
(106
)
Total borrowed funds cost
167

(132
)
35

 
1,022

(1,029
)
(7
)
 
850

(693
)
157

Total interest expense
1,022

(112
)
910

 
2,773

(162
)
2,611

 
4,124

1,282

5,406

Net interest income
$
(2,396
)
$
4,598

$
2,202

 
$
(1,478
)
$
4,761

$
3,283

 
$
2,417

$
5,396

$
7,813

(a)
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.
(b)
Interest income and yields are presented on a fully tax-equivalent basis using a 21% statutory federal corporate income tax rate.
Net interest income was $36.0 million for the second quarter of 2019, an increase of 6% compared to the linked quarter. Net interest margin was 3.77% for the second quarter of 2019, compared to 3.80% for the linked quarter. The slight decline in net interest margin during the quarter was driven by higher costs for time deposits and governmental deposits, which more than offset increased loan yields, driven by the acquisition of First Prestonsburg. Compared to the first quarter of 2019, net interest income was positively impacted by the acquisition of First Prestonsburg.
Accretion income, net of amortization expense, from acquisitions was $1.2 million for the second quarter of 2019 and $722,000 for the first quarter of 2019, which added 13 basis points and 8 basis points, respectively, to net interest margin.


52

The growth in accretion income compared to the first quarter of 2019 was due to the First Prestonsburg acquisition, specifically the loan discount that was accreted during the quarter.
Net interest income for the current quarter increased $3.2 million, or 10%, over the second quarter of 2018. Net interest margin increased 3 basis points compared to 3.74% for the second quarter of 2018. The increase in net interest income compared to the second quarter of 2018 was driven by higher yields on loans combined with the impact of acquired First Prestonsburg loans. These were partially offset by higher deposit costs due to increased competition for deposits, combined with additional interest expense related to the acquired First Prestonsburg deposits. The second quarter of 2018 also benefited from proceeds of $248,000 received on an investment security that had been previously written down due to an OTTI, which added 3 basis points to the net interest margin. Peoples recorded no similar proceeds during the current quarter.
Accretion income, net of amortization expense, from acquisitions was $1.2 million for the second quarter of 2019 and $523,000 for the second quarter of 2018, which added 13 basis points and 6 basis points, respectively, to net interest margin. The increase in accretion income compared to the second quarter of 2018 was due to the First Prestonsburg acquisition.
For the first six months of 2019, net interest income grew 13% compared to 2018, and net interest margin grew 8 basis points to 3.78%. The increases were driven by higher interest income on loans due to a combination of loan growth, which was primarily the result of the First Prestonsburg and ASB acquisitions, and higher yields from interest rate increases. The increase in interest income due to loan growth outpaced higher deposit costs, which were due to the recent acquisitions and increased competition for deposits. The first six months of 2018 benefited from proceeds of $589,000 received on investment securities that had been previously written down due to OTTI, which added 3 basis points to net interest margin. Peoples recorded no similar proceeds during the first six months of 2019.
Accretion income, net of amortization expense, from acquisitions was $1.9 million for the first six months of 2019 and $1.1 million for the first six months of 2018, which added 10 basis points and 6 basis points, respectively, to net interest margin. The growth in accretion income compared to the first six months of 2018 was largely due to the First Prestonsburg acquisition.
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 "FINANCIAL CONDITION - Interest Rate Sensitivity and Liquidity."
Provision for (Recovery of) Loan Losses
The following table details Peoples’ provision for (recovery of) loan losses:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Provision for (recovery of) other loan losses
$
475

$
(360
)
$
1,000

 
$
115

$
2,842

Provision for checking account overdrafts
151

97

188

 
248

329

Provision for (recovery of) loan losses
$
626

$
(263
)
$
1,188

 
$
363

$
3,171

As a percentage of average total loans (a)
0.09
%
(0.04
)%
0.18
%
 
0.03
%
0.26
%
(a) Presented on an annualized basis.
 
 
 
 
 
 
The provision for, or recovery of, loan losses recorded represents the amount needed to maintain the appropriate level of the allowance for loan losses based on management’s formal 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, current economic conditions, and other environmental factors such as changes in real estate market conditions, unemployment, and the economic impact of tariffs.
The provision for loan losses during the second quarter and the first six months of 2019 was lower than historical trends, given low gross charge-offs and high recoveries combined with originated loan balances remaining stable during the first six months of 2019. Net charge-offs for the second quarter of 2019 were $208,000, or 0.03% of average total loans, compared to net recoveries of $1.0 million, or 0.15% of average total loans, for the linked quarter and $720,000, or 0.11% of average total loans, for the second quarter of 2018. Net recoveries during the first quarter of 2019 were driven by a $1.8 million recovery recorded on a previously charged-off commercial loan. Gross charge-offs were $665,000, or 0.09% of average total loans, for the second quarter of 2019, compared to $1.0 million, or 0.15% of average total loans, for the first quarter of 2019, and


53

$1.0 million, or 0.15% of average total loans, for the second quarter of 2018. Net recoveries for the first six months of 2019 were $799,000, compared to net charge-offs of $2.7 million for the first six months of 2018. The first six months of 2018 included a charge-off of $827,000 on an acquired commercial loan relationship. Gross charge-offs were $1.7 million, or 0.12% of average total loans, for the first six months of 2019, compared to $3.3 million, or 0.26% of average total loans, for the first six months of 2018.
Additional information regarding changes in the allowance for loan losses and loan credit quality can be found later in this discussion under the caption “FINANCIAL CONDITION - Allowance for Loan Losses.”
Net (Losses) Gains Included in Total Non-Interest Income
Net gains and net losses include gains and losses on investment securities, and on asset disposals and other transactions, which are recognized in total non-interest income. The following table details Peoples’ net gains and net losses:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Net (loss) gain on investment securities
$
(57
)
$
30

$
(147
)
 
$
(27
)
$
(146
)
 
 
 
 
 
 
 
Net (loss) gain on asset disposals and other transactions:
 
 
 
 
 
 
Net loss on other assets
$
(274
)
$
(157
)
$
(330
)
 
$
(431
)
$
(251
)
Net (loss) gain on OREO
(24
)
(25
)
14

 
(49
)
9

Net loss on debt extinguishment
—

—

(13
)
 
—

(13
)
Net gain (loss) on other transactions
5

—

(76
)
 
5

(76
)
Net loss on asset disposals and other transactions
$
(293
)
$
(182
)
$
(405
)

$
(475
)
$
(331
)
During the second quarter of 2019, losses included $253,000 of write-offs of fixed assets acquired from First Prestonsburg. During the first quarter of 2019, net loss on other assets was primarily due to $118,000 of market value write-downs related to closed offices that were held for sale. During the second quarter of 2018, net loss on other assets included losses of $192,000 related to fixed assets acquired from ASB and $147,000 of market value write-downs related to closed offices that were held for sale.
Net losses during the year-to-date period through June 30, 2019 were driven by the write-offs of fixed assets acquired from First Prestonsburg, combined with market value write-downs related to closed offices that were held for sale. For the year-to-date period in 2018, the second quarter losses on fixed asset disposals, loss on investment securities, and market value write-downs on properties held for sale were partially offset by net gains related to repossessed assets recorded in the first quarter of 2018.
Total Non-Interest Income, Excluding Net Gains and Losses
Insurance income comprised the largest portion of the second quarter 2019 total non-interest income.  The following table details Peoples' insurance income:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Property and casualty insurance commissions
$
2,680

$
2,674

$
2,597

 
$
5,354

$
5,242

Performance-based commissions
2

1,419

3

 
1,421

1,350

Life and health insurance commissions
626

359

596

 
985

1,140

Other fees and charges
178

169

173

 
347

292

Insurance income
$
3,486

$
4,621

$
3,369

 
$
8,107

$
8,024

The decline in revenue related to performance-based commissions is due to annual performance-based insurance commissions, which are primarily recognized in the first quarter of each year and are a core component of insurance income.


54

Life and health insurance commissions were low in the first six months of 2019 primarily due to an increase in deferred revenue.
Peoples' fiduciary and brokerage revenues continued to be based primarily upon the value of assets under administration and management, with additional income generated from transaction commissions, cross-selling of products and additional retirement plan services business. Fiduciary and brokerage income for the second quarter of 2019 increased compared to the first quarter of 2019 and the second quarter of 2018 primarily due to higher market values of accounts. The following tables detail Peoples’ trust and investment income and related assets under administration and management:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Fiduciary
$
1,837

$
1,636

$
1,767

 
$
3,473

$
3,374

Brokerage
1,038

965

989

 
2,003

1,952

Employee benefits
526

511

476

 
1,037

974

Trust and investment income
$
3,401

$
3,112

$
3,232

 
$
6,513

$
6,300

 
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
(Dollars in thousands)
Trust assets under administration and management
$
1,501,110

$
1,471,422

$
1,384,113

$
1,489,810

$
1,454,009

Brokerage assets under administration and management
887,745

863,286

849,188

914,172

881,839

Total assets under administration and management
$
2,388,855

$
2,334,708

$
2,233,301

$
2,403,982

$
2,335,848

Quarterly average
$
2,356,121

$
2,312,098

$
2,316,201

$
2,378,676

$
2,331,529

Peoples' electronic banking ("e-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. The following table details Peoples' e-banking income:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Interchange fees
$
2,747

$
2,443

$
2,520

 
$
5,190

$
4,784

Promotional and usage income
520

544

265

 
1,064

786

E-banking income
$
3,267

$
2,987

$
2,785

 
$
6,254

$
5,570

Peoples' e-banking revenue is derived largely from ATM and debit cards, as other services are mainly provided at no charge to the customers. The amount of e-banking income is largely dependent on the timing and volume of customer activity. The increases in e-banking income in all comparisons were the result of the increased usage of debit cards by more customers, which includes the impact of additional cardholders obtained in the merger with First Prestonsburg.
Deposit account service charges are based on the recovery of costs associated with services provided. The following table details Peoples' deposit account service charges:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Overdraft and non-sufficient funds fees
$
1,746

$
1,433

$
1,584

 
$
3,179

$
3,023

Account maintenance fees
1,012

752

646

 
1,764

1,321

Other fees and charges
219

156

158

 
375

164

Deposit account service charges
$
2,977

$
2,341

$
2,388

 
$
5,318

$
4,508



55

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. Management periodically evaluates its cost recovery fees to ensure they are reasonable based on operational costs and similar to fees charged in Peoples' markets by competitors. Income from deposit account service charges were up compared to the linked quarter, due to a combination of the additional accounts acquired from First Prestonsburg and a new deposit account fee schedule that was implemented in March 2019. Income from deposit account service charges for the first six months of 2019 were up compared to a year ago primarily due to the ASB and First Prestonsburg acquisitions, coupled with changes in fee schedules.
The following table details the other items included within Peoples' total non-interest income:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Mortgage banking income
$
1,000

$
788

$
969

 
$
1,788

$
1,320

Bank owned life insurance income
490

485

497

 
975

965

Commercial loan swap fees
516

146

146

 
662

262

Other non-interest income
502

1,101

421

 
1,603

1,752

Mortgage banking income is comprised mostly of net gains from the origination and sale of real estate loans in the secondary market, and servicing income for loans sold with servicing retained. As a result, the amount of income recognized by Peoples is largely dependent on customer demand and long-term interest rates for residential real estate loans offered in the secondary market. The increase in mortgage banking income from the first quarter of 2019 was mainly due to customer demand which is typically seasonally low in the first quarter of each year. For the first six months of 2019, compared to the same period in 2018, the increase in mortgage banking income was largely attributable to gains on sale of real estate loans originated by the mortgage origination operation acquired as part of the ASB acquisition.
In the second quarter of 2019, Peoples sold approximately $24.9 million in loans to the secondary market with servicing retained and sold approximately $11.4 million in loans with servicing released, compared to approximately $13.7 million and $10.9 million, respectively, in the linked quarter. For the first six months of 2019, Peoples sold approximately $38.6 million in loans to the secondary market with servicing retained and sold approximately $22.3 million in loans with servicing released, compared to approximately $29.2 million and $13.6 million, respectively, in the first six months of 2018. The volume of sales has a direct impact on the amount of mortgage banking income.
Commercial loan swap fees are largely dependent on timing, interest rates, and volume of customer activity. The increase in all comparisons was driven by a combination of an increase in the average size of each transaction and higher customer demand, given the current rate environment and the favorable longer term rates that customers can lock in by utilizing a swap.
Compared to the linked quarter, other non-interest income declined primarily due to lower income from equity investment securities, which was down $809,000. During the first quarter of 2019, Peoples recognized $787,000 of income related to the sale of restricted Class B Visa stock, which had been held at a carrying cost and fair value of zero due to the litigation liability associated with the stock. Other non-interest income for the first six months of 2019 was down compared to the same period of 2018, due to a decrease in Small Business Administration income of $550,000 and declines in various other small items, partially offset by an increase in income from equity investment securities of $585,000.


56

Non-Interest Expense
Salaries and employee benefit costs remain Peoples' largest non-interest expense, accounting for over one-half of total non-interest expense.  The following table details Peoples' salaries and employee benefit costs:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Base salaries and wages
$
14,353

$
11,874

$
12,656

 
$
26,227

$
23,028

Employee benefits
1,966

2,690

1,485

 
4,656

3,028

Sales-based and incentive compensation
3,096

2,609

3,003

 
5,705

5,239

Payroll taxes and other employment costs
1,208

1,377

1,036

 
2,585

2,220

Stock-based compensation
930

1,208

424

 
2,138

1,510

Deferred personnel costs
(729
)
(556
)
(579
)
 
(1,285
)
(1,010
)
Salaries and employee benefit costs
$
20,824

$
19,202

$
18,025

 
$
40,026

$
34,015

Full-time equivalent employees:
 
 
 

 
 
 
Actual at end of period
918

859

862

 
918

862

Average during the period
906

869

844

 
891

820

 
The increase in full-time equivalent employees in the second quarter of 2019 and the first six months of 2019 compared to previous periods was mainly due to additional employees from the First Prestonsburg acquisition and, in comparison to the 2018 periods, employees that were added in the last twelve months from acquisitions and for future growth.
The increase in base salaries and wages for the second quarter of 2019 compared to the linked quarter was primarily due to acquisition-related expenses of $2.2 million (mainly severance and change in control costs). Compared to the second quarter of 2018, base salaries and wages increased due to a combination of employees that have been added in the last twelve months from acquisitions and for future growth, annual merit increases, which included the implementation of a $15 per hour minimum wage throughout the company, and an increase in acquisition-related expenses of $594,000. The $15 per hour minimum wage began being phased in during 2018 and is expected to be largely implemented by January 1, 2020. For the first six months of 2019 compared to the same period of 2018, the increase was impacted by the First Prestonsburg and ASB acquisitions, as well as the employees that have been added in the last twelve months for future growth.
The decline in employee benefits for the second quarter of 2019, compared to the linked quarter, was primarily due to lower medical insurance costs of $817,000. Medical insurance costs in the linked quarter included annual contributions to employee health benefit accounts resulting in an expense of $450,000. These contributions occur primarily in the first quarter of each year. Compared to the second quarter of 2018, the increase in employee benefits was driven by higher medical insurance costs due primarily to higher medical claims and the increase in the number of plan participants, which was impacted by the First Prestonsburg acquisition. The increase in employee benefits in the six-month periods comparison was impacted by the First Prestonsburg and ASB acquisitions, and included an increase in medical insurance costs of $1.3 million.
The increase in sales-based and incentive compensation for the second quarter of 2019, compared to the linked quarter, was due to higher sales-based compensation from insurance, mortgage banking and retail lines of business. The increase in sales-based and incentive compensation for the second quarter of 2019, compared to the second quarter of 2018, was due to higher sales-based compensation from the mortgage banking and retail lines of business. Compared to the first six months of 2018, the increase in sales-based and incentive compensation for the first six months of 2019 was driven by higher sales-based compensation from mortgage banking. The increase in mortgage banking growth compared to the first six months of 2018 was largely attributable to the mortgage origination operation acquired as part of the ASB acquisition.
The increases in payroll taxes and other employment costs for periods in 2019 compared to those in 2018 primarily reflected the increases in base salaries and wages.
Stock-based compensation declined compared to the linked quarter due largely to annual stock grants, which occur primarily in the first quarter of each year. The majority of the grants are expensed over the three-year vesting period, with the exception of those made to retirement eligible grantees. Stock grants to retirement eligible grantees are expensed either immediately or over a shorter period than three years. The $1.2 million of stock-based compensation for the first quarter of 2019 included $469,000 of expense related to stock grants to retirement eligible individuals, and $128,000 of expense related


57

to the annual vesting of prior stock grants. The increase in stock-based compensation compared to the 2018 periods was driven by higher expense related to stock grants made to retirement eligible grantees combined with Peoples' improved performance during recent years.
Peoples' net occupancy and equipment expense was comprised of the following:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Depreciation
$
1,494

$
1,249

$
1,248

 
$
2,743

$
2,466

Repairs and maintenance costs
715

770

659

 
1,485

1,507

Net rent expense
250

288

235

 
538

444

Property taxes, utilities and other costs
673

671

661

 
1,344

1,252

Net occupancy and equipment expense
$
3,132

$
2,978

$
2,803

 
$
6,110

$
5,669

Net occupancy and equipment expense for the second quarter of 2019 increased primarily due to costs related to the addition of nine full-service bank branches from the First Prestonsburg acquisition and ongoing increased operating costs associated with the expanded footprint. These increases were partially offset by a reduction in ATM repairs and maintenance costs driven by a new vendor contract. For the first six months of 2019, the increase in net occupancy and equipment expense was driven by additional costs related to the First Prestonsburg and ASB acquisitions, partially offset by a reduction in ATM repairs and maintenance costs driven by the new vendor contract.
The following table details the other items included in total non-interest expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Professional fees
$
2,344

$
1,276

$
3,022

 
$
3,620

$
4,740

Electronic banking expense
1,693

1,577

1,407

 
3,270

2,857

Data processing and software expense
1,567

1,545

1,359

 
3,112

2,681

Amortization of other intangible assets
824

694

861

 
1,518

1,615

Franchise tax expense
772

705

614

 
1,477

1,258

Marketing expense
490

594

656

 
1,084

981

FDIC insurance expense
381

371

416

 
752

782

Foreclosed real estate and other loan expenses
469

255

338

 
724

550

Communication expense
317

278

300

 
595

644

Other non-interest expense
6,063

2,519

6,170

 
8,448

8,400

Professional fees increased $1.1 million, or 84%, from the first quarter of 2019, driven by acquisition-related expenses of $562,000 in the current quarter, up from $58,000 in the first quarter of 2019, combined with additional audit and consulting work performed during second quarter of 2019. Professional fees were down compared to the second quarter of 2018, primarily due to consulting work performed during the second quarter of 2018 which was not duplicated in 2019. Professional fees were down compared to the first six months of 2018, mainly due to lower legal expenses and consulting work performed during the first six months of 2018 which was not duplicated in 2019.
Electronic banking expense was up in each comparison due to an increase in customer accounts and customer usage of mobile and online banking tools, which were impacted by the First Prestonsburg and ASB mergers.
Data processing and software expense increased $208,000, or 15%, from the second quarter of 2018, and $431,000, or 16%, compared to the first six months of 2018. The increases were driven by upgrades and overall growth, which included: the implementation of enhanced functionalities for Peoples' core banking system, including making certain mobile banking tools available to customers; increases in customer accounts and customer usage of mobile and online banking tools; software upgrades; and additional network capacity and security features. Data processing and software expense included $91,000 of acquisition-related expenses in the first six months of 2019, and $59,000 in the first six months of 2018.
Peoples' amortization of other intangible assets is driven by acquisition-related activity. Amortization of other intangible assets for the second quarter of 2019 was up compared to the first quarter of 2019 as a result of the core deposit intangible asset related to the acquisition of First Prestonsburg.


58

Marketing expense was down $104,000, or 18%, for the second quarter of 2019, compared to the first quarter of 2019, and down $166,000, or 25%, compared to the second quarter of 2018, due to the timing of product marketing campaigns.
The increase in other non-interest expense of $3.5 million for the second quarter of 2019 compared to the linked quarter, was primarily due to acquisition-related expenses of $3.7 million (mainly contract termination fees) in the current quarter compared to $54,000 in the linked quarter.
Income Tax Expense
Income tax expense was $2.2 million for the second quarter of 2019, compared to $3.4 million for the linked quarter and $1.0 million for the second quarter of 2018. The decline in income tax expense compared to the linked quarter was due to lower pre-tax income. The current quarter included a tax benefit of $59,000 recorded for the vesting of restricted stock during the current quarter, compared to a tax benefit of $133,000 in the linked quarter. The vesting of a majority of stock awards granted by Peoples occurs annually in the first quarter. The increase in income tax expense compared to the second quarter of 2018 was due to higher pre-tax income combined with the release of a valuation allowance during the second quarter of 2018 of $805,000.
For the first six months of 2019, Peoples recorded income tax expense of $5.6 million, compared to $3.4 million for the same period in the prior year, and the effective tax rate for the first six months of 2019 was 18.9%, compared to 14.7% for the first six months of 2018. The year-over-year increase in income tax expense was primarily due to higher pre-tax income combined with the release of a valuation allowance during the first six months of 2018 of $805,000. The first six months of 2019 included a tax benefit of $192,000 recorded for the vesting of restricted stock during the period, compared to a tax benefit of $296,000 in the first six months of 2018.
Additional information regarding income taxes can be found in "Note 12 Income Taxes" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K.
Pre-Provision Net Revenue (non-US GAAP)
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 total non-interest income (excluding all gains and losses) minus total non-interest expense while excluding the recovery of, or 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. This ratio represents a non-US GAAP financial measure since it excludes the provision for loan losses and all gains and/or losses included in earnings.


59

The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:    
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Pre-provision net revenue:
 
 
 
 
 
 
Income before income taxes
$
11,836

$
17,746

$
8,904

 
$
29,582

$
23,028

Add: provision for loan losses
626

—

1,188

 
363

3,171

Add: loss on debt extinguishment
—

—

13

 
—

13

Add: net loss on OREO
24

25

—

 
49

—

Add: net loss on investment securities
57

—

147

 
27

146

Add: net loss on other assets
274

157

330

 
431

251

Add: net loss on other transactions
—

—

76

 
—

76

Less: net gain on OREO
—

—

14

 
—

9

Less: recovery of loan losses
—

263

—

 
—

—

Less: net gain on investment securities
—

30

—

 
—

—

Less: gain on other transactions
5



—

 
5

—

Pre-provision net revenue
$
12,812

$
17,635

$
10,644

 
$
30,447

$
26,676

Total average assets
$
4,239,779

$
3,985,621

$
3,897,957

 
$
4,113,403

$
3,748,331

Pre-provision net revenue to total average assets (a)
1.21
%
1.79
%
1.10
%
 
1.49
%
1.44
%
(a) Presented on an annualized basis.
 
 
 
 
 
 
Pre-provision net revenue and the ratio of pre-provision net revenue to total average assets decreased in the second quarter of 2019 compared to the linked quarter, due primarily to decreased income before income taxes mainly as a result of acquisition-related expenses of $6.8 million. Compared to the second quarter of 2018, the increase in pre-provision net revenue and pre-provision net revenue to total average assets was driven by higher net interest income. Pre-provision net revenue and the ratio of pre-provision net revenue to total average assets for the first six months of 2019, compared to the first six months of 2018, increased primarily due to higher income before income taxes, as both periods were impacted by acquisition-related expenses.
Core Non-Interest Expense (non-US GAAP)
Core non-interest expense is a financial measures used to evaluate Peoples' recurring expense stream. This measure is non-US GAAP since it excludes the impact of all acquisition-related expenses.
The following tables provide reconciliations of this non-US GAAP measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Core non-interest expense:
 
 
 
 
 
 
Total non-interest expense
$
38,876

$
31,860

$
35,971

 
$
70,736

$
64,192

Less: acquisition-related expenses
6,770

253

6,056

 
7,023

6,205

Core non-interest expense
$
32,106

$
31,607

$
29,915

 
$
63,713

$
57,987



60

Efficiency Ratio (non-US GAAP)
The efficiency ratio is a key financial measure used to monitor performance. The efficiency ratio is calculated as total non-interest expense (less amortization of other intangible assets) as a percentage of fully tax-equivalent net interest income plus total non-interest income excluding net gains and losses. This measure is non-US GAAP since it excludes amortization of other intangible assets and all gains and/or losses included in earnings, and uses fully tax-equivalent net interest income.
The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
 
 
 
 
 
 
 
Efficiency ratio:
 
 
 
 
 
 
Total non-interest expense
$
38,876

$
31,860

$
35,971

 
$
70,736

$
64,192

Less: amortization of other intangible assets
824

694

861

 
1,518

1,615

Adjusted total non-interest expense
$
38,052

$
31,166

$
35,110

 
$
69,218

$
62,577

 
 
 
 
 
 
 
Total non-interest income
$
15,289

$
15,429

$
13,255

 
$
30,718

$
28,224

Less: net (loss) gain on investment securities
(57
)
30

(147
)
 
(27
)
(146
)
Less: net loss on asset disposals and other transactions
(293
)
(182
)
(405
)
 
(475
)
(331
)
Total non-interest income excluding net gains and losses
$
15,639

$
15,581

$
13,807

 
$
31,220

$
28,701

 
 
 
 
 
 
 
Net interest income
$
36,049

$
33,914

$
32,808

 
$
69,963

$
62,167

Add: fully tax-equivalent adjustment (a)
267

200

225

 
467

450

Net interest income on a fully tax-equivalent basis
$
36,316

$
34,114

$
33,033

 
$
70,430

$
62,617

 
 
 
 
 
 
 
Adjusted revenue
$
51,955

$
49,695

$
46,840

 
$
101,650

$
91,318

 
 
 
 
 
 
 
Efficiency ratio
73.24
%
62.71
%
74.96
%
 
68.09
%
68.53
%
 
 
 
 
 
 
 
Efficiency ratio adjusted for non-core items:
 
 
 
 
 
 
Core non-interest expense
$
32,106

$
31,607

$
29,915

 
$
63,713

$
57,987

Less: amortization of other intangible assets
824

694

861

 
1,518

1,615

Adjusted core non-interest expense
$
31,282

$
30,913

$
29,054

 
$
62,195

$
56,372

 
 
 
 
 
 
 
Total non-interest income excluding net gains and losses
$
15,639

$
15,581

$
13,807

 
$
31,220

$
28,701

Net interest income on a fully tax-equivalent basis
36,316

34,114

33,033

 
70,430

62,617

Adjusted revenue
$
51,955

$
49,695

$
46,840

 
$
101,650

$
91,318

 
 
 
 
 
 
 
Efficiency ratio adjusted for non-core items
60.21
%
62.21
%
62.03
%
 
61.19
%
61.73
%
(a) Based on a 21% statutory federal corporate income tax rate.
The increase in the efficiency ratio compared to the linked quarter was driven by an increase in acquisition-related expenses of $6.5 million. The efficiency ratio adjusted for non-core items declined compared to both the linked quarter and the second quarter of 2018, mostly due to higher net interest income. Management is targeting an efficiency ratio of 59% to 61% for the full year of 2019, after excluding acquisition-related expenses and other non-core acquisition-related expenses.
Return on Average Assets Adjusted for Non-Core Items (non-US GAAP)
In addition to return on average assets, management uses return on average assets adjusted for non-core items to monitor performance. The return on average assets ratio adjusted for non-core items represents a non-US GAAP financial measure since it excludes the after-tax impact of all gains and losses, and acquisition-related expenses.


61

The following table provides a reconciliation of this non-US GAAP financial measure to the amounts reported in Peoples' Unaudited Consolidated Financial Statements for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
 
 
 
 
 
 
 
Annualized net income adjusted for non-core items:
 
 
 
Net income
$
9,598

$
14,369

$
7,892

 
$
23,967

$
19,633

Add: net loss on investment securities
57

—

147

 
27

146

Less: tax effect of net loss on investment securities (a)
12

—

31

 
6

31

Less: net gain on investment securities
—

30

—

 
—

—

Add: tax effect of net gain on investment securities (a)
—

6

—

 
—

—

Add: net loss on asset disposals and other transactions
293

182

405

 
475

331

Less: tax effect of net loss on asset disposals and other transactions (a)
62

38

85

 
100

70

Add: acquisition-related expenses
6,770

253

6,056

 
7,023

6,205

Less: tax effect of acquisition-related expenses (a)
1,422

53

1,272

 
1,475

1,303

Net income adjusted for non-core items
$
15,222

$
14,689

$
13,112

 
$
29,911

$
24,911

Days in the quarter
91

90

91

 
181

181

Days in the year
365

365

365

 
365

365

Annualized net income
$
38,497

$
58,274

$
31,655

 
$
48,331

$
39,591

Annualized net income adjusted for non-core items
$
61,055

$
59,572

$
52,592

 
$
60,318

$
50,235

Return on average assets:
 
 
 
 
 
 
Annualized net income
$
38,497

$
58,274

$
31,655

 
$
48,331

$
39,591

Total average assets
4,239,779

3,985,621

3,897,957

 
4,113,403

3,748,331

Return on average assets
0.91
%
1.46
%
0.81
%
 
1.17
%
1.06
%
Return on average assets adjusted for non-core items:
 
 
 
Annualized net income adjusted for non-core items
$
61,055

$
59,572

$
52,592

 
$
60,318

$
50,235

Total average assets
4,239,779

3,985,621

3,897,957

 
4,113,403

3,748,331

Return on average assets adjusted for non-core items
1.44
%
1.49
%
1.35
%
 
1.47
%
1.34
%
(a) Based on a 21% statutory federal corporate income tax rate.
The return on average assets declined in the second quarter of 2019 compared to the linked quarter, driven by an increase in acquisition-related expenses of $6.5 million compared to the linked quarter, combined with higher average assets which resulted from the First Prestonsburg merger. Compared to the second quarter of 2018, the increase in return on average assets was driven by higher net interest income, non-interest income, and a lower provision for loan losses, partially offset by an increase in average assets. The return on average assets increased in the first six months of 2019 compared to the same period of 2018, driven by higher net interest income, a lower provision for loan losses, and higher non-interest income compared to the linked quarter, partially offset by an increase in average assets, all of which were impacted by the First Prestonsburg and ASB mergers.
The return on average assets adjusted for non-core items declined in the second quarter of 2019 compared to the linked quarter, driven by the increase in average assets, combined with relatively unchanged non-interest income. Compared to the second quarter of 2018, the increase in return on average assets adjusted for non-core items was driven by higher net interest income, non-interest income, and a lower provision for loan losses, partially offset by an increase in average assets. The return on average assets adjusted for non-core items increased in the first six months of 2019 compared to the same period of 2018, driven by higher net interest income, a lower provision for loan losses, and higher non-interest income compared to the


62

linked quarter, partially offset by an increase in average assets, all of which were impacted by the First Prestonsburg and ASB mergers.
Return on Average Tangible Equity (non-US GAAP)
The return on average tangible equity ratio is a key financial measure used to monitor performance. The return on tangible equity is calculated as net income (less after-tax impact of amortization of other intangible assets) divided by tangible equity. The return on tangible equity is calculated as net income (less the after-tax impact of amortization of other intangible assets) divided by tangible equity. This measure is non-US GAAP since it excludes amortization of other intangible assets from earnings and the impact of goodwill and other intangible assets acquired through acquisitions on total stockholders' equity.
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
March 31,
2019
June 30,
2018
 
June 30,
(Dollars in thousands)
 
2019
2018
Annualized net income excluding amortization of other intangible assets:
 
 
 
Net income
$
9,598

$
14,369

$
7,892

 
$
23,967

$
19,633

Add: amortization of other intangible assets
824

694

861

 
1,518

1,615

Less: tax effect of amortization of other intangible assets (a)
173

146

181

 
319

339

Net income excluding amortization of other intangible assets
$
10,249

$
14,917

$
8,572

 
$
25,166

$
20,909

Days in the quarter
91

90

91

 
181

181

Days in the year
365

365

365

 
365

365

Annualized net income
$
38,497

$
58,274

$
31,655

 
$
48,331

$
39,591

Annualized net income excluding amortization of other intangible assets
$
41,109

$
60,497

$
34,382

 
$
50,749

$
42,165

Average tangible equity:
 
 
 
 
 
Total average stockholders' equity
$
564,992

$
524,196

$
489,876

 
$
544,706

$
472,152

Less: average goodwill and other intangible assets
175,169

161,673

161,600

 
168,458

152,943

Average tangible equity
$
389,823

$
362,523

$
328,276

 
$
376,248

$
319,209

Return on average stockholders' equity ratio:
 
 
 
 
 
Annualized net income
$
38,497

$
58,274

$
31,655

 
$
48,331

$
39,591

Average stockholders' equity
$
564,992

$
524,196

$
489,876

 
$
544,706

$
472,152

Return on average stockholders' equity
6.81
%
11.12
%
6.46
%
 
8.87
%
8.39
%
Return on average tangible equity ratio:
 
 
 
Annualized net income excluding amortization of other intangible assets
$
41,109

$
60,497

$
34,382

 
$
50,749

$
42,165

Average tangible equity
$
389,823

$
362,523

$
328,276

 
$
376,248

$
319,209

Return on average tangible equity
10.55
%
16.69
%
10.47
%
 
13.49
%
13.21
%
(a) Based on a 21% statutory federal corporate income tax rate.
The return on average stockholders' equity and on average tangible stockholders' equity ratios were impacted by the First Prestonsburg acquisition, which created increases in capital and decreased income for the second quarter of 2019 due to the acquisition-related costs. The return on average stockholders' equity and on average tangible stockholders' equity ratios increased in the first six months of 2019 compared to the first six months of 2018, reflecting an increase in net income, which was partially offset by dividends declared and paid during the period.


63

FINANCIAL CONDITION
Cash and Cash Equivalents
At June 30, 2019, Peoples' interest-bearing deposits in other banks increased $20.9 million from December 31, 2018. The total cash and cash equivalent balance included $19.8 million of excess cash reserves being maintained at the FRB of Cleveland at June 30, 2019, compared to $11.2 million at December 31, 2018. 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 six months of 2019, Peoples' total cash and cash equivalents increased $15.8 million as Peoples' net cash provided used in financing activities of $71.2 million was less than the sum of net cash provided by investing and operating activities of $68.2 million and $18.8 million, respectively. Peoples' investing activities reflected a net decrease of $29.2 million in loans and $145.2 million in net proceeds from sales, principal payments, calls and prepayments on available-for-sale and held-to-maturity investment securities, which were partially offset by purchases of $116.4 million in available-for-sale investment securities. Financing activities included a $207.3 million decrease in short-term borrowings, as well as $12.5 million of cash dividends paid, offset partially by a net increase of $150.3 million in deposits.
Further information regarding the management of Peoples' liquidity position can be found later in this discussion under “Interest Rate Sensitivity and Liquidity.”
Investment Securities
The following table provides information regarding Peoples’ investment portfolio:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Available-for-sale securities, at fair value:
 
 
 
 
Obligations of:
 
 
 
 
 
U.S. Treasury and government agencies
$
—

$
—

$
—

$
—

$
43

U.S. government sponsored agencies
19,051

—

—

—

—

States and political subdivisions
125,418

84,827

88,587

93,790

96,913

Residential mortgage-backed securities
748,132

706,976

692,608

688,656

688,002

Commercial mortgage-backed securities
22,664

6,649

6,707

6,713

6,799

Bank-issued trust preferred securities
4,099

4,118

3,989

4,166

4,167

Total fair value
$
919,364

$
802,570

$
791,891

$
793,325

$
795,924

Total amortized cost
$
910,431

$
806,641

$
804,655

$
819,431

$
816,217

Net unrealized gain (loss)
$
8,933

$
(4,071
)
$
(12,764
)
$
(26,106
)
$
(20,293
)
Held-to-maturity securities, at amortized cost:
 
 
 
 
Obligations of:




 
 
 
States and political subdivisions
$
4,398

$
4,401

$
4,403

$
4,451

$
4,530

Residential mortgage-backed securities
23,335

28,348

29,044

29,765

30,668

Commercial mortgage-backed securities
7,106

2,857

3,514

3,574

3,636

Total amortized cost
$
34,839

$
35,606

$
36,961

$
37,790

$
38,834

Other investment securities
$
43,508

$
41,449

$
42,985

$
43,044

$
42,007

Total investment securities:


 
 
 
 
Amortized cost
$
988,778

$
883,696

$
884,601

$
900,265

$
897,058

Carrying value
$
997,711

$
879,625

$
871,837

$
874,159

$
876,765


During the second quarter of 2019, Peoples acquired, in the First Prestonsburg acquisition, investment securities totaling $140.7 million and subsequently sold approximately $65.1 million of acquired available-for-sale investment securities. In April and May of 2019, $53.7 million in proceeds were reinvested. Available-for-sale residential mortgage-backed securities


64

were up at March 31, 2019, compared to December 31, 2018, primarily due to an increase in fair value driven by overall declines in market interest rates during the quarter. At December 31, 2018, the amortized cost of available-for-sale securities declined compared to September 30, 2018, as securities matured and were not replaced.
Additional information regarding Peoples' investment portfolio can be found in "Note 3 Investment Securities" of the Notes to the Unaudited Consolidated Financial Statements.


65

Loans
The following table provides information regarding outstanding loan balances:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Gross originated loans:
 
 
 
 
 
Commercial real estate, construction
$
102,904

$
116,992

$
124,013

$
103,562

$
107,255

Commercial real estate, other
641,061

630,679

632,200

630,720

650,512

     Commercial real estate
743,965

747,671

756,213

734,282

757,767

Commercial and industrial
548,460

558,070

530,207

510,591

471,270

Residential real estate
299,173

297,667

296,860

299,768

299,934

Home equity lines of credit
90,374

90,831

93,326

92,892

89,957

Consumer, indirect
419,595

410,172

407,167

396,701

373,384

Consumer, direct
72,209

69,710

71,674

72,601

71,545

    Consumer
491,804

479,882

478,841

469,302

444,929

Deposit account overdrafts
676

518

583

649

860

Total originated loans
$
2,174,452

$
2,174,639

$
2,156,030

$
2,107,484

$
2,064,717

Gross acquired loans (a):
 
 
 
 
 
Commercial real estate, construction
$
6,775

$
7,966

$
12,404

$
13,050

$
14,780

Commercial real estate, other
201,909

171,785

184,711

191,993

207,195

     Commercial real estate
208,684

179,751

197,115

205,043

221,975

Commercial and industrial
51,506

34,837

35,537

41,188

40,938

Residential real estate
348,439

308,137

296,937

308,178

309,629

Home equity lines of credit
41,262

38,084

40,653

42,961

45,933

Consumer, indirect
90

111

136

161

198

Consumer, direct
9,100

2,021

2,370

2,712

3,101

    Consumer
9,190

2,132

2,506

2,873

3,299

Total acquired loans
$
659,081

$
562,941

$
572,748

$
600,243

$
621,774

Total loans
$
2,833,533

$
2,737,580

$
2,728,778

$
2,707,727

$
2,686,491

Average total loans
$
2,830,558

$
2,734,592

$
2,718,620

$
2,717,200

$
2,627,777

Average allowance for loan losses
(21,311
)
(20,406
)
(20,079
)
(19,584
)
(19,071
)
Average loans, net of average allowance for loan losses
$
2,809,247

$
2,714,186

$
2,698,541

$
2,697,616

$
2,608,706

Percent of loans to total loans:
 
 
 
 
 
Commercial real estate, construction
3.9
%
4.6
%
5.1
%
4.3
%
4.5
%
Commercial real estate, other
29.7
%
29.3
%
29.9
%
30.4
%
31.9
%
     Commercial real estate
33.6
%
33.9
%
35.0
%
34.7
%
36.4
%
Commercial and industrial
21.2
%
21.7
%
20.7
%
20.3
%
19.1
%
Residential real estate
22.9
%
22.1
%
21.8
%
22.5
%
22.7
%
Home equity lines of credit
4.6
%
4.7
%
4.9
%
5.0
%
5.1
%
Consumer, indirect
14.8
%
15.0
%
14.9
%
14.7
%
13.9
%
Consumer, direct
2.9
%
2.6
%
2.7
%
2.8
%
2.8
%
    Consumer
17.7
%
17.6
%
17.6
%
17.5
%
16.7
%
Deposit account overdrafts (b)
NM

NM

NM

NM

NM

Total percentage
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
Residential real estate loans being serviced for others
$
473,443

$
464,575

$
461,256

$
458,999

$
451,391

 
(a)
Includes all loans acquired, and related loan discount recorded as part of acquisition accounting, in 2012 or thereafter. Loans that were acquired and subsequently re-underwritten are reported as originated upon execution of such credit actions (for example, renewals and increases in lines of credit).
(b)
Not meaningful.


66

As of June 30, 2019, balances in loan accounts acquired from First Prestonsburg totaled $125.3 million, including $52.1 million in residential real estate loans, $42.4 million in commercial real estate loans, $7.4 million in consumer, direct loans, $17.7 million in commercial and industrial loans, and $5.8 million in home equity lines of credit.
Period-end total loan balances at June 30, 2019 increased $96.0 million compared to March 31, 2019, $104.8 million compared to December 31, 2018, and $147.0 million compared to June 30, 2018. Originated loan balances declined $187,000 compared to March 31, 2019, and increased $18.4 million compared to December 31, 2018, and $109.7 million compared to June 30, 2018. Loan originations during the first half of 2019 were higher than in recent years for the same period, however, significantly higher loan paydowns experienced during the first half of 2019 minimized the impact of the increased production on loan growth for all comparison periods. Compared to period-end total loan balances at March 31, 2019, originated commercial and industrial loan balances declined $9.6 million, partially offset by growth in originated consumer indirect loans of $9.4 million.
Commercial and industrial loan balances grew $18.3 million compared to December 31, 2018. Growth in residential real estate loans of $71.2 million was driven by the First Prestonsburg acquisition, combined with the purchase of $19.0 million of 1-4 family first lien mortgages, during the first quarter of 2019.
Compared to June 30, 2018, originated loan growth of $109.7 million, or 5%, was led by an increase in commercial and industrial loans of $77.2 million, or 16%, and indirect consumer lending growth of $46.2 million, or 12%.
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, continued 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 June 30, 2019:
(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, construction:
 
 
 
 
Assisted living facilities and nursing homes
$
17,745

$
29,268

$
47,013

23.7
%
Apartment complexes
15,767

14,818

30,585

15.4
%
Educational services
8,538

19,895

28,433

14.3
%
Office buildings
15,775

7,702

23,477

11.8
%
Mixed used facility
17,729

4,902

22,631

11.4
%
Industrial
8,271

—

8,271

4.2
%
Child care
5,930

95

6,025

3.0
%
Retail
1,797

4,035

5,832

2.9
%
Warehouse
4,280

1,333

5,613

2.9
%
Residential property
2,465

2,714

5,179

2.6
%
Other (a)
11,382

4,057

15,439

7.8
%
Total commercial real estate, construction
$
109,679

$
88,819

$
198,498

100.0
%
(a)
All other outstanding balances are less than 2% of the total loan portfolio.


67

(Dollars in thousands)
Outstanding Balance
Loan Commitments
Total Exposure
% of Total
Commercial real estate, other:
 
 
 
 
Office buildings and complexes:
 
 
 
 
Owner occupied
$
73,617

$
1,822

$
75,439

8.6
%
Non-owner occupied
52,739

4,591

57,330

6.5
%
Total office buildings and complexes
126,356

6,413

132,769

15.1
%
Mixed-use facilities:
 
 
 
 
Owner occupied
36,567

864

37,431

4.3
%
Non-owner occupied
71,527

785

72,312

8.2
%
Total mixed-use facilities
108,094

1,649

109,743

12.5
%
Apartment complexes
77,535

849

78,384

8.9
%
Retail facilities:
 
 
 
 
Owner occupied
29,202

714

29,916

3.5
%
Non-owner occupied
39,602

98

39,700

4.5
%
Total retail facilities
68,804

812

69,616

8.0
%
Industrial facilities:
 
 
 
 
Owner occupied
46,056

127

46,183

5.2
%
Non-owner occupied
16,782

1,088

17,870

2.0
%
Total light industrial facilities
62,838

1,215

64,053

7.2
%
Warehouse facilities
56,048

4,898

60,946

6.9
%
Lodging and lodging related
30,901

—

30,901

3.5
%
Assisted living facilities and nursing homes
30,915

282

31,197

3.5
%
Land only
16,383

2,177

18,560

2.1
%
Other (a)
265,096

18,693

283,788

32.3
%
Total commercial real estate, other
$
842,970

$
36,988

$
879,957

100.0
%
(a)
All other outstanding balances are less than 2% of the total loan portfolio.
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 not material at either June 30, 2019 or December 31, 2018.


68

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)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Commercial real estate
$
8,245

$
8,297

$
8,003

$
7,966

$
8,271

Commercial and industrial
7,197

6,743

6,178

6,138

5,365

     Total commercial
15,442

15,040

14,181

14,104

13,636

Residential real estate
1,184

1,213

1,214

999

1,005

Home equity lines of credit
598

608

618

708

618

Consumer, indirect
3,172

3,133

3,214

3,423

3,339

Consumer, direct
342

351

351

395

465

    Consumer
3,514

3,484

3,565

3,818

3,804

Deposit account overdrafts
86

61

81

95

95

Originated allowance for loan losses
20,824

20,406

19,659

19,724

19,158

Acquired allowance for loan losses
533

533

536

155

108

Allowance for loan losses
$
21,357

$
20,939

$
20,195

$
19,879

$
19,266

As a percent of total loans
0.75
%
0.76
%
0.74
%
0.73
%
0.72
%
At June 30, 2019, the allowance for loan losses was $21.4 million, compared to $20.2 million at December 31, 2018 and $19.3 million at June 30, 2018. The ratio of the allowance for loan losses as a percent of total loans was 0.75% at June 30, 2019, compared to 0.74% at December 31, 2018 and 0.72% at June 30, 2018. The ratio includes all acquired loans, from both First Prestonsburg and previous acquisitions since 2012, of $659.1 million and allowance for acquired loan losses of $533,000. The increase in the allowance for loan losses over time was mainly the result of loan growth. The increase during the first quarter of 2019 was also impacted by the specific reserve on a non-accrual loan.
The significant allocations of allowance for loan losses 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.


69

The following table summarizes Peoples’ net charge-offs and recoveries:
 
Three Months Ended
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Gross charge-offs:
 
 
 
 
 
Commercial real estate, other
$
43

$
113

$
—

$
—

$
7

Commercial and industrial
—

63

—

—

7

Residential real estate
67

109

64

66

82

Home equity lines of credit
—

9

40

10

20

Consumer, indirect
346

473

548

488

550

Consumer, direct
33

63

61

78

109

    Consumer
379

536

609

566

659

Deposit account overdrafts
176

173

234

311

215

Total gross charge-offs
$
665

$
1,003

$
947

$
953

$
990

Recoveries:
 
 
 
 
 
Commercial real estate, other
$
2

$
10

$
2

$
15

$
28

Commercial and industrial
228

1,784

8

10

—

Residential real estate
102

31

133

32

41

Home equity lines of credit
1

1

2

3

2

Consumer, indirect
47

115

71

131

138

Consumer, direct
27

13

25

31

15

    Consumer
74

128

96

162

153

Deposit account overdrafts
50

56

45

44

46

Total recoveries
$
457

$
2,010

$
286

$
266

$
270

Net charge-offs (recoveries):
 
 
 
 
 
Commercial real estate, other
$
41

$
103

$
(2
)
$
(15
)
$
(21
)
Commercial and industrial
(228
)
(1,721
)
(8
)
(10
)
7

Residential real estate
(35
)
78

(69
)
34

41

Home equity lines of credit
(1
)
8

38

7

18

Consumer, indirect
299

358

477

357

412

Consumer, direct
6

50

36

47

94

    Consumer
305

408

513

404

506

Deposit account overdrafts
126

117

189

267

169

Total net charge-offs (recoveries)
$
208

$
(1,007
)
$
661

$
687

$
720

Ratio of net charge-offs to average total loans (annualized):
Commercial real estate
0.01
 %
0.02
 %
—
 %
—
%
—
%
Commercial and industrial
(0.03
)%
(0.26
)%
—
 %
—
%
—
%
Residential real estate
—
 %
0.01
 %
(0.01
)%
—
%
0.01
%
Home equity lines of credit
—
 %
—
 %
—
 %
—
%
—
%
Consumer, indirect
0.03
 %
0.05
 %
0.07
 %
0.05
%
0.06
%
Consumer, other
—
 %
0.01
 %
0.01
 %
0.01
%
0.01
%
    Consumer
0.03
 %
0.06
 %
0.08
 %
0.06
%
0.07
%
Deposit account overdrafts
0.02
 %
0.02
 %
0.03
 %
0.04
%
0.03
%
Total
0.03
 %
(0.15
)%
0.10
 %
0.10
%
0.11
%
Each with "--%" not meaningful.


70

During the second quarter of 2019, net charge-offs remained low, as gross charge-offs were down compared to prior periods. The net recoveries during the first quarter of 2019 were driven by the recognition of a $1.8 million recovery on a previously charged-off commercial loan. During the third and fourth quarters of 2018, the net charge-offs decreased as Peoples' asset quality remained stable.
The following table details Peoples’ nonperforming assets: 
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Loans 90+ days past due and accruing:
 
 
 
 
 
Commercial real estate, construction
$
230

$
—

$
—

$
401

$
—

Commercial real estate, other
557

15

801

60

615

   Commercial real estate
787

15

801

461

615

Commercial and industrial
261

50

18

—

—

Residential real estate
2,291

963

1,430

1,338

1,308

Home equity lines of credit
53

42

7

84

6

Consumer, indirect
—

4

—

2

—

Consumer, direct
57

—

—

—

46

   Consumer
57

4

—

2

46

Total loans 90+ days past due and accruing
$
3,449

$
1,074

$
2,256

$
1,885

$
1,975

Nonaccrual loans:
 
 
 
 
 
Commercial real estate, construction
$
688

$
703

$
710

$
725

$
725

Commercial real estate, other
6,427

6,459

6,730

6,751

6,422

   Commercial real estate
7,115

7,162

7,440

7,476

7,147

Commercial and industrial
1,748

1,719

1,304

939

1,265

Residential real estate
3,868

4,479

4,075

3,725

3,770

Home equity lines of credit
1,001

1,065

1,023

796

681

Consumer, indirect
383

440

324

286

221

Consumer, direct
13

17

56

14

12

   Consumer
396

457

380

300

233

Total nonaccrual loans
$
14,128

$
14,882

$
14,222

$
13,236

$
13,096

Nonaccrual troubled debt restructurings ("TDRs"):
 
 
 
 
 
Commercial real estate, other
$
122

$
127

$
154

$
186

$
236

Commercial and industrial
332

332

405

430

436

Residential real estate
1,664

1,389

1,951

2,087

2,132

Home equity lines of credit
193

195

210

160

71

Consumer, indirect
152

159

156

119

93

Consumer, direct
—

5

—

17

5

   Consumer
152

164

156

136

98

Total nonaccrual TDRs
$
2,463

$
2,207

$
2,876

$
2,999

$
2,973

Total nonperforming loans ("NPLs")
$
20,040

$
18,163

$
19,354

$
18,120

$
18,044

OREO:
 
 
 
 
 
Residential
$
123

$
81

$
94

$
106

$
63

Total OREO
$
123

$
81

$
94

$
106

$
63

Total nonperforming assets ("NPAs")
$
20,163

$
18,244

$
19,448

$
18,226

$
18,107

Criticized loans (a)
$
97,016

$
89,812

$
114,188

$
118,703

$
120,809

Classified loans (b)
63,048

47,327

43,818

49,058

55,596



71

(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Asset Quality Ratios:
 
 
 
 
 
NPLs as a percent of total loans (c)(d)
0.71
%
0.66
%
0.71
%
0.67
%
0.67
%
NPAs as a percent of total assets (c)(d)
0.47
%
0.45
%
0.49
%
0.46
%
0.46
%
NPAs as a percent of total loans and OREO (c)(d)
0.71
%
0.67
%
0.71
%
0.67
%
0.67
%
Allowance for loan losses as a percent of NPLs (c)
106.57
%
115.28
%
104.35
%
109.71
%
106.77
%
Criticized loans as a percent of total loans (a)(c)
3.42
%
3.28
%
4.18
%
4.38
%
4.50
%
Classified loans as a percent of total loans (b)(c)
2.23
%
1.73
%
1.61
%
1.81
%
2.07
%
(a) Includes loans categorized as special mention, substandard or doubtful.
(b) Includes loans categorized as substandard or doubtful.
(c) Data presented as of the end of the period indicated.
(d) Nonperforming loans include loans 90+ days past due and accruing, troubled debt restructurings and nonaccrual loans. Nonperforming assets include nonperforming loans and OREO.

Nonperforming assets increased $1.9 million, or 11%, compared to March 31, 2019, and were up $2.1 million, or 11%, compared to June 30, 2018. The increase compared to March 31, 2019, was partially due to acquired loans from First Prestonsburg, which comprised $0.7 million of nonperforming assets at June 30, 2019, with the remainder due to smaller relationships that have become 90+ days past due and are still accruing. Classified loans, which are those categorized as substandard or doubtful, increased $15.7 million, or 33%, compared to March 31, 2019, and were up $7.5 million, or 13%, from June 30, 2018. The increase in classified loans was largely related to acquired First Prestonsburg loans, coupled with downgrades of two commercial loan relationships totaling $8.5 million during the second quarter of 2019. Criticized loans, which are those categorized as special mention, substandard or doubtful, increased $7.2 million, or 8%, compared to March 31, 2019, and decreased $23.8 million, or 20%, compared to June 30, 2018. The increase in criticized loans was largely related to acquired First Prestonsburg loans.
Deposits
The following table details Peoples’ deposit balances:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Non-interest-bearing deposits (a)
$
643,058

$
628,464

$
607,877

$
617,447

$
585,861

Interest-bearing deposits:
 
 
 
 
 
Interest-bearing demand accounts (a)
610,464

572,316

573,702

547,172

570,359

Savings accounts
526,746

477,824

468,500

473,240

480,615

Retail certificates of deposit ("CDs")
497,221

404,186

394,335

402,309

406,214

Money market deposit accounts
428,213

403,642

379,878

391,377

389,893

Governmental deposit accounts
331,754

363,636

267,319

344,320

305,255

Brokered CDs
326,157

287,345

263,854

265,258

211,062

Total interest-bearing deposits
2,720,555

2,508,949

2,347,588

2,423,676

2,363,398

  Total deposits
$
3,363,613

$
3,137,413

$
2,955,465

$
3,041,123

$
2,949,259

(a)
The sum of amounts presented is considered total demand deposits.
As of June 30, 2019, the balances in deposit accounts acquired from First Prestonsburg totaled $232.2 million, including $65.3 million of retail CDs, $62.8 million of interest-bearing demand accounts, $55.7 million of savings accounts, $33.4 million of non-interest-bearing demand accounts, and $15.1 million of money market accounts.
At June 30, 2019, period-end deposits increased $226.2 million, or 7%, compared to March 31, 2019, $408.1 million, or 14%, compared to December 31, 2018, and $414.4 million, or 14%, compared to June 30, 2018. Compared to the linked quarter, the growth was driven by the First Prestonsburg acquisition, partially offset by a seasonal decline of $31.9 million in governmental deposits, which are typically higher during the first quarter of each year. During the second quarter of 2019, Peoples issued $30.0 million of 90-day brokered CDs to fund three $10.0 million interest rate swaps with a notional value in the aggregate of $30.0 million during the second quarter of 2019. The swaps will pay a fixed rate of interest while receiving three-month LIBOR, which offsets the rate on the brokered CDs.


72

Total demand deposit accounts comprised 37% of total deposits at June 30, 2019, compared to 38% of total deposits at March 31, 2019, 40% at December 31, 2018, 38% at September 30, 2018, and 39% at June 30, 2018. Peoples continues its deposit strategy of growing low-cost core deposits, such as checking and savings accounts and retail CDs when possible, and relying on higher-cost, non-core deposits, such as brokered CDs when deposits are not available in Peoples' footprint.
Borrowed Funds
The following table details Peoples’ short-term and long-term borrowings:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Short-term borrowings:
 
 
 
 
 
FHLB overnight borrowings
$
—

$
24,000

$
165,000

$
102,000

$
173,000

FHLB 90-day advances
117,200

110,000

110,000

100,000

13,000

Current portion of long-term FHLB advances
23,129

13,188

30,000

30,000

98,566

Retail repurchase agreements
46,128

44,175

51,202

64,840

76,177

Unamortized debt issuance cost (a)
—

—

(4
)
(10
)
(16
)
Total short-term borrowings
$
186,457

$
191,363

$
356,198

$
296,830

$
360,727

Long-term borrowings:
 
 
 
 
 
FHLB advances
$
78,324

$
98,670

$
102,361

$
103,860

$
105,890

Junior subordinated debt securities
7,367

7,325

7,283

7,239

7,195

Total long-term borrowings
$
85,691

$
105,995

$
109,644

$
111,099

$
113,085

Total borrowed funds
$
272,148

$
297,358

$
465,842

$
407,929

$
473,812

(a)
Unamortized debt issuance cost is related to the cost associated with the Credit Agreement with Raymond James Bank, N.A. which was a short-term obligation as of March 31, 2019.
Peoples' short-term FHLB advances generally consist of overnight borrowings maintained in connection with the management of Peoples' daily liquidity position. Borrowed funds, in total, which include overnight borrowings, are mainly a function of loan growth and changes in total deposit balances. Overnight borrowings as of June 30, 2019 declined $24 million compared to March 31, 2019, primarily due to the increase in deposit balances during the quarter. As of June 30, 2019, Peoples had fifteen effective interest rate swaps, with an aggregate notional value of $140.0 million, $110.0 million of which was funded by FHLB 90-day advances, which are expected to extend every 90 days through the maturity dates of the swaps. The remaining $30.0 million of interest rate swaps was funded by 90-day brokered CDs, which will also be extended every 90 days through the maturity dates of the swaps. Peoples continually evaluates the overall balance sheet position given the interest rate environment. Long-term FHLB advances declined at June 30, 2019 compared to March 31, 2019 due to transfers to short-term borrowings. At March 31, 2019 compared to December 31, 2018, long-term FHLB advances declined due to principal payments.
Additional information regarding Peoples' interest rate swaps can be found in "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements.
Capital/Stockholders’ Equity
At June 30, 2019, 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. 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 was phased in from 0.625% beginning January 1, 2016 to 2.50% by January 1, 2019, and applies to the common equity tier 1 ("CET1") ratio, the tier 1 capital ratio and the total risk-based capital ratio. At June 30, 2019, Peoples had a capital conservation buffer of 7.14%, compared to 2.50% for the fully phased-in capital conservation buffer required at January 1, 2019. As such, Peoples exceeded the minimum ratios including the capital conservation buffer at June 30, 2019.


73


The following table details Peoples' risk-based capital levels and corresponding ratios:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Capital Amounts:
 

 
 
 
 
Common Equity Tier 1
$
410,979

$
389,393

$
378,855

$
367,537

$
358,987

Tier 1
418,347

396,719

386,138

374,776

366,182

Total (Tier 1 and Tier 2)
439,704

417,657

406,333

394,655

385,448

Net risk-weighted assets
$
2,903,387

$
2,788,934

$
2,782,995

$
2,764,951

$
2,755,112

Capital Ratios:
 
 
 
 
 
Common Equity Tier 1
14.16
%
13.96
%
13.61
%
13.29
%
13.03
%
Tier 1
14.41
%
14.22
%
13.87
%
13.55
%
13.29
%
Total (Tier 1 and Tier 2)
15.14
%
14.98
%
14.60
%
14.27
%
13.99
%
Leverage ratio
10.26
%
10.31
%
9.99
%
9.69
%
9.73
%
Peoples' capital ratios at June 30, 2019 increased compared to the linked quarter due to earnings during the second quarter of 2019, which exceeded the dividends declared and paid during the quarter by $2.6 million. The capital ratios at June 30, 2019 were also impacted by the increase in risk-weighted assets, which was largely attributable to the First Prestonsburg merger. The capital ratios increased at March 31, 2019 compared to December 31, 2018 due to increased equity as earnings exceeded the dividends declared. Peoples' capital ratios at December 31, 2018 increased compared to September 30, 2018 due primarily to increased earnings, which was largely driven by loan growth. The capital ratios increased at September 30, 2018 compared to June 30, 2018 due to increased equity as earnings exceeded the dividends declared, while net risk-weighted assets decreased slightly in relation to some large payoffs that were higher volatility commercial real estate loans. The leverage ratio at September 30, 2018 decreased slightly compared to June 30, 2018 due to the increase in average assets in the third quarter of 2018 compared to the second quarter as ASB was acquired on April 13, 2018.
In addition to traditional capital measurements, management uses tangible capital measures to evaluate the adequacy of Peoples' stockholders' equity. Such ratios represent non-US GAAP financial measures since their calculation removes the impact of goodwill and other intangible assets acquired through acquisitions on amounts reported in 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 Peoples to incur losses but remain solvent.


74

The following table reconciles the calculation of these non-US GAAP financial measures to amounts reported in Peoples' Unaudited Consolidated Financial Statements:
(Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Tangible equity:
 
 
 
 
 
Total stockholders' equity
$
579,022

$
535,121

$
520,140

$
504,290

$
499,339

Less: goodwill and other intangible assets
176,763

161,242

162,085

163,401

163,953

Tangible equity
$
402,259

$
373,879

$
358,055

$
340,889

$
335,386

Tangible assets:
 
 
 
 
 
Total assets
$
4,276,376

$
4,017,119

$
3,991,454

$
4,003,089

$
3,972,091

Less: goodwill and other intangible assets
176,763

161,242

162,085

163,401

163,953

Tangible assets
$
4,099,613

$
3,855,877

$
3,829,369

$
3,839,688

$
3,808,138

Tangible book value per common share:
 
 
 
 
Tangible equity
$
402,259

$
373,879

$
358,055

$
340,889

$
335,386

Common shares outstanding
20,696,041

19,681,692

19,565,029

19,550,014

19,528,952

Tangible book value per common share
$
19.44

$
19.00

$
18.30

$
17.44

$
17.17

Tangible equity to tangible assets ratio:
 
 
 
 
Tangible equity
$
402,259

$
373,879

$
358,055

$
340,889

$
335,386

Tangible assets
$
4,099,613

$
3,855,877

$
3,829,369

$
3,839,688

$
3,808,138

Tangible equity to tangible assets
9.81
%
9.70
%
9.35
%
8.88
%
8.81
%
The increase in the tangible equity to tangible assets ratio at June 30, 2019 compared to March 31, 2019, was due largely to the issuance of equity in the form of common shares in connection with the First Prestonsburg merger combined with higher retained earnings and other comprehensive income during the second quarter of 2019, offset partially by higher tangible assets attributable primarily to the First Prestonsburg merger. The increase in the tangible equity to tangible assets ratio compared to December 31, 2018, as well as previous periods, was the result of higher retained earnings, combined with an increase in the market value of available-for-sale investment securities.
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 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 asset-liability management 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 affect Peoples' exposure to IRR and increase interest costs or reduce revenue streams.
Peoples has assigned overall management of IRR to its Asset-Liability Committee (the “ALCO”), which has established an IRR management policy that sets minimum requirements and guidelines for monitoring and managing the level of IRR. The methods used by ALCO to assess IRR remain largely unchanged from those disclosed in Peoples' 2018 Form 10-K.


75

The following table shows the estimated changes in net interest income and the economic value of equity based upon a standard, parallel shock analysis with balances held constant (dollars in thousands):
 
Increase (Decrease) in Interest Rate
Estimated Increase (Decrease) in
Net Interest Income
 
Estimated (Decrease) Increase in Economic Value of Equity
(in Basis Points)
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
300
$
13,557

 
10.1
 %
 
$
7,351

5.5
 %
 
$
(11,969
)
 
(1.1
)%
 
$
(22,088
)
(2.1
)%
200
11,046

 
8.3
 %
 
5,780

4.3
 %
 
24,680

 
2.2
 %
 
(7,191
)
(0.7
)%
100
7,478

 
5.6
 %
 
3,588

2.7
 %
 
25,125

 
2.2
 %
 
3,926

0.4
 %
(100)
(11,962
)
 
(9.0
)%
 
(9,075
)
(6.8
)%
 
(41,465
)
 
(3.7
)%
 
(44,512
)
(4.2
)%
(200)
(23,702
)
 
(17.7
)%
 
(23,712
)
(17.6
)%
 
(95,175
)
 
(8.5
)%
 
(130,769
)
(12.4
)%
Estimated changes in net interest income and economic value of equity are partially driven by assumptions regarding the rate at which non-maturity deposits will reprice given a move in short-term interest rates. Peoples takes a historically conservative approach when determining what repricing rates (deposit betas) are used in modeling interest rate risk. These assumptions are monitored closely by Peoples and are updated at least annually. The actual deposit betas experienced recently by Peoples in the repricing of non-maturity deposits are lower than those used in Peoples’ current interest rate risk modeling. Peoples has benefited from this trend in the current interest rate and competitor environment as it has provided for growth in Peoples’ net interest income. However, in recent months, Peoples has experienced more pressure on margin expansion and rate competition in its markets.
Peoples considers other interest rate scenarios in addition to analyzing the impact of parallel yield curve shifts. This includes various flattening and steepening scenarios in which short-term and long-term rates move in different directions with varying magnitude. Peoples believes these scenarios to be more reflective of how interest rates change versus the severe parallel rate shocks described above. At June 30, 2019, the U.S. Treasury and LIBOR swap curves were inverted for certain tenors. Given the shape of market yield curves at June 30, 2019, consideration of the bull steepener scenario yields insights which were not captured by parallel shifts. The key insight presented by the bull steepener scenario highlights the risk to net interest income when long-term yields remain constant while short-term rates fall. In such a scenario, Peoples’ funding costs, which are correlated with short-term rates, decline, while asset yields correlated with long-term rates remain constant.
At June 30, 2019, Peoples' consolidated balance sheet was positioned to benefit from rising interest rates in terms of potential impact on net interest income. The table above illustrates this point as changes to net interest income increase in the rising rate scenarios. The increase in asset sensitivity from December 31, 2018 was largely attributable to the high balance of governmental deposits. Peoples’ overnight FHLB borrowing position, which had declined substantially from December 31, 2018 to June 30, 2019 as a result of increased public funds deposits, ultimately led to a decline in liability sensitivity in the first half of the year. The increased public funds deposit balances are expected to decline through September 2019. While parallel interest rate shock scenarios are useful in assessing the level of interest rate risk inherent in the 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 might occur as a result of the Federal Reserve increasing short-term interest rates in the future could be offset by an inverse movement in long-term interest rates.
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of June 30, 2019, Peoples had entered into fifteen interest rate swap contracts, with an aggregate notional value of $140.0 million. Additional information regarding Peoples' interest rate swaps can be found in "Note 14 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements included in this Form 10-Q.
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 Bank's liquidity position remain unchanged from those disclosed in Peoples' 2018 Form 10-K.
At June 30, 2019, Peoples Bank had liquid assets of $261.9 million, which represented 5.6% of total assets and unfunded loan commitments. This amount exceeded the minimum level by $168.2 million, or 3.6% of total loans and


76

unfunded commitments, currently required under Peoples' liquidity policy. Peoples also had an additional $115.0 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 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 performance of an obligation or service. Historically, most loan commitments and standby letters of credit expire unused. Peoples Bank's 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 Bank 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 Bank 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 Bank's normal course of business and include traditional off-balance sheet credit-related financial instruments, interest rate contracts and commitments to make additional capital contributions in low-income housing tax credit investments. Traditional off-balance sheet credit-related financial instruments continue to represent the most significant off-balance sheet exposure.
The following table details the total contractual amount of loan commitments and standby letters of credit:
 (Dollars in thousands)
June 30,
2019
March 31,
2019
December 31,
2018
September 30,
2018
June 30,
2018
Home equity lines of credit
$
106,456

$
103,343

$
101,265

$
101,651

$
103,975

Unadvanced construction loans
95,266

80,916

74,734

71,836

87,477

Other loan commitments
360,872

308,103

314,271

324,059

319,519

Loan commitments
$
562,594

$
492,362

$
490,270

$
497,546

$
510,971

Standby letters of credit
$
14,658

$
12,371

$
10,214

$
9,979

$
20,354

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


77

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 June 30, 2019.  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 June 30, 2019, that have materially affected, or are reasonably likely to materially affect, Peoples’ internal control over financial reporting.
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
Peoples has entered into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for Peoples making fixed payments. As of June 30, 2019, Peoples had entered into fifteen interest rate swap contracts, which were effective with an aggregate notional value of $140.0 million. Although Peoples expects that each of the hedging relationships will continue to be highly effective as described above, it has not assumed that there will be no ineffectiveness in the hedging relationships. Additional information regarding Peoples' interest rate swaps can be found in "Note 14 Derivative Financial Instruments" of the Notes to the Consolidated Financial Statements included in Peoples' 2018 Form 10-K and "Note 9 Derivative Financial Instruments" of the Notes to the Unconsolidated Financial Statements in this Form 10-Q.
There have been no other material changes from those risk factors previously disclosed in “ITEM 1A. RISK FACTORS” of Part I of Peoples’ 2018 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.


78

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 June 30, 2019:
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)
April 1-30, 2019
—


$
—

 
—

$
15,049,184

May 1-31, 2019 (2) (3)
3,728

 
32.60

 
—

15,049,184

June 1-30, 2019 (2) (3)
2,724

 
31.23

 
—

15,049,184

Total
6,452

 
$
32.02

 
—

$
15,049,184

(1)
On November 3, 2015, Peoples announced that on that same date, Peoples' Board of Directors authorized a share repurchase program authorizing Peoples to purchase up to $20.0 million of its outstanding common shares. No common shares were purchased under this share repurchase program during the three months ended June 30, 2019.
(2)
Information reported includes 3,160 common shares and 2,239 common shares withheld to pay income taxes associated with restricted common shares which vested during May and June, respectively.
(3)
Information reported includes 568 common shares and 485 common shares purchased in open market transactions during May and June, respectively, by Peoples Bank under the Rabbi Trust Agreement. The Rabbi Trust Agreement establishes 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.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 OTHER INFORMATION
None



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ITEM 6 EXHIBITS
Exhibit
Number
 
 
Description
 
 
Exhibit Location
 
 
 
 
 
 
Agreement and Plan of Merger, dated as of October 23, 2017, between Peoples Bancorp Inc. and ASB Financial Corp.+
 
Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples Bancorp Inc. ("Peoples") on Form S-4/A (Registration No. 333-222054)
 
 
 
 
 
 
Agreement and Plan of Merger, dated as of October 29, 2018, as amended on December 18, 2018, between Peoples Bancorp Inc. and First Prestonsburg Bancshares Inc.+
 
Included as Annex A to the definitive proxy statement/prospectus which forms a part of the Registration Statement of Peoples on Form S-4/A (Registration No. 333-228745)
 
 
 
 
 
3.1(a)
 
Amended Articles of Incorporation of Peoples Bancorp Inc. (as filed with the Ohio Secretary of State on May 3, 1993) P
 
Incorporated herein by reference to Exhibit 3(a) to Peoples' Registration Statement on Form 8-B filed July 20, 1993 (File No. 0-16772)
 
 
 
 
 
 
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 3.1(b) to Peoples' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017 (File No. 0-16772) ("Peoples' September 30, 2017 Form 10-Q")
 
 
 
 
 
 
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 3.1(c) to Peoples' September 30, 2017 Form 10-Q
 
 
 
 
 
 
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”)
 
 
 
 
 
 
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)
 
 
 
 
 
 
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)
 
 
 
 
 
 
Amended Articles of Incorporation of Peoples Bancorp Inc. (This document represents the Amended Articles of Incorporation of Peoples Bancorp Inc. in compiled form incorporating all amendments. The compiled document has not been filed with the 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. P
 
Incorporated herein by reference to Exhibit 3(b) to Peoples’ Registration Statement on Form 8-B filed on July 20, 1993 (File No. 0-16772)
 
 
 
 
 
 
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
 
 
 
 
 
 
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)
 
 
 
 
 
+Schedules and exhibits were omitted pursuant to Item 601(b)(2) of SEC Regulation S-K, as in effect at the time of filing of the Agreement and Plan of Merger. A copy of any omitted schedules or exhibits will be furnished supplementally to the SEC upon request.
P Filed the exhibit with the SEC in paper originally and has not been filed with the SEC in electronic format.
 
 
 
 
 


80

Exhibit
Number
 
 
Description
 
 
Exhibit Location
 
 
 
 
 
 
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)
 
 
 
 
 
 
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)
 
 
 
 
 
 
Certificate regarding Adoption of Amendment to Division (D) of Section 2.02 of Code of Regulations of Peoples Bancorp Inc. by the Shareholders at the Annual Meeting of Shareholders on April 26, 2018
 
Incorporated herein by reference to Exhibit 3.1 to Peoples' Current Report on Form 8-K dated and filed on June 28, 2018 (File No. 0-16772) ("Peoples' June 28, 2018 Form 8-K")
 
 
 
 
 
 
Code of Regulations of Peoples Bancorp Inc. (This document represents the Code of Regulations of Peoples Bancorp Inc. in compiled form incorporating all amendments.)
 
Incorporated herein by reference to Exhibit 3.2 to Peoples' June 28, 2018 Form 8-K
 
 
 
 
 
 
Loan Agreement, made and entered into as of April 3, 2019, between Peoples Bancorp Inc., as Borrower, and U.S. Bank National Association, as Lender
 
Incorporated herein by reference to Exhibit 10.1 to Peoples' Current Report on Form 8-K dated and filed on April 9, 2019 (File No. 0-16772) ("Peoples' April 9, 2019 Form 8-K")
 
 
 
 
 
 
Revolving Credit Note issued by Peoples Bancorp Inc. on April 3, 2019 to U.S. Bank National Association in the principal amount of $20,000,000
 
Incorporated herein by reference to Exhibit 10.2 to Peoples' April 9, 2019 Form 8-K
 
 
 
 
 
 
Peoples Bancorp Inc. Amended and Restated Nonqualified Deferred Compensation Plan (adopted effective July 11, 2019)
 
Filed herewith
 
 
 
 
 
 
Rule 13a-14(a)/15d-14(a) Certifications [President and Chief Executive Officer]
 
Filed herewith
 
 
 
 
 
 
Rule 13a-14(a)/15d-14(a) Certifications [Executive Vice President, Chief Financial Officer and Treasurer]
 
Filed herewith
 
 
 
 
 
 
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 June 30, 2019 of Peoples Bancorp Inc. are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (Unaudited) at June 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2019 and 2018; (iv) Consolidated Statement of Stockholders' Equity (Unaudited) for the six months ended June 30, 2019; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended March 31, 2019 and 2018; and (vi) Notes to the Unaudited Consolidated Financial Statements.



81

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:
August 1, 2019
By: /s/
CHARLES W. SULERZYSKI
 
 
 
Charles W. Sulerzyski
 
 
 
President and Chief Executive Officer
 
 
 
 
 
 
 
 
Date:
August 1, 2019
By: /s/
JOHN C. ROGERS
 
 
 
John C. Rogers
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer



82